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Arizona Short Sale FAQ

Arizona Short Sale FAQ's (7)

What Is My Tax Liability On An Arizona Short Sale?

The Mortgage Forgiveness Debt Relief Act was enacted by congress and applies to the calendar years 2007 through 2012.

When a lender forgives a debt, as in a short sale, the Lender will issue a 1099-C, generally a 1099 creates taxable income that you would be responsible.  However, in the case of debt forgiven on a mortgage, the IRS has made a special exception.

The following scenarios are not taxable income:

  • Primary residence- you have lived in the home as a primary residence- this means most homeowners are not liable for the debt forgiven in a short sale
  • Bankruptcy- debts discharged through bankruptcy are not 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 used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences

In conclusion: most short sale sellers are not responsible for the tax liability created with the debt forgiven.  Most homeowners qualify as their primary residence or due to insolvency.

For more info from the IRS visit The Mortgage Forgiveness Debt Relief Act

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What Is An Arizona Short SaleTransaction?

A short sale is any sale in which the home is sold for less than is owed on the mortgage.  Any real estate sale that there is a loss for the Seller.  A couple of examples:

Example 1: Home sells for less than is owed

Example: home sells for $100,000, mortgage is $200,000, there is a loss of $100,000 plus all costs of the sale

This $100,000 loss is considered the “deficiency”

Example 2: Home sells for what is owed, but all the costs, commissions, title fees, etc create a loss

Example: Home sells for $150,000, mortgage is $150,000, but commissions are $9000, Title fees are $1000, there is a loss of $10,000

Deficiency amount here is $10,000

Instead of the Seller paying the “deficiency” to sell their home, a short sale is the best option.

In  a SHORT SALE- your Realtor (Secure Real Estate), negotiates on your behalf with your current Lender/ Lien Holder(s) to take a loss of the deficiency amount.

So what are various reasons that would create a short sale situation for a homeowner?

In the first scenario above, we would negotiate to have the entire $100,000 deficiency forgiven.  In the second scenario, we would negotiate to have the $10,000 deficiency forgiven.

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Why Would You Choose To Do A Short Sale In Arizona?

You would short sell in Arizona if you meet any of the following conditions:

  • You can no longer afford your home.
  • You are in foreclosure- negotiating with your Lender/ Lien holder to avoid foreclosure is the best option.
  • Your home is worth so little- you make a financial decision to walk away.

Most Lenders/ Lien holders will require some sort of hardship (inability to pay your mortgage.

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If I Short Sell In Arizona, What Are The Legal Ramifications?

Arizona is one of the few states that have anti-deficiency laws.

A.R.S. §§ 33-729(A)

http://www.azleg.gov/FormatDocument.asp?inDoc=/ars/33/00729.htm&Title=33&DocType=ARS

A.R.S. §§ 33-814(G)

http://www.azleg.gov/FormatDocument.asp?inDoc=/ars/33/00814.htm&Title=33&DocType=ARS

These laws prohibit lenders from collecting on a mortgage after the home is foreclosed, when that mortgage was used as purchase money for the property.

The key to the anti-deficiency laws is the way the mortgage was written.  The laws only apply to purchase money mortgages.  This means that you are only protected if your mortgage was used at the time you purchased your property for the financing of the property.  Purchase money mortgages are typically only 1st loans on a property; however, I have seen some as 2nd loans as well.

Any other types of 2nd loans where the mortgage money was not used to purchase the property are not protected by the anti-deficiency laws.  This includes re-financed mortgages, Home Equity Lines of Credit and second mortgages taken out after the purchase of the home.

If you have a 2nd loan on the property and you are letting the home foreclose, I would suggest contacting a bankruptcy attorney or a certified public accountant regarding the consequences and your options to protect yourself from the deficiency balance.

Because the anti-deficiency depends on your specific mortgage, it is best to short sell and have all terms your Mortgage company agrees in writing!  This is in the form of a Short Sale Approval Letter- the Approval includes all terms moving forward.

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What If I Don’t Like The Terms In My Short Sale Approval?

The decision is all yours!  Our goal is to help you into a better financial position than you currently are in with the home.  So if you don’t like the  terms, you can always decide to not move forward with the short sale.

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Who Pays For The Bank To Approve My Short Sale In Arizona?

DO NOT PAY ANYONE to Short Sell your home!  There are tons of scammers out there collecting “upfront” costs and running off with your money.

The 2nd part of this answer is, you may have to pay your lender something to complete the short sale.  In many cases the Mortgage companies will ask for some cash at closing.  Generally this happens if you have Mortgage Insurance, meaning you didn’t put any money down on your home.  Most of our homeowners don’t have to pay at the closing, however, some have decided to pay their Mortgage Company because the small amount of money paid is much worth the relief of them being done with the house.

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Why Would The Mortgage Company Or Bank Accept A Short Sale?

Your mortgage company makes a greater profit by allowing you to Short Sale than foreclosing on your house. And this puts you, the homeowner, in a better position, not worrying about your Mortgage Company ever suing you, you have all terms in writing and you can move on with your life.

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