IRS clarifies short sale debt forgiveness
The Internal Revenue Service has sent a letter to U.S. Sen. Barbara Boxer, affirming that California families who lost their homes to a short sale will not have to pay a tax penalty for debt forgiven after the federal law banning those penalties ends in 2013.
“California homeowners have struggled through years of economic hardships during the Great Recession,” Boxer said in a statement on Friday, Nov. 15. “I am relieved that these families will not face a burdensome tax penalty just as they are trying to rebuild their lives with a short sale.”
Boxer says the IRS clarification letter relates specifically to California homeowners.
California law, passed in 2011, protects homeowners from lenders attempting to collect additional assets in the case of a short sale, she said.
Boxer wrote the IRS in August over concern about what the expiration of the Mortgage Forgiveness Debt Relief Act would mean to Californians. The law is set to expire at the end of the year.
Without the tax forgiveness in place, Boxer said she feared distressed borrowers might be inclined to let their property go to foreclosure, rather than seek a short sale, to avoid a large tax bill.
The California Association of Realtors, in a report released Oct. 22, said California’s share of short sales in September had fallen to 9.4 percent, the lowest point since January 2009. In September 2012, one out of four transactions involved a short sale.
Although short sales have been in decline, as previously underwater homes move into positive equity, CAR projects there may be as many as 55,000 short sales in California in 2014.
On average, $60,000 in debt is forgiven in short sale transactions, according to the real estate trade association. For property owners weighed down by debt, that can be a sizeable tax obligation.
C.A.R. president Kevin Brown said the association has been working with Boxer to protect distressed homeowners from debt relief income tax associated with a short sale in California.
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By: Gruszecki, Debra. ”IRS clarifies short sale debt forgiveness.”
PE.com. 11/15/2013. Web: SHORT SALES: IRS clarifies short sale debt forgiveness | Business | PE.com.
Posted on November 20, 2013, in Real Estate, Short Sales and tagged Barbara Boxer, Debt Foregiveness, foreclosure, Internal Revenue Service, IRS, Mortgage Forgiveness Debt Relief Act, short sale, taxes. Bookmark the permalink. Comments Off.