Reminder on Mortgage Forgiveness Debt Relief Act

Travis, also, even without the debt relief act, if the homeowner is insolvent the CPA can use that to offset the IRS amount owed. But you must speak to your CPA or tax attorney about this. We do get referrals for short sale listings from tax attorneys.Good post.

Travis, I think you are right that congress has finally done something right!  Great info.  I knew about this, but didn't understand all the details about who would qualify.  Thanks

Hello Travis,

I had posted a blog a couple of months ago regarding the Mortgage Forgiveness Debt Relief Act and was swamped with calls from agents as well as some homeowners who had no idea what I was talking about.  At a couple of conferences I went to agents admitted to have never read the law and really had no idea what it entailed.   

We really have to educate ourselves and then our clients in this area, yet I suppose with caution.  There is apparently no plan by congress to revisit this to make any extensions After December 2009.

Those who are struggling to keep their homes and fall into foreclosure thinking they are still safe will be unpleasantly surprised.   With our economy the way it is, and more layoff's coming, it is concerning how long some of these borrowers can hold on to those homes they put zero down on, and are now upside down.  Relationships with tax attorneys is very good advice, I utilize that as well as referring clients to a non-profit debt counseling agency to get their finances straight for the long haul recession. 

Note:  I have a friend who is struggling with a $90K tax consequence due to the loss on her million dollar home that went to foreclosure prior to this debt relief act.   We have to really pay attention.  Thanks!

Good reminder. Sad we have a law like this, but a good reminder. Leave it up to the IRS to kick someone when they are down. After all, don't you still have to pay income tax on unemployment still?

With all the talk in congress about tax fairness, fairness is not part of the tax code. As far as this paper income from losing the home and negotiating a short sale that cuts the loss for a lender.

Everyone is in a lose less/lose less situation, making the best result for all concerned. Dropped market, cannot pay, no alternatives.

There is no income here. There really was no income. there was a home that lost value in a market adjustment.

An equity withdrawal however did involvethe receipt of cash. I can understand the equity debt being treated differently.

On the tax code, it is sad also to see the number of right offs allowed by the IRS and performed by accountants and their clients to the point that the filing actually shows no taxable income.

Most self employed people actually pay taxes on an income that is commiserate with their life style and debt load, but some do not. I do not understand how that can get through even a cursory reasonableness test?

Maybe with the stated programs becoming restricted, such tax abuse will be encouraged to be reduced.

I already told one client last week who said their account did the return, that maybe their accountant will lend them the money to buy their new home.

Richard

TIMING IS EVERYTHING IN BAILING BEFORE THE FORGIVENESS DEADLINE

I decided to revisit this post in regard to the  Mortgage Forgiveness Debt Relief Act of 2007.  Legislation enacted in October 2008 to extend relief through 2012.  Homeowners  should be aware that their lender  has a deadline in which to provide them with a 1099, and that 1009 should be reviewed very careful to assure the calculations are correct before filing their taxes in regard to the relief.  The IRS urges people with mortgage problems to take full advantage of the valuable relief available to them through this Act.

A thought that seems to linger in the back of my mind as we approach the new deadline of 2012, is the time-line in which to seek a short sale, or walk away from a property that can not be saved?

Borrowers in trouble have a few options when in trouble on a mortgage:

1. Modify the terms of the loan with their lender if that is an option, bringing the account current

2. Short Sale the property, whereas you will request from the lender to sale the property at market value despite the principal balance may exceed that amount substantially.

3. Offer the home to the lender "Deed-in-Lieu of Foreclosure".

Let's say you decide to do a Modification, and after several months of negotiations the bank determines you do not make significant amount of income to satify a new mortgage payment.  You will then have the remaining 2 options; Short Sale, or Deed in lieu of forecloure.  Both of these choices take considerably amounts of time to resolve.  I have had short sales that have taken the bank 13 months to come to the conclusion of approving a short sale.  I have alsoo had short sales that took a bank 13 months only to result in the banks investors deciding to foreclose on the property despite there is a fair market offer for the property. (fortunately, I was saavy enough in real estate to convince the investors to allow my buyer to still purchase after they foreclosed on the property).

My concern here is TIMING!  Deed in lieu seems simple, "Here is the keys, Here is the deed, Let me walk away." NOT!!!  Agents who are informing their clients of such a simple process are not doing their clients any service.  There is a definate protocal even for trying to just hand the bank back the home.  Deed in lieu is designed to relieve borrower from most or all personal indebtness associated whith the defaulted credit.  It does still carry the demolition of your credit scores to a degree. 

In speaking with Bank of America regarding a client wishing to surrender their home Deed in lieu of foreclosure the representative informed me that they would like to see the home for sale on the market for a minimum of 90 days, before starting the process.  According to HUD rule 2000-2005 the process is to be completed within 90 days of inception.  In order to complete a deed in lieu both the bank and borrower have to come to an agreement. Neither borrower or lender is obligated to proceed with a deed in lieu until final agreement is reached.

In analyzing all this; my recommendation to anyone seeking this option is to begin the process far before the Tax Relief deadline of 2012, to assure the bank does not lose track of your request (which is very common with alot of banks), or just plain fail to complete the transaction before the end of the 2012 year end.  I say it every day to homeowners: PROTECT YOURSELF, PROTECT YOURSELF, never assume the bank is watching for your best interest, that is not the case in any events that I have witnessed!

Also as a note;  During a short sale, there is also an opportunity to negotiate with the lender to forgive excess debt following a short sale.  IE; On a short sale deal I did the lender was requesting the borrower pay $10,000 in order to gain a short sale approval, I was able to negotiate an additional $5,000 paid by the borrower to the lien holder in exchange for a full written off account of any debt owed to the lender (in writing!). This borrower was going to have to recognize the amount loss due to it being a rental property and him having no other reason for default other than he just became disenchanted with the market. While $15,000 may not seem like a success story to some, it was a wonderous event for this seller who was looking at recongizing an income gain on his income taxes to the tune of $88,000.

5 Year Loan Modifictions:

I've been working with some clients whom I had previously listed their home. They had decided to put the short sale on hold due to being contacted by the lender, Bank of America whom has a proposed a modification of terms on their loan reducing the interest for 5 years.  The mortgage payment will go down by $1100.00 which makes that payment now affordable for the borrower.  Sounds great?  Well if you can live your life with a broken arm and only put a band-aid on it instead of a total repair which would alleviate the problem long-term wise.  I explained to my client that this sounds great today, because they can now afford their home, however the home is still terribly upside down since purchasing it at $350,000 and it is now worth $165,000.  Also there is the matter of them potentially losing the home after the 5 year modification expires and setting themselves up for a potential tax hazard.  With the issue of the 2007 debt relief act, this family would be outside of the protection of that act when facing the bank again in 2014 to ask for another modification.  My question is:  Will the banks be in the clear financially by 2014 and in a postion to foreclose on this home to potentially reap the rewards of a partially recovered market.  Let's say this home is worth $275,000 in 2014 and the bank stands to lose much less in a foreclosure than they would have in 2009.  My advice to this client is to weigh their decisions carefully and examine all the pro's and cons' of accepting a short term loan modification.  The bank had previously refused to do a loan modification at all when this client used an attorney, stating they could not afford the home due to lack of income.  Now the bank will modify them but only short term.  Who is this really benefitting in the first place?  Homeowners may find themselves reffering to their status as simply "renters with the right to a mortgage tax write off" when referring to these short term modifications.  Hey, isn't this how we got ourselves in this mess in the first place?