Generally, after a foreclosure, the bank repossesses the unit when the owners fail to repay their loans. A short sale is when prior to foreclosure during the pre-foreclosure stage the owner sells the house, with the permission of the lender, for an amount that is less than what is owed on the loan.
Banks agree to short sales to avoid the hassles and expenses of foreclosures. Moreover, after a foreclosure, the house remains unsold and stands empty for months on end, ending up with the property crumbling.
The government can consider the loan amount forgiven to be income and levy taxes on it. In California, the majority of the first mortgages that were taken out to buy residential houses were not affected but were still heavily taxed, in the case that the homeowners defaulted on certain kinds of refinancing loans and second mortgages.
Faced with this growing problem, the Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 that has saved homeowners from being taxed for loans forgiven. The act prevents such taxes from being levied till the end of 2012.
California State updated its own laws to be in conformity with the federal acts of 2007 and 2008. But an extension for 2009 has yet to be passed. This has left many of those who had short sold their houses to remain in a state of anxious limbo. With state laws conform to federal laws, about 16,000 borrowers would benefit – those who have debts forgiven from 2009 to 2012, according to the findings of the California Franchise Tax Board.
The realtors said that the political heads of California should act immediately so that the families who are already battered and bruised should not be further hurt. Elizabeth Velasco is a realtor with Warren Realty and she said that, “These are people who lost homes and you expect them to pay $20,000 in taxes? They can’t even put food on their table.”
Kate Dalcour of San Diego suffered a loss of $175,000 when she sold her condo last December. If her forgiven amount is taken as income she will have to pay $16,000 as extra taxes to the state.
She is hoping against hope that the government does something about it and rises above the petty wrangling between the Governor and the Legislature. There are thousands like her in the same boat, as well. The economy of the state is in shreds with unemployment standing at 12%.