Not Everyone Will Qualify For A Short Sale, Will You?
While banks have made efforts to make the short sale process easier for sellers, they have not really made changes to the criteria they use to qualify those sellers for a short sale. To qualify for a short sale, you will need to prove to the bank that you are no longer able to afford your home based on a hardship that you have incurred since the purchase of your home. There are numerous acceptable hardships that the banks will work with, but the most common ones are Loss of Employment, Curtailment of Income, Divorce, Loss of a Spouse, Medical Expenses, or a Death in the Family.
You will need to write a Hardship Letter to include with the short sale package to your mortgage lender when applying for the short sale. You will also have to provide proof of the financial change in your life by submitting your most recent bank statements, pay stubs (or a letter explaining that you do not have an income), the last two years tax returns, and any supporting legal documents (divorce decree, death certificate, etc…) or invoices to be presented as evidence for your reason of hardship.
Even If You Do Qualify For A Short Sale, You May Still Have Tax Consequences
Say you are able to qualify for the short sale of your home, and the bank(s) provide the approval letters for the short sale, does this mean you are in the clear as far as taxes are concerned? The answer is NO.
Most banks, after the close of escrow on the short sale, will issue you a 1099-c at the end of the year for the deficiency amount (the owed amount/loan balance minus the pay off amount they agreed to accept to close the escrow). The good news is that there has been legislation in the past to help protect California Residents from the tax consequences, such as The Mortgage Debt Relief Act of 2007 which applies to debts forgiven from 2007 – 2012, and there is new legislation being approved in 2013 to provide protection as well. Assembly Bill 42 and Senate Bill 30 of 2013 will provide protection for qualified forgiven debts from January 1, 2013 to January 1, 2014.
Two of the major qualifying requirements for the debt forgiveness protection are: Does this property qualify as your primary residence; Was the forgiven debt considered Purchase Money? Purchase money is considered to be mortgages that were originated at the time of purchasing the property, not mortgages secured against the property after the time of purchase (such as home equity lines of credit, or refinances that increased your loan amount for the sake of borrowing against your property).
By filling out the form below, we will help you determine whether or not you qualify for the short sale, however only your accountant can tell you for certain if you are liable for taxes on the property or not. If your accountant is not experienced in this field, we will be more than happy to provide you the contact information of a qualified accountant that specializes in this field.