THE REAL AMY
Mostly about Real Estate.
Or me. Or what I'm into.
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Real ANSWER | Tax Benefits for Short Selling Before the End of 2012
- by Steve Pollock MS, CFP®, EA
Q : I’ve heard that there is a big tax advantage to short selling my home before the end of 2012—what is it and what does it mean for me?
A : Yes, there is an advantage. Congress moved quickly to provide troubled homeowners with tax relief for income resulting from forgiven mortgage debt*—The Mortgage Forgiveness Debt Relief Act of 2007.
The Act allows taxpayers to exclude income from the discharge of debt on their principal residence. Meaning, if you short sell your home—you may not have to pay taxes on the amount of money your lender agrees to forgive.
The primary tax benefit of short selling your principal residence before the end of 2012 is to take advantage of this favorable provision before it expires.
If you are faced with a mortgage you can no longer afford, consult your real estate professional, attorney, and tax preparer to discuss your different options and how each may affect your specific situation.
*In simple terms, “forgiven mortgage debt” is the result of your lender agreeing to accept an amount for your home that is less than the amount that you owe—commonly called a short sale. The “forgiveness of debt” amount is viewed by the Internal Revenue Services as income for the seller and therefore reported on that individual’s tax return as taxable income.
IN COMPLIANCE WITH IRS CIRCULAR 230, WE ARE REQUIRED TO DECLARE THAT ANY WRITTEN TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (1) AVOIDING ANY PENALTIES UNDER THE INTERNAL REVENUE CODE, OR (2) PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. ANY WRITTEN ADVICE THAT WE PROVIDE DOES NOT TAKE INTO ACCOUNT THE POSSIBILITY THAT A TAX RETURN WILL NOT BE AUDITED, THAT AN ISSUE WILL NOT BE RAISED ON AUDIT, OR THAT AN ISSUE WILL BE RESOLVED THROUGH SETTLEMENT IF RAISED.
This may be welcome news for those who are struggling to keep their homes—especially those who have mortgages with Bank of America (BofA). BofA has joined forces with Keep Your Home California (KYHC), an organization run by the California Housing Finance Agency, that utilizes federal funding to help troubled borrowers. BofA is the largest of the major banks to participate in KYHC’s Principal Reduction Program. The video below gives an overview of what KYHC is all about.
Real INFO | BofA To Reduce Principal for Eligible Homeowners
Real INFO | Mediation
When my Dad was a residential Realtor in the 1980s, the purchase contract was 1 page long. That’s it. My, how far we’ve come. The latest version of the California Residential Purchase Agreement (RPA) is 8 pages. It can be a little intimidating. One area that can be confusing is paragraph 26 that relates to “Dispute Resolution.” Unfortunately, despite everyone’s best efforts—disputes can arise. So, what happens when a Buyer and Seller can’t agree? Or feel they’re owed money by the other party? In the state of California—mediation comes first. When you sign the RPA, paragraph 26A states that both “buyer and seller agree to mediate any dispute” before “resorting to arbitration or court action.”
So what does that mean? The California Association of Realtors has a great Q/A section on their website that includes something called Mediation for Consumers. It provides a easy-to-understand series of Q/As about mediation, including this definition:
Mediation is the term used to describe a relatively informal form of dispute resolution that occurs outside of the court system. In mediation, the parties to the dispute are assisted by a neutral third person called a mediator. The mediator is not empowered to impose a decision on the parties; instead the mediator facilitates discussions and negotiation between the parties with the goal of assisting them in reaching a mutually acceptable settlement of their dispute.
That means that whether you’re the Seller or the Buyer, you’re agreeing to try to work things out with a mediator first. In a future post, I’ll touch on arbitration and what that’s all about. As always, if you have questions or are curious about how any of this works, don’t hesitate to let me know. I’m here to serve.
Real INFO | Natural Pool Myths Busted
I just live for this sort of thing. As a kid, I used to draw pictures of what my house and yard (by yard, I mean pool) would look like, and now that I’m considered by most to be an adult—not much has changed. I’ve long been a fan of very natural looking pools and most folks don’t know just how natural a pool can get. Loved this article that dispels 9 common myths about installing and maintaining natural pools vs. the traditional ones. Go ahead and just let your imagination wander…
That dog is so ready to get natural.
Real NEWS | Extended Unemployment Forbearance for FHA Loans
If you’re unemployed, with a FHA-backed loan—this is probably welcome news. The Obama Administration announced that they are requiring Servicers to extend the minimum period of forbearance from 3 months to a full year. As expressed by U.S. Housing and Urban Development Secretary Shaun Donovan, the change was prompted because, “the current unemployment forbearance programs have mandatory periods that are inadequate for the majority of unemployed borrowers. Today, 60 percent of the unemployed have been out of work for more than three months and 45 percent have been out of work for more than six. Providing the option for a year of forbearance will give struggling homeowners a substantially greater chance of finding employment before they lose their home.”
Another juicy bit from the HUD’s blog, so cleverly titled, The HUDdle (well done, Name Chooser):
“At the end of the forbearance period, the lender will review your financial situation again to determine what option might fit your circumstances like a loan modification or repayment plan. The extended forbearance period begins August 1st with another 60 days for lenders to implement.”
And P/S, if you don’t have a FHA-backed loan…
“The Obama Administration also intends to require lenders participating in the Making Home Affordable Program (MHA) to extend the minimum forbearance period to 12 months wherever possible under regulator and investor guidelines.”
I do respect a man who admits his mistakes. So, now what?
“We’re going back to the drawing board.” – President Obama
Real NEWS | Short Sale Insight
There’s a lot of talk about short sales these days (certainly I have posted a bunch about it), as they are a reality for a growing number of people and common in our marketplace. But this article does a good job of speaking plainly about what they are, why they are challenging, and what’s being done to try to improve the process.
Thought this summed it up well :
We want to do short sales [because] it’s good for the homeowner, institution and community. It’s good for the homeowner because it lessens the credit impact and allows them to be in control when they move and how they go about it. It’s good for the institutions because they lose less money and don’t have to take properties back. And it’s good for the communities because the housing stock stays in a better condition.
—Doug Shepherd, President | Inland Valley Association of Realtors
Real NEWS | Treasury Scolds HAMP Lenders
While for some, it might seem like too little, too late—I do think it’s encouraging that the Treasury is calling out some of the major lenders and their lackluster performance when it comes to the Home Affordable Modification Program (HAMP). As part of their monthly HAMP report, the Treasury added ratings for the top 10 HAMP Servicers. The 4 that received the worst ratings, needing “substantial” improvement were: Bank of America, Chase, Ocwen Loan Servicing, and Wells Fargo. This comes as a surprise to absolutely no one. Except, perhaps to the Servicers themselves. Or at least their PR departments would like us to think so. There’s a humorous response to their protests, written by Martin Mandelman, which you might enjoy.
The remaining 6 were cited as needing “moderate” improvement: American Home Mortgage Servicing, CitiMortgage, GMAC Mortgage, Litton Loan Servicing, OneWest, and Select Portfolio Servicing.
The most telling, perhaps, is that there was not a single Servicer who was identified as need “minor” improvement. Clearly, there’s a long way to go. But, I do think it’s a step in the right direction for the Treasury to turn up the heat on Servicers and hold them more accountable. Let’s hope the trend of accountability continues.
In the meantime, if you’re struggling to make payments, trying to determine whether or not to seek a loan modification, pursue a short sale—or you’re just not sure what to do—please don’t hesitate to reach out and let me know. I’m happy to connect you with the resources you need. Despite the unimpressive performance of all these Servicers, there are indeed resources out there and real alternatives to foreclosure. The important thing is to be proactive.
Real NEWS | Fannie Issues New Servicer Standards
One of the most common complaints from homeowners and Realtors alike is how long it takes to receive responses from loan servicers for troubled mortgages. If you’re like most people, who are not in the habit of using the term “loan servicer” and would like to know what that means—it’s the entity that you pay your mortgage check to—often a bank. They serve the investors who ultimately own your loan.
Anyhow—Fannie Mae is attempting to ease the problem a bit with new standards in regard to how servicers communicate with homeowners—as a Fannie spokesperson states:
These new standards give homeowners facing difficulty making their mortgage payments a clear, consistent process. We want homeowners to be able to understand their options when facing foreclosure, and we want servicers to reach homeowners early in the process, communicate frequently and clearly, and help homeowners avoid foreclosure.
—Jeff Hayward, Senior Vice President of Fannie Mae’s National Servicing Organization
Sounds reasonable enough, right? The trouble is, there’s not been a whole lot of reasonable for some time now. Let’s see how implementation goes. Fingers crossed!
Real OPTIONS | Refinancing to Shorter Terms
“Freddie Mac chief economist Frank Nothaft says, ‘there’s a lot of chatter about the [Federal Reserve] pushing rates up’ in the coming months, so many homeowners are checking out their options on locking in rates that may well be the best they will ever see. Freddie Mac’s own forecasts put 30-year fixed rates at 5.25% by the final quarter of this year.”
If you’re a homeowner who has equity and solid credit—you may be able to take advantage of the low interest rates and refinance your mortgage for a shorter term. An interesting and potentially very financially savvy option particularly for those baby boomers who want to own their home outright when they retire.