On the Market: Short sales

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

There’s good news for thousands of California taxpayers who sell homes at a loss, a practice known as a short sale. A measure (SB 401) signed last week by Gov. Arnold Schwarzenegger waives state taxes on mortgage debt forgiven in a foreclosure or short sale.

The federal liability waiver for mortgage debt relief is still in place, but the state waiver was set to expire at the end of 2008. The new state provision applies to mortgage debt forgiven by lenders during tax years 2007 to 2012.

Without the tax shelter, the difference between the mortgage debt and sale price on a short sale becomes taxable income. So a state earner making $65,000 who sold a home at a $100,000 loss would be responsible for taxable income of $165,000.

On April 5, the Obama administration expanded the existing Home Affordable Modification Program to include new federal guidelines and incentives for lenders and qualified borrowers. The new Home Affordable Foreclosure Alternatives program helps eligible homeowners avoid foreclosure by providing options for short sales or deeds-in-lieu of foreclosure.


Borrowers are required to be owner-occupants of the principal residence, show financial hardship and have a first lien mortgage originated on or before Jan. 1, 2009 with a principal balance that does not exceed $729,750. In addition, the borrower’s total monthly mortgage payment must be greater than 31% of his or her monthly gross income.

Under the new HAFA program, borrowers can get up to $3,000 in relocation assistance. Service providers can get $1,500 for administrative and processing costs. Forgiven debt that does not exceed the debt used for acquisition, construction or rehabilitation of a principal residence is not taxed as income. (Make sure that you check these guidelines with a tax advisor or the IRS.)

If the home remains unsold despite a good-faith effort by the owner, the lender may accept a title transfer and release the borrower from the debt and further claims through a deed-in-lieu of foreclosure. For more information about HAMP programs, visit Making Home or call (888) 995-4673.

Here are a few of the many short sales on the market.

849 E. 101st St., L.A. Listed at $75,000 at, this three-bedroom, one-bathroom single-family home was built in 1944 in 941 square feet. According to public records, the property last sold on Oct. 3, 2005 for $337,000.

1018 W. 65th Place, L.A. Listed at $90,000 at Redfin, this three-bedroom, two-bathroom single-family home was built in 1924 in 1,032-square-feet and renovated in 1966. According to public records, the property last sold on July 5, 2006 for $437,000.

2766 Armacost Ave., L.A. Listed at $649,000 (the bank is reportedly looking for $680,000) at Redfin, this three-bedroom, two-bathroom single-family home was built in 1950 in 1,812-square-feet and is renovated with upgrades throughout. According to public records, the property listed for $799,000 in February 2009.

-- Michelle Hofmann