Posts

Important Update on Status of California Short Sale Tax Issue

in , , , , , , , , , , , , , /by

I wrote last week that the federal tax exemption for mortgage debt forgiveness had been extended for one year as part of the “fiscal cliff” settlement between Congress and the White House.

  • California’s Homeowners Exemption has Expired

At that time, I also wrote that the California tax exemption expired on December 31, 2012, without having been extended by the state legislature.  Consequently, mortgage debt forgiveness is currently subject to California state income tax.

  • Senate Bill Introduced to Reinstate the California Exemption

To remedy this inconsistency between federal and state tax law, the California Association of Realtors is sponsoring Senate Bill 30 (Calderon, D-Montebello).  SB 30 will conform state law to the federal law passed last week.  Upon passage of SB 30, the measure as currently drafted will be effective retroactive to Jan. 1, 2013.

  • Contact Your Local State Representative

If you believe the state tax exemption should be reinstated, contact your local state senator and ask that he/she support SB 30.

I will report further as the bill moves its way through the legislative process.

 

URGENT: Homeowners Tax Exemption Extended Through 2013

in , , , , , , , , , , , , , , , , , , , , , , /by

The 2007 Mortgage Debt Relief Act, which was scheduled to expire at midnight on December 31, 2012, has been extended for one year as a result of the “fiscal cliff” deal struck between Congress and the president.

The Senate included the extension as a part of the bill that passed at 2:00 a.m. on Tuesday morning.  After House Republicans failed to pass a separate bill modifying the Senate plan, that plan was presented for a full house vote late last night and passed 257-167.  President Obama has stated he will sign the bill.

EXTENDS TAX FORGIVENESS FOR MANY HOMEOWNERS WHO COMPLETE A SHORT SALE, FORECLOSURE, “DEED IN LIEU”  OR LOAN MODIFICATION IN 2013.

This is very important news for homeowners whose short sales and “deeds in lieu of foreclosure” had not been concluded by December 31st, and who were facing a substantial income tax bill if the exemption had expired and not been renewed.  It also will benefit many homeowners whose properties are foreclosed in 2013, as well as individuals who obtain a “principle reduction” loan modification on their home mortgages.

EXEMPTION DOES NOT COVER ALL FORGIVEN MORTGAGE DEBT

As I have previously explained, the tax exemption does not apply to all forgiven mortgage debt.  Specifically, the debt must have been on a primary home, and the debt must have been used to either buy the property, to pay off purchase debt, or to repair/renovate the home.  It does not apply to debt on second homes or income property, or on “cash out” refi debt.

STATUS OF CALIFORNIA’S SEPARATE TAX EXEMPTION NOT YET CLEAR

Keep in mind that the separate California tax exemption for mortgage debt relief also was scheduled to expire on December 31, 2012.  Whether that state exemption will be extended as a result of the federal extension is not yet known.  I will report further once that information becomes available.

I recommend you immediately contact your local representative if you feel the California tax exemption should also be extended.

CONSULT WITH A QUALIFIED ATTORNEY OR TAX ADVISER NOW TO DETERMINE IF YOU QUALIFY

For “underwater” homeowners that have been “sitting on the fence”, now is a good time to speak with a qualified real estate attorney or tax adviser to determine whether and to what extent you qualify for the extended tax exemption.  Keep in mind that it can take many months for a short sale, loan modification, “deed in lieu” or foreclosure to be completed.  For that reason, it’s important to get the process started as soon as possible.  That way you can implement your best strategy without having to worry about losing the tax exemption at the end of 2013.

 

URGENT: FHFA Announces New Fannie/Freddie Short Sale Guidelines

in , , , , /by

The Federal Housing Financial Administration (FHFA) has just announced that it will align guidelines for Fannie Mae and Freddie Mac short sales and allow lenders and servicers to quickly and more easily qualify borrowers for a short sale.  Real estate professionals and associations have long advocated for a streamlined, standardized short sale process, and some of the changes below address some of the main concerns involving these transactions.

Effective November 1, 2012, the primary changes are as follows:

  • Eliminates current Fannie Mae and Freddie Mac short sale programs and creates a single standard short sale process for both entities (Fannie and Freddie HAFA programs will expire at the end of the year).
  • Enables servicers to quickly and easily qualify certain borrowers for short sales who are current on their mortgages without waiting for an approval from Fannie Mae or Freddie Mac Offers special treatment for military personnel with Permanent Change of Station (PCS) orders.
  • Standardizes and clarifies foreclosure suspensions on a property with an approved short sale.
  • May pay borrowers up to $3,000 in relocation assistance.
  • Fannie Mae and Freddie Mac will offer up to $6,000 to subordinate lien holders to expedite a short sale.

FHFA also clarified that a borrower experiencing a hardship must wait at least two years following a short sale before becoming eligible for a new Fannie Mae or Freddie Mac loan.

It is hoped that these new guidelines will improve short sales eligibility for those troubled homeowners trying to avoid a foreclosure so they can move on with their lives.  Of course, only time will tell….

See Fannie Mae’s press release regarding the new short sale guidelines:  http://www.fanniemae.com/portal/about-us/media/corporate-news/2012/5814.html

For a copy of Freddie Mac’s Servicer Bulletin go to: http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1216.pdf

Time ticking down on important short sale tax protection.

in , , , , , , , , , /by

For many homeowners considering a short sale of their property, among the most important factors is whether and to what extent they may face a tax liability as a result of the transaction.  The concern is well founded.

As a general rule, the IRS requires that any lender receiving less than the full amount of mortgage debt owed on a property must send the borrower a Form 1099 for that “deficiency” amount.  In other words, if you owe $250,000, and you short sell your property for $190,000, you will receive a Form 1099 for $60,000.

The most important question is whether you have to pay taxes on that $60,000 of “income.”  Prior to the collapse of the housing market, the income was virtually always taxable.  In 2007, Congress passed the Mortgage Debt Relief Act, which generally allows taxpayers to exclude income from the discharge of debt on their principal residence.  For purposes of the Act, the IRS defined “principal residence” as a property in which the taxpaper lives for a total of 24 of the 60 months preceding the discharge of the debt.

It is important to understand that the tax exemption does not apply to all debt on a principal residence.  The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.

Where a homeowner has “cashed out” equity in a principal residence through refinance or a home equity line of credit for unrelated purposes, the tax exemption does not apply.  Similarly, the exemption does not apply to non-principal residences; i.e., rental or income property.

Now here’s the important part: THE ACT EXPIRES ON DECEMBER 31, 2012!  In other words, if you want to benefit from this very important tax exemption by short selling your home you need to start NOW.  Any delay risks having the sale not be approved, and as a result not closing, before the expiration of the act.

There is a chance that the Act may be extended; however, the current lack of bipartisan cooperation in Washington raises the very real chance that nothing will get done before the next Congress is sworn in next year.  And there’s no guarantee the new Congress will pass the legislation necessary to revive the Act.  Under the circumstances, my advice is better to be safe than sorry.

If you have questions about whether you qualify for the exemption, or have other issues relating to your mortgage, short sales or foreclosures, please contact my office and let’s talk.

URGENT: New Fannie/Freddie Short Sale Guidelines Take Effect June 15, 2012

in , , , , , /by

Fannie Mae and Freddie Mac have announced aggressive new guidelines applicable to short sales involving FM loans.  The intention, as with most of the recent changes in federal “distressed property” programs, is to streamline the short sale process.  Many experts, this writer included, harbor serious doubts whether the guidelines can be achieved.

Chief among the new guidelines, effective June 15, 2012, is the requirement that servicers review and respond to short sale offers or requests within 30 days.  Servicers requiring more than 30 days must transmit weekly updates to the borrower/seller, and in all cases provide a final response within 60 days.  For HAFA short sales, the clock starts ticking once the borrower has presented a complete short sale approval package.  Requests for pre-approval of short sales also must be completed within the new time frames.

As one who has been tracking short sales since 2007, I frankly question whether these new deadlines can — and will — be met.  Certainly, I have observed situations where short sales are processed start-to-finish in 2 months or less; however, these are far and away the exception than the rule.  More typically, the short sale process from submission of the borrower’s package to issuance of approval by the servicer is 3-4 months or longer.  And indeed the timeline can be extended significantly where short sale approval must be issued by more than one lender/servicer.

The new guidelines provide financial incentives to servicers that complete short sales within the new FM timeline.  In addition, banks servicing Fannie loans risk fines and other penalties if they fail to follow the guidelines.  However, from what I’ve been able to determine, these penalties represent a proverbial “slap on the wrist.”  Only time will tell whether servicers that have to date have dragged their feet in processing short sales will now suddenly “snap to” and provide the timely review and approvals that have left far too many borrowers hanging.  Hope springs eternal….

Here is a link to a complete copy of the Servicer Guide Announcement:  https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2012/svc1207.pdf