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Friday, October 26, 2012
Thursday, October 25, 2012
Sunday, October 14, 2012
The Mortgage Forgiveness Act: Will It Be Extended?
As the year winds down, we are getting more and more inquiries about the Mortgage Forgiveness Debt Relief Act of 2007 and whether or not it will be extended past its original expiration date of December 31, 2012. This is important as people who are selling their home through a short sale may be faced with a tax liability if they don’t close by the aforementioned date.
Here is the way the IRS explains the tax liability:
“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.”
What does the Act accomplish?
Let’s go back to the IRS for the explanation:
“Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”
(For more information on the ACT from the IRS, click here)
This relief also applies to most short sales. Therefore, the question of whether or not the Act will be extended is crucial for anyone considering selling their house through the short sale process.
Will the Act be extended past the end of the year?
No one knows for certain. Diana Olick of CNBC recently reported on the issue:
“So what is the possibility of congress extending the tax relief? One Hill-watcher puts it at 60-40. The Senate Finance Committee passed a package of tax extenders right before the recess, including a one year mortgage relief extension, but leadership in the House of Representatives has not figured out how it wants to handle these extenders. With the looming ‘fiscal cliff,’ tax cuts are an increasingly tough sell. This particular extension does have bipartisan support, but that doesn’t always mean passage in Congress, especially around a presidential election.”
Without knowing whether the Act will be extended, we suggest anyone considering selling via the short sale process do it now.
Wednesday, September 12, 2012
Let's Not Get Carried Away with Home Price Increases
There has been a lot of excitement about home prices over the last few months. Though we agree that the housing industry is in a full out recovery, we also believe that there will still be price volatility over the next several months. We must realize home sales are seasonal and that fact impacts prices.
Lawrence Yun, Chief Economist for National Association of Realtors, explains that the inventory of lower priced homes has been constrained leading to the rise in median home prices:
“Fewer sales in the lower price ranges are contributing to stronger increases in the median price, but all of the home price measures now are showing positive movement and that is building confidence in the market.”
Celia Chen, housing analyst at Moody’s Analytics projects that this positive price movement may not be sustained over the next few months as more distressed properties enter the market:
“Housing is about to turn from being a drag on the broader economy to being a driver…House prices will remain the laggard, perhaps dipping a little before hitting a sustained and solid pace of appreciation next year…The distress pipeline casts a shadow over the outlook. Indeed, the CoreLogic price index gained strongly between late 2009 and the second quarter of 2010, when foreclosure moratoriums were in place, before losing nearly all of the gains once the distress share of sales picked up again.”
The RPX Report suggests that price declines in the next few months could erase any gains we have seen this year:
“The gains of the first half of 2012 could be short lived. They were the result of seasonal factors and REO disposition strategies that could reverse in the fall. The unusually rapid price appreciation could give way to equally rapid declines in the second half of the year.”
Calculated Risk probably did the best job of explaining the situation reporting:
“Home price indexes will show month-to-month declines later this year. This should come as no surprise and will not be a sign of impending doom… There is a clear seasonal pattern. In recent years the seasonal pattern has been exaggerated by the large number of foreclosures – foreclosures tend to be fairly steady all year, but conventional sales are stronger in the spring and early summer and weaker in the fall and winter. This leads to more downward pressure from foreclosures in the fall and winter.”
Again, Calculated Risk explains that this “will not be a sign of impending doom”. It is instead the normal seasonality we have seen in home prices over the last several years.
Monday, August 13, 2012
Is There a 3.8% House Seller Tax in the Health Care Bill?
We have received many questions about a possible 3.8% tax which will be put on home sales beginning in 2013. We want to do our best to clarify this situation for everyone. We are not accountants and give you this information just as a simple answer to the misconception. Understand that, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.
A little history on the confusion
Fact Check.org explains it this way:
The truth is that only a tiny percentage of home sellers will pay the tax. First of all, only those with incomes over $200,000 a year ($250,000 for married couples filing jointly) will be subject to it. And even for those who have such high incomes, the tax still won’t apply to the first $250,000 on profits from the sale of a personal residence — or to the first $500,000 in the case of a married couple selling their home.
We can understand how this misconception got started. The law itself is couched in highly technical language that only a qualified tax expert can fully grasp. (This provision begins on page 33 of the reconciliation bill that was passed and signed into law.) And it does say the tax falls on “net gain … attributable to the disposition of property.” That would include the sale of a home. But the bill also says the tax falls only on that portion of any gain that is “taken into account in computing taxable income” under the existing tax code. And the fact is, the first $250,000 in profit on the sale of a primary residence (or $500,000 in the case of a married couple) is excluded from taxable income already. (That exclusion doesn’t apply to vacation homes or rental properties.)
The Joint Committee on Taxation, the group of nonpartisan tax experts that Congress relies on to analyze tax proposals, underscores this in a footnote on page 135 of its report on the bill. The note states: “Gross income does not include … excluded gain from the sale of a principal residence.”
And just to be sure, we checked with William Ahern, director of policy and communications for the nonprofit, pro-business Tax Foundation. “Some home sales would see a tax increase under this bill,” Ahern told us, “but it would have to be a second home or a principal residence generating [a gain of] more than $250,000 ($500,000 for a couple).”
Simple Explanation:
The following simple explanation comes from midiShaw:
The tax will affect those sellers of real property who will be otherwise taxed on capital gains under current tax laws. Under current laws, if you sell your primary residence and meet the ‘time ‘ criteria, you are exempt up to $250,000 or $500,000 (filing individually or jointly). Any amount realized OVER that amount is taxable under current tax schedules based on income. As such, this new tax will apparently be added to the current capital gains tax burden IF your income is over $200,000/$250,000 (filing individually or jointly). For those selling second homes and investment properties, the tax, once again, will be applied to the amount of gain realized.
Detailed Explanation:
The following also comes from midiShaw in a comment to the above answer.
Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.” In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income.
We offer this just as an explanation. Remember, when it comes to IRS regulations, you should check with your accountant for the most accurate and up-to-date information.
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