No New News of Possible Extension of Mortgage Debt Relief Act
I continue to receive daily inquiries from homeowners and real estate professionals regarding the pending December 31st expiration of the Mortgage Debt Relief Act. Unfortunately, the matter remains mired in the highly politicized negotiations over the “fiscal cliff.” While I remain hopeful that the necessary parties will set aside their differences for the benefit of distressed homeowners, that hope is tempered by skepticism based on the lack of progress in the negotiations.
Meanwhile, I urge all affected individuals to contact their congressional and senate representatives to let them know where you stand. And keep your fingers (and toes) crossed.
My purpose is writing this blog is to address a separate but related issue about which I’ve also received numerous questions. Specifically, are California’s SB 458/931 threatened by the potential expiration of the Act? The short answer is “no.”
Don’t Confuse California’s Short Sale “Anti-Deficiency” Protections with the Taxability of Forgiven Debt
California Senate Bills 458 and 931 were enacted in 2011 and are now found in Section 580e of the Code of Civil Procedure. These laws say that a lender who agrees to a short sale is barred from collecting any portion of the mortgage debt not paid from the proceeds of sale. In other words, the “deficiency” is deemed “forgiven” as a matter of law; thus the term “anti-deficiency” protection.
Before Section 580e, lenders frequently approved short sales only on the condition that the seller/borrower agreed to repay some portion of the loan deficiency. This is no longer allowed. More importantly, there is no “expiration date” to this California statute. It will remain in effect unless and until repealed by the legislature with the consent of the governor. That is extremely unlikely.
In summary, no matter what happens with the Mortgage Debt Relief Act, mortgage holders whose lenders approve a short sale of their California property will remain protected by the state’s “anti-deficiency” statutes; they will not have to repay any portion of the unpaid, forgiven loan balance.
Impact of Expiration of Act on California Short Sales
In contrast, expiration of the Mortgage Debt Relief Act will remove many of the protections that qualified homeowners have had since 2007 for the tax consequences of forgiven mortgage debt. In other words, the IRS will tax as income any portion of the home loan not repaid to the lenders from the proceeds of the short sale. (As stated in earlier articles, there are other possible tax exemptions applicable to this “income”; however, far fewer property owners will qualify for these other protections.)
Expiration of the federal Act will trigger expiration of California’s related tax protection. That is, the law passed in California to protect homeowners from the state income tax liability for forgiven debt also expires on December 31, 2012.
There is no guarantee that an extension of the federal exemption will automatically result in an extension of the California exemption. For that reason, it is also important to contact your representatives in Sacramento to urge extending the state tax protection.
If you are uncertain regarding the impact of these matters on your situation, please contact qualified legal and tax professionals without delay.