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  • July 2011
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  • Mary K. Lenahan, J.D., Realtor

How to Close a Short Sale when There are Insufficient Funds to Pay CaliforniaTax Liens


Altadena Home, Poppyfields Neighborhood

Altadena Home, Poppyfields Neighborhood

One of many potential obstacles to successfully closing a Short Sale are liens recorded against the property.   There are several kinds of liens, such as, among others, mechanic’s liens, judgment liens, child support liens, spousal support liens, and California State Tax liens.

A lien on the property is security for payment of a debt.   A lien generally prevents the sale or refinance of a property unless the lien is satisfied first.   A lien generally carries with it the right to sell the property to satisfy the debt.    In order for a lien to be enforceable, it must be recorded with the County Recorder’s office in the county where the property is located.

A California State Tax Lien may arise if you have unpaid California income taxes, corporate income taxes, or employee payroll taxes, and the Franchise Tax Board records a State Tax Lien against you for those unpaid taxes with the County Recorder’s office.

If there is a California State Tax lien on the property, however, you may still be able to Short Sale the house without paying off the State Tax Lien, under a Partial Release of Lien for Short Sale.   Under this program, the taxpayer submits an application to the Franchise Tax Board for a partial release showing, among other things, that there will be insufficient escrow funds to pay a State Tax Liens in the short sale transaction.

If the Franchise Tax Board approves an application for a Partial Release in a short sale transaction, then it will releases the specific property from the lien.   The release, however, is only a partial releasse because the lien remains in effect against the taxpayer personally and continues to encumber other property the taxpayer may own, or property the taxpayer may acquire in the future.

It takes approximately 21 working days to get a response to an application for a Partial Release of a Lien for Short Sale.    The escrow or title representative handling the Short Sale transaction should send the following documents to support the application:
1. Letter of explanation detailing the request.
2. Estimated closing statement.
3. Current preliminary title report that includes the legal description of the property.
4. Current appraisal.
5. Documentation to substantiate all lien payoffs through escrow.
6. Lender’s Short Sale Approval.

The above documents should be sent by title or escrow via overnight mail to:
Attn: Lien Resolution Unit – Mail Stop A317
Franchise Tax Board
Sacramento, CA 95827

Some of the factors that the Franchise Tax Board will consider are:
1. The reason and substantiation for the request.
2. Whether the the property is being sold at, or near fair market value and whether verification has been provided.
3. Whether industry standard fees/commissions are charged.
4. Whether only senior lien holders and/or judgment creditors are paid.

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