Law Offices of Elizabeth A. Edwards
462 Danbury Road
Wilton
CT 06829
P.O. Box: 936
Georgetown
CT 06829

What Is a Short Sale?

A Short Sale occurs when real property is sold and the lender agrees to accept less than the amount owed on the mortgage and to release the lien that secures the debt. A Short Sale can often be used as an alternative to foreclosure. Contact experienced real estate lawyer Elizabeth A. Edwards.

Complex Transaction

Short Sales must be approved by the lender. Just because you owe more than your home may be worth doesn't mean the transaction will qualify as a Short Sale. The Short Sale process is complex. You need advice from a knowledgeable real estate attorney. Experienced real estate lawyer Elizabeth A. Edwards can provide the guidance you need in navigating the often treacherous waters of Short Sales and foreclosures. Short Sale attorney Elizabeth A. Edwards can help you:

Determine if a Short Sale is a Realistic & Practical Approach for you:-

  • Understand the Short Sale process and the deadlines involved
  • Negotiate with all parties including your lender, your lender's attorney, your Buyer, your Buyer's attorney, asset managers and others
  • Prepare contracts
  • Represent you in a foreclosure proceeding, if applicable
  • Prepare the Short Sale package for the lender's approval
  • Prepare closing documents
  • Attend the closing as your representative, disburse funds as appropriate, obtain and record necessary releases

Advantages of a Short Sale

  • Avoid foreclosure:

    A Short Sale does not require auction sign, court action or other negative consequences of a foreclosure process. Successful negotiation of a Short Sale can avoid the negative impact and public exposure associated with foreclosure.

  • Avoid bankruptcy:

    Even if you are behind in your mortgage payments and owe more than your house is worth, successful negotiation of a Short Sale can pay off your mortgage and allow any shortfall to be forgiven by your lender, frequently allowing you to avoid bankruptcy.

  • Discharge the balance of your mortgage debt:

    In a Short Sale your lender agrees to accept less than the full amount owed on your mortgage and to release you from your obligation to pay the balance, or the deficiency.

  • Avoid paying taxes on the deficiency:

    If you owe a debt to someone else and they cancel or forgive that debt, the cancelled or forgiven amount may be taxable. The Mortgage Debt Relief Act of 2007 generally allows you to exclude income from the discharge of debt on your principal residence. Debt reduced through mortgage restructuring as well as mortgage debt forgiven in concoction with a Short Sale or foreclosure, qualifies for the relief.

  • Less impact on your Credit Score:

    A Short Sale generally has about 1/2 the negative impact on your credit scare as a foreclosure or bankruptcy proceeding.

Please contact real estate lawyer Elizabeth A. Edwards for additional information or to schedule an appointment.

The Mortgage Forgiveness Debt Relief Act

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

Cancellation of Debt

If you borrow money and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.

Here is a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Taxability of Cancellation of Debt Income

Cancellation of debt income is not always taxable. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or does not result in cancellation of debt income. However, it may result in other tax consequences.

The Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

Exclusion of Income

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?

No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.

Refinancing and the Mortgage Forgiveness Debt Relief Act

Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified..

How long is this special relief in effect?

It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2013.

Maximum amount of forgiven qualified principal residence indebtedness that can be excluded from income

The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven.

Please contact real estate lawyer Elizabeth A. Edwards for additional information or to schedule an appointment. We serve clients in Danbury, Ridgefield, Wilton, Stamford, Georgetown, Westport, Norwalk, Trumbull, Greenwich and throughout Fairfield County.

 

At The Law Offices of Elizabeth A. Edwards, LLC, I represent clients throughout Fairfield County, including Georgetown, Ridgefield, Danbury, Wilton, Weston, Redding, Westport, Fairfield, Norwalk, Easton, Trumbull, Bethel, Newtown, Darien, New Canaan, Stamford and Greenwich, Connecticut.

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