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Does a new California law change tax consequences of a short sale?

October 9, 2014


From:  David
Date:  05 Dec 2011

How is your article, "Tax Consequences of a 'Short Sale' of Real Estate vs. Foreclosure," changed for Californians by Senate Bill 458 that recently became law? Are all amounts not repaid considered non-recourse and therefore not taxable? Will you update the article?

Answer

Date:  12 Dec 2011

Hello David,

Thank you for writing. Senate Bill 458 extends anti-deficiency protection to junior mortgages in addition to first mortgages for residential housing up to four units, which were covered by Senate Bill 931 earlier in the year.

I discussed this issue with an attorney friend. It seems to us the home mortgage after refinancing is still non-recourse, because the short sale requires the lender’s consent. Until the lender gives consent to the short sale, the lender isn’t limited to the proceeds of the property for satisfaction of the loan.

Based on that understanding, my article is unchanged, except adding some discussion about the two statutes. I will be writing an update in January 2012.

This may not be the last word on this issue. I expect to see litigation about whether the status of mortgages has been changed to non-recourse in the future, but we may not see rulings on the issue for years.

Best wishes,
Mike Gray

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