SHORT SALES: TOP 10 MYTHS DEBUNKED!

SHORT SALES: TOP 10 MYTHS DEBUNKED!
Myth #1: The homeowner must fall behind on mortgage payments in order to qualify for a short sale.
Debunked: Years ago this may have been true, but not in 2012.
• A financial hardship must exist, such as the ARM (Adjustable Rate Mortgage) increasing in monthly payments.
• Loss of job or income.
• Health or medical issues.
• Extraordinary loss in home value (which may be considered a hardship).

Check back tomorrow for myth #2.

TAX BREAK FOR MORTGAGE DEBT FORGIVENESS

President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.

This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).

For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer’s principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.

For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648.

Foreclosures and Short Sales – Subject to Taxes?

The IRS says there is no free lunch. If you transfer title on your home, whether voluntarily through a warranty or grant deed, or involuntarily through foreclosure, you have SOLD your home. You might be subject to taxes, even if you sold your home at a loss, either on a short sale or by foreclosure.It doesn’t seem fair. What’s worse is you might not even find out that you owe taxes until the day you open your mail to find a 1099. Source: Elizabeth Weintraub

For example: Assume a family purchased their home for $200,000, with a mortgage of $195,000. Later, they need to sell the home, and find that the value of homes in their area has declined, and they can sell for only $185,000. At the time of the sale, the outstanding balance on the mortgage might be, for example, $190,000. Thus, there will not be enough cash at settlement to repay the lender the full balance of the mortgage. In some circumstances, a lender might forgive the amount of any shortfall ($5,000 in this example).

In this example, the seller will be required to recognize $5000 of income (the forgiven amount of the debt) and pay tax on it at ordinary rates. Thus, the seller, who has experienced a true economic loss, is required to pay tax on any phantom income, even though no cash has changed hands and even though he has experienced a loss. Similar results would apply in a foreclosure where some debt amount remains outstanding at the conclusion of the proceeding.

Any lender who forgives debt is required to provide a Form 1099 information report to the borrower and to the IRS stating the amount of the forgiven debt. The Form 1099 will be required in any circumstance when a debt is forgiven, whether it is a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of a debt. More information about Foreclosures, Short Sales and Taxes 

Jill Denton ~ Hometown GMAC Real Estate and Changing Spaces Interior Redesign & Staging