Internal Revenue Service Will Not Penalize California Families Losing Homes to Short Sale
Senator Boxer Wrote the IRS in August Asking How They Will Treat California Short Sales After the Expiration of the ‘Mortgage Forgiveness Debt Relief Act’
U.S. Senator Barbara Boxer (D-CA) released a letter earlier this week she received from the Internal Revenue Service (IRS) clarifying that California families who have lost their homes in a short sale will not be subjected to a tax penalty for debt forgiven after the federal law prohibiting such penalties expires at the end of this year.
“California homeowners have struggled through years of economic hardships during the Great Recession,” Senator Boxer said. “I am relieved that these families will not face a burdensome tax penalty just as they are trying to rebuild their lives with a short sale.”
California law protects homeowners from lenders attempting to collect additional assets in the case of a short sale. But until Senator Boxer’s inquiry, the IRS had not clarified that homeowners would not face taxes on the forgiven portion of their debt through a short sale. Senator Boxer first wrote the IRS on August 28th of this year with concerns about what the expiration of the Mortgage Forgiveness Debt Relief Act would mean for Californians.
“Because the federal Mortgage Forgiveness Debt Relief Act of 2007 exempted any forgiven mortgage debt from being counted as income, homeowners in California and elsewhere who engage in a short sale currently do not have to worry about being hit with a large tax bill on this forgiven debt,” Senator Boxer wrote.
Without a clarification from the federal government that California law protects families from receiving a tax bill in the event of a short sale, once the Mortgage Forgiveness Debt Relief Act expires at the end of this year, Senator Boxer warned that: “…distressed borrowers may face the unfortunate incentive to go to foreclosure rather than seek a short sale in order to avoid a large tax bill.”
The IRS replied with excellent news for California homeowners, clarifying that these families will not face burdensome tax penalties as a result of making a short sale. The California Association of Realtors has projected that even under the recovering housing market there may be as many as 55,000 short sales in California in 2014, with an average debt forgiven of $60,000 per short sale – an amount that could have been taxable without this clarification.