CRITICAL SHORT SALE ISSUES
 From the many calls and emails I receive, I can tell there is still a lot of misunderstanding surrounding a lot of issues involving short sales. The following are a number of recurring critical issues involving short sales.

 1.  CALIFORNIA INCOME TAX APPLIES TO ALL SHORT SALES. Unlike Federal law which extended its exemption until December 2012, on certain loans which received debt relief on a short sale beginning in January 2007. However, California only gave this tax break on certain qualifying loans for debt relief on short sales that closed escrow between JANUARY 1, 2007 through DECEMBER 31, 2008. Therefore, there is no exemption for California Income Tax on short sale debt relief this year or in any future years until, and if, the California State Legislature ever decides to pass a bill extending this relief.

 Remember that even under Federal Income Tax rules, only a very limited number of short sales in which there is debt relief on loans are exempted from income tax. Those are only loans on the personal residence of the borrower, and specifically a loan to purchase the personal residence, a loan to refinance the purchase money loan without taking out any money (i.e. essentially an interest rate change), and loans on personal residences in which the  money is used to improve the personal residence. In other words, there is no tax relief even on a personal residence if the loan receiving the debt relief was a loan for cash to the owner which was spent on something other than improving the personal residence.

 2.   A NON-RECOURSE LENDER CAN MAKE A  SHORT SALE DEAL WITH THE OWNER FOR THE OWNER TO CONTINUE TO MAKE PAYMENTS AFTER THE CLOSE OF ESCROW.  There is much confusion over this issue because of the perception that the California “anti-deficiency” statutes and case law apply to short sales. This is incorrect. The “anti-deficiency” statues in California apply when a foreclosure sale takes place. The whole point of a short sale is to avoid the foreclosure sale, and if the debt is forgiven in a short sale, then no monies would be due to a Lender after the close of escrow. If a foreclosure sale takes place, the owner may be subject to a deficiency judgment if the loan is a recourse loan, i.e. it is not protected by the California “anti-deficiency” statutes.

 These statutes and related case law are somewhat complicated in defining recourse versus non-recourse loans, sold out junior lien holders, etc. Therefore, every few years or so I publish a Newsletter which discusses the basic anti-deficiency rules. You need only review my April 2008 Newsletter for an understanding of the basic “anti-deficiency” rules. However, the Owner must always be referred to a lawyer for legal advice if they are trying to make a decision as to whether or not to close a short sale instead of letting the property get sold at a foreclosure sale.

 Remember that there are two types of short sales. A short sale in which the Lender not only releases the lien ( i.e., reconveys the Deed of Trust) but agrees to cancel the note or in some other way in writing, agrees to forgive any debt remaining after the payoff at the close of escrow. On the other hand, some Lenders, even those that could not collect money from the owner/borrower after a foreclosure sale, sometimes merely offer the owner/borrower a “Release of Lien” without a cancellation of the Note. In this case, the escrow closes because the Deed of Trust is removed, but the Seller is obligated to continue to pay on the Note. This is because there was no forgiveness. Some Sellers go along with this arrangement of continuing to pay on the Note after the close of escrow because the Listing Agent did not explain the contents of the Lender’s “consent” letter.

 Therefore, there are certainly cases in which a foreclosure is preferable over a short sale. Here is the example: The Lender would not be able to seek a deficiency after a foreclosure sale because it’s a non-recourse loan under the anti-deficiency statutes and the other loan or loans is/are also non-recourse loan(s). Now, the Seller gets a “consent letter” on a short-sale transaction involving these facts, but the lender or lenders are only agreeing to a “Release of Lien” without cancelling the debt. Therefore the Seller would then have to make payments on the note (s) after the close of escrow. In this case, the Seller would financially be better off with a foreclosure because after the foreclosure, the Seller would owe nothing to the lender(s).

 3.  THE PROPER USE OF C.A.R. FORM SSA (SHORT SALE ADDENDUM). First, a date must be filled in on paragraph A which allows either party to cancel after that date if there has not been a written short sale approval.  I have seen files in which the SSA form was lacking any date in paragraph A.  It would obviously be difficult to determine the outcome of any dispute involving an SSA without a date filled in paragraph A. Second, paragraph B involves two choices. These choices must be carefully considered and properly negotiated depending on which party the agent is representing. The first choice is whether or not the time periods for the contract begin immediately or only after there is written short sale consent. The second choice deals with the disposition of the deposit. Is it cashed immediately or only upon the written short sale consent? These are critical issues for the Buyer and Seller. Finally, please use my ADDENDUM TO C.A.R. SSA FORM WHICH WAS PUBLISHED IN BOTH MY MAY AND JULY 2008 NEWSLETTERS.
 
- Vince MacIsaac -