Karen Fiddler offers good advice for people who may be forced to sell their homes through a short sale. The Mortgage Tax Relief Act will be expiring in December 2012. The Act’s provision regarding federal tax consequences will expire with the Act. That benefit is an important part of the act and will have a negative effect on people who must sell their homes through a short sale. I have disabled comments. Please go directly to Karen’s post to comment.
So much of the Mission Viejo Real Estate Market is short sales. In fact, all of Southern California seems to be listing short sales. It's a sad situation that those who purchased or refinanced during the "boom" period a few years ago now find themselves stuck when they need or want to move.
In an effort to help these short sale sellers as well as the housing market in general, Washington DC had passed the Mortgage Tax Relief Act. This included the provision in which the federal tax consequences were not applied for a period of time.
Did you know that normally the amount of debt forgiven on a mortgage would be considered ordinary income to the tax payer?
For example: If you owed $400,000 on a mortgage but could only sell it for $300,000 in a short sale, the difference ($100,000) would be added to your income.
You would pay tax on an extra $100,000!!!
Obviously the intent was to help those who were already struggling financially to avoid additional burden.
Once someone decides to sell a home in a short sale...typically the seller does not pay their mortgage any longer. (I'm not suggesting this, I'm not a CPA nor attorney and these decisions should be made with professional advice) The goal being to save for the next chapter of their lives. They also expect a long time frame for short sale approvals. This is in essence rent/mortgage free living.
Sometimes this is the only thing which allows the seller to save enough to move forward.
Adding to the normal length of short sale approval is the lack of motivation for the seller. They are living free at the moment, and the longer that lasts, the more they can save. Often they are also hoping for a child to finish a school year, or job offer to come through. This can make the showing availability very limited. They lack a desire to show at all....let alone at inconvenient times. Embarrassment can also limit typical marketing activities, like a yard sign or open house.
However.....if you have been considering a short sale in Mission Viejo, or anywhere in Southern California, this might be the time to act. As of now, the Mortgage Tax Relief Act expires in December, 2012.
Maybe this seems like a long time away....but it's not. Most short sales go through a buyer or two and long approvals on each. There are many contributing factors; Buyers change their minds, the bank comes back with unrealistic approval price or terms, lack of attention from new buyers due to the length of time on the market, and some buyers will just avoid short sales altogether. Perhaps you don't need to list in January....but by March I would suggest some urgency, if you want to be safe.
Now maybe the Act will be extended, I know that would be a positive step for helping our market...and frankly, it's an election year. But if it's not...then closing January 1, 2013 vs December 31, 2012 could mean thousands of dollars of tax debt. Not a gamble I'd like to take.
If you are feeling that a short sale might be a good option.....talk to an agent. Get some information and direction. We can help....but don't come to us at the last minute, when it's too late.
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