Selling Short can be scary

Home Front: Selling short can be scary

By Jim Wasserman jwasserman@sacbee.com

http://www.sacbee.com/business/story/2070978.html


As attempted short sales proliferate across the capital region, many people are worried about bad things that might happen to them – even if they succeed in selling.
Foremost among worries are nasty state tax bills for forgiven debt. With short sales, banks take less than they are owed to avoid the high costs of foreclosing. And governments typically have taxed that kind of forgiven debt as extra income.
Home Front checked this week into the status of legislation that would get people off that hook. As many know, the federal government already has ordered the IRS not to tax forgiven mortgage debt through the end of 2012.
The state of California did the same last year with Senate Bill 1055. It told the Franchise Tax Board not to tax forgiven mortgage debt through the end of 2008. So what about 2009 and beyond? Two bills to extend the protection through the end of 2012 – Assembly Bill 111 and SB 97 – are parked in Assembly and Senate revenue and tax committees.
Technically, if they don't pass, people who do short sales in 2009 will owe taxes on that forgiven debt on April 15, 2010. But don't fret yet; SB 97, at least, by Sen. Ron Calderon, D-Montebello, provides an out.
Even if passed after April 15, "the bill says there are no penalties or interest imposed for failure to pay," said Eileen Newhall, consultant to the Senate Banking, Finance and Insurance Committee. In other words, if the bill passes after the tax filing deadline there are no tax problems for those who do short sales in 2009. (Again, this is only for people who own and occupy their homes, not for investors.)
There's another out, which also applies to investors, said Linda Hainsworth of Sacramento. She conducts classes on short sale complexities for other real estate agents.
"There's an exemption if you're insolvent," she said. The definition of insolvency is tricky, she added, so advice is best taken from a tax attorney.
A second concern
People trying to do short sales also are worrying about reports that some lenders are selling second mortgages – typically the down payment loan – to collection agencies. They fear that in three or four years those agencies will be on the phone seeking payment.
Hainsworth confirmed it's happening. Elk Grove bankruptcy attorney Jonathan Stein said the owner of a "second" has up to four years after the default date to collect. He said it's critical that your real estate agent negotiates a solution to the second.
Stein fears some people will rebuild credit scores after the hit of a short sale only to file bankruptcy when confronted later by a collection agency.
Both offer the same counsel: get good advice about that short sale.
Credit extension in limbo
So, what's the newest on extending $10,000 state tax credits to more buyers of new unoccupied homes in California? The short answer: nothing.
As you'll remember, the Franchise Tax Board stopped taking applications July 3, while home builders and lawmakers tried to work out a deal to extend the tax credit to thousands more buyers. But lawmakers left for summer vacation without a deal.
None of three bills dealing with extending the credit – AB 765, SB 49 and SB X3 38 – shows signs of changes to make it happen. Staffers say to check back after Aug. 17. Meanwhile, the Franchise Tax Board has awarded certificates worth $70.9 million so far to 7,567 new homebuyers.
Getting back to good
One new housing project at a time, the capital region is restabilizing. One project that's finally gone all the way is North End Lofts at 14th and C streets in the Mansion Flats district of downtown Sacramento. It's an 11-unit loft project that started in 2006 with sales prices in the $400,000s. As the housing bust settled in, the developer lost the project to the bank, which recently slashed prices to the low $300,000s.
Thursday, property managers Frank Sherman and Cory Smith were finishing the interior of the last unit sold. The project is an anchor now in a neighborhood that needs it.
New occupants include Lynn Mayo, who moved to Sacramento from Portland.
"They're really nice," she said of the three-story lofts. "Hopefully, this will be an up-and-coming neighborhood."
Also just arrived are Sacramento artist John Krempel and architect Phil Harvey. They sold their house in Land Park and moved downtown.
"We've been looking for something like this for a long time," Krempel said.