Just under 50% of the closed sales in Orange County presently are “short sales” which means the homeowner sold their home for less than the balance due on their mortgage. In such cases, the bank must approve the sale price since they are taking a loss, and the homeowner/seller may end up receiving a 1099 for the unpaid portion of the mortgage which needs to be provided with your tax returns. The federal Mortgage Forgiveness Debt Relief Act of 2007 provided an exception for homeowners who lost their home in foreclosure or a short sale, or had their loan balance reduced in a modification. (gee, I don’t know of anyone who got a balance reduction!)
You still have to report the forgiven debt on your tax return, but it’s typically not included in your income for federal tax purposes if it was your primary residence, the debt was less than $2 million (that lets most people out) and it was forgiven in years ‘07 through ’12. The bad news is California hasn’t updated their law to conform with the federal law after January 1, 2009, so you may owe taxes to the state unless this is resolved. See http://tinyurl.com/yhx89zw to see if you may receive relief prior to filing April 15th if this affects you.
One final note: A short sale will normally appear on your credit report as such, and have a negative effect on FICO scores and also prohibit mortgage financing for a period of at least two years. So proceed with caution.
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