Great news from IRS for sellers that short sell

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November 15, 2013

Dear Roy,

As the new president of the CALIFORNIA ASSOCIATION OF REALTORS®, I’m pleased to be the first to inform you of some very good news.

We have been working with California Sen. Barbara Boxer to protect distressed homeowners from debt relief income tax associated with a short sale in California.  As part of this effort, Sen. Boxer requested the Internal Revenue Service (IRS) to provide guidance on whether mortgage debt forgiveness in a lender-approved short sale would be taxable income under federal law, given California’s recent non-recourse laws for short sales, which were hard fought victories by C.A.R.

The IRS has clarified in a letter that California’s troubled homeowners who sell their homes in a short sale are not subject to federal income tax liability on “phantom income” they never received.  The IRS recognizes that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes.  This clarification rescues tens of thousands of distressed home sellers from personal liability upon expiration of the Mortgage Forgiveness Debt Relief Act of 2007 on Dec. 31, 2013.

C.A.R. is seeking a similar ruling from the California Franchise Tax Board (FTB), which has been awaiting the IRS action; we anticipate the FTB will act promptly.  Short sales may raise other tax issues and, as always, you should advise your clients to speak with their tax professional regarding the tax consequences of a short sale.

C.A.R.’s Legal Department has prepared a Realegal to further explain the IRS’s clarification.

I know you join me in expressing our thanks, as well as those of our troubled homeowners, to Sen. Boxer for her leadership on this issue.  I will keep you informed and provide additional details as I have them.

Kevin Brown
Kevin Brown
2014 President

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