Traditionally, The IRS views any type of debt forgiveness as income and as we all know, taxes are levied on income. How it works, is say a homeowner has a mortgage in the amount of $250,000 but his/her home is now only worth $190,000. The homeowner contracts a Real Estate professional to sell his/her home and the Seller finally accepts an offer of $190,000. The Sellers bank does its own appraisal of the property and determines that indeed the offer of $190,000 does reflect the current market value. Once the bank agrees to accept this loss, the transaction can then move on to settlement. Tax time rolls around and the homeowner who sold his/her home as a short sale now realizes that he/she is expected to pay taxes on "income" (the difference between the $250,000 owed and the $190,000 accepted) that he/she never received.
Short Sale Information and Updates
Tax Relief extended to 2013 for "Short Sales"
Throughout the past two years, the words "foreclosure" and "short sale" have become a part of a Real Estate professional's daily vocabulary and unfortunately, it's looking like that isn't going to change anytime soon. A Homeowner who is considering doing a short sale (a short sale occurs when a home is sold for less than what is owed on the Seller's mortgage and the bank agrees to accept this arrangement) naturally is and should be concerned about the resulting tax liability.
The good news is that the "Emergency Economic Stabilization Act of 2008" has now extended a previously passed exclusion to the IRS laws that would basically exclude a homeowner in a short sale situation from paying taxes on forgiven debt "income" on his/her principal residence. This exclusion now applies to debt discharged after 2006 and before 2013. For more information on this provision, please visit irs.gov and as always, talk to your accountant for the most updated and accurate information as everyone's tax situation is different.
Market Update: New short sale guidelines may help housing market
You probably heard that the Federal Housing Finance Agency (FHFA) recently issued new guidelines on response times for short sales.
Why is this significant?
According to Rick Davidson, CEO of Century 21, the new guidelines “are designed to assist inventory-constrained markets…by moving properties through the short sale process more efficiently.”
Short sales typically take several months to settle often with no guarantee during that time that the buyer’s offer will even be accepted. This can make short sale properties a less attractive option for buyers and leave the owner of a distressed property in limbo for months.
The new rules will hopefully make short sales a more viable option for both sellers and buyers – and in doing so, help bolster a continuing housing recovery!
FEDERAL HOUSING FINANCE AGENCY
NEWS RELEASE
Fannie Mae and Freddie Mac to Streamline
Short Sales to Help Borrowers and Communities
New Timelines Take Effect in June
Washington, DC – The Federal Housing Finance Agency (FHFA) has directed Fannie Mae
and Freddie Mac to develop enhanced and aligned strategies for facilitating short sales, deeds-
in-lieu and deeds-for-lease in order to help more homeowners avoid foreclosure. The effort will
come in stages with the first taking place this June. The new, aligned timelines include the
requirement that mortgage servicers review and respond to requests for short sales within 30
calendar days from receipt of a short sale offer.
“FHFA and the Enterprises are committed to enhancing the short sales and deeds-in-lieu
process as additional tools to prevent foreclosure, keep homes occupied and help maintain
stable communities,” said FHFA Acting Director Edward J. DeMarco. “These timeline and
borrower communication announcements set minimum standards and provide clear
expectations regarding these important foreclosure alternatives.”
With the alignment, servicers will be required to do the following:
* review and respond to requests for short sales within 30 calendar days from receipt of a
short sale offer and a complete borrower response package;
* provide weekly status updates to the borrower if the short sale offer is still under review
after 30 calendar days;
* make and communicate final decisions to the borrower within 60 calendar days of
receipt of the offer and complete borrower response package.
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The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.
These government-sponsored enterprises provide more than $5.7 trillion in funding for the U.S. mortgage markets
and financial institutions.
If you have any questions about the short sale process or would like to discuss your options.
Thanks again for allowing me to be of service and feel free to contact me anytime.
Do You Know a Homeowner Facing Foreclosure? Here's A Way Out.
Headlines today are filled with stories about homeowners in financial distress—people who face a lender’s foreclosure on their home.
Millions of American home owners are wondering what to do.
Like most crises, this one has produced its share of rumors and misinformation. One of the biggest ones is “just let it happen." Why fight back, this line of thinking goes. It’s too emotionally draining, and the government’s loan modifications aren’t helping many people. Well, that’s only partly true.
While government loan modification programs have fallen short of the mark so far, there is another solid, sensible option for homeowners. It’s called a short sale—a sale to a buyer where the seller’s lender agrees to accept less than the full amount owned.
Why not be foreclosed? Why sell short? Agents who have closed hundreds of these transactions provide this list of reasons:
- Avoid the foreclosure stigma – Homeowners will always have to disclose that they had a foreclosure on any mortgage application and (many job applications) that they submit in the future. This can have an adverse affect on their future mortgage rates. Foreclosure is asked about specifically in credit inquiries. There is no seven-year time limit on this item.
- Protect credit score – Credit scores will be lowered by 300-plus points (per loan) by foreclosure. The impact of a short sale—about half that much.
- Improve eligibility for a government insured loan – The homeowner will be ineligible for a government insured loan for 5-7 years (only two years in a short sale). A foreclosure is the one credit report item that is almost impossible to have repaired.
- Avoid a deficiency judgment – Lenders can seek a deficiency judgment against the homeowner and collect any amount they do not recover at sale.
- Protect employment prospects – Many employers run credit checks on prospective employees. Foreclosure is one of the top items that will put a potential new hire, or even current employment, in jeopardy.
These are the top reasons, but there are more. Talk to me to get the full picture of the options.
One more tip. Don’t believe everything you read about how long short sales take and how few get finalized. Short sale timelines, while still longer than normal, are shrinking as lenders get their paperwork act together.
Below is an update regarding the current short sale act for homeowners. The rules could change so if you thinking about short selling your home the time is now.
If you’re not familiar the Mortgage Forgiveness Debt Relief Act (MFDRA) of 2007, it was passed by President Bush in December in an attempt to help homeowners who completed short sale transactions avoid a potentially hefty tax bill after the fact. It was one of the best pieces of legislation to help homeowners, in my opinion, and has helped many people significantly reduce any tax liability from a short sale.
How the MFDRA affects the homeowners today…
When a homeowner completes a short sale their lender will deal with their “loss” in one of a few ways. Either they will pursue the homeowner for the balance of the loan owed, or they will give the homeowner a 1099C for the amount they lost which is considered “forgiveness of debt”. The Mortgage Forgiveness Debt Relief Act deals with the 2nd scenerio where a 1009C is given to the homeowner.
The result of a 1099C in a short sale…
In many cases, prior to the MFDRA, when a homeowner received a 1099C after completing a short sale, the “forgiven amount” could be considered income (phantom income) by the IRS and taxes would be due for that amount. This created another hardship for many homeowners who escaped the clutches of foreclosure only the fall in the lap of the IRS with a large tax bill now due. Many homeowners decided to let their property go into foreclosure, and risk their bank coming after them for money rather than having the IRS chase them since, unlike the bank, ”their bite is worse then their bark”.
Hooray! Along comes the MFDRA!…
So when the government saw homeowners choosing to let lenders foreclose rather than risking their necks with the IRS they took action and this law came into existence. Homeowners who qualify for the protection under the MFDRA, when a short sale is completed and they receive a 1099C, that income would not be considered taxable. This took the burden off the backs of homeowners and incentivized working with lenders to complete short sales. This was done with hopes to help not only these homeowners, but also the housing market and our economy as a whole.
With the amount of buyers that back out of short sales these days it’s advisable to NOT wait until you only have several months left to start the process. If a homeowner doesn’t make the deadline that could mean SERIOUS tax problems which could’ve been avoided. Many homeowners that want to keep their homes also apply for Loan Modifications in hopes that their situation will improve. At last check I remember hearing there is approx. a 42% success rate for homeowners who’ve completed a loan modification NOT falling back into a hardship. A loan modification can also take 3-6 months to get approved, usually will have a 90 day trial period (possibly longer), and if a homeowner doesn’t qualify they may find out that a short sale is their only option left!
Get it while the gettin’ is good!…
If you have been considering a short sale, but have been holding off, please take these points into consideration! If a short sale is not necessary in your situation then find a solution that is (i.e. loan modification, forebearance,etc.). Right now the economic climate is such that lenders and even Uncle Sam and the IRS are willing to help people with their financial situations, but as many of us know that can change over night! Understand the sense of urgency and take action!
Contact John Ellis with Keller Williams Realty at 813-335-3434, JLELLIS@KW.COM
20701 Bruce B Downs Blvd, Tampa FL 33647
