Archive for the ‘Real Estate’ Category

After a short sale or a foreclosure, will there be taxes owed on the ‘forgiven debt’?

Consult your CPA for more details, but the bottom line is: most homeowners will not owe tax on the forgiven amount. Prior to the Mortgage Forgiveness Debt Relief Act (HR3648), homeowners of primary residences were subject to a “Phantom Tax” on whereby the amount forgiven would count as income. Since the passage of this retroactive law in December 2008, eligible homeowners still report the cancelled debt as income, but they also are granted exclusion to write off the income. The new write off only applies to forgiven debt on primary residences and cancelled debt up to $2,000,000. If you acquired a home equity line of credit (HELOC) after closing that was not used to improve the property, then forgiveness of that loan may be subject to tax.

If you had debt cancelled and are no longer obligated to repay the debt, you generally must include the amount of cancelled debt in your income. However, if it was a discharge of qualified principal residence indebtedness, you may be able to exclude all or part of this amount from being included in your income.

What is qualified principal residence indebtedness?

Qualified principal residence indebtedness is a mortgage that you took out to buy, build, or substantially improve your principal residence. The mortgage must be secured by your principal residence. Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is treated as qualified principal residence indebtedness. However, only up to the amount of the old mortgage principal just before the refinancing qualifies for exclusion. Any additional debt that you incurred to substantially improve your principal residence is also treated as qualified principal residence indebtedness.

If the amount of your original mortgage is more than the total of the cost of your principal residence plus the cost of any substantial improvements, the full amount of the original mortgage does not qualify for exclusion. Only the debt that is not more than the cost of your principal residence plus improvements is qualified principal residence indebtedness.

What amount of cancelled debt can be excluded from income?

The exclusion applies ONLY to debt discharged after 2006 and before 2013. The maximum amount that you can treat as qualified principal residence indebtedness is $2 million ($1 if filing Married Filing Separately).

You cannot exclude from income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

Ordering rule: If only a part of a loan is qualified principal residence indebtedness, the exclusion applies only to the extent that the amount discharged exceeds the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness.

Example: Assume your principal residence is secured by a debt of $1 million, of which $800,000 is qualified principal residence indebtedness. If your residence is sold for $700,000 and $300,000 of debt is discharged, you would only be able to exclude $100,000 of debt (the $300,000 that was discharged minus the $200,000 of nonqualified debt). The remaining $200,000 of nonqualified debt may qualify in whole or in part for one of the other exclusions, such as the insolvency exclusion.

From the IRS:

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

If you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable.

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

More information, including detailed examples can be found in Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Also see IRS news release IR-2008-17.

The following are the most commonly asked questions and answers about The Mortgage Forgiveness Debt Relief Act and debt cancellation:

What is Cancellation of Debt?
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.

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.
These exceptions are discussed in detail in Publication 4681.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?
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.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. 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. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.


The Emergency Economic Stabilization Act of 2008 extended the exclusion from gross income for the discharge of qualified principal residence indebtedness by an additional 3 years. The exclusion now applies to debt discharged after 2006 and before 2013. See Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals), for more information.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

Where can I get this form?
If you use a computer to fill out your return, check your tax-preparation software. You can also download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much debt was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by February 2, 2009. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion. See Publication 4681 for further details.


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As potential homebuyers begin wading back into a battered real estate market, it’s helpful to know how to evaluate properties, especially foreclosures and houses that may have stood abandoned. Is that fixer-upper really such a bargain?

Dwight Martin, a master homebuilder and the owner of DK Martin Custom Homes emphasizes hiring a home inspector, because whether the home is new or old not all problems can be spotted by the untrained eye — or even a relatively trained one. When his daughter bought a home, he inspected it but also called a friend, who requested the furnace number and the model. The house’s furnace had been recalled due to a carbon monoxide issue. “That was something I never would have known so we had the seller test the furnace,” says Martin.

“Often times the cost of the home inspection won’t be as much as the benefit you’ll get from the seller in fixing something they found. When people say, ‘I can’t afford an inspector,’ what if he finds your furnace needs to be replaced?”

But before you even get an inspector involved, there can still be warning signs that a house is a questionable choice. If you see numerous “for sale” signs throughout one neighborhood, it’s best to find out the reason for the mass exodus. Notice if the house smells either bad or too artificially good (this could be an indicator of an air freshener being used to cover up a moldy smell). Make an effort to notice those little things that could mean a lot, such as rodent droppings in the cabinets.

There’s one former red flag that may no longer apply. Before, a house lingering a long time on the market was often considered a bad sign, but now it can just be a sign of the economic times.

Lack of Maintenance

Home inspector Reggie Marsten, owner of the D.C.-based REM Home Inspections says his number-one red flag is a lack of maintenance.

“When I first pull up to a home, even before I get out of my vehicle, I’m scanning the house for a sense of what I’m getting into. “I’m looking at the roof—what condition is it in? Is there vegetation growing in the gutters from not being cleaned, does the house need paint, is there damaged or missing trim and siding? Are the shrubs in front neatly trimmed or do they look wild, has the grass been cut? Chances are if the exterior of the house looks somewhat rundown and unkempt then the interior is also in the same condition.”

Water Damage

“When I think of big problems in houses, I think of water, or too much moisture in the house,” says Martin, adding that one indicator of that danger is when the ground around the house is sloped toward the house instead of away, which can lead to a flooded basement. He also cautions to make sure the bathrooms have adequate ventilation, and checking the attic or crawlspace to make sure there’s no mold or mildew.

Regional Concerns

Martin, who builds homes in the Puget Sound region, notes that houses situated on water are more exposed to the weather and have different storage needs, and buyers there have to consider whether houses are raised high enough.

Other locations bring different key home features into play, and it’s good to know regulations specific to your region. In areas that get extreme heat or cold temperatures, energy efficiency takes on more importance. If it’s an older house, it might not be well insulated, and it may have single pane glass. Because of new technologies and energy codes, new homes are much better at keeping the heat in winter and keeping it out in summer.

Structurally, homes are being built much stronger, such as with seismic design and construction, notes Martin. “On the West Coast, we have very strict rules so the homes will hold up much better in earthquakes. In the Gulf States, they’re much stronger for hurricanes.”

House Age and Period-Specific Issues

There are positives and negatives for both new and old houses. Older homes might show quality craftsmanship on a more consistent basis, but might need to be adapted for today’s lifestyles, such as installing modern sound systems or upgrading the kitchen to current preferences.

For Marsten, the age of a house can be his red flag number two. “Age itself is not a problem with a home if it’s been maintained and upgraded. All components of a home have a life expectancy; 20 years for a standard asphalt shingle, 12 years for a hot water heater, 15 years for an air conditioner. If I’m in a house that’s 22 years old and find the original roof, hot water heater, furnace and air conditioner and kitchen appliances then I have to inform my client that they will need to budget to replace all the components that are past life expectancy.”

Homes built in different eras have different hidden potential dangers characteristic of their period, Marsten said. “In our quest to build houses quicker and cheaper over the years, products were used that didn’t receive adequate testing, or at the time they were used the long term exposure ramifications weren’t known.” He cites the following examples:

• Homes built in the early 1900s used lead water lines.

• Homes built from the 1920s until the 1970s utilized lead- and asbestos- containing products.

• Homes built in the 1960s to the present contain products that give off volatile gases (hurricane Katrina HUD trailers for example).

• Some homes that were built from the mid 1970s to the present utilized defective water lines that fail.

Avoid Raising Flags

Marsten advises that purchasers do as he does: “Just take a few minutes, stand across the street from the house their looking at and just scan the exterior looking at the roof, gutters, siding, trim and shrubbery looking for anything that doesn’t look normal or out of place.”

Compare the home to others in the area, he says. Does the home look better than the others, the same, or worse? Keep in mind everything that needs to be painted, repaired, adjusted, tweaked, or replaced has a dollar sign attached to it and those dollars can add up very quickly, Marsten says.

“You can also tell when the owner let the house run down and then slapped a coat of paint on it to sell it, the, “lipstick on a pig” syndrome. Lack of maintenance can’t be hidden.”

“Well-built is an indication of professionalism and craftsmanship, unfortunately two traits that are rapidly disappearing with today’s builders and replaced with speed and profit,” says Marsten “I call it ‘good bones’ if the house has been constructed structurally sound, that is; square, plumb and level that’s 75% of a well built house, the remaining 25% is maintenance.”

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WASHINGTON (Reuters) – Sales of previously owned U.S. homes rose unexpectedly in January, but prices tumbled to the lowest in nearly nine years, an industry group said on Wednesday.

The National Association of Realtors said sales climbed 2.7 percent month over month to an annual rate of 5.36 million units from a downwardly revised 5.22 million pace.

Economists polled by Reuters had expected January sales to fall 2.1 percent to a 5.24 million-unit pace from the previously reported 5.28 million units in December.

Compared with January last year, sales were up 5.3 percent. The median home price fell 3.7 percent from a year-ago to $158,800, the lowest since April 2002.

“I would have thought that the winter weather would have kept some buyers away from the market, it doesn’t appear to have happened though and we’re a little bit encouraged by it,” David Resler, chief economist at Nomura Securities in New York.

The NAR has been accused of overcounting existing home sales. The Wall Street Journal on Monday quoted California real estate analysis firm, CoreLogic, as saying the NAR could have overstated home sales by as much as 20 percent.

NAR dismissed the claim and chief economist Lawrence Yun told reporters: “I would be highly surprised if it was 20 percent.”

The NAR also revised the sales rates for the past three years, which showed 2010 sales little changed.

An overhang of foreclosed properties is casting a pall over the housing market, weighing down the sector even as the broader economy has entered a sustainable growth path. Housing was at the core of the worst recession since the 1930s.

The U.S. stock market held its slight losses on the data, while prices for safe-haven government bonds were little changed. The dollar fell against the euro.


Last month, distressed sales accounted for 37 percent of transactions, the highest in 12 months. First-time buyers accounted for just under a third of transactions in January, with all cash purchases making up 32 percent. Investors accounted for 23 percent of purchases in January.

The existing home sales report also showed the shift in housing becoming more pronounced, with sales of single family homes rising 2.4 percent and multi-family purchases surging 4.7 percent.

Demand for rental apartments is on the increase as prospective homeowners shy away from owning a property because of falling values and families lose their homes to foreclosure, boosting sales of multi-family homes.

Paul Dales, a senior U.S. economist at Capital Economics, estimates there is an oversupply of 850,000 homes on the market, with another 4.5 million properties in the foreclosure pipeline.

January’s sales pace left the supply of existing homes on the market at 7.6 months’ worth, the lowest since December 2009, down from 8.2 months’ worth in December.

A month’s supply of between 6-7 is generally considered as ideal, with higher readings pointing to lower house prices.

Standard & Poor’s/Case Shiller said on Tuesday prices for single-family homes fell for a sixth straight month in December and warned that house prices could fall another 25 percent.

Applications for home loans rebounded last week as buyers rushed to take advantage of a slide in mortgage rates in the wake of the growing unrest in the Middle East, but demand is unlikely to be strong enough to prevent prices from falling further.

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Lets ask the reporting agencies:

The impact a foreclosure, short sale or bankruptcy have on credit scores can vary depending on the credit profile of a particular person. The amount of the score’s drop is based on the person’s starting score. In general, a foreclosure will reduce a credit score by 140 points, he added; a short sale will drop the score by 130 points.

While both a foreclosure and a short sale will remain on a credit report for seven years, they are often reported differently. A foreclosure is reported as a foreclosure, but short sales can appear as “settled for less than balance owed,” or similar terminology.

There are distinct advantages for someone to choose a short sale over a foreclosure. Specifically, they will have the ability to become homeowners again faster vs had they experienced a foreclosure…here are the recently updated lending guidelines:

Conventional Conforming (FNMA/FHLMC)

1) Foreclosure is 7 years

2) Deed-in-Lieu is 4 years 80% LTV for primary residences. 7 years for second homes and investment properties regardless of LTV.

3) Short Sales is 2 years 80% LTV and 7 years > 90% LTV

4) Bankruptcy is 4 years

According to TransUnion foreclosure won’t in and of itself impact credit, particularly since it arrives on the heels of hard financial times.

“Foreclosure will be regarded as a derogatory action on a credit report and will have a more serious impact than a loan modification or a short sale, but only if it is publicly reported,” ……If a property is going into foreclosure, more than likely the damage has already been done to the person’s credit report with missed mortgage payments that resulted in the foreclosure.”

Note: its the MISSED payments that do the most credit damage vs the actual short sale or foreclosure.

A bankruptcy causes a credit score to tumble a maximum of 365 points and appears on the credit report for seven to 10 years, depending on the type of bankruptcy. Again, if the starting score is already low, bankruptcy will drop that score significantly fewer points than if the starting score is high. So, if you have a B/K and your credit score is already low the actual credit point drop is LESS compared to someone with a higher score.

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It’s hard for us to keep our eyelids propped open when Fannie and Freddie are brought up. We’re sure we’re not alone.

Yet the government controlled mortgage giants are once again in the news, with the Obama administration’s recently unveiled a proposal for winding them down. And given that this is MarketBeat, we figured we we should say something about these two crucial cogs in the not insignificant $10.6 trillion U.S. mortgage market.

So we figured we’d try to tell the story of Fannie and Freddie through some of the great charts The Journal has cobbled together in recent years on the two GSEs. The idea here is not that all the numbers will be completely up-to-date. (They can’t be. These charts are from older stories.) But we just want to try to make sense of the Fannie and Freddie mess for you.

But first things first. Exactly what do they do? The Journal’s Nick Timiraos, who covers Fannie and Freddie seems to have the best plainspoken explanation we’ve seen:

For 40 years, the housing-finance system has featured a blend of public and private entities. Fannie and Freddie buy mortgages from banks and other originators, repackage them for sale as securities and make investors whole when borrowers default. Investors long assumed the two shareholder-owned firms had an implied federal guarantee, which let them borrow at below-market rates and facilitate 30-year fixed-rate loans.

So what happened? Where to begin? Well we could go all the way back to the early 1930s when the U.S. first started getting involved in housing finance. (There’s a great timeline on page 10 of this report.)

But let’s just start during our recent housing mania. During the housing boom, Fannie and Freddie, which were publicly traded private companies — albeit with a fairly obvious backing of the Feds — began losing market share in the profitable business of buying up loans, packaging them up into securities and selling them off to investors.

The Journal reported that two companies, seeking to regain lost market share, loaded up on riskier subprime and Alt-A loans in 2006 and 2007 just as the housing market was starting to tank. As people began to have trouble paying their loans, some pretty ugly losses began to show up for Fannie and Freddie, like this.

Given the importance of Fannie and Freddie to the financial system — like other large banks such as Citigroup, et al. – the government didn’t let them collapse. As a result the bailout of Fannie and Freddie became a sizable part of the bailout mania of recent years. Click on the link to see the full article and charts illustrating the saga.

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CHICAGO (MarketWatch) — The average rate on 30-year fixed-rate mortgages jumped to its highest level since the last week in April 2010, after positive economic reports caused long-term bond yields to rise, Freddie Mac’s chief economist said Thursday.

The 30-year fixed-rate mortgage averaged 5.05% for the week ending Feb. 10, up from 4.81% last week and 4.97% a year ago, according to Freddie Mac’s weekly survey of conforming mortgage rates.
Rates on 15-year fixed-rate mortgages also jumped, averaging 4.29%, up from 4.08% last week. The mortgage averaged 4.34% a year ago.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.92%, up from 3.69% last week. The ARM averaged 4.19% a year ago.

And 1-year Treasury-indexed ARMs averaged 3.35%, up from 3.26% last week. The ARM averaged 4.33% a year ago.

To obtain the rates, the fixed-rate mortgages required payment of 0.7 point, while the ARMs required an average 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.

“Long-term bond yields jumped on positive economic data, which placed upward pressure on mortgage rates this week,” said to Frank Nothaft, vice president and chief economist of Freddie Mac, in a news release. “For all of 2010, nonfarm productivity rose 3.6%, the most since 2002, while January’s unemployment rate unexpectedly fell from 9.4% to 9.0%. Moreover, the service industry expanded in January at the fastest pace since August 2005.”

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In many housing markets, buyers can afford to be picky. In fact, many first-time buyers looking for affordable properties aren’t searching for starter homes that need some fixing up, but move-in ready places they barely have to touch.

So say the results of a recent Coldwell Banker Real Estate survey.

Eighty-seven percent of people who purchased their first home over the past year said finding a move-in ready place was important to them, according to the study. Many were pleased with how far they were able to stretch their dollars, according to the survey of 300 first-time buyers.

Sixty-seven percent said market conditions allowed them to buy a home sooner than expected, half of them said they found a home in a more desirable neighborhood than they expected, and 61% said they were able to get the home at a better price than expected.

Forty percent said the amount of space they were able to get exceeded their expectations and 43% said they were able to lock in a lower mortgage interest rate than they thought they would.

As the ranks of renters rise, those who have the means and the desire to buy a home today can have their pick — and they might find they’re able to get a lot more for their money than they thought.

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