Effects of a Short Sale for homeowners in California 2014
Here are the effects or consequences of short selling your home in California. You will want to consider any credit, tax and deficiency issues after a short sale. There are good news however for those who are weighing the advantages and disadvantages of a short sale in California. Please read more below. For more information, please give us a call at 760-798-9024 or fill out the contact information request below to find out if a short sale is the right option for you. We are happy to help.
The effects or consequences of a short sale in California
Your credit score decreases immediately after a short sale
The temporary effect of a short sale in California will be reflected in a significant drop on your credit score anywhere from 100-200 points immediately after a short sale. This will affect your ability to finance most major purchases after a short sale. On a positive side, your credit score will increase over time after a short sale, as long as you take the positive steps necessary to improve your credit such as paying your bills on time and paying down your other debts.
Note that if you are already delinquent on your payments, you will notice that your credit has already suffered even before doing a short sale. To find out how your credit looks like now, be sure to get a free copy of your report at AnnualCreditReport.com.
You will need to wait at least 1 year to 3 years to buy another home again after a short sale
You will need to wait at least 1 year to 3 years after the short sale to buy another house again depending on your downpayment and the circumstances that led to the short sale. Read more about buying a house again after a short sale here. On a positive side, while waiting to qualify to buy a home again, take the opportunity to save money for downpayment and pay down your bills while renting.
You may or may NOT have tax consequences of a short sale
You may NOT have to pay taxes after a short sale in California after a short sale on a primary residence (1-4 units) with a non-recourse, purchase money loan. Please consult your tax professional on the tax effects of a short sale in California.
*A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.
Short Sellers who are otherwise subject to pay taxes on cancellation of debt (COD) income, which is approximately the difference between the outstanding loan balance and the fair market value may qualify for certain exceptions. The exceptions to being taxed on cancellation of debt income after a short sale include bankruptcy, insolvency (your liabilities are greater than your assets) and forgiveness of a non-recourse debt after foreclosure.
Please note that there are a few instances when some California homeowners may realize a gain even after selling their investment or rental property in a short sale. Any gain after calculating the difference between the basis of the home and net selling price could be considered taxable income. However, if you are short selling a primary residence with a gain, you may not have to worry about taxes if the gains are up to $500,000 (married filing jointly) and up to $250,000 (single). Again, it is critical to consult a tax professional on the tax effects of a short sale in 2014 in California.
It is important for you to read more about short sale related laws that favor homeowners in 2014 here.
Deficiency after a short sale
The good news for California homeowners is that California offers protections against deficiency judgments after short sales and foreclosures. A California homeowner is generally protected against a deficiency judgment after short sale for a one-to-four residential unit property. The instances in which a California homeowner is generally protected against a deficiency judgment following foreclosure include, among other things, a non-judicial foreclosure or a loan that is all of the following: 1) owner-occupied, 2) secured by a 1-4 unit dwelling and 3) the loan was a purchase money transaction. If you meet the criteria, it is illegal for the lenders to come after you for deficiency after a short sale.
The moral dilemma of a short sale
There are homeowners who feel a sense of guilt for walking away from their mortgage obligation by allowing their home to go into foreclosure. In deciding to do a short sale, you become part of the solution to a problem. You proactively seek the bank’s approval on the short sale and cooperate fully with all parties involved including the lender, real estate agents, and buyers. In doing a short sale, you are mitigating the bank’s loss on a property that is worth less than what you owe. When you signed a loan contract with the lender, you agreed to take out a loan based on your your ability to make payments at the time. Situations may have changed such as loss of employment, decreased income, divorce/separation, and medical issues that now hinder your ability to make good on your side of the contract. Expecting the possibility of a borrower’s inability to make payments, the loan contract allows for the lender to take the property back in a foreclosure as a recourse for the debt. You now have the choice to use your savings/401K/IRAs or borrow money to continue making payments, refinance the property, sell the property if there is equity, or short sale the home if underwater, or let it go in a foreclosure.
Did you know that our California short sale agent specialist has earned the nationally recognized Short Sales and Foreclosure Resource certification. The National Association of REALTORS® offers the SFR® certification to REALTORS® who want to help both buyers and sellers navigate these complicated transactions, as demand for agents with short sales expertise grows. Please contact us at 760-798-9024 for a confidential and free consultation or by filling out the contact information request below for more information to find out if short sale is the right option for you in 2014.
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We can help California homeowners avoid foreclosure. Please feel free to call or email us if you have any questions on the ramifications or consequences of a short sale.
SB 458 favors California homeowners who short sell with a second mortgage
If you are thinking of short selling your home in California with a first mortgage and second mortgage, or possibly with a second mortgage only. You will be happy to know about SB 458 which was passed in 2011 and benefits short sales with second mortgages.
Under SB 931 passed in 2010, a first mortgage holder could accept an agreed-upon short sale payment as full payment for the outstanding balance of the loan. SB 458 passed in 2011 in California extends the protections of SB 931 to junior liens i.e. second mortgages. SB 458 extends the protections of SB 931 (2010), to ensure that any lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans.
“The signing of this bill is a victory for California homeowners who have been forced to short sell their home only to find that the lender will pursue them after the short sale closes, and demand an additional payment to subsidize the difference,” said C.A.R. President Beth L. Peerce. “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
Short selling a rental property formerly used as a primary residence
Short Selling a converted rental property
If you have converted your primary residence to a rental property and meet the ownership and use test of having lived and owned the property 2 years out of the last 5 years, then you may want to ask your CPA, if you can take advantage of avoiding any tax on the gain by treating the home as a primary residence for tax purposes only. If you are qualified under IRS’ rules, most homeowners who may have a realized gain of up to $500,000 (married filing jointly) and a gain of up to $250,000 (single) on the sale of their converted rental property (formerly primary residence home) may not pay any taxes on a home they have owned and lived in 2 years out of the last 5 years. You also may not have sold another home in the last 5 years to take advantage of this. It is critical to speak to your CPA on what is the tax implication of a converted rental home. Timing is key here. If you have missed the required timeline, some homeowners may need to move back into their rental property to establish this as a primary residence again for the necessary period of time. Please contact us for more information on short selling a rental property or a primary residence in California.