2012: The Year to Short-Sale Your Home

Forgiveness of Debt

Traditionally, if a person had a debt forgiven by a creditor then that forgiven debt was considered as income by the IRS. That forgiven debt would be taxed at your normal short-term tax rate. Currently, there is a special dispensation by the IRS forgiving or waiving any tax on the debt the bank is shorted and the customer is forgiven. This expires at the end of 2012. While the National Association of Realtors is working hard to lobby congress to extend this policy–there is no guarantee of an extension.

HAFA Program

Under the National Housing Affordable program, you may qualify for $3,000 cash to move out of your home when you complete your sale. You will usually qualify if you are living in your home or have only recently moved out.

Bank Full Satisfaction

Those in past years who sold their homes as short sales had to worry about a possible deficiency judgment by the banks being shorted unless they were “insolvent” at the time of sale. In early 2011, the California legislature passed a law which said that a first mortgagor who allowed a short-sale had to accept it as “full satisfaction” for the debt. Then in July 2011, the legislature passed another law which applied to second mortgage companies. It is very typical for a second mortgagor to accept around 6 percent of their debt as satisfaction. As of now, if approved, neither lender can come after the former homeowner for a deficiency. (If the second has been charged off to a debt collector, negotiations are more difficult but the same law applies.)

Better Than Foreclosure

Generally speaking, the seller may purchase a new home with a conventional loan within three years after the short-sale. It is much longer after foreclosure.

For those moving to a different city,loans can be made immediately if the borrower was never late on his payment during the short-sale. 

As always, be sure to consult with a legal and/or tax specialist before listing a short- sale.