Great News for People Who Did Short Sales in 2012 and 2013 in California!

Great News for People Who Did Short Sales in 2012 and 2013 in California!

Just got this great letter and had to pass it along!

December 4, 2013

Dear Robin,

The good news just keeps continuing.

As we anticipated, C.A.R. today received a letter from the California Franchise Tax Board (FTB), obtained by the State Board of Equalization, clarifying that California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.

Last month, in a letter to California Sen. Barbara Boxer, the Internal Revenue Service (IRS) recognized that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB. Now with the FTB’s clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.

We are pleased with the recent clarifications issued by the IRS and the California Franchise Tax Board, which protect distressed homeowners from debt relief income tax associated with a short sale in California. We would like to thank Sen. Boxer and BOE member George Runner for their leadership in obtaining this guidance from the IRS and FTB. Distressed California homeowners can now avoid foreclosure or bankruptcy and can opt for a short sale instead, without incurring federal and state tax liability, even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year.


Kevin Brown
2014 President


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Should I Short Sale My Underwater Home in the East Bay Area or Tri-Valley of California Now? Most Likely Yes. Do I have to Pay Taxes if I Short Sale My Home? Maybe.

Should I Short Sale My Underwater Home in theEastBayArea or Tri-Valley of California Now or Wait & Short Sale Later? Now is Most Likely Better for you.

Do I have to Pay Taxes if I Short Sale My Home? Maybe.



It it important to know how the different federal and state laws may apply to you and how you can use them in your benefit to avoid paying taxes of the cancelled debt of your under water property. This document goes into detail of that by sharing notes on the subject from the 2012/2013 Fall Federal and California Tax Update Seminar Real Estate Spidell Publishing, Inc.® 7-16-7-19 ©2013

Please be aware that these notes were written for tax preparers so they do get a bit technical, but they do provide good examples to help with understanding. I would be review your situation with you from a layman’s perspective (I am not a rax professional) and I would be happy to refer you to my trusted tax advisor if you would like a profession consultation.

The Principal Residence Cancellation of Debt (COD) Exclusion Extended through 2013!!!!

The American Taxpayer Relief Act of 2012 extended the COD exclusion for principal residence

through 2013.


Californiafully conforms to the insolvency exclusion under IRC §108.California partially

conforms to the residency exclusion. Like federal law, California’s residency exclusion expired on

December 31, 2012.


The California Legislature must extend the residency exclusion or it will be unavailable in 2013.


If the exclusion is not extended, a taxpayer must look to insolvency to exclude COD income on a

principal residence.




Under IRC §108(a)(1)(E) and (h), a taxpayer may exclude from income up to $2 million of COD

income from the discharge of qualified principal residence indebtedness on or afterJanuary 1, 2007,

and beforeJanuary 1, 2013. (IRC §108(a)(1)(E) and (h))


California conformity

California conforms, with these major exceptions:

Qualified principal residence indebtedness is limited to $800,000 ($400,000 formarried filing

separate) instead of the federal $2million ($1 million for married filing separate); and

The maximum COD income exclusion is further limited to $500,000 ($250,000 for

taxpayers married filing separately).

California’s principal residence exclusion also no longer applies to sales or exchanges on or

after January 1, 2013. (R&TC §17144.5)



If the qualified principal residence exclusion is not an option for some of your clients, you must

consider insolvency.California conforms to the insolvency provision, so this exclusion will apply for

federal and state purposes. (R&TC §17131)

A taxpayer may exclude from income a discharge of indebtedness that occurs while the taxpayer

is insolvent (but not involved in bankruptcy proceedings) up to the amount by which he or she is

insolvent. (IRC §108(a)(1)(B), (a)(2)(A), and (a)(3))

The term “insolvent” means that there is an excess of liabilities over the FMV of assets,

determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.

(IRC §108(d)(3)) See below for a discussion of the assets included in the insolvency calculation.

Liabilities include contingent liabilities or liabilities that the taxpayer has guaranteed if it is more

likely than not that the taxpayer will be called upon to pay them. (Merkel v. Comm. (1999) 192 F.2d

844) A taxpayer must be able to prove insolvency. (Rinehart v. Comm.,TCM 2002-71)

For many taxpayers, especially those who have frequently refinanced their residence, the

insolvency provisions will allow them to exclude most of their discharge.

The excluded amount is applied to reduce tax attributes in the order listed on Form 982,

Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

However, an insolvent taxpayer may elect to apply all or a portion of the excluded amount first to

reduce basis in depreciable assets or in real property held as inventory, rather than to reduce the tax


For more information on the basis adjustments, see the instructions for Form 982.

Note: A taxpayer may use the insolvency exclusion even if the COD income forgiven exceeds the

amount of his or her tax attributes, or if he or she has no tax attributes. The amount of COD income

in excess of the amount by which the taxpayer is insolvent is treated like COD income of a wholly

solvent taxpayer and will generally be included in income. (IRC §§61(a)(12), 108(a)(3))


Example of excess COD income

Tina has $250,000 ofCODincome.

Tina is insolvent, but her liabilities only exceed her assets by $160,000. Tina will pay

tax on $90,000 of her COD income ($250,000COD- $160,000 of insolvency).


Example of insolvency

Garybought his house for $200,000. He refinanced the property several times, and

used the proceeds to send his kids to college, take vacations, purchase a boat, etc. The

value of the house had risen to $700,000, and the balance of his mortgage was $650,000.

All of the debt was recourse debt, and only $150,000 was acquisition indebtedness.

The home’s value has fallen to $500,000. He has other assets worth $50,000 and other

liabilities of $80,000.

Garyis insolvent to the extent of $180,000 (total assets = $550,000; total liabilities =



California conformity

Californiaconforms to the insolvency exclusion. (R&TC §17024.5)


Assets for purposes of the insolvency exclusion

The Code provides only for “assets.” Thus, a taxpayer must count cash, stocks and bonds, and

other business and investment assets, along with personal assets such as a personal residence, auto,

and household goods.

More controversial are exempt assets. Both theIRSand the Tax Court have previously held that

assets exempt from creditors’ claims are excluded when taking account of a taxpayer’s assets in determining insolvency. (Babin v. Comm., TCM 1992-673; Hunt v. Comm., TCM 1989-335; Estate of

Marcus v. Comm.,TCM 1975-9;PLR 9125010) However, these cases were decided under the judicial

insolvency exclusion that preceded the statutory exclusion.

More recently, both the Tax Court and theIRShave ruled the opposite way; that is, they have

ruled that assets exempt from creditors are counted, including pension assets. (Carlson v. Comm.

(2001) 116 TC 87;PLR199932013;TAM199935002; SCA 1998-039)

For purposes of valuing pension assets, defined contribution plans are valued as the FMV of the

participant’s account on the date of discharge.

Defined benefit plans are valued in one of two ways, depending on whether the participant has

started receiving benefits:

Has started to receive benefits: Actuarial present value of the payments to be made using

the interest rate and mortality tables at Treas. Regs. §20.2031-7; or

Has not started receiving benefits: Greater of the actuarial present value of the accrued

benefit payable at normal retirement age, or the amount of any single-sum distribution that

the participant could receive under the plan as of the discharge date.
Documentation is important

Taxpayers were denied an insolvency exclusion because they were unable to provide sufficient

evidence to support their insolvency calculation. (Shepherd v. Comm.,TCM 2012-212)

In 2008, the taxpayers came to a settlement agreement with their credit card company, and

$4,412 of their outstanding debt was cancelled. The taxpayers received a 1099-C listing the cancelled

debt. However, they did not claim the $4,412 as income on their return because they claimed they

were insolvent.

The IRS disagreed with the taxpayers’ insolvency calculation. Specifically, they questioned the

FMV used for two homes owned by the taxpayers, and the husband’s pension in theNew   Jersey

Public Employees Retirement System.


The value of the homes

To support the value of their beach house the taxpayers presented a settlement between them

and the city where the property is located, which established the value of the property for the 2010

year for property tax purposes. This evidence was problematic for two reasons:

1. The Tax Court has previously held that the value placed on property for purposes of local

taxation is not acceptable to determine FMV for income tax purposes (Pierce v. Comm. (1974)

61 TC 424); and

2. Taxpayers are required to demonstrate they are insolvent immediately before the debt is

cancelled. In this case, that was 2008, not 2010.

The Court noted that the taxpayers did not present evidence of comparable sales for the period

immediately before the debt cancellation, which would have been acceptable evidence.

To support the value of their principal residence, the taxpayers presented:

1. A letter datedMarch 29, 2011, fromChase Bank showing the value of the principal residence; and

2. A “2008 Final/2009 Preliminary Tax Bill.”

Again, a property tax valuation is not sufficient to support FMV for income tax purposes, and

the evidence must support value immediately prior to the cancellation.

The Court also stated that the letter from Chase Bank was not sufficient to establish value

because it did not describe the property or the method used to establish value.


The pension

Although the Court found that the taxpayers were not insolvent because of the lack of evidence

to support FMV of the two homes, they still addressed the issue of the husband’s pension.

They specifically noted that the taxpayers did not include the husband’s pension in their list of

assets, but did include a loan from the pension in their list of liabilities. The Court stated that for

consistency purposes, the taxpayer must either remove the loan as a liability or include the collateral

that secures the loan (the pension) as an asset. However, the Court also noted that “the portion of

the pension that could have been withdrawn as a loan is an asset for purposes of insolvency.”


I hope you found this information as useful as I did! If you would like to discuss your situation with me, I would be happy to prodvide you with a free, no obligation consultation. My direct number is 925-577-8692.

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Should I Short Sale My House in Livermore, Danville, Pleasanton or the Tri-Valley Bay Area Now or Wait?

Should I Short Sale My House in Livermore, Danville, Pleasanton or the Tri-Valley Bay Area Now or Wait?

I have had many people ask me whether they should short sale their house in Livermore, Danville, San Ramon, Dublin, the Bay Area, Tri-Valley Area of California now or wait until the market improves and do a traditional sale.

Well, based on the real estate trends, mortgage lending history, and economic condition of the state, it is probably going to take another 7-10 years for the market to begin to turn around and recoup some of the home value you have lost, and there is no guarantee that in that time your home will even reach the price you paid or owe  if your purchased your refinanced home to get equity out between 2004 and 2007.

If you are in a bad situation and you owe more money on your home than it is worth and you can no longer afford to make the payments on the property, or you have another reason that you need to move out the home or sell it (for example, job relocation, medical condition that does not allow you to climb stairs and you own a two story home, etc.—lots of many possible scenarios), then you will want to get your home listed ASAP so you can get an offer, the short sale processed and the transaction closed BEFORE the end of 2012.

The typical lender takes 30-90 days to process a short sale once you have an offer which could come right away or take 30+ days to get. Then there is a 30 day escrow period for the buyer to complete their inspections, get their loan in place and close the transaction. So, on an average transaction, you are looking at 3-6 months from start to finish. Depending upon the type and price range of property you have, the desirability of your neighborhood, and who your lenders are, it could take you a year or more to get through the short sale process, so do not wait.

What’s the rush?

The reason you will want to list right away rather than wait is because

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation ends at the end of 2012!

According to the IRS website,,,id=179414,00.html

 “If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.”

“The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence.”

 This means that if you short sale your primary residence, then you should not have to pay taxes on the forgiven debt!

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.”

Since the Act is set to expire at the end of 2012 and so far, I have not heard talks of extending it, probably due to the fact that the country needs the tax money, NOW is the time to short sale if that is the route you are considering taking. If you miss the end of the 2012 calendar year deadline and they do not extend the act, you may end up being responsible for paying taxes on all of the forgiven debt on your home if you short sale later or even let it foreclose. Yes, if you let you home foreclose, you may still owe taxes on the property.

Most people cannot afford to pay taxes on an extra $100,000 or more of  “income,” especially when that income is only on paper via the 1099 that the lender will issue to you and not actual money deposited into your account.

I have been listing and processing short sales for 5 years, before most agents even knew what they were, and have successfully closed so many short sales that I have earned the designation of Short Sale Genius Elite Master. I am also HAFA certified so that I can assist people who qualify for the HAFA program short sale their homes and receive up to $3,000 to assist with moving costs.

I have been doing short sales so long that I have already started helping past short sale clients purchase new homes!

I provide free short sale consultations for people who are considering short selling their home or investment properties. Whether you just want to learn more about what a short sale is, what some of the alternatives you may have to doing a short sale, or if you are ready for us to meet for me to list your home, I would be happy to talk to you. Feel free to give me a call at 925-289-1432 or send me a message through my blog and I will be happy to discuss your situation with you.

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Home Buyer Tax Credit Extension Stuck in the House

The Senate has passed a bill to give homebuyers another three months to close on their homes and receive tax credits up to $8,000. The Tax Extenders Bill would apply to homebuyers who met the April 30, 2010 deadline with a signed contract to purchase a new or existing primary residence. The amendment would extend the deadline to September 30, 2010 for homebuyers to close on their real estate transaction. The previous deadline was June 30, 2010. The bill is now sitting in the House of Representatives, where it is expected to pass should it actually get voted on in time.

The National Association of Realtors estimates that as many as 180,000 homebuyers have qualified for the tax credit and met the contract deadline of April 30, 2010, but might not be able to close their transaction by the June 30, 2010 deadline due to the sheer volume of loan applications in the pipeline.

Many of the short sale lenders out there that I have been working with are telling me that they are having delays in getting their approvals out because of the number of folks who are wanting to close by June 30th.

Many buyers are rushing trying to close escrow as quickly as possible…sometimes foregoing inspections on the property. I highly recommend that all buyers due their due diligence and take the time to inspect the property they are buying because there could be something worng with the property that may actually cost you more than the tax credit that you should know about.

Some loan agents out there are trying to speed the process up by whatever means they can to help their clients meet the deadline. Some things are good, others not so much in my book. Buyers beware.

The above content is for informational purposes only and should not be used as a substitute for consultation with a tax advisor.

The great guys at have a great daily video about this in their June 24, 2010 archive if you want to check it out.

You can subscribe to their free Daily video updates to keep you up on what is going on out there in the real estate and mortgage world. If you ever need a pick me up during the day or first thing in the morning, watching their high energy video updates will wake you up and get your blood pumping. I really like what they have to offer and you cannot beat the price!