All good things must come to an end, right? 2012 is the year of countless predictions of our world as we know it coming to an end. But here's one fact of a good thing coming to an end - The End of The Mortgage Debt Relief Act (MDRA) which forgives your loss in a short sale or foreclosure from being taxable income. Without it, you could owe tens of thousands of dollars. In fact, the Sacramento Bee just came out with an article that confirms what I have been saying since last year, time to fish or cut bait.
But the way the IRS sees things, if you borrow $500,000 and sell it as a short sale or lose it in foreclosure and the lender gets $200,000, you gained $300,000 because you borrowed it without having to pay it back. And let's say you are in the 35% bracket, then you would owe the IRS a whopping $105,000! Only in the 15% or so bracket? You would still owe $45,000.
This is something that needs to be taken seriously. Owing your lender and owing the IRS are two very different things.
Many are thinking they will stay in their homes until late in the year and then put their home up for sale so that it meets the deadline of 2012. However, it MUST close by December 31, 2012 and with short sales, you never know how long a short sale will take. In fact, I recently closed two short sales in January of 2012 that started back in April of 2011. I have also seen others take over a year to negotiate and close. There are some exceptions to the rule in which a short sale will close in about 3 months, but the norm is 5-6 months with many exceeding that time frame.
And what about the buyer? What if they cancel the short sale because they found something better, cheaper or just lost their job? It happens all the time. In fact, about 40% of short sale transactions, if not more, end up sold and resold two times or more before finally closing escrow. So which side of the 40% do you think you will fall in?
The fact is, at this moment, the MDRA is scheduled to end on December 31, 2012. There are no extensions that we know of and you have to go with what you have.
In California, in 2011 two Senate Bills went into effect which allows you to do a short sale of your home without having to pay the difference to your lender regardless if it was a refi or a recourse loan. SB931 and SB458 allow you to walk away from a short sale without having to pay the difference to your lender, no kidding. It must be noted however that these two bills only apply to short sales and not to foreclosures and a few restrictions apply, very few.
When it comes down to it, this is the year and this is the time when you need to do something if you are in a home that is upside down whether you are having problems making your payments or not. If you owe a lot more for your home than what it is worth, it could be 15 years or more before you break even depending on how upside down you are. Basically, you are paying rent for that amount of time and it is a bad debt.
I am not advocating that everyone sell their upside down home, I just think that you should know your rights and options and do the math to see what makes sense for you. You need to put your emotions aside and think business first and make the best possible business decision for you and your family, and not for your lender. Lenders unload bad debts all the time without thinking twice about it.
The time for you to start thinking and start deciding is now.
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