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Investors still on tax
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TAMPA, Fla. – Aug. 21, 2008 – For homeowners in trouble, a short sale can be a lifesaver. Lenders allow a house to be sold for less than is owed on the mortgage and then write off the rest. The homeowner just walks away. Unless the owner is an investor, that is. A short sale gets these owners off the hook for the loan, but many will get a surprise from Uncle Sam next tax season: an income tax bill based on the amount forgiven by the lender. “I’m telling you this is going to be a big issue,” said Ralph Fisher, a Lutz attorney who specializes in foreclosure. “If you’re an investor, watch out.” As the Bay area’s foreclosure rate steadily increases each month, short sales are becoming a popular alternative for financially strapped homeowners who owe more than their homes are worth. Late last year, as lenders started to permit more short sales, President Bush signed the Mortgage Forgiveness Debt Relief Act. Before the legislation, all homeowners had to pay income tax on the loan amount written off by the lender. Under the new law, owners won’t have to pay taxes on that amount, up to the original mortgage amount on the purchase of the home. But that’s only if the home is their primary residence. The president and legislators apparently took no pity on investors who gobbled up properties by the dozens during Florida’s red-hot housing boom and now can’t pay their mortgages. Those buyers, if they’re lucky enough to get a lender to agree to a short sale, will be stuck paying the resulting income tax. That goes for owners of secondary homes as well, said Sue Hales, spokeswoman for the IRS. Homeowners who work out a short sale should receive a 1099 tax form with their lenders, she said. Once they get the form, she said, they should carefully check the values of the shortfall amount and the house value. For example, if a homeowner owes $250,000 on a mortgage and the lender agrees to let him or her sell the home for $200,000, the lender would forgive the $50,000. But if the owner doesn’t live in the home, he or she will have to claim the forgiven $50,000 as income. Until late last year, the average homeowner had never heard of a short sale. Now, neighborhoods throughout the Bay area are dotted with for sale signs denoting the home as a “short sale.” Of the 16,677 Hillsborough County area homes listed for sale in the Multiple Listing Service, nearly 20 percent are marked as a short sale. Brad Monroe, a real estate agent and former president of the Greater Tampa Association of Realtors, said he thinks the actual number of short sales occurring is much higher. Agents in Pasco County report short sales are as high as 60 percent of the properties they’re selling. With real estate generally slow all over Florida, some real estate agents and title companies are specializing in getting lenders to approve short sales. Borrowers facing foreclosure are jumping on the opportunity. Getting a short sale approved at all is difficult, and lenders aren’t always willing to approve them. However, faced with millions of dollars in losses in foreclosures – plus court costs – they are more likely now to approve short sales. Still, real estate agents say the approvals are often delayed or denied. When homeowners do get approved for a short sale, a lot of borrowers aren’t getting good tax advice from some of the real estate professionals helping them with their deals, said Mike Edenfield, an attorney who works with foreclosures. “Most people aren’t aware of it at all,” he said of the income tax requirement. “Florida is typically a debtor’s paradise. But the IRS has a super priority. For the investor out there who bought a bunch of condos and is now in trouble, they’re going to get bitten.” Ron Donalson, a principal with Alday-Donalson Title Agencies of America, travels the state holding how-to workshops for real estate agents. He said it’s up to the real estate agent to inform sellers of this rule. Often, though, investors call him looking for an easy way out. “You wouldn’t believe all the investors who come in wanting to sell their three houses as short sales,” he said. “They took a gamble, and they’ll have to pay income tax just as they normally would.” Copyright © 2008, Tampa Tribune, Fla., Shannon Behnken. Distributed by McClatchy-Tribune Information Services. |
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Taxes for Foreclosed homes See below: Naples, FL Short Sales Information Definition: A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed. Also Known As: Shorted sale Alternate Spellings: Short-sale Examples: If the unpaid balance of a loan is, say, $100,000 and a property sells for $90,000, under a short sale the lender might accept $90,000 as payment in full. There are many ways to lose a home but signing away ownership in a manner that destroys credit, embarrasses the family and strips an owner of dignity is one of the hardest. For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale." When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales. If you are considering buying a short sale, there could be drawbacks. For your protection, I suggest that all borrowers:
As a real estate agent, I am not licensed as a lawyer nor a CPA and cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware the I.R.S. will consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim. Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.
Now, if everything goes well, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request. Foreclosure and Short Sale Taxes - Home Sellers Might Owe the IRSThe IRS says there is no free lunch. If you transfer title on your home, whether voluntarily through a warranty deed or grant deed, or involuntarily through foreclosure, you have sold your home. You might be subject to taxes, even if you sold your home at a loss, either on a short sale or by foreclosure. It doesn't seem fair. What's worse is you might not even find out that you owe taxes until the day you open your mail to find a 1099. But sellers of residences acquired within the past two years or so are going to incur losses. Even assuming no price declines, losses will result because of expenses for real estate brokers, lawyers and the like. Sellers will not be able to deduct those losses. Makes no difference that they are forced to sell because of, for instance, job changes or health reasons. "Besides problems for sellers of personal residences, there are tax troubles for investors who, say, bought several condos in places like Florida and are unable to flip them because prospective buyers are waiting for further price declines. Often, it is not worthwhile for those investors to rent their places; what they receive as rent payments will be insufficient to cover their real estate taxes and mortgage interest. Their only option is to sell at a loss."
Block on Offsetting Losses Against Gains"Sellers can offset their capital losses against capital gains. But in the absence of capital gains, the yearly cap is $3,000 ($1,500 for married couples filing separately) on the amount of losses they can offset against their "ordinary income," meaning income from sources like salaries, pensions and withdrawals from retirement plans. The law allows them to carry forward unused losses to later years."
Block on Tax Rules for Foreclosures"The IRS has tax rules for foreclosures or repossessions by lenders of homes of owners who have fallen behind on their mortgage payments. There can be severe and unexpected tax consequences for an owner who simply walks away because he or she has little or no equity and the lender takes over and sells the place. "In that situation, cancellation or forgiveness by the lender of the debt usually means the debtor has reportable income, though there are some exceptions -- for instance, insolvency."
Block on Personal Liability"An example: Brown buys a condo and uses it as a personal residence. He pays $300,000, down payment of $15,000 and takes a mortgage loan of $285,000. He is personally liable for the mortgage. When the remaining balance of the loan is $280,000, Brown defaults and the lender bank accepts his voluntary conveyance of the unit, canceling the loan. Similar condos at the time sell for $230,000. "The tax code treats the transaction as a sale. Brown incurs a nondeductible loss of $70,000, the amount by which his condo's adjusted basis of $300,000 exceeds its market value of $230,000. No deduction for the loss because Brown uses the condo as a personal residence. "Brown also has reportable income of $50,000 when the bank cancels the loan. The $50,000 is the amount by which the debt of $280,000 exceeds market value of $230,000. "Enter the IRS when the mortgaged property is foreclosed or repossessed, and the bank reacquires it, or the bank knows Brown has abandoned the property. The bank sends a Form 1099-A to Brown and the IRS. Using the numbers in the example, the 1099-A indicates the foreclosure bid price ($230,000), the amount of Brown's debt ($280,000), and whether he was personally liable. Debt cancellation (here, $50,000) is taxed at the rates for ordinary income, same as for salary."
Secured Debt Without Personal LiabilityThe IRS says sellers who are not personally liable for a debt will realize an amount that includes the full canceled debt, even if the value of the property that is security for the debt is less, which can be offset depending on your adjusted basis in the property. Purchase money loans secured by real property in California carry no personal liability. For example, Ms. Smith buys a home valued at $300,000, puts down $30,000 and takes out a mortgage of $270,000. Smith stops making payments. The bank forecloses on a loan balance of $260,000, and the market value of the home has fallen to $250,000. Smith has an adjusted basis of $265,000, due to a $5,000 casualty loss. The amount Smith realizes on the foreclosure is $260,000. Smith figures her gain or loss by comparing $260,000, which is the amount realized, to her adjusted basis of $265,000. She has a $5,000 realized gain.
Before Foreclosure or Selling, Plan AheadBefore you sell on a short sale or go through a foreclosure, seek legal and tax advice. Do tax planning ahead of time, before it is too late. |
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