This article will cover Short Sale Tax Implications, Short Sale Negotiation, The Mortgage Forgiveness Debt Relief Act 2019, Interview Questions for Real Estate Salesperson, Short Sale Contingency Addendum etc . keep reading to have indepth idea about short sale.
Short Sale Tax Implications
Call me a teacher (I have an education degree), call me a dad, a husband, a sports fanatic, or a real estate agent if you like: one thing you can‟t accuse me of is being a tax professional. That said, I am legally prohibited from giving out tax advice.
If you have any concerns about the tax consequences of a short sale, I urge you to seek the advice of your accountant or attorney. I decided to include this chapter in the book because of the very real possibility of a change in how the IRS treats the debt forgiven in a short sale.
This will have a significant impact on your taxes, and it‟s out there, looming on the horizon. If you are considering a short sale, you need to act quickly.
The Mortgage Forgiveness Debt Relief Act of 2019
Once upon a time, when a homeowner had his mortgage debt forgiven in a short sale, the IRS taxed him on the amount forgiven. For instance, if he owed his lender $350,000 but the short sale only resulted in $210,000, the IRS considered the $140,000 that the lender forgave as “ordinary income” and the homeowner would have been taxed on it.
Now, I don‟t know about you, but the tax ramifications of an additional $140,000 to my income would be quite painful. Then, in December 2007, President George W. Bush explained, “When your home is losing value and your family is under financial stress, the last thing you need is to be hit with higher taxes.
So I’m working with members of both parties to pass a bill that will protect homeowners from having to pay taxes on cancelled mortgage debt.” President Bush was successful and, in December 2007, he signed The Mortgage Forgiveness Debt Relief Act. Underwater homeowners now had a three-year window in which to expect tax relief on distressed property transactions.
In October 2008, congress enacted legislation to extend the tax relief through 2012.Some members of Congress have been pushing for another extension (H.R. 4290, the Homeowner Tax Fairness Act, and S. 2250, the Mortgage Forgiveness Tax Relief Act). Since the government seems to be looking in every nook and cranny of this country for additional revenue, I wouldn‟t count on any extensions.
In fact, GovTrack.us, a website that keeps track of pending legislation, gives the House legislation a 3 percent chance of passing and an 18 percent chance for the Senate bill.
The Insolvency Exception
Prior to the 2007 passage of the Mortgage Forgiveness Debt Relief Act, the IRS included certain exceptions to their rules on taxing forgiven debt. One of these was the socalled insolvency exception, wherein the IRS said that the debt won‟t be considered gross income if the “discharge occurs when the taxpayer is insolvent.”
What do they mean by insolvent? Here‟s the answer: according to IRS Code Section 108, the term “insolvent” means “the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer‟s assets and liabilities immediately before the discharge.”
The operative words there are “immediately before the discharge.” This means you must have been insolvent at the time the short sold home closes escrow – becoming insolvent afterward won‟t count. Again, I am not a tax professional, but I do know that determining insolvency is complex and requires the assistance of an accountant.
Should I Wait for the Market to Recover?
Many struggling homeowners are sitting on the sidelines watching the real estate market closely, hoping that it improves quickly enough to allow them to perform an equity sale, and maybe even make a few dollars in the process.
If you‟re not in dire straits, meaning foreclosure isn‟t imminent, and (although it might be a struggle) you feel you can remain in your home, your question is: “Should I?” That depends on who you ask. Housing news over the past year has yielded a mixed bag of opinions and forecasts.
However, Although we‟re seeing pockets of improvement in home prices, most experts agree that it will take several years for prices to return to their prehousing market crash levels – enough for you to recoup some of the value you have lost.
As I mentioned, there is some disagreement as to when the housing market will fully recover. Let‟s take a look at the most recent MacroMarkets home price survey. This survey is based on the combined opinions of over 100 economists, housing market analysts, and investment strategists, and illustrates their expectations for 2012 and beyond.
As you can see, the experts predict an additional loss of 0.4 percent in values through 2012, and then a modest increase in 2013 and beyond. By 2016, the average American homeowner may realize only a 3.5 percent increase in home value. Just this one study alone shows me that it isn‟t worth it to sit on the home unless you plan on sitting on it until at least 2020. To further explain, let‟s look at two scenarios.
Homeowner A purchases her home in January 2005. She obtains a $300,000 interestonly, 10-year ARM at 6.25 percent interest. She also takes out a second mortgage at 7 percent interest. Let’s look at how long it will take her to break even on the loan (and no longer be upside down).
However, As you can see, the break-even point on this loan, after paying all customary closing costs, is 2021. This example assumes that housing prices begin to appreciate, and continue that trend. So-called 80/20 loans have been common during the past decade, and the above graph is illustrative of why so many Americans are upside down in their mortgages. Sadly, the chart also shows how very long it will take to break even. On the following page, we’ll look at another scenario.
This homeowner purchased his home for $250,000 in January, 2007. He obtained a 30- year fixed FHA-backed loan at 5.5 percent interest. Here‟s a look at how long it will take Homeowner B to break even on the mortgage: FHA-backed loans are quite popular, mainly because they allow homeowners to get into a home for as little as 3.5 percent down.
The problem here is that a large portion of the monthly payment goes toward paying the interest on the loan, so for the first five years or so, the principle hardly budges. The chances are good that your home’s value, and what you owe on your mortgage, will catch up with one another somewhere down the line. That “somewhere,” however, may be close to a decade away.
Duties of the Short Sale Listing Agent
Since the agent is the most important component of the short sale process, I thought it might be a good idea to let you know what you should expect of your listing agent. Remember, an inexperienced agent is not going to understand the depth and range of these duties as they pertain to the short sale.
However, Keep this list handy as you interview agents for the job of listing your short sale. Ask each one to explain his or her duties during the process and avoid any agent that can‟t rattle the following information off the top of his or her head. Your agent should be able to: Contact your lender to obtain authorization to communicate on your behalf.
Explain the entire short sale process to you so that you have a thorough understanding of what is going to occur at each step. Explain the tax and credit ramifications of the short sale, and advise that you seek further counsel from your attorney and/or tax professional. Counsel you on how to ready the home for the market, and explain to you your duties during the marketing process.
Compile the preliminary short sale package, ensuring that it includes a release of liability to protect you from having to pay the deficiency after the sale. Negotiate with buyers to bring in the amount the lender is most likely seeking. Add the purchase agreement and the HUD-1 statement to the short sale package and send it to your lender for approval. Assist your lender in verifying the home‟s current market value.
Short Sale Negotiation
Negotiate second lien payoffs with your lender. And negotiate any demands from the holder of the second lien. Follow up with the lender‟s short sale team on a weekly basis, and relay the results of these communications to you. Order the preliminary title report. Comply, in a timely fashion, with all lender requests. Compare the short sale approval letter to the HUD-1 to ensure everything matches. Deliver the short sale approval letter to all parties involved in the transaction. Review closing documents.
The above-mentioned duties are the basics and, believe me, anything can and does happen that may require adjusting these duties and adding additional ones. Only an experienced short sale listing agent knows what to expect and how to deal with the unpredictable aspects of the short sale transaction as they arise. Only an agent with contacts within the lender‟s short sale team can move the transaction along quickly. Choose your agent carefully.
Appendix ii- Interview Questions for Real Estate Salesperson
How many short sales have you performed in the past year? How many of those transactions were successful? Do you hold any short sale credentials? I have a second loan on the house. How will this be handled if I hire you? How do I know if I have PMI? If I do have PMI, will that affect the short sale?
However, Do you have any direct contacts within my lender’s short sale department? On average, how many days do your short sales take to close? Do you use Equator? (See Appendix vii). How many offers will you submit to the lender? (The answer to this should be “One – the best one.”) If the agent says that all offers will be submitted, find another agent.
Appendix iii: Contents of the Short Sale Package
When complete, the short sale package will contain: The Authorization Letter, signed by all parties (see Appendix iv). Your last two bank statements. If employed, your last two pay stubs. A hardship letter (see the Appendix v for an example). The last two year‟s tax returns, and IRS Form W2 or IRS Form1099.
However, The signed purchase agreement(s). Short Sale Contingency Addendum (see Appendix viifor an example). Required bank addenda, such as the Arm‟s Length Affadavit. A printout of your home‟s listing from the Multiple Listing Service database. Samples of marketing pieces we’ve created to help sell the home.
Proof that the home is worth what we say it is – typically in the form of a Broker’s Price Opinion. Exclusive Kris Lindahl Short Sale Report.
Appendix iv: Letter of Authorization
Appendix v: Sample Hardship Letter
(Sample Hardship Letter courtesy of the United States Department of Housing and Urban Development)
Appendix vi: Homeowner Financial Worksheet
Appendix vii: Short Sale Contingency Addendum
Finally, Appendix viii: Short Sale Glossary
The 1099-C is an Internal Revenue Service form that is issued to homeowners receiving debt forgiveness. In the absence of government amnesty programs, (such asThe Mortgage Forgiveness Debt Relief Act of 2007, set to expire at the end of 2012), the amount listed on the 1099-C that you receive from your lender after the short sale will be treated as ordinary income on your tax return.
Closing, sometimes called “settlement,” is the last step in the short sale process. All parties to the sale come together to sign documents and funds are disbursed, according to the contract terms.
However, A CMA (Comparative Market Analysis) and a BPO (Broker‟s Price Opinion) are similar methods used by real estate agents to determine and justify the estimated value of a property by comparing it to similar properties that have recently sold.
Concessions are items that sellers concede to buyers. They can include anything from the home’s furnishings to the payment of closing costs.
A contingency in a real estate contract is a clause that makes the sale of the property dependent upon the outcome of some event. For instance, an inspection contingency allows for the buyer to walk away from the deal upon dissatisfaction with the home inspection. Contingencies are time-sensitive, and expire if not formally removed by the specified time.
Equator is an online software service that improves the lenders’ response time and keeps track of important documents.
Typically a spreadsheet, the financial worksheet lists all of your income and expenses, savings and other assets. The lender typically requires supporting documents to back up your claims on the financial worksheet.
Examples of documents that you may be required to supply include bank statements, investment account statements and paycheck stubs. (See Appendix vi for a sample financial worksheet).
The hardship letter, addressed to your lender, explains your current financial situation, how it came about and why it will persist into the foreseeable future. You will find a sample hardship letter in
HUD-1 Settlement Statement
However, The HUD-1 Settlement Statement is a document that itemizes all funds. And it will be paid or have been paid at closing.
A junior lien — typically a mortgage – is one that is subordinate to your first mortgage. The priority of liens on your property is generally established by the date recorded . Or by a subordination agreement, authorized by junior lien holders to establish a refinanced first mortgage as the senior or primary lien.
Letter of Authorization
A letter that allows me, as your listing agent and authorized representative. To communicate or negotiate with the lender on your behalf. You‟ll find a sample letter in Appendix iv.
Limited Third Party Authorization
A limited third party authorization gives your primary lender permission to discuss your situation .And negotiate with the junior lien holder.
The lender typically wants a copy of the agreement you sign with me. Authorizing me to list your home for sale. Some lenders also require a copy of the MLS listing for the home and a log of all showings. PMI Short for Private Mortgage Insurance, PMI insures the lender should the buyer default on the mortgage. See Chapter 9 for a discussion of how PMI may derail your short sale.
A promissory note is a signed document containing a written promise to pay a specific sum of money.
Purchase Contract or Agreement
This is the contract submitted by the buyer of the property. The lender wants to see a fully executed contract, along with any counter offers and addendums.
A servicer is the financial institution that manages a lender‟s loan portfolio. Duties of the servicer include receiving payments, sending bills, accounting and communication with borrowers. Not all lenders use a servicer.
Short Sale Contingency Addendum
Every short sale agreement includes the implied contingency . The sale is predicated on the lender agreeing to accept the purchase price. Which is lower than the amount owed on the loan. The short sale addendum is a separate form that makes this implication concrete and requires acknowledgement by the buyer.
However, The short sale agreement also contains the amount of time the buyer will wait for approval. See Appendix viifor an example of a short sale contingency addendum.
Short Sale Package
However, The short sale package includes a compilation of all the lender-required documents. It is used to determine whether or not you qualify for a short sale . And how much money it stands to realize from the sale. You‟ll find a complete listing of what we need to include in your short sale package in Appendix iii.
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