Short Gift

Short sale sellers received a Christmas present this season from their former antagonists, the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB). The IRS and the FTB gave short sale sellers the gift of: Nothing. As in, “You owe us nothing.”

That’s the kind of nothing short sale sellers needed.

Before receiving this gift, short sale sellers could be taxed on ‘phantom income’.

Example: Frank and Laura Wilson owed more on their house than it was worth. Frank is a firefighter, and Laura is a health counselor. Frank’s department cut back his hours, and cut his income. Then Laura lost her job through government cutbacks.

“Here we were,” said Laura, “up to our necks in debt and underwater in our house.”

The Wilsons called the bank that had the loan on their house and were told they were legitimate candidates for a short sale, whereby the bank agrees to take less than they are owed upon the sale of the house.

The Wilsons put their house on the market, received an offer, and began the process of the short sale.

“It was brutal,” said Frank. “The person at the bank, our ‘short sale negotiator’, was like an evil slave-driver. I’ve never been inflicted with so much paperwork or heard so many demands. If you ever need someone tortured, hire a short sale negotiator.”

The Wilsons did close their sale, and the bank agreed to receive $50,000 less than they were owed.

“Then came the surprise we weren’t prepared for,” said Laura.

“The Tax Man,” said Frank.

The Wilsons had no idea they could be taxed on the $50,000 the bank agreed not to take. The forgiven debt was treated as ‘phantom income’ by the IRS and FTB.

“The Tax Man wanted $10,000, and the Tax Man is relentless,” said Frank. “The short sale negotiator is like Mary Poppins compared to the Tax Man.”

Just in time, Frank and Laura received their gift. As of this past December the IRS and the FTB no longer treat unpaid debt as phantom income.

“It’s strange but true,” said Laura, “we’re overjoyed that we don’t owe money for taxes on income we never received.”

“We got the perfect Christmas gift,” said Frank. “Nothing.”

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Doug Love is Sales Manager at Century 21 Jeffries Lydon. Email escrowgo@aol.com, or call 530-680-0817.