As a Realtor, I often will attend many seminars and Realtor Events. One of the many advantages these events offer me is the opportunity to network with other Realtors. Another very important reason I attend of course, is to keep abreast of current laws and trend in our ever changing market place.
I am often surprised however, when I speak with some Realtors regarding legal issues as to just how many do not take the time to actually read the important new laws and issues once these items are enacted. Agents actually state to me, "well I heard that ...." In a positon such as ours we really can not afford to take "hear-say" to the table of our homeowners. The more informed we are, the better we can assist our clients.
At a recent Short Sale and Foreclosure Seminar put on by our local board, I raised the question whether or not the Mortgage Debt Cancellation Relief Law would be revisited at a later date, in order to possibly extend this date. The answer as I'd suspected by the legal community is "no." My real surprise however, was just how many agents had spoken to me in the hallway and were truly not aware that there was a time limit on this law, and were not really sure how this affected their clients.
Why the Concern?
When I sit down at an appointment with a homeowner who has phoned me because they are in trouble, I listen to their concerns. I also hear that some of these homeowners really want to see just how long they can hold on to the home. When I pose the question, "ideally, how long would you envision holding on if your payments were modified to help you weather the storm." The answer is almost always, "hopefully another 2-3 years". So why the concern? Although we definately do not want to encourage individuals to walk away from their home, what if this homeowner struggles for 2 years only to foreclose in 2010. Well, lets say he owes ...$400K and the bank short sales it for $310,000 - the borrower would have to recognize on his tax returns an income amounting to $90,000. That is quite a hit!
What I am seeing are homeowners struggling to pay a mortgage that is sometimes as crazy as 50 %-60 percent of their household income, and yet they are miraculously hanging in there. With a modification from the lender, there may be some help, so I am happy they called me. On the other hand, if they do manage to hold on for the next 2 years and then fall prey to foreclosure or a short sale, they will be outside the protection of the Mortgage Debt Cancellation Relief Law.
Mortgage Debt Cancellation Relief Law excuses individuals from having to recognize on their income tax returns any amounts the banks lose on a short sale or foreclosure when the indiduals are relieved of their obligation to pay some portion of a mortgage debt on a principal residence between January 1, 2007 and December 31, 2009.
These individuals who foreclose or go through a short sale during this time period only will not be required to pay income tax on any amount that is forgiven.
A FORECLOSURE JUST WAITING TO HAPPEN
Then there are the individuals that the bank can not do a modification because they absolutely are in the home that they in no way should have been in the first place. This homeowner usually can not be helped by the bank, and the bank may just inform them that they simply can not afford the home because their income is just entirely too low to manage the mortgage. Yet, the borrower may have managed to stay just one, two, or three payments in the hole from month to month feeling so personally attached to this home. So there they cling, in full denial. What they do not realize is that even if they should fall behind in mid-next year, that home may not go through a forclosure until the end of the year, and God fobid that it go that full legnth. By the time the bank takes the home the borrower has lost the protection under the new law if it forecloses after December 2009.
Will this law be revisited or revised ??? NOT LIKELY SAY THE EXPERTS
ADJUSTABLE LOANS
Of course there is the homeowner with the 5-7 year adjustable, who feels somewhat of a security because they do not adjust until 2009-2012. They can indeed pay this amount, even though it is a struggle, yet they could not refinance due to declining values. I am glad they called as well. My concern for this homeowner is whether they can actually afford this home at all because they are indeed struggling and want to keep their home for as long as possible. I caution them to read the law and understand it, because there may be some steep consequences should they default in 2010 or beyond. If the modification goes well, and the new amount is something they can truly live with, great! If it just gives them a little breathing room - I am concerned they may be a foreclosure just waiting to happen down the road, and hope they do not foreclose after December 2009.
As Realtors, we all know we can not give our clients tax or legal advise. What I do is strongly advise my clients to become educated on the new laws that affect them, and advise them to consult with a very good tax and/ or legal consultant.
I'm a REALTOR, I love what I do for a Living!
AGENTS - READ THE LAWS AND BE AWARE
******************************************************************************************
From CAR.Org
General Provisions of Public Law 110-142:
Refinanced Mortgages: The relief does apply to refinanced debt in some circumstances. The rules seek to assure that any debt eligible for the relief is directly related to the acquisition or improvement (such as rehabilitation, expansion, renovation, reconstruction) of the principal residence. Debt used for furnishings (i.e., any movable property) in the home is not eligible for the relief. When the proceeds of any refinanced debt is used for any purpose other than acquisition or improvement, those proceeds are not eligible for the relief.
Additional Provisions of Public Law 110-142:
Principal Residence: A principal residence is defined in the same manner as the rules that apply to the capital gains exclusion on the sale of a principal residence. An individual may not have more than one principal residence at any given time.
Second Homes: As a general matter, the relief does not apply to any debt forgiveness on any mortgage for any second home of the taxpayer. However, if a taxpayer uses a residence (other than his principal residence) solely as an income-producing rental property, already-existing relief provisions might apply, depending on the taxpayer's situation. If the second home property was acquired as a speculative investment (such as for resale rather than rental), relief provisions are unlikely to be available.
In all events an individual who is in a short sale, foreclosure, workout or similar situation on a residence (including condos) other than his principal residence should consult a tax adviser to determine what, if any, relief provisions might be available.
Mortgage Insurance Premiums: The deduction for mortgage insurance premiums is extended through tax year 2010. Income limitations on the deduction will continue to apply.
Surviving Spouses/$500,000 Exclusion: In some circumstances, a surviving spouse is denied eligibility for the full $500,000 exclusion on the sale of his/her principal residence. This most frequently occurs when the residence is not held in joint ownership at the time the spouse who is not on the title dies. In that case, the deceased spouse had no ownership interest, so there is no basis step-up on that half of the property. The surviving spouse is thus eligible only for an exclusion of $250,000. (Had the home been sold during the deceased spouse's lifetime, the full $500,000 exclusion would have applied, so long as they filed a joint return.)
Challenges for the surviving spouse are compounded when this circumstance occurs late in the year. The surviving spouse is often unable to sell the property within the same year that the spouse died. This legislation provides that a surviving spouse may claim the full $500,000 exclusion not only in the year of the deceased spouse's death, but also during the two years after the spouse's death.
Second Homes Converted to Principal Residence: The new law signed by the President does not include a provision limiting the application of the $250,000/$500,000 exclusion when a second home is converted to a principal residence and late
Background Information
A fundamental principle of the income tax is that a taxpayer must recognize income and pay tax any time a debt of the taxpayer is forgiven or discharged. Exceptions are provided in several circumstances, including bankruptcy, insolvency (as defined by state law) and for some investment real estate. Until this new rule was enacted, however, no exception applied to any amount debt forgiven on a mortgage for a taxpayer's principal residence. Thus, until now, when some portion of a mortgage debt was forgiven, that amount has been treated as taxable income and the borrower has been taxed at ordinary income rates on the forgiven amount, even though there is no cash.
The newly-enacted relief for mortgage debt forgiveness is Congress's response to the problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets. Thus, when a lender forgives some portion of a borrower's mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will not be required to recognize income or pay tax on the forgiven amount. This relief applies to debts forgiven between January 1, 2007 and December 31, 2009.
Th
Comments(0)