After the Short Sale: A Taxing Matter!

It is so frustrating.  Too often, Realtors are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly.

Consider This Scenario – Your Realtor just spent several stressful weeks helping you, a beleaguered home seller, negotiate a short sale. They have helped you demonstrate to the lender that the home’s price has fallen and that to close the deal with the new buyer, the lender will have to forgive $10,000 of your outstanding mortgage loan not covered by the sale proceeds. But you did it, and now everyone is happy. The buyer gets a home, the lender avoids a messy foreclosure, and as the seller, you walk away with no further financial burdens. Well, not quite.

Whenever real estate is sold, whether in a standard transaction, a short sale or a foreclosure auction, there are potential tax consequences for the seller. In this little scenario, the seller may still owe taxes to Uncle Sam — both in the form of capital gains on the home and on the unpaid portion of the mortgage. Yet, too often, Realtors are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly. Don’t make the mistake of working with an inexperienced Realtor.

In a Nutshell – Here’s How It Works

With a short sale, the lender has three possible ways to handle the deficiency balance, which is the portion of the mortgage debt not covered by the sale of the home. First, the lender can attempt to collect the deficiency balance from the seller after the property has closed. Second, the lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled, or forgiven, debt. Third, the lender may agree to cancel the entire deficiency balance.

On the surface, option three would be seem to be the best alternative for a seller. However, the IRS considers any canceled mortgage debt ordinary income. This means that the amount forgiven is taxed at the same rate — somewhere between 15 percent and 30 percent — as the sellers’ salaries. In addition, because the IRS requires the lender to file a 1099-C form stating the amount of the canceled debt, Uncle Sam will have a record of the exact amount of the debt that was cancelled. A seller will also receive a copy of the 1099-C to use in filing income taxes.

4 Exceptions to the Rule

The IRS does recognize four situations in which cancellation of debt will not result in tax liability for the seller. Call me to discuss the four exceptions to see if they apply to your situation.  While I certainly don’t intend to give specific tax advice, you should be informed as to the basic facts about the tax consequences of short sales.

With the current foreclosure crisis in this country, many, including NAR, are working to reverse this law. However, until that time, if you find yourself in this situation, you must be aware of the potential tax issues for a short sale. Do yourself a favor, call me today to discuss your individual situation.

MAY – EXISTING HOMES CONTINUE RISING TREND

Washington, June 23, 2009

Sales of existing homes showed another gain in May, benefiting from favorable affordability conditions and a first-time buyer tax credit, according to the National Association of Realtors®. May’s increase was the first back-to-back monthly gain since September 2005.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.4 percent to a seasonally adjusted annual rate1 of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008.

Lawrence Yun, NAR chief economist, expected an improvement. “Historically low mortgage interest rates clearly drew buyers into the market, and housing remains very affordable even with a recent uptick in rates,” he said. “First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage edged up to 4.86 percent in May from a record low 4.81 percent in April; the rate was 6.04 percent in May 2008. Last week, Freddie Mac reported the 30-year fixed at 5.38 percent; data collection began in 1971.
Total housing inventory at the end of May fell 3.5 percent to 3.80 million existing homes available for sale, which represents a 9.6-month supply2 at the current sales pace, down from a 10.1-month supply in April.

Yun said the appraisal problem is serious. “Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales,” he said. “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

An NAR practitioner survey in May showed first-time buyers accounted for 29 percent of transactions, and that the number of buyers looking at homes is nearly 10 percentage points higher than a year ago. “This is the time of year when we see large increases in the number of repeat buyers, who are benefitting from sales to entry-level buyers,” Yun said. “Investors appear less active, but are more prevalent in areas with large price corrections.”

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said appraisals and the tax credit are key issues. “To maximize the potential for a housing recovery and subsequent economic recovery, we need realistic appraisals that are based on proper comparisons and done by a local specialist,” he said. “In addition, the first-time buyer tax credit should be expanded to all buyers of primary homes regardless of income. Extending the credit into 2010 would allow more time for the market to catch up with underlying demand, in part because many families with children, who normally time their purchase based on school year considerations, do not have enough time to move before the start of school in late August.

“Freeing a pent-up demand in housing will absorb inventory at a faster pace, strengthen communities and stabilize home prices earlier,” McMillan said.  The national median existing-home price3 for all housing types was $173,000 in May, down 16.8 percent from a year earlier. Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes.

“The decline in the distressed sales share likely results from an increase of repeat buyers in May,” Yun said. “First-time buyers are concentrated in the lower price ranges, which include most of the distressed sales.”
Single-family home sales rose 1.9 percent to a seasonally adjusted annual rate of 4.25 million in May from a pace of 4.17 million in April, but are 3.0 percent below the 4.38 million-unit level in May 2008. The median existing single-family home price was $172,900 in May, down 16.1 percent from a year ago.

Existing condominium and co-op sales increased 6.1 percent to a seasonally adjusted annual rate of 520,000 units in May from 490,000 in April, but are 8.9 percent below the 571,000-unit level in May 2008. The median existing condo price4 was $173,800 in May, down 21.9 percent from a year earlier.  Regionally, existing-home sales in the Northeast rose 3.9 percent to an annual level of 800,000 in May, but are 10.1 percent below a year ago. The median price in the Northeast was $243,600, which is 12.5 percent below May 2008.

Existing-home sales in the Midwest jumped 9.0 percent in May to a pace of 1.09 million but are 4.4 percent below May 2008. The median price in the Midwest was $145,800, which is 10.4 percent lower than a year ago.  In the South, existing-home sales were unchanged at an annual pace of 1.74 million in May but are 8.9 percent below a year ago. The median price in the South was $157,400, down 9.9 percent from May 2008.  Existing-home sales in the West slipped 0.9 percent to an annual rate of 1.14 million in May, but are 11.8 percent higher than May 2008. The median price in the West was $197,700, down 30.6 percent from a year ago.

1. The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns. However, seasonal factors cannot compensate for abnormal weather patterns.

Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 to 90 percent of total home sales, are based on a much larger sample – more than 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions.

Single-family data collection began monthly in 1968, while condo data collection began quarterly in 1981; the series were combined in 1999 when monthly collection of condo data began. Prior to this period, single-family homes accounted for more than nine out of 10 purchases. Historic comparisons for total home sales prior to 1999 are based on monthly single-family sales, combined with the corresponding quarterly sales rate for condos.

2. Total inventory and month’s supply data are available back through 1999, while single-family inventory and month’s supply are available back to 1982.

3. The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.

4. Because there is a concentration of condos in high-cost metro areas, the national median condo price generally is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes.

How Many Feet Do You Have?

We are selling our house and the square footage on our tax record is more that it really is! Is a garage usually considered in the square footage in a home? It’s attached to the house.

Although a garage is attached to the home, it is not considered part of the home’s square footage. That is because only livable space is considered in the square footage calculation.  Calculating the square footage of a home is not as easy as it sounds. Neither real estate agents nor homeowners should attempt the calculation (at least not if you want a reliable figure). Rarely are houses perfectly square, which is one reason for the difficulty.

Appraisers map out the house on a piece of graph paper, calculate all the edges, come up with “mini-areas” for each rectangle – then add them all together.  Plus, there are other intricate rules. If there has been an addition to the house and the owner did not receive a building permit, then that section of the house may not be allowable as part of the square footage. The same with attic and basement conversions, lofts, and so on.

It’s best to rely on a licensed appraiser to calculate the square footage of your house. When a home’s square footage is advertised, the figure usually comes from previous sales, perhaps as far back as the builder. If it was wrong then, it probably is still wrong today.

Good Credit Reports – What Do They Look Like?

A credit report with good FICO scores is called a good credit report. Established by Fair Isaac Corporation which introduced mathematical formula to determine and evaluate credit scores. It is one of the most used tools to establish a person’s credit worthiness. It changes depending on many things, but the FICO scores considered as an average score on a scale of 850 is 723. A good credit report has a 750+ score.  Credit scores are a reflection of what and how much you are spending.

In a good credit report, it is important that it holds no dark areas and no red marks at all. These specifically are serious delinquencies such as late payments appearing in one or more than one accounts. Ideally, there shouldn’t be any record of accounts passed on to a collection agencies for the collection of past-due payments.

One or more recent accounts that are past due, appear on the credit report as a negative.  The amount of poor payment history is extremely important and can make a great credit report a bad one.

Credit scores also determine what interest rates you qualify for. A good credit report should not have any declined credit requests.  

Let’s face it.  It is almost impossible for most people to function in our world without credit. Who can pay cash for a house, a car or a lot of things we consider “must haves.”  A good credit report is important to rent an apartment, applying for a job, and even purchasing an insurance policy. Take care of your credit, it can help you achieve your financial goals.

Buyer Question:

Will is hurt my credit if I get pre-approved for a mortgage loan from multiple lenders?

A lot of people think shopping around for the best rate will hurt their credit. That used to be the case until a few years ago. The answer is no, it won’t hurt your credit as long as you do it in a small time frame and for the same type of loan, meaning all home loans or all car loans.

Under today’s strict mortgage guidelines, in a lot of cases a lender cannot even quote a firm interest rate unless they have your credit report and all 3 scores, since most rates today (FHA excluded) are tiered based on your score, therefore two separate borrowers one with a 739 credit score and one with a 740 may pay different rates.

It’s Official-The $8000 First Time Home Buyer Tax Incentive Can Be Used for a Down Payment

The first time home buyer tax credit can be used for a down payment all over the country.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a downpayment.
According to Donovan, the FHA’s approved lenders will be permitted to monetize the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.
Call Dave today at 425-330-0663 to find out more about the program.

Is now a good time to buy?

The best thing I can do is help you answer this question is to point out some key factors you must consider, when deciding whether to buy a house now or wait until later.
Right now, mortgage rates are at their lowest point in decades. The average interest rate for a 30-year fixed mortgage has varied between 4.78 to 5.25% … and that’s a darn good! So that’s one thing home buyers have in their favor right now.
Home prices are also at record lows in this area, which is a direct result of the housing problems we just endured. Surplus is high too, so there are plenty of houses to choose from. Add to this the $8,000 tax credit for first-time buyers, and you have plenty of reasons to buy a house now instead of waiting until later. Low interest rates, low prices, plenty of inventory, and a tax credit of eight grand.

Also consider that rents, along with the cost of living, will always continue to climb. So no matter what conditions in the housing market are, the sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your family. After a few years, you will be able to leverage this investment and buy a larger house.

These are all good reasons to buy now. For answers to more questions about home buying, visit our website at www.themcfarlandgroup.net.

Overview of the 8k Tax Credit

The Obama administration, as part of the American Recovery and Reinvestment Act of 2009 has provided $288 billion in tax relief for individuals. As part of this relief, first time home buyers are able to claim an $8,000 credit on either their 2008 or 2009 tax return, depending on the closing date. This is a significant benefit for buyers, sellers and real estate investors alike. We wanted to provide you with a solid overview of the tax credit, and discuss what this means to anyone looking to buy or sell real estate soon. Here is an 8-point overview of the tax credit. 

1. Who qualifies? As mentioned, this tax credit is for first time home buyers… kinda. It’s important to note that the IRS defines words a little differently than the rest of us. In this case, the language rules of the IRS actually benefit the individual seeking the tax credit. The IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase. So, even if you’ve owned five houses in your life, as long as you haven’t owned one in three years, you qualify as a first time home buyer.

 2. How much is the credit? The actual amount of the tax credit is 10% of the home’s value, with a cap at $8,000. This is refundable, which means the IRS will actually send you a check for the entire amount of the credit with your tax return (granted you don’t owe the IRS taxes). CNN Money had a good 3-scenario rundown of filing results:

 “Scenario 1: Your final tax liability is normally $6,000. You’ve had taxes withheld from every paycheck and at the end of the year you’ve paid Uncle Sam $6,000. Since you’ve already paid him all you owe, you get the entire $8,000 tax credit as a refund check.

Scenario 2: Your final tax liability is $6,000, but you’ve overpaid by $1,000 through your payroll witholding. Normally you would get a $1,000 refund check. In this scenario, you get $9,000, the $8,000 credit plus the $1,000 you overpaid.

 Scenario 3: Your final tax liability is $6,000, but you’ve underpaid through your payroll witholding by $1,000. Normally, you would have to write the IRS a $1,000 check. This time, the first $1,000 of the tax credit pays your bill, and you get the remaining $7,000 as a refund.” (from CNN Money)
Regardless of what scenario you fall under, the bottom line is still… FREE MONEY from the United States Treasury! And, you can do whatever you want with it (invest, improve, save or spend).

 3. What are the conditions? Back to the wordplay of the IRS… the word refundable means two things. One, you get the refund in your return. But there is another provision that says you have to refund the government for the tax credit if you do not maintain ownership of the property for at least three years. This is also known as “recapture,” in that the Government can capture the money back from you.  It’s worth noting that the housing market is in a lull right now, and should rebound as the economy itself bounces back. There is a lot of room for optimism here – it is likely that the property that is available at such low prices today, will turn out to be a fruitful investment – hold on to it for three years and you will get to keep the $8K from the government, and profit thousands of dollars (probably tens of thousands) when you decide to resell.

4. When to file? In order to qualify for the tax credit, closing must happen between January 1, 2009 and December 1, 2009 (November 30 is the last day). The big date to note, though, was May 15 (2009). The importance of this date is that closings that were complete before May 15 can be filed on your 2008 tax return – even if you missed it when you filed, you can still file an amended return and get the credit now (most amended returns are mailed out within 3-5 weeks of filing).

 5. How to file? In order to receive the tax credit, you need to a) file your taxes and b) file the First-Time Homebuyer Credit form (aka Form 5405). This form can be downloaded from irs.gov right here. Aside from your name, the address of the property and the date of acquisition, there are only six fields to fill in. The entire form is just two and a half pages, two of which are instructions.

 6. Income Specifications. There are also income specifications that determine an individual or married couple’s eligibility for the tax credit. Individuals with a modified adjusted gross income of $75,000 or less qualify for the full credit, with the limit for married couples set at $150,000. Those with modified adjusted gross incomes above this amount, may still qualify for a percentage of the tax credit. According to the 5405 form, only those who make over $95,000 a year (or $170,000 for married couples) are ineligible for the tax credit altogether. Those within the $20,000 per year buffer can file for a reduced credit.

 7. What does this mean for the real estate industry? As mentioned earlier, there is a lot to be optimistic about with this credit. First, it adds incentive for people in the market – potential home buyers – to get out there and buy a home. The CNN Money article referenced above points to two potential effects of the credit:

 “…the $8,000 credit will bring an additional 300,000 new homebuyers into the market, according to estimates by Lawrence Yun, chief economist for the National Association of Realtors…The credit could also create a domino effect, he said, because each first-time homebuyer sale will lead to two more trade-up transactions down the line. ‘I think there are many homeowners who would be trading-up but they have had no buyers for their own homes,’ Yun said.”

8. What does this mean for real estate professionals? Real estate professionals should be very excited right now. Not only is there an influx of great valued properties on the market, but there is the impetus of this tax credit (specifically the time parameters of it). All the potential first time home buyers who were patiently waiting it out, now have an incentive to move swiftly, so that the closing is complete before the December 1 deadline. Professionals will be wise to learn and share all the information they can concerning this tax credit with potential clients – who will be all the more enthusiastic about buying a home, knowing they’ll have $8,000 to decorate with.

It’s not all that implausible to imagine that lenders will begin to accommodate short term loans for the amount of the tax credit. This will make home sales and closings more attainable, as it will free up guaranteed funds that can be used towards down payments.

Downsizing Your Home

The new trend in real estate is to live big by living small! Check out this video from the Today Show and see why.

Downsizing Your Home- Watch more Videos at Vodpod.

What is Your Neighborhood Doing?

Overall median home price and volume were down in King and Snohomish Counties for February 2009, comparing year over year sales. However, there were five neighborhoods in King County with positive gains in Median Home Price. The winners are:

Belltown/Seattle – 10.4%
Des Moines/Redondo – 8.9%
Newcastle – 7.2%
Vashon Island – 4.3%
Central Dist/Seattle – 1.5%

We have the numbers for your particular neighborhood. Don’t hesitate to contact us anytime we can be of assistance at 425-330-0663.