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Real Estate Short Sale Deadline Nears

March 4, 2012
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Jeff Donnellan  Re/Max

Click here for Short Sale HELP

The Mortgage Debt Forgiveness Act is set to expire at the end 2012.  This act provides tax exemptions to home owners who have a deficiency judgement as the result of a foreclosed or short sale their home.  A deficiency judgment is an unsecured money judgment against a borrower whose mortgage foreclosure sale did not produce sufficient funds to pay the underlying promissory note, or loan, in full.  The IRS considers this taxable income.  For example is a mortgage balance is 100k and and after the home is sold through short sale or foreclosure the total amount recovered after expenses is 50k.  The IRS would consider the 50k of debt cancellation as taxable income.  The Mortgage Debt Forgiveness Act is an exemption for home owners to not be taxed on forgiven debt, but this is the last year to claim it.

A major benefit of a short sale over a foreclosure is the ability to negotiate the deficiency judgement away.  When using an experienced short sale Realtor & attorney they will most likely be able have the bank release the mortgage deficiency and have it reported to your credit scores as “paid in full” or “settled.”  This has a dramatic difference simply because a foreclosure will not be on the record, which will damage credit for 7-10 years.  In effect it’s like a fresh start with the slate wiped clean, giving home owners a chance to start over and one day purchase again.

Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

  • Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
  • Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
  • Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
  • Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
  • Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

More information is available on the IRS website http://www.irs.gov/individuals/article/0,,id=179414,00.html

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2012. Year of the Short Sale

February 23, 2012
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All signs point to 2012 being the year of the short sale.

Back in 2007 no one had ever heard of a short sale and the process was a complete disaster. Real estate agents didn’t know how to price short sales or get them approved by the banks. The whole process was a mystery because there was a complete lack of communication from the banks and they had no idea with thousands of defaulting loans. So many horror stories came from the early days of the housing crisis and home owners were on the loosing end, and the final chapter was foreclosure.

Real estate felt like the wild west. Prices were falling through the floor and loans were defaulting left & right. Banks were so far behind on handling home owners who fell behind on their payments and because they had no systems in place the only option was to foreclose. Most owners didn’t know what to do when their mortgage company wouldn’t answer phone calls or would send them into voice mail loops for days and weeks at a time and could never speak to a live person. Home owners became frustrated beyond all belief because there were no answers to the problems they faced.

5 years later the game has changed. Banks have realized that it’s more expensive to foreclose than helping home owners to complete a short sale or modification. Between attorney’s fees, loss of revenue from a paying mortgage ( some times for 2 full years), property damage, and endless management fees until the home finally sells as foreclosure. Systems & procedures have been established to give home owners more options than ever when they can no longer afford their mortgage and the major banks are extremely cooperative when payments fall behind. Many of the mortgage lenders are now calling when this happens to offer owners a way out with incentives up to $35000 in moving expenses for completing a short sale. In November, short sales accounted for more than 9% of single family home sales and were up 32% from the year before, according to CoreLogic. Short sales are being approved now more than ever providing home owners a way out.

The short sale process is being refined down to the finest detail so home owners have a way out now and prevents the dramatic decline in values that foreclosures represent ( up to %40 loss of value). Programs like HAFA, HAMP, & HARP are designed to free home owners from burdensome mortgages and receive moving expenses (up to $3000). Banks are offering cash incentives ($3000- 35,000) for home owners who complete short sales and streamlining the process so home owners have direct answers in short time periods. BofA, the largest servicer of home loans, did 107,000 short sales last year. That was up from 92,000 in 2010, which was double the 2009 volume, it says. New legislation has even been proposed to have answers in writing with in 75 days of an offer being submitted on a short sale.

Under water homes have more options than ever to get a fresh start, get out from a mountain of debt created by an economic down turn & a bad mortgage. However time is of the essence because the mortgage debt forgiveness act of 2007 is set to expire at the end of the year. This prevents owners from having to pay taxes on the difference of what they sell for and what they owe.

An opportunity exists for people who are behind on mortgage payments or soon will be. The opportunity to sell a home for less than what is owed while having the least impact to credit scores and receive cash to help with moving expenses. At no other time during this financial down turn have so many advantages been offered to struggling home owners.

Jeff Donnellan  Re/max

http://www.webhomesearcher.com