Source: http://ashouri.com/short-sales/
Timestamp: 2017-08-19 01:43:28
Document Index: 749003005

Matched Legal Cases: ['§ 726', '§ 580', '§ 580', '§ 580', '§ 580', '§ 580', '§ 726', '§ 1785', '§ 10131', '§ 10026', '§ 2970', '§ 2945', '§108', '§ 108']

Short Sales – Ashouri Law Office
A . A lender may foreclose on the defaulting borrower's real property which secures the loan. There are two types of "foreclosures" available to a lender: a trustee's sale and a judicial foreclosure. (Bank of Italy National Trust & Savings Assoc. v. Bentley, 217 Cal. 644 (1933).) Technically, a trustee's sale is not a "foreclosure" but the term has been used for both a trustee's sale as well as a judicial foreclosure.
A. Depending on the situation, a lender may consider one of the following:
A. A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. (Cal. Code Civ. Proc. § 726 (b).) A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment. See Question 4 for more details.
A. It depends. California has "anti-deficiency statutes" that protect certain borrowers from deficiency judgments. Under those circumstances, a lender would opt for a trustee's sale foreclosure which is quicker and less expensive than a judicial foreclosure. A trustee's sale foreclosure does not involve the courts. Generally, there are five situations in which a deficiency judgment is prohibited:
Purchase Money. If the loan is obtained to purchase a residential 1-4 unit dwelling all or part of which is owner occupied and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. This loan is entitled to "purchase money" protection. (Cal. Code Civ. Proc. § 580b.) Note, however, that should the buyer refinance the home, the new loan is no longer "purchase money." Thus, the buyer would lose the protection against a deficiency judgment in the event of a default.
Seller Carryback. If the purchase money loan for any type of real property is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower/buyer. (Cal. Code Civ. Proc. § 580b.)
Trustee's Sale. A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee's sale foreclosure (a non-judicial action). (Cal. Code Civ. Proc. § 580d.)
3 Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of judicially-ordered sale. (Cal. Code Civ. Proc. § 580a.)
Fair Value Limitations. A deficiency judgment is limited by the difference between the amount of the indebtedness and the fair market value of the property, unless the actual sale price exceeds that value. (Cal. Code Civ. Proc. §§ 580a, 726 (b).)
A. No. A lender cannot sue on a debt secured by a mortgage or trust deed except for a judicial foreclosure. This is called the "one action rule" or "one form of action rule." (Cal. Code Civ. Proc. § 726.) One exception to this rule is if the security for the loan has become "valueless" after the lender's security interest was recorded (e.g., a "wiped out" junior lien holder). In this case, the lender can sue directly on the debt (note) unless the borrower's loan falls into category 1) or 2) in Question 4.
A. Lenders may have ample incentive to negotiate a short sale with a distressed borrower. For example, should the lender take back a property pursuant to a foreclosure sale, the lender would become responsible for a variety of costs, including property maintenance, utilities, HOA fees, and might risk destruction of the property by vandalism. Furthermore, lender-owned properties (REO) may take a long time to sell, in part because so many REO properties are now for sale.
A. Yes. Lenders will report the short sale as being settled for less than the full balance. This would show up on the borrower's credit report as a negative mark for seven years. (Cal. Civ. Code § 1785.13.)
A. Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower's credit report as a "foreclosure in process," "foreclosure proceedings," "current was 30," or in some other way. Any such terms, or other similar reporting comments, harm that individual's overall credit rating.
A. Typically, no. The short sale is usually reported to credit reporting agencies as settled for less than the full balance. However, a borrower may try to negotiate this at the time the short sale is being arranged.
A. Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower's best interest. Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.
Generally speaking, any relief of indebtedness from a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale.
A. A short sale consultant is someone who advises on short sales. Depending on the agreement between the parties involved, the typical short sale consultant assists a homeowner or listing agent to prepare a short sale application package, submit it to the homeowner’s lender, and negotiate with the lender on the homeowner’s behalf to approve the short sale.
A. Yes. Generally, if a short sale consultant negotiates real estate loans or performs services for borrowers or lenders, both the short sale consultant and the short sale consulting company must be properly licensed with the California Department of Real Estate (DRE). More specifically, unless an exemption applies, a real estate license is required for someone who, for compensation or in expectation of compensation, does or negotiates to do any of the following acts on behalf of another:
Collects payments for loans secured by real property. (Cal. Bus. & Prof. Code § 10131(d).)
A. No, unless certain requirements are met. An advance fee is a fee charged upfront for services not yet performed. An advance fee is broadly defined to include a fee claimed, demanded, charged, received, collected or contracted from a principal for negotiating real estate loans (Cal. Bus. & Prof. Code § 10026). Among other things, no less than ten calendar days before collecting an advance fee, a real estate broker must submit to the DRE the advance fee agreement and all other materials to be used for advertising, promoting, soliciting, or negotiating the advance fee (10 Cal. Code of Reg. § 2970). Furthermore, if a Notice of Default has been recorded against a property involving one-to-four owner occupied residential units, an advance fee is prohibited for foreclosure-related consulting services under the foreclosure consultant law (Cal. Civ. Code § 2945 et seq.).
A. Yes, if the property being sold is a residential 1-4 unit dwelling and the transaction doesn't fall into one of the regular TDS exemption categories. No exemption exists for a short sale transaction in which the borrower sells the property to an outside buyer, using the sale proceeds to pay off the lender.
A. Yes. Short sales are treated just like any other sales transaction.
A. Probably. Although the lender is technically not a party to the real estate contract, lender approval is nearly always a contingency of the agreement. Therefore, REALTORS® should obtain the client's permission to keep the lender apprised of any relevant developments, including the presentation of other offers.
A. No. Listing agents working with distressed sellers owe them a fiduciary duty. Since in a short sale situation a lender could choose to foreclose on the seller, the lender's interests are potentially adverse to the seller's interests. Attempting to negotiate a future listing agreement with the lender raises the issues of "to whom is the agent's loyalty devoted" and "has the agent violated the fiduciary duty he/she owes the seller." The safer practice is to avoid putting oneself in such a position.
A. It is always in the best interest of the borrower to keep the lender informed. If the borrower is in default of the loan and is contemplating a short sale, it would be best for the borrower to let the lender know before the foreclosure proceedings are well under way. The lender may or may not grant more time to the borrower to find a buyer. In general, the process goes as follows:
A. Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:
Proof of ability to purchase, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand;
Q 22. What are the tax implications of a short sale?
A. A short sale, where the lender agrees to reduce some or all of the outstanding debt, may give rise to forgiveness of debt income (also called "cancellation of debt" income). The amou♠ Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code §108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:
The indebtedness is discharged after January 1, 2007 and before January 1, 2013. (The end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).
The unpaid balance of the loan is $300,000;
The sales price (FMV) is $250,000;
The taxpayer's adjusted basis in the property is $50,000.
Q 23. Are there any other exemptions from the taxation of cancellation of debt income?
A. Yes. There are four other circumstances, in addition to what was discussed in Question 9 where the taxpayer can get relief from taxation on cancellation of debt income:
The taxpayer is insolvent (the taxpayer's debts exceed their assets, but the cancellation of debt is forgiven only to the extent of the insolvency);
The debt is discharged as part of a bankruptcy proceeding;
The debt discharged is qualified farm indebtedness; or
The debt discharged is qualified business indebtedness.
For all of the above, any reduction in indebtedness will be applied to reduce the taxpayer’s basis in the property. (26 U.S.C. §§ 108(a), 108(b), 108(c) and IRS publication 908.)
Q 24. Are there any exemptions from the capital gains taxation in a foreclosure, deed in lieu of foreclosure or short sale if the property is a principal residence?
A. Yes. If the sale, whether through a foreclosure or deed in lieu or short sale, generates capital gains and if the property was the seller's principal residence, the seller may be able to use the capital gains exclusion of $250,000 if single and $500,000 if married filing a joint return. This exclusion does not apply to ordinary income from cancellation of debt.
Q 25. Which is better for an owner facing a distress sale: a foreclosure, a deed in lieu of foreclosure or a short sale?
Q 26. What is a quick summary of these taxation rules?
*No Ordinary Income if "Qualified Principal Residence Indebtedness" (**See the discussion in Question 9)
Q 27. Does California follow the debt relief rules set forth above?
A. Recently passed California law, SB 1055, conforms California Revenue and Tax Code Section 17144.5 to federal law with the following exceptions:
Q 28. Where can readers obtain more information on the subjects covered above?
For the complete and other related articles visit California Association of Realtors