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The Mortgage Debt Forgiveness Act of 2007 and the Emergency Economic Stabilization Act of 2009 provide tax relief for debt forgiven through a short sale or foreclosure. In the Internal Revenue Code Section 108, discharge of qualified debt from the purchase of a principal residence can be excluded from income if the discharge occurs in calendar years 2007 through 2012. In order to understand how these laws apply to your specific mortgage, you must determine the following:

1) Is it a recourse or non-recourse mortgage?

a. Recourse -the borrower is personally liable for the debt and the lender can pursue collections

b. Nonrecourse – the lender is limited to the property and the borrower is not personally liable for any deficiency

i. California – is a nonrecourse state so most loans to purchase a home are nonrecourse

ii. California – most loans from refinancing or a home equity line of credit are recourse

2) Will there be cancellation of debt?

a. When nonrecourse mortgages are foreclosed or sold as a short sale, the mortgage is thereby satisfied

b. For recourse mortgages, the remaining debt is the difference between the principal balance of the debt and the fair market value of the property and collections can be and often are pursued

In California SB 1055 was the state tax law intended to follow the federal legislation and was only effective for 2007 and 2008. Currently, the state is considering new legislation that would adopt the federal law through 2010 but it has yet to be approved.

For more information regarding the current federal tax laws go to the Internal Revenue Service website for further information.

It is important to understand how the federal and state imposed tax laws will apply to your specific situation be sure to consult an attorney and CPA prior to making any decisions pertaining to foreclosures and short sales. As Stockton’s number 1 listing agent, I would be happy to answer your questions regarding a Stockton short sale, Lathrop short sale, Lodi short sale, Tracy short sale or Manteca short sale.

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