SHORT SALE TAX IMPLICATONS

What are the tax implications of a short sale?

A

Cancellation of Debt (COD) Income

A short sale, where the lender agrees to reduce some or all of the outstanding debt, may give rise to forgiveness of debt income (also called "cancellation of debt" or COD income). The amount of the debt that the lender agrees to write off is treated as "ordinary income" (as opposed to capital gains income which is taxed at a lower rate). Even though the lender may be taking this action to facilitate the sale by the owner who is under a notice of default and facing a foreclosure, the agreement between the owner and the lender is considered voluntary and the amount of the loan written off by the lender is treated as forgiveness of debt (cancellation of debt--COD). The taxpayer will generally receive a 1099 tax form from the lender in the amount of the cancellation of debt.

This forgiveness or cancellation of debt which is treated as "ordinary income" under certain circumstances may or may not be subject to taxation.

Federal Mortgage Forgiveness Debt Relief

Under the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by the President on December 20, 2007, Internal Revenue Code §108(a)(1)(E) was added and provides that a taxpayer will not be taxed upon cancellation of debt income if the following conditions are met:


. The property sold in the short sale is the taxpayer's principal residence, as that term is used in IRC §121.
. The cancellation of debt is Qualified Principal Residence Indebtedness** under IRC Section 163(h)(3)(B).
. The indebtedness is discharged after January 1, 2007 and before January 1, 2013. (The end date was increased by three years from 2010 to 2013 pursuant to H.R. 1424, the Emergency Economic Stabilization Act of 2008).

**Qualified Principal Residence Indebtedness is a loan secured by the residence used to acquire, construct or substantially improve the residence. The income relief provided is capped at $1,000,000 in the case of a married person filing a separate return and $2,000,000 for all others.

Any reduction of indebtedness excluded by IRC §108(a)(1)(E) will be applied to reduce the basis of the taxpayer's principal residence, but not below zero. This could result in a higher amount of capital gains tax owed by the taxpayer.

California Mortgage Debt Forgiveness Relief

California law, SB 401, conforms California Revenue and Tax Code Section 17144.5 to federal law, but with the following changes:

(1) The maximum amount of qualified principal residence indebtedness is $800,000 for married couples filing jointly, registered domestic partners filing jointly, single persons, head of household, widow/widower; and $400,000 for married couples or registered domestic partners filing separately; and

(2) The maximum amount of debt relief income that can be forgiven is $500,000 for married couples filing jointly, registered domestic partners filing jointly, single persons, head of household, widow/widower; and $250,000 for married couples or registered domestic partners filing separately; and

(3) California’s debt relief statute applies to property sold on or after Jan. 1, 2009 and before Jan. 1, 2013.

Qualifying taxpayers who have already filed their 2009 California tax returns should file Form 540X, Amended Individual Income Tax Return, to subtract the amount of debt relief from income. To expedite processing, write "Mortgage Debt Relief" in red across the top of the amended tax return. Taxpayers must attach a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their state tax return.

Capital Gains Income

Finally, if the owner has owned the property for some time and has refinanced to take out some of the equity, the owner could be subject to capital gains taxation when selling the property as well. For example, the borrower has a remaining loan on the property when the borrower refinances in order to buy an investment property (or to buy a car, to take a vacation, consolidate credit card debt, etc.) and now owes $300,000 to the lender. Thus, the taxpayer's adjusted basis may be lower than the outstanding balance on the loan (see the example below).

The tax calculation for any capital gains income looks just like step one when calculating capital gains income for a foreclosure sale of recourse debt.

Example:

1. The unpaid balance of the loan is $300,000;

2. The sales price (FMV) is $250,000;

3. The taxpayer's adjusted basis in the property is $50,000.

Sales price (FMV $250,000) less taxpayer's adjusted basis ($50,000) results in capital gains for the taxpayer.

Sales Price (FMV) $250,000
Less Adjusted Basis $50,000
Capital Gains $200,000


Additionally, the taxpayer will have ordinary income from the lender's write off of any debt, which in this example would be $50,000 (** See the discussion above in this question to determine whether or not this would be taxable)

Loan Balance $300,000
Less Sales Price $250,000
Ordinary Income $50,000

Earth Day!!!

Today is Earth Day and to be gentle on the earth my kids and I are riding our bikes today instead of driving our car (even running errands today for me). We are also using as little electricity as possible today. So far no T.V. or radio and only lights this morning to get ready. My little guy and I have been playing games and talking rather than electronic diversion. What can you do on this day of earth celebration?

Tax Relief Bill Vetoed

Governor Schwarzenegger vetoed a bill that would have prevented California homeowners who sold their homes via short sales or received loan modifications in 2009 from being taxed on the forgiven mortgage debt. Schwarzenegger vetoed the bill, which would have aligned much of the state’s tax code with that of the federal government’s, because it contained an unrelated provision regarding tax refunds for the state’s largest businesses. Although the governor vetoed this particular bill, he expressed his support for banning taxation of forgiven mortgage debt, and immediately called for the legislature to send him a bill to provide tax forgiveness prior to the April 15 tax-filing deadline.

Choices?

QUESTION: How do you choose your real estate agent? a) Signs around town b) Referral from a friend c) Google, Yellow Pages, etc. d) From a listing you were interested in e) other (please explain) Would LOVE to hear your responses...thanks!

Time is Running Out

Only 12 more days to get into escrow to take advantage of the Federal First Time Homeowner Tax Credit of up to $8000.

New California Tax Credit

Governor Schwarzenegger signed AB 183, providing $200 million for home buyer tax credits. The bill allocates $100 million for qualified first-time home buyers of existing homes and $100 million for purchasers of new, or previously unoccupied, homes.
The tax credit is equal to the lesser of 5 percent of the purchase price or $10,000, taken in equal installments over three consecutive years. Under AB 183 purchasers will be required to live in the home as their principal residence for at least two years or forfeit the credit (i.e. repay it to the state).

The eligible taxpayer who closes escrow on a qualified principal residence between May 1, 2010 and December, 31, 2010, or who closes escrow on a qualified principal residence on and after December 31, 2010 and before August 1, 2011, pursuant to an enforceable contract executed on or before December 31, 2010, will be able to take the allowed tax credit.
This credit will not last until December though. It is estimated that the money will run out within 3 to 4 months so if you are eligible for this credit after May 1st you need to fill out and turn in your paperwork asap.

What's on my mind today.

Do more with Less

Keeping Your Home in Ship Shape

Things to check on a regular basis...
Electrical Wiring- Fix broken plugs or switches. When updating your electrical be sure to check with your city to see what permits are necessary.
Roof- Do a visual inspection of your own twice a year. Repair damaged tiles/shingles as they arise and cut back tree limbs that grow near the roof or pose a threat.
Plumbing- Fix dripping faucets, tighten toilet bolts and check for moisture under sinks to avoid mold/mildew and structural damage from water.
Overall upkeep- Check the caulking around the doors and window that can compromise the efficiency of your heating and cooling systems. Walk around your home with a scrutinizing eye looking for cracking or peeling paint, broken fixtures (inside or out) or broken appliances.
Keeping up with items around your home will not only keep your homes value but make it more pleasing f0r you while you live there.

Incentive Tax Rebates

Incentive tax rebates will start going out today, a week earlier than expected, President Bush announced Friday afternoon. Direct deposit payments will go out first, while paper checks will be mailed beginning May 9. The rebates — up to $600 for an individual, $1,200 for a couple, and an additional $300 for each dependent child. As I understand it, this incentive check is an advance to next years tax refunds so whether you get it now or next year it's all the same money. It's not extra money but money given to the American people early in order to stimulate the economy.
And also remember that you will only receive your check after you've filed your 2007 tax return.

Selling Today

Home owners who are reluctant to sell because prices have fallen, should do the math, and realize that the market downturn could work in their favor. Selling now also means buying in a market downturn which in the long run will be a positive. Taking advantage of this market can be possible on so many levels. Think about your dream home and what a great deal you can get for it while at the same time making someone elses dream come true by selling your current home. Don't wait until it's too late and prices rise again and they will rise again. They always do.

Open House

Come and visit me on Saturday 4/12/08 at the Open House for
16423 Fontlee Lane Fontana. I will be there from 12-4pm.
Asking price is $260,000 and that is a good deal for this neighborhood.
Not a short sale, probate or foreclosure. Just a regular house for sale that needs a buyer. There has been a lot of activity for this property so I don't see it staying on the market long.

Foreclosure Update

3.6 percent of borrowers were at least 90 days late on their payments in December – the highest percentage in more than five years, reported the Mortgage Bankers Association. Even so, it’s important to remember that 96.4 percent of borrowers were on time with their mortgage payments and new foreclosures accounted for only 0.83 percent of all home mortgages in the fourth quarter of 2007, up from 0.54 percent in 2006.
Not as bad as the media would like you to think.

Rates are down this week

If you're on the fence about purchasing a home jump off. Rates came down again this week for 30 fixed, conforming rates and jumbo rates. The only one that didn't go down but stayed the same was FHA rates.

Have you heard of metal roofs?

About one-third of new homes built today come with metal roofs, according to the National Roofing Contractors Association, and an increasing number of homeowners are choosing metal for replacement roofs. Some of the advantages are they last about twice as long as traditional asphalt shingles. They can withstand high winds. When treated with coatings and finishes, they reflect heat to keep your house cool and air conditioning bills down. There are few drawbacks. They are slippery, so it can be difficult to find people to work on them. Rain and hail sound loud. And they cost about twice as much as even the most expensive fiberglass-asphalt shingles.

Market conditions not so bad

5.92%
Average interest rate on a 30-year fixed-rate mortgage during February 2008, compared with 6.29 percent in February 2007, according to Freddie Mac.
68.6
The median number of days it took to sell a single-family home in February 2008, compared with 66.1 days for the same period a year ago.

As you can see the market in terms of interest rates is better than last year at the same time. Interest rates are down while prices are still down as well. The average number of days that it takes to sell a home is about the same. The market is quite favorable for buyers still and market analysts are seeing an upward turn, a slow upward turn but a turn non the less.

Information curtisousy of the San Francisco Chronicle

New listing

Hi everyone,
Just wanted to update everyone about my new listing in Fontana.
It's a 3 bedroom 2 bath home with great potential for only $260,000.
It just needs the right buyer and that can be in the form of a first time buyer or an investment buyer looking to add to their investment portfolio. Give me a call or email me if you want more information.

The Buying Process

Find a REALTOR®
Nothing can substitute for the broad market knowledge of a REALTOR® when it comes
to buying a home. A REALTOR®’s expertise, experience, commitment to a code of ethics,
and promise to keep up-to-date on the latest industry news and changes in real estate
practice ensure an opportunity to negotiate the best price on a home. In addition, a
REALTOR® is able to offer impartial and unemotional advice as you navigate the road to
homeownership.
Get Pre-Qualified
Work with a qualified lender and obtain a pre-qualification letter that will give you a clear
picture of your borrowing and buying power. The pre-qualification letter tells a seller that you
are a serious buyer, and can save you time during the home-search process.
Shop Around
The current real estate market is not impacting all neighborhoods equally. For example: The
median home price in Los Angeles in November 2007 was $520,960, while in Riverside/San
Bernardino counties it was $344,140, and in the San Francisco Bay Area it was $793,930. A
qualified REALTOR® can break down this kind of data by neighborhood and provide other critical
information about homes in your area. For example, did you know that in today’s market, homes
are listed for an average of between six and eight weeks, in some cases longer, before they are
sold. You have more time to consider your options today, and more homes from which to choose.
Make an Offer
The bidding wars that prevailed as recently as a year ago have subsided considerably in many
areas. Roughly 55 percent of the sellers of homes on the market in 2004 received multiple offers. Today, the number is roughly 27 percent. Once you have found the home you would like to buy,a REALTOR® can help you complete a written offer to purchase the home. This crucial document should include your initial offer on the house and a comprehensive list of terms of the sale, including the price you are offering; deposit amount; escrow closing date; termite work; loan terms; inspection schedules; and other fee arrangements to be promised by either you or the seller.
Make a Deposit
Once you and the seller have a signed purchase agreement, your “good-faith” deposit may be delivered to escrow, and credited toward your down payment. The U.S. Dept. of Housing and Urban Development (HUD) advises that a good-faith deposit typically be a minimum of between 1 to 5 percent of the purchase price. The home-buying process encompasses many often complicated steps, from the pre-qualification phase, to negotiating a sale price, right down to your final walkthrough.
Have the Home Inspected
Arrange for the home to be inspected for termite damages and construction and
mechanical soundness, as well as the functionality of the home’s plumbing, heating,
and electrical systems, among other things. The buyer usually pays for his or her own
inspection, so prepare to pay these fees either directly to the inspector or through escrow,
unless you are able to negotiate with the seller to cover a portion or all of them.
Get a Copy of the Appraisal
Once you’ve made an offer to purchase a home, your lender may order an appraisal of
the home. An appraisal is an estimate of your home’s value based on the current housing
market, the home’s age, condition, and other factors. An appraisal amount is not the
same as a listing price, but rather an estimate of what a professional believes a home
is worth. Your appraisal will likely include comparables for a minimum of three similar
properties in your buying area; an evaluation of the overall market conditions nearby; and
detailed comments about the characteristics and features of the home.

Taxes on Forgiven Debt

A bill that would make it possible for California taxpayers to avoid paying taxes on forgiven mortgage debt through a short sale or short payoff recently passed a key senate committee. The measure would help California taxpayers whose lenders have forgiven a portion of their mortgage debt, by allowing them to exclude the forgiven debt from their incomes for state income tax purposes. Under existing state tax law, forgiven debt on mortgages is taxable to the borrower as ordinary income for the year in which the debt is forgiven

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