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If you are one of the smart homeowners who were involved in mortgage restructuring or a short sale in 2012, tax time is an IMPORTANT season for you. There are tax implications associated with debt cancellation/mortgage forgiveness. For those who have been involved this year, here are instructions and tips from Seattleshortsaleblog on how to take advantage of the Mortgage Forgiveness Debt Relief Act that was extended until 1/1/2014!

Here is an example of your liability if the debt relief act did not get extended or if you do not follow tax instructions posted here: Example: If you owe $150,000 on your home and it sells in a foreclosure auction for $100,000, the amount remaining of $50,000 would be taxable income. If you are in the 25% tax bracket, you will have to pay the IRS $12,500 in taxes on the foreclosure.

The Mortgage Forgiveness Debt Relief act allows you to exclude this income on your taxes but you must take action.

Here are instructions directly derived from the IRS Website. Read the full page HERE

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

TIPS For Mortgage Forgiveness from TurboTax: Dealing with incorrect 1099-C forms
If your lender has reduced or eradicated your debt under a short sale or mortgage restructure, it will send you IRS Form 1099-C at the end of the year, showing the amount of the debt forgiven and the fair market value of the property. Review the document carefully and compare it to your own figures. If it contains misstatements, contact the lender and attempt to have it correct the form. If it is not able, or not willing, to do that in a timely manner, recalculate the correct figures and provide the IRS with documentation showing how you arrived at your figures when you file your income tax return.

It is vital to follow these steps after any type of mortgage forgiveness. Please read through these instructions & tips. Also, make sure you are reboosting your credit!

Feel free to contact me at Peter@seattleshortsaleblog.com

Good luck!

Peter

Barack Obama was elected for his second term as president of the United States and now it’s time for action especially in the distressed housing sector which has affected millions of Americans around the nation. Both houses of congress unanimously agree that the mortgage forgiveness debt relief act is a good policy and support an extension. However, there is no concrete evidence of an extension yet which will be detrimental to all distressed homeowners. How and when will this policy be extended?

What happens if there is no extension Jan. 1, 2013?

If you are involved in a loan modification, short sale, or a foreclosure, you will be liable for taxes on the forgiven amount because it is deemed as income. This is not a small tax liability. An example would be, if you owe $150,000 on your home and it sells in a foreclosure auction for $100,000, the amount remaining of $50,000 would be taxable income. If you are in the 25% tax bracket, you will have to pay the IRS $12,500 in taxes on the foreclosure.

Expecting struggling homeowners to be burdened with this tax liability after losing their biggest asset, would leave the homeowner in a dire financial crisis. Obama’s FY2013 budget proposal does include the extension of this act to 2015 but we are coming close to the expiration of this policy (Dec 31, 2012). Homeowners are now panicking and the National Association of Realtors as well as numerous realtors around the globe are participating in a call to action to extend this forgiveness act asap.

I believe the extension of this act will be extended. However, when and how are the questions that are up in the air. More than 50,000 homeowners go through foreclosure monthly. What should a struggling homeowner do when they are in pre-foreclosure and not sure of when this act will be extended?

Solutions: Short sales are still the best answer

Now that Obama has been elected, we are assured via his FY2013 budget that the forgiveness act will be extended. If you however lose your home to foreclosure after the expiration and before the extension, it could mean tens of thousands of dollars owed to the IRS post foreclosure, loan mod, or short sale.

If you are in at risk of foreclosure, I strongly suggest you begin trying to qualify for a short sale and get your short sale started right away. This way, you will be able postpone your foreclosure date and initiate your short sale which will take typically 3-6 months to close.

This would be your smartest financial move for your situation because you are avoiding a huge tax liability, avoiding a foreclosure which would be detrimental to your situation, and walking away from your home without being vulnerable of pursuit by your lender post foreclosure for the remaining balance.

Hope this helps

Peter

A ray of good news shined through the ominous clouds of the fiscal cliff this past week stating that the Mortgage Forgiveness Debt Relief Act has officially been extended. Through this act, homeowners who are involved in a short sale, foreclosure, or mortgage restructuring are able evade a significant tax bill.

However, the storm is not anywhere near from over. The recent fiscal cliff deal was a small step of progress but the federal deficit still needs to be resolved which calls for more budget battles ahead. Could we be seeing our last Mortgage Forgiveness Tax Relief Act extension in 2013?

Only hours before the end of year 2012, congress was able to strike a deal to avert the fiscal cliff. Fortunately, this included the extension of the debt relief act which is now set to the new expiration date: December 31, 2013. It is official and the proof can be found in the IRS Website or in the American Taxpayer Relief Act of 2012 Bill.

Homeowners are very fortunate to get one extra year of opportunity to short sell their homes. Congress realizes that without this extension, numerous homeowners would be devastated with critical financial conditions. Although, the extension of the various tax cuts alleviated our impending tax increases momentarily, our government is also in a bad financial position in that it has a debt ceiling issue to deal with and the $1.3 billion dollars in taxes that they lost through the extension of the act may be a provision that our government may not be able to continue in our future budgets.

We may get a better forecast in a couple of months as a debt ceiling battle in Congress may occur and more budgets will be established.

What are your thoughts on this? Do you believe we will get an extension beyond Jan 1, 2014?

I have to say that I am EXTREMELY pleased that the Mortgage Debt Forgiveness Relief Act has been extended for another year. If you are a homeowner in distress this is not the time to sit back and relax because there is not guarantee that this will be extended after the end of this year. This is the time for YOU to take ACTION...AND it is the BEST time for YOU to take action. 

In November, I had given numbers of homeowners in default throughout the country. These, of course, were statistics up to the month of November 2012. I was especially shocked by the last statistic of close to 2 million homeowners were in Foreclosure status. That is a great concern and can be avoided by the homeowners taking action, Real Estate Agents getting the word out to the homeowners. 

There are many programs in place to help homeowners either stay in their home (if the numbers make sense) through a loan modification or to exit gracefully with a Short Sale. If a homeowner chooses the latter they are sure to reap the some of the following benefits of selling their home: 

• MORTGAGE DEBT RELIEF ACT: This act will allow homeowners to exclude the forgiven debt on the principal residence from income. 
• THERE IS NO COST TO THE HOMEOWNER: The commission for the sale of the home is paid through the lender. 
• YOU DO NOT HAVE TO BE BEHIND IN YOUR PAYMENTS: Depending on your lender, you may be able to move forward with a short sale if you are not behind on your payments! This is huge...as long as you can show a hardship, you may be able to complete a short sale, save your credit, and move on to something better and more affordable.
• CALIFORNIA HOMEOWNER BILL OF RIGHTS: Sellers will benefit from the Single Point of Contact (SPOC) and th end of Dual Tracking. So, the lender/investor can not foreclosure on homeowner in the midst of them performing a short sale (this also applies for a loan modification).
• RELOCATION FEE: Some lenders are offering up to $35,000 for homeowners and tenants to exit the home gracefully and keeping the home is saleable condition. 
• COMMUNITY GROWTH: Although, property values have dropped considerably. Completing a short sale keeps the home from being vacant and/or abandoned. Abandoned homes will continue to bring down the value of the home and the community. 
• GRACEFUL EXIT: The beauty of a short sale is that, although sellers may take a hit on the credit (If they are late on their payments), they will still have the opportunity to purchase again in 2-3 years (as long as they are continue to save and  work on their credit). Not to mention that they have helped the community, agent, lender, and investor.

The bottom line is that homeowners need to open their communication to receive the benefits from the help that is available. 

Short Sale Tax Consequences

After a short sale, there is still one more type of paperwork that the seller has to accomplish and it pertains to income tax after a short sale. Ordinarily, a debt that has been forgiven is still treated as taxable income. However, because of the Mortgage Forgiveness Debt Relief Act of 2007, homeowners may qualify to exclude the forgiven debt from the net taxable income but what is considered as a forgiven debt and what makes a homeowner qualified for debt relief? It is important for a homeowner who just went through a short sale to fully understand the provisions under Mortgage Forgiveness Debt Relief Act of 2007 since not all types of debt forgiven can be excluded from the net taxable income. By doing so, a homeowner can avoid paying for unnecessary taxes or being penalized for excluding a taxable income. Here are the common questions that relate to income tax after a short sale.

What is forgiven debt?

A forgiven debt is an amount you owe your lender but have been waived usually as a result of a request backed by a very valid reason. In the case of a short sale, a forgiven debt is the difference between the selling price and the mortgage which the lender or bank has waived because of your valid hardship situation.

What is exclusion of forgiven debt or income?

Continue Reading About Short Sale Tax Consequences

I have read several news and Blog pieces about 2012 being the bottom of the market and how the best time to purchase a home is now. In good conscious I cannot sit idly by without voicing my opinion.

The news and columnists have based their analysis on the low number of inventory currently on the market for sale and the fact that it is 22% less than this time last year. They further site a 30% increase in property searches on Realtor.com which is one of the top search websites where consumers make purchase decisions. The reporters further substantiate their point by stating that interest rates are the lowest they have been since the great depression. Well folks, I am here to let you in on a few things. I am a distressed property real estate broker and live in the numbers and happenings on the ground. Last year alone I personally closed $17 Million in real estate. More than three quarters of my sales were short sales and bank owned property sales. My job revolves around tracking properties that have defaulted on their mortgage payments and listing the property for sale before it ends up in foreclosure. When properties do end up going to foreclosure the banks also contacts me to sell the properties back into the marketplace as a bank owned property. This is also known as a REO (Real Estate Owned) property.

In dealing with the lenders on a daily basis I have the ability to see how many mortgages are current or behind in any part of California. The numbers are staggering! One in three properties in San Diego County is currently underwater (owe more than what the property is worth).
Many of you may have heard of the “Mortgage Debt Relief Act of 2007” which is set to expire at the end of 2012. This means that anyone wanting to do a short sale has until the end of this year to get it done to avoid the enormous tax and deficiency implications. As homeowners scramble to do short sales, the banks are absolutely inundated with files. Banks have increased their loss mitigation departments to handle the amount of short sale requests as the deadline draws near.

So to shed further light on the subject of a “recovery,” I would have to say that the reason there is a 22% decrease in inventory on the market for sale is due to the “Robo-signing” debacle which simply held up the foreclosure process for a few months. Furthermore, the lenders have started issuing three month extensions to foreclosure sale dates rather than the standard 30 day extensions. The numbers are artificially adjusted to modify the supply and demand ratio. Also, the news columnists have stated that the average nationwide sales price has started increasing and the market is recovering. This is not quite correct because the number of higher end distressed sales has dramatically increased. In other words, if 100 homes sell at $200K and 900 homes sell at $500K, the average home price may have increased.  However, what they are not saying is that the home that is currently selling at $500K was purchased in 2005 for $900K.  See how they are messing with the numbers. Just because the average nationwide sales price has increased, does not mean we are recovering.

So I would maybe agree that the lower end has reached the bottom whereas the middle and higher end have room to fall.  Far be it from me to state that 2012 is the “Big Housing Recovery.” New young families or recent college graduates will also add to the lower end recovery as they will need to purchase in this range.

The number of Baby Boomers now wanting to downsize will further hamper the prices of the middle and higher end as they add to the supply. There are currently 30 million Americans in this segment of the market.

The FED made an error in judgment a month ago when they stated interest rates would remain low through the end of 2014, which took away the immediate driving force to purchase now. If interest rates would remain low for an extended period of time, why would anyone be in a hurry to purchase when they know how much shadow inventory the lenders are sitting on?

As the world has become a global economy, few have shed light on the fact that China has begun their housing crisis with more than half the cities reporting huge decreases in home prices. This may have an influence on our economy further down the road as this may affect the cost of consumer goods locally.

Gas prices are at an all-time high and could further contribute to inflation and gyrations in the consumer price index.

Unemployment is still stubbornly above 8% and steam rises from the printing presses at the Fed.

I don’t know folks. Recovery 2012?  I am not so sure. And over the years I have learned that in the long run it pays to be honest rather than bending a situation for personal gain. There is a reason I am renting right now. Though the rents are higher, cash will soon be back on the thrown to be crowned King. Don’t be in any hurry to purchase unless you find a great deal.

This is my honest humble opinion.

If you can not pay your mortgage you might want to do something about it sooner rather than later. Here's why:

1. The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012

2. This act says that if you sell your primary residence as a short sale or it is foreclosed then no federal tax is owned on the debt foregiveness, the difference between what you owe and what the bank was paid back after the short sale or foreclosure.

3. In 2013, unless the act is extended there will be taxes owned on homes that are foreclosed or sold as short sales.

4. Do you really think the congress is going to pass anything like an extension of this tax relief during the election season?

So, if you can not pay your mortgage DO SOMETHING NOW. Don't be stuck with losing your home and then still owing taxes on it.

If you have any questions about short sales in San Mateo or Santa Clara Counties, please feel free to contact me.

Marcy Moyer

Keller Williams Realty

www.marcymoyer.com

marcy@marcymoyer.com

650-619-9285

D.R.E. 01191194