Short Sale Tax Relief Expires December 31, 2012

The tax relief law that allows homeowners to exclude from income certain debts that have been forgiven by their lender is set to expire December 31, 2012. Why is this important now? Because it can take up to 6 months to receive formal short sale approval and close a short sale escrow.

According to a recent article in the Los Angeles Times, when this provision expires Sellers who participate in short sales WILL have to report the debt relief they receive from the short sale lender as income on their federal tax returns. .As of today, the tax break is not extended, so time is of the essence …

The following are the main items that escrow looks at/needs when processing a short sale:

1. Short Sale Addendum to the Purchase Contract

2. Real Estate Commissions

a. Escrow will use the Short Sale Approval letter to determine permissible broker commissions (regardless of what the listing

agreement states)

b. MLS should provide clear provisions for short sale lender commission changes

3. Written Short Sale Approval Letter

a. Escrow will verify that the Sales Price and Proceeds amounts match what is stated on the Short Sale Approval letter

b. In the case of proceeds to the Lender, escrow will conrm that they receive , at a minimum, the amount stated on the

Short Sale Approval letter

c. Escrow must close within the stated time frame or an extension and an updated Short Sale Approval letter will be required

In order to prevent closing delays, Sellers should be made aware of the fees that Short Sale Lenders may not approve and/or require additional information (see a limited, non-inclusive list below).

Short Sale Negotiator Fees

• Home Warranty

• Retrofit work*

• Termite Work *

• Delinquent Property Taxes**

• HOA fees***

* Short Sale lender typically approves inspection fee but not the actual retrofit or termite work

** Re-submission to the short sale lender for a revised short sale approval letter may be needed (and may cause closing delays)

*** Short Sale lender may approve payment of HOA dues but not always approve delinquencies or certain other HOA fees such as Transfer fee or Document Fee

Typically when the Short Sale Lender does not approve the Seller’s payment of certain escrow/closing fees, the costs may be paid for by the buyer provided its permitted in the Short Sale Approval letter.

Sources:

1. http://articles.latimes.com/2012/jan/29/business/la--lew-20120129

2. http://www.irs.gov/individuals/article/0,,id=179414,00.html

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has

been gathered from sources believed to be reliable, please note that individual situations can vary, therefore, please consult a professional for specific advice.