No More Deficiency Judgments From Short Sales, But Income Taxes May Still Loom
On July 15, 2011 Governor Jerry Brown signed SB 458 into law with an urgency declaration making it effective immediately. This new law prevents deficiency judgments after a short sale and means those naughty lenders cannot come after you once your short sale is complete. 
A recent Short Sale blog article on this subject explains the deficiency problems with short sales. The comments are asking if this is retroactive and the answer is NO. Those who have already gone through short sales are not protected by this new law and should seek bankruptcy protection and discharge for those deficiency judgments. Remember that all debts discharged through bankruptcy have no income tax liability.
Local Realtors are excited about this new law and the California Association of Realtors posted a news release on the recent passing of this bill here. What this bill means is that the mortgage holders can no longer come after the seller for any deficiencies after the close of the short sale. However, Seller beware of the Tax Man!
The IRS and Franchise Tax Board are currently waiving income taxes on canceled debts where a mortgage is involved. I understand that this ends in 2012 and we have no information on whether this will continue. You can read more about The Mortgage Forgiveness Debt Relief Act and Debt Cancellation from the IRS directly. You MUST consult with your tax professional before you decide to short sell your home as the laws are constantly changing.
If you're facing a deficiency judgment from a previous short sale, or if you're concerned about income tax consequences potentially looming from a short sale, then I suggest you talk to your professionals. Call your tax professional and consult with a bankruptcy lawyer to be sure you're liability obligation to pay on that debt is eliminated. You may not need to file bankruptcy if you hire a tax professional who has knowledge of this area of the tax laws. Don't delay or you may be on the hook for this debt after your short sale.
Photo from Rich Vintage Photography
