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Q & A on Short Sales | Part 1

There are a  lot of homeowners out there who are underwater, and they just don’t know what to do but wait to hear about their loan modification. Being a Realtor, I’m often asked by homeowners regarding their their options and what they can do.  So I decided to shed some light on the situation and help out those homeowners who are in need.

The Pitfalls to loan modification? (Loan Modification or Short Sale?)

Getting a loan modification can be the best possible solution to a financial hardship, but could also potentially be the worst. A loan modification is only the BEST solution if the outcome resolves your financial woes and is permanent. If not, it becomes a band-aid to a wound that won’t ever heal and will become much worse.

  • For Example, the 2007 Mortgage Forgiveness Debt Relief Act passed by the Bush Administration in 2007 expires at the end of 2012.
    • This bill forgives the property owner’s losses on their principle residence for federal income tax purposes.
    • Outside of this bill, the property owner would be 1099 on the loss that the lender incurred and taxed as income.
    • This could amount to an unbelievably large tax bill that could take years and years for the typical family to be able to pay off.
  • Therefore by agreeing to a temporary modification which keeps you in the home for the next five or so years, you would eliminate yourself from the umbrella of this policy. If you owe $500,000 and the property sells for $300,000 then you would be 1099 and taxed on $200,000 of income. ***
  • If you cannot obtain a permanent worthwhile loan modification, your best bet is to pursue a short sale.

What is a short sale?

A short sale is not a term that refers to the time frame of the sale but to the deficiency or loss on the loan. The lender accepts the loss on the difference of what is owed and what the current market will bring.

  • In a short sale, the property owner is underwater and owes more on the property than it is worth. In most cases, an agent will sell the property at current value and negotiate with the lender to accept a loss at no cost to the property owner.

What is the Cost to do a short sale?

In most cases, short sale costs are absolutely free to the property owner as the lender will incur all the fees and costs.

What are the tax consequences of a short sale?

  • The 2007 Mortgage Forgiveness Debt Relief Act forgives losses on principle residences for Federal tax purposes.
  • The state act has since expired and as of right now state tax will be owed. The federal act does not cover investment properties, second homes and income property.
  • On April 12, 2010 the California State Senate passed Senate Bill 401 that exempts distressed homeowners from state income tax liability with the short sell, foreclosure or loan modification on their home.
  • It is very important in all cases to contact a CPA or tax attorney to find out what your tax liabilities are.

Stay tuned for the 2nd part of my short sale series to find out the advantages of the short sale,  how it works, and how it can affect your credit score. You can also contact our office for more information at 714.283.6649.


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