Short Sale vs. Foreclosure: Taxes and Deficiencies : Irvine Real Estate : Irvine Homes for Sale

by Robert Mack on March 14, 2011

in Latest News, Sellers

If you thought the IRS couldn’t possibly make losing your home even worse, think again. They’ll likely be there with their hands out expecting a cut if you short sell your home or even if you’re foreclosed upon, in some cases. It may not be fair but the only way you can avoid it is to get short sale help from a professional who knows how to make sure that you get the best deal possible. Make sure you talk to an accountant, as well. Possibly the only thing worse than taxes are surprise taxes!

When you go through the mortgage foreclosure process, a great deal will be riding on whether or not you have more than one loan against your home. If you have one mortgage and it was only for the money actually used to pay for the home, you’ll likely walk away from the debt once the home sells. If you go through a short sale, you’ll most likely walk away with far less damage to your credit because of having worked with the bank proactively. This is the first and most important difference between the two options.

If you have home equity lines of credit or other liens against your home, those creditors can go after you for the full amount if you’re in California. With a single mortgage written for purchase money, they can only hold you liable for the property. The other creditors, however, can hold you liable for everything you owe them through a deficiency judgment. The best way to avoid this becoming a total disaster is to act right away. Start by talking to someone who understand the California foreclosure timeline and what you can do to avoid step 1 in that progression of events.

If you know you’re going to have trouble, you can oftentimes get foreclosure postponement by starting to work with the bank right away. You’ll have to have a competent realtor present them with your short sale plan. If they approve it and give you a full release, it means that you walk away from the debt after the sale of the house. The house sells for market value and all your debt is forgiven beyond that amount. The IRS may assess taxes against the amount you’re forgiven as income, however, so it’s important to talk to your accountant when you go through with this option. The Mortgage and Debt Relief Act of 2007 may help you avoid paying any taxes on the debt forgiven if you’re short selling you primary residence.

Posted on Irvine Orange County Real Estate Market News

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