Are taxes due on your foreclosure?

Taxing your loss

Nobody has to pay taxes on a loss, no matter the source.  But you may have to pay taxes on a partially  forgiven mortgage loan.

The rule: While borrowed money isn’t regarded by Uncle Sam as income, if you  don’t pay it all back, the unpaid balance is taxed just like income.

Example: I loan you $10,000 and you pay back only $4,000. The day I give  up trying to collect and write off the $6,000, as far as the IRS is concerned, I  lost $6,000 and you earned it. It’s the same as if you’d won $6,000 in a  contest, or at a casino. In short, you’re $6,000 richer, and Uncle Sam wants his  cut.

If you owe $100,000 on a mortgage, give the house back in a foreclosure and  the bank recoups only $40,000, the bank takes a $60,000 deductible  loss. As far as the IRS is concerned, that’s $60,000 you earned.

So whenever you pay back less than you borrow, if the forgiven debt exceeds  $600, it’s possible you’ll get a 1099-C form in the mail the following  January.

If you find yourself facing this misery, at least you’ll have plenty of  company. Millions  of 1099-Cs are issued annually.

Is it fair?

At first blush, this may seem the epitome of kicking someone when they’re  down. After all, you already lost a house, along with the down payment and any  improvements. Going after you for taxes on the forgiven portion of the debt  smacks of emptying a carton of Morton’s into the wound.

But there’s logic behind this seemingly cruel rule. If no tax were required  for forgiven debt, it would be easy to cheat the government. For example,  suppose I took a $100,000-per-year job, but asked to be paid in the form of a  forgiven loan. Since loans aren’t taxable income, without this rule, I’d be  earning $100,000 tax-free.

When forgiven debt isn’t taxable

Fortunately for millions of hapless homeowners, since 2007,  forgiven foreclosure-related mortgage debt is rarely taxable.

The 2007  Mortgage Forgiveness Debt Relief Act, extended through the end of 2013,  specifically excludes forgiven mortgage debt from income. At least, as long as  it related to a primary residence, was less than $2 million for joint filers,  and, as the IRS puts it, was “directly related to a decline in the home’s value  or the taxpayer’s financial condition.”

Here are some other situations where forgiven debt isn’t taxable:

  • If the debt was discharged in bankruptcy.
  • If the debt was forgiven when you were insolvent. This  is the strategy used by many with canceled or settled credit card debts. You’re  insolvent when what you owe exceeds what you own; in other words, your debts  exceed your assets. This doesn’t mean, however, you don’t report it. The  forgiveness is nontaxable only to the extent of your insolvency, and you’ll have  to fill out a worksheet and file an IRS form.
  • Non-recourse loans. When the lender’s only recourse is  to repossess the financed property, that’s a non-recourse loan. In other words,  the lender can’t come after you personally. While some real estate fits  this bill, car loans almost never do.
  • Some student loans can be canceled in exchange for  entering certain professions or performing public service. If they meet the  criteria, cancellation of these debts is nontaxable.

Note that qualifying to have your forgiven loan rendered nontaxable doesn’t  make it automatic. If you get a 1099-C, so did the IRS. So if you’re entitled to  an exemption, you’ll need to include the amount on the 1099-C in your gross  income, then file a Form  982 with your tax return to show why it’s not taxable.

Number of Short Sales Dropping

What goes up, must come down.

While the price of homes and the number of home sales continues to rise each year, the number of short sales has dropped. Short sales, which are home sales in which the sale price is less than the total of the outstanding mortgages secured by the property, made up 5.3 percent of all sales in October, according to RealtyTrac’s monthly foreclosure report. That’s down from 6.3 percent in September and 11.2 percent in October 2012.

In the report, RealtyTrac Vice President Daren Blomquist explained the shift: “After a surge in short sales in late 2011 and early 2012, the favored disposition method for distressed properties is shifting back toward the more traditional foreclosure auction sales and bank-owned sales,” Blomquist said. “The combination of rapidly rising home prices — along with strong demand from institutional investors and other cash buyers able to buy at the public foreclosure auction or an as-is REO [real estate owned] home — means short sales are becoming less favorable for lenders.”

The national median sales prices stayed consistent from September to October at $170,000, which is a 6 percent year-over-year increase. The annualized sales rate hit 5.6 million, a 2 percent increase from September and a 13 percent surge from October 2012. Despite the drop in short sales, they remain a large part of real estate in states riddled with distressed properties. In October, 14.2 percent of Nevada’s home sales were short sales, the highest share among all states. Florida was runner-up at 13.6 percent, followed by Maryland (8.2 percent), Michigan (6.7 percent) and Illinois (6.2 percent).

While Blomquist cited cash sales as a contributing factor to the decline in short sales, some of those same states reported a high percentage of cash sales. Nationwide, such transactions — those that have no loan recorded at the time of sale — accounted for 44.2 percent of all sales, a 33.9 percent increase from the same time last year. The percentage of cash sales in September was revised to 45 percent.

Florida led all states with 65.6 percent of its sales completed in cash, followed by Nevada (55.5 percent), Georgia (55.4 percent), South Carolina (53.9 percent), Michigan (49.5 percent) and Ohio (49.2 percent).

Number of short sales falling

Over the past few months the number of short sales has gradually been falling. According to a RealtyTrac report, fewer lenders are willing to sanction short sales due to the fact that property prices are increasing.

The article in Inman News shows that in October, national short sales accounted for just 5.3% of all sales compared to the previous month when they accounted for 6.3%. In October last year the number of short sales was 11.2% of total sales.

A recent report by the National Association of Realtors shows that short sales tend to sell at an average of 14% below market value. Towards the end of 2011 and early last year, the number of short sales surged. Now it’s becoming more usual for distressed properties to be disposed of through bank owned sales and foreclosure auction sales.

At least part of this shift in the way distressed properties are being disposed of is due to inventory shortages. Recent figures have shown that foreclosure inventory in the US is now at its lowest level since the end of 2008. It has fallen nearly 30% in a year, and stood at 1.28 million in October. Home prices are rapidly increasing, and there’s still strong demand from cash buyers and institutional investors, both of whom are able to buy at foreclosure auctions. As a result short sales are becoming a far less preferable method of getting rid of distressed properties.

A year ago foreclosure auction sales accounted for just 1.3% of sales to third parties, but this is now increased to 2.5% of all sales. Property sales of REO homes (real estate owned) repossessed by banks rose slightly in October, accounting for 9.6% of sales compared to 8.9% a month earlier. This figure is largely unchanged from a year earlier when it was 9.4%. In October cash sales accounted for 44.2% of all residential sales, up from 33.9% in October last year.

Home prices to climb across Front Range

The Northern Colorado housing market continues to recover, and buyers are looking east more than ever.

That was a message delivered Thursday when experts from the Everitt Real Estate Center in the Colorado State University College of Business presented a 2014 real estate forecast at Embassy Suites in Loveland.

Drawing on research conducted by an academic team with data gathered from several sources, including individual city planning departments and industry professionals, Everitt Center Executive Director Eric Holsapple said that home prices are expected to continue to climb next year in the Fort Collins and Loveland/Berthoud markets.

According to experts from the Everitt Real Estate Center in the Colorado State University College of Business, Loveland home prices are forecasted to see more than a 10 percent increase  for 2014, rising to an average of $270,000. New home closings are also strong and expected to keep growing.

The Loveland market follows a trend across Colorado, where the housing market is still in recovery mode after the recession. In terms of housing starts activity, Larimer County is at 53 percent of its 2004-2005 peak and is recovering faster than any other county in the Front Range, according to John Covert, who is the regional director of the national home construction tracking company Metrostudy.

 

Homeowners can get a home loan after short sale

After you go through a short sale, the dream of homeownership doesn’t have to end there. Homeowners who sell their homes for less than what they owe can qualify for a home loan again.

They’ll need persistence and strong credit discipline.  In today’s tight lending environment, many homeowners tend to think it’s nearly impossible to qualify for a mortgage after a short sale, but its not.  The normal wait perior is at least two years after you go through a short sale to qualify for a mortgage.  But  it is all dependent on the type of the loan and the down payment.

Below are the minimum waiting periods and down-payment requirements to get a conventional loan after a short sale are:

Two-year wait with a 20 percent down payment,

Four-year wait with a 10 percent down payment, and

Seven-year wait with less than 10 percent down payment.

For FHA loans, there’s a three-year waiting period from the short-sale closing date, and home buyers can get a mortgage with as little as 3.5 percent down. Those who qualify for a VA loan have to wait two years and are not required to make a down payment. FHA is the best option and shortest route for buyers with less than 10 percent down.

There is hope out there for you to own a home again if you have gone throught hard times and had to short sale your home. Stay positive, keep persistant and it will happen.

People Filing for Foreclosure in Colorado dropped Drasctically in April

 

The Foreclosure-filing rate for Colorado  in April dropped 68.7 percent from April 2012 and 34 percent from March, according to RealtyTrac’s monthly foreclosure report.

Colorado had the 36th highest foreclosure-filing rate in the nation last month — its a solid improvement from having among the top 10 highest rates in the country for much of the last couple of years.

Accross the nation, there were 144,790 properties that had foreclosure filings in April, which is down 23 percent from April 2012 and down 5 percent from March.

It went on to say that one in every 905 U.S. housing units had at least one foreclosure filing in April.

Nevada posted the nation’s highest state foreclosure rate for the second month in a row, reporting one in every 360 housing units with a foreclosure filing during the month.

Foreclosure filings are the initial documents, these documents are filed with county public trustee’s offices, this then starts the foreclousre process. That process ends with the sale of a property at auction, unless debt related to the property is repaid.

Should You Choose a Short Sale Over a Foreclosure?

By Elizabeth Weintraub, About.com Guide

Short Sale Benefits

Here are a few benefits for doing a short sale that may not have occurred to you:

  • You are in control of the sale, not the bank.
  • You may sleep better at night knowing who is buying your home.
  • You will spare yourself the social stigma of the “F” word, foreclosure.
  • Contrary to popular belief, you can be current on your payments and still effect a short sale.
  • Your home sale will be handled like any other home sale.

Buying Again After a Short Sale

If your payments have never fallen behind 30 days late and the lender does not require that you pay back the loan, Fannie Mae guidelines may allow you to buy another home immediately. Finding a lender who will fund that kind of loan is very difficult. If you are current on your mortgage, you can qualify for an FHA loan immediately as well, but lender requirements can be weird such as you have to move more than 600 miles away.

If your payments are in arrears yet a short sale is granted by your lender, you may qualify to buy another home with a Fannie-Mae backed mortgage within two years, regardless of whether the home is your primary residence. The wait for FHA is 3 years.

Buying Again After a Foreclosure

With certain restrictions, you may be eligible to buy another home in 5 years if the home was your primary residence. Without restrictions, the wait is 7 years.

If you are an investor and do not occupy the home, the wait to buy with a Fannie Mae insured loan is 7 years.

Affects on Credit After a Short Sale

A short sale may be considered to be a derogatory mark on your credit even though credit bureaus do not show the word “short sale” on your credit report. It may say “paid in full for less than agreed” or “settled for less,” among other categories. Some clients have reported negative FICO score drops from 50 points to 130 points.

Major point drops are typically due to being in default, meaning you have fallen behind on your payments.

Affects on Credit After a Foreclosure

Depending on your credit history and other guidelines, Myfico.com shows 2 examples in which a credit score could fall 105 points to 160 points after a foreclosure. Generally, a foreclosure will remain on your credit report in the trade lines section for 7 years.

Credit Reports After a Short Sale

All lenders report short sales differently, with many reporting “paid in full for less than agreed,” and some report the short sale as a charge off. Negative credit, however, stays on your report for 7 years.

Credit Reports After a Foreclosure

If a prospective employer runs a credit check on you, your job application may be denied if you have a foreclosure on your record.

Deficiency Judgments After a Short Sale

Judgments are often negotiated between the seller and the short sale bank. In some cases, such as California, if the home is your personal residence and was financed through purchase money, there is no deficiency judgment.

Deficiency Judgments After a Foreclosure

Banks are generally unwilling to negotiate deficiency judgments with the homeowner after a foreclosure. In California, for example, according to the California Association of REALTORS, a deficiency judgment may be filed regarding a hard-money loan if the lender forecloses under a judicial foreclosure versus a trustee sale or if the second loan is a hard money loan and the sale takes place as a trustee’s sale.

Loan Application Questions After a Short Sale

Loan applications do not ask questions about a short sale. You may report that you sold your home.

Loan Application Questions After a Foreclosure

You are required to answer the question: “Have you ever had a property foreclosed upon or given a deed-in-lieu thereof in the past 7 years.” If the bank sees you have had a foreclosure, your loan most likely will be denied. If you lie, you may be subject to investigation by the FBI for mortgage fraud.

Length of Time to Move After a Short Sale

If you’ve had a foreclosure notice filed, you may be able to postpone that action while the bank considers your short sale. The wait for short sale approval can be from 2 to 3 months, or longer.

Length of Time to Move After a Foreclosure

Unless prior arrangements have been made, the bank may want you to immediately vacate the property and can commence eviction proceedings.

Taxation After a Short Sale

A personal residence is exempt from mortgage debt relief until the end of 2012 on a federal level. Some states will still tax you unless you qualify for an exemption. An investor is not exempt from mortgage debt relief, subject to certain conditions.

Taxation After a Foreclosure

Same as with a short sale. Except some lenders immediately send out 1099s, even if the owner is exempt.

In closing, always obtain legal and tax advice before making a decision between a short sale or a foreclosure.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.

Jeff Corporon, Owner

Attorney/Realtor/CDPE

Corporon & Associates LLC

Attorneys at Law

Brix Real Estate LLC

1315 South Clayton Street #200

Denver, Colorado 80210

Fax: 303-496-0534

Cell: 303-475-1276

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