“Should I Stay or Should I Go Now?”

2012 IS THE YEAR TO DECIDE WHETHER TO SHORT SELL, WALK AWAY OR STAY

Since real estate values began dropping in 2006, many homeowners have been trying to hold on to their homes hoping that the market would turn around or that they may be able to modify their existing mortgages pursuant to one of the various modification plans for which few, if any, people qualify. Many people already have reached the decision that they need to get out from under their underwater houses, and have either walked away and let the property go to Trustee’s Sale or have sold their property in a short sale.  If you have been on the fence whether to unload your underwater home, now is the time to get off the fence and get on with your future. 2012 is the last year for a very important tax break for those people that are walking away from mortgage debt.

When a lender accepts less than full repayment of its loan in satisfaction of the debt, the difference between the balance owed and the amount due to the lender is considered income to the borrower. In addition to losing their home, borrowers were being hit with a tax liability for income that they never received.  For example, if a homeowner owed $200,000 on a home that was “short sold” for net to the lender of $150,000, the borrower would receive a 1099 for $50,000 of “debt forgiveness” even though the borrower suffered a significant loss on the transaction.  In order to provide some relief to such borrowers, Congress enacted The Mortgage Debt Forgiveness Act of 2007 which provides that borrowers may exclude up to $2 Million of debt forgiven on their principal residence.  This law is of utmost importance to borrowers that are planning to walk away from or short sell their homes.  In other times, it could be expected that Congress would pass an extension of the present law, but given the dysfunctional nature of Congress these days a borrower cannot count on the passage of an extension.  Therefore underwater homeowners need to think long and hard about finally getting out of their underwater home now in order to take advantage of this tax savings.

When deciding whether to just walk away or to go through the short sell process, one consideration the homeowner has to include is the fact that the bank may not foreclose on the property right away.  In some cases, banks have listed a property for Trustee’s sale only to post-pone the sale at the last minute, after which the sale may be put off for many months. If the bank were to delay taking back the property until 2013, the income exemption may not be available.  The advantage of a short sale, if approved, is that the homeowner can be assured that the sale will occur in 2012.  Remember also that sometimes even an approved short sale falls through if the proposed purchaser fails to obtain a mortgage loan.  So if you are still on the fence as to whether to stay or leave your principal residence, now is the time to make your decision.  We strongly suggest that you consult your accountant when considering to short sell your home.  Although the exclusion provided under the Mortgage Debt Forgiveness Act is limited to your principal residence, other provisions of the tax code may provide relief from debt forgiveness tax liability. If you have questions or concerns about the prospect of a short sale, feel free to call us at (623)551-9366 and set up a consultation.

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2 Comments to ““Should I Stay or Should I Go Now?””

  1. THIS IS THE FIRAST TIME I HAVE EVER RECEIVED COMMUNICATION FROM CARROLL ATTYS I APPRECIATE ANY INFO YOU CAN SEND ME, I W ENT THROUGH A SHORT SALE HAD 6 OFFERS, 3 WERE CASH ALL THE SAME APPRAISED VALUE, ORIGNAL VALUE 225,000.000 APPRISED SHORT SALE 125,000.00 EVERYONE OF THE OFFERS RAN OUT OF TIME. SO MY REALTOR LEFT. DON’T BLAME HER. CHASE BANK IS UNBELIEVABLE. I AM ONE OF YOUR PLEIN CLIENTS. tHIS WAS ALMOST TWO YEARS OF PLAYING AROUNS

    4

    • Unfortunately the short sale process is not streamlined, and therefore each bank has had their own procedures in place for handling short sales. Within the past year or so banks have become more open to short sales because the banks are finding that they can receive more proceeds from short sales than foreclosures and, in Arizona especially, if a property doesn’t sell as a short sale the borrowers inevitably stop paying the bills and the home sells as a foreclosure anyway. Additionally, within the past year the State of Arizona has established a fund that is now paying for $4,000 in seller’s closing costs when the bank approves a short sale. This payment serves as additional encouragement to approve a short sale offer. Unfortunately there is no recourse to force a bank to accept a short sale, but, if you were to attempt to start the process of a short sale today, in contrast to two years ago, the bank should be more likely to move the process along.

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