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 More to follow within the next couple of weeks.


jone said...

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Thanks for sharing this great content, I really enjoyed the insign you bring to the topic, awesome stuff!

Mike Bishop7 said...

I did not know this about short sale tax relief, very good read. I was coming across your blog while I was reading articles on tax debt relief. I'm happy I did because you shared news that I did not know. Thank you for posting this.

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Mark Martin said...

Hey! I will be looking forward to visit your page again and for your other posts as well. Thank you for sharing your thoughts about home sales in your area. I am glad to stop by your site and know more about home sales. Keep it up! This is a good read.
Some junior lien holders and other with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. (Iowa has a procedure, sale free of liens, which allows a foreclosure court to "cram down" a short sale over the objections of the junior creditors.) If a creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date.
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HcoRealEstate said...
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