Monday, July 23, 2012
Short Sale Tax Relief Expires December 31, 2012
The tax relief law that allows certain qualifying homeowners to exclude from income certain debts that have been forgiven by their lender is set to expire December 31, 2012. Why is this important now? Because it can take up to 6 months to receive formal short sale approval and close a short sale escrow.
According to a recent article in the Los Angeles Times, when this provision expires Sellers who participate in short sales WILL have to report the debt relief they receive from the short sale lender as income on their federal tax returns. As of today, the tax break is not extended, so time is of the essence …
The following are the main items that escrow looks at/needs when processing a short sale:
1. Short Sale Addendum to the Purchase Contract
2. Real Estate Commissions
a. Escrow will use the Short Sale Approval letter to determine permissible broker commissions (regardless of what the listing agreement states)
b. MLS should provide clear provisions for short sale lender commission changes
3. Written Short Sale Approval Letter
a. Escrow will verify that the Sales Price and Proceeds amounts match what is stated on the Short Sale Approval letter
b. In the case of proceeds to the Lender, escrow will confirm that they receive, at a minimum, the amount stated on the Short Sale Approval letter
c. Escrow must close within the stated timeframe or an extension and an updated Short Sale Approval letter will be required
In order to prevent closing delays, Sellers should be made aware of the fees that Short Sale Lenders may not approve and/or require additional information (see a limited, non-inclusive list below).
• Short Sale Negotiator Fees
• Home Warranty
• Retrofit Work *
• Termite Work *
• Delinquent Property Taxes**
• HOA fees***
* Short Sale lenders typically approve the inspection fee but not the actual retrofit or termite work
** Resubmission to the short sale lender for a revised short sale approval letter may be needed (and may cause closing delays)
*** Short Sale lenders may approve payment of HOA dues but not always approve delinquencies or certain other HOA fees such as Transfer fee or Document Fee
Typically when the Short Sale Lender does not approve the Seller’s payment of certain escrow/closing fees, the costs may be paid for by the buyer provided its permitted in the Short Sale Approval letter.
This post highlights only some of the provisions of the bill , please revert to the actual bill for specific information
For Buying or Selling, it helps to have a guide that gives you straight answers. For more information on buying, selling, or renting out an income property in San Diego, please call Frank Rashid's cell phone at (858) 676-5250 or email him at firstname.lastname@example.org. More to follow within the next couple of weeks.