Many people have questions about the tax implications on short sales. I AM NOT a tax accountant, so I always tell my clients to talk to their accountant before they decide to short sell their home.
For my buyers, I know enough to tell them that they will not have to pay the back taxes or extra money the seller owes the bank. This is always a light-bulb moment for my buyer. Somehow they can’t wrap their head around the bank “forgiving” the balance owed by a seller. Keep in mind that a short sale saves the bank a lot of money vs. foreclosing on the home; it is about $50,000 to foreclose on each home.
Some banks are also offering sellers up to $20,000 to short sale rather than walk away from the house. So if you are underwater on your house and are thinking of just walking away from the home, you may want to give your bank a call and see what kind of programs they have going on in your area.
The following article was found online at Inmam News. It explains a few tax implications of short sales. But please check with an accountant before you short sale or foreclose on a property. Just a darn good idea.
Can’t claim a loss when short-selling home
No tax on debt forgiveness is seller’s best hope
By Tom Kelly, Wednesday, March 14, 2012.
Due to the decline in housing prices, many home sales are “short sales” in which the purchase price offered by the buyer is less than the mortgage amount owed by the seller.
In a recent column, we discussed how some lenders go out of their way to grab both a tax deduction for the mortgage debt not paid while also attempting to go back to the seller and collect that same mortgage debt.
When a lender agrees to a short sale, it can either retain the ability to collect from the seller the amount of mortgage debt owed that is not satisfied by the purchase price, or it can discharge all or a portion of the unsatisfied debt amount.
If a lender discharges debt, it reports this discharge of debt to the Internal Revenue Service on a 1099-C Cancellation of Debt Form. The issuance of the 1099-C allows the lender to take a tax deduction for the loss represented by the amount of debt discharged, and this same amount of debt discharged becomes taxable income to the home seller.
Article continues below.
A lender is now able do one or the other, not both. Some consumers are confused by how lenders can collect the mortgage debt owed after agreeing to the short-sale price. Others feel they are protected from the practice under a law passed five years ago.
In December 2007, Congress passed the Mortgage Forgiveness Debt Relief Act. This law provides some relief for homeowners who lose their house through foreclosure or short sales, or who restructure their mortgages with a lower principal amount. The law enables individuals to exclude from tax up to $2 million of certain mortgage debt canceled by lenders.
According to Nathan Gordon, government affairs director for the Washington Association of Realtors (WAR), some short-sale negotiations do not include language of the forgiveness — that the difference between what is owed and what is paid will actually be “forgiven.”
“In cases where, for whatever reason, that is not negotiated as part of the short sale, a recent court case ruled that even if the bank gives the borrower a 1099, (the bank) still can go back after the borrower for the remaining amount for up to three years, because both the bank and the borrower have up to three years to amend their IRS returns,” Gordon said.
“The Mortgage Forgiveness Debt Act really doesn’t speak to this specific point. The MFDA merely says that until the end of 2012, if you do get a 1099 from the bank as a result of a short sale, that you do not have to pay taxes on the forgiven amount even though it is technically unearned income.”
Gordon said the distinction to keep in mind is that currently a 1099 does not necessarily indicate that the debt is forgiven, just that, for the time being, the bank is writing it off as a loss on their taxes. WAR is backing legislation that would clarify all short-sale terms for the homeowner.
“Should our bill (Senate Bill 6337) pass, that would all change and a 1099 would be a concrete declaration of forgiveness of the short sale.”
While you don’t have to pay tax on the forgiven amount, there is no relief or tax deduction for selling your home at a loss. There is no benefit for folks who bought at the peak or made expensive remodels, then had to sell in a hurry and actually got less for their home than the cash they had invested in it.
Uncle Sam will not let you show a loss on your primary residence if you sell for an amount less than the purchase price. If you’ve planned on writing that down on your 2011 federal return, think again.
Tom Kelly’s new e-book, “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement,” is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Diesel eBook Store, and Google Editions.
Over the last few years, people have asked specific questions about Exclusive Buyer Agency so I thought I’d republish a previous post on my blog. A definition of an Exclusive Buyer Agent (EBA) that I like is from The National Association of Exclusive Buyer Agents (NAEBA.ORG): Exclusive Buyer Agent is an agent who works solely for buyers, avoiding the conflicts of interest inherent in the traditional seller-oriented purchase transactions. This unique relationship of commitment, trust and care assures buyers the best possible for their home buying experience. They don’t represent homes, they represent people! And there is never a question in a buyer’s mind whether the agent is in her corner or not. Below explains details of what am EBA can do for you during your home purchase.
Why use an Exclusive Buyer Agent?
As a NAEBA member, your Real Estate Agent will deliver you the utmost professional assistance including:
- Search out properties on the market, including “For Sale By Owner” properties not included in the MLS;
- Evaluate your loan package to identify a favorable loan and rate;
- Develop a preliminary evaluation of a property (including both pros and cons) and provide an explanation of comparative property values in the area;
- Properly advise you on price and other advantageous negotiating options and prepare a purchase offer
- Deliver any purchase offer promptly to the seller or the seller’s agent,
- Negotiate only on your behalf;
- Arrange inspections, warranties, and any certifications that might affect the value of the property;
- Accompany you on a final walk-through of the property before closing;
- Attend the closing and provide assistance to you and your attorney at the closing.
By working with a Real Estate Broker who holds a valued membership in NAEBA, you, the buyer, can expect your home search, purchase and closing to be as anxiety-free and streamlined as is humanly possible.
Even the National Association of Realtors specifically recognizes Exclusive Buyer Agents in their literature. According to the National Association of Realtors® publication ‘Agency – Choices, Challenges, and Opportunities’, Exclusive Buyer Agency is: “The practice of representing only buyers and never sellers in a transaction. The company never lists a seller’s property and thus never has a seller as a client. Agents never accept subagency that is offered by a seller’s agent” (pg. 25).
Recently, a lot of traditional agents have started advertising that they will represent buyers. While this is legal in most states even the National Association of Realtors® warns it’s members: “Buyer agency is viable method of practicing real estate, but an agent should be cautious in her approach if she is not thoroughly knowledgeable about the entire process. Agents who are used to working with buyers as seller’s subagents need to be aware of the new duties and potential liabilities of buyer’s agents before changing the form of representation they offer.” (pg. 18). This publication goes on to say that Exclusive Buyer Agency “Promotes a more natural relationship for agents working with buyers”
Agency and representation in real estate can be tricky and cost a buyer extra money during their home purchase. You wouldn’t go to court without a lawyer, would you? Don’t buy a home without your own Exclusive Buyer Agent by your side!
For more information about agency or about buying a home, please call or email me soon!
Joanne@TheBuyersBest.com, 301.639.4473
With the Spring Market just around the corner, it is important for buyers to be aware of the inventory and interest rates available to purchase a home.
Currently, rates remain low. If you search online, you will see that FHA rates quoted can be as low as 2.25% on a 5 year adjustable rate mortgage and 3.25% on a fixed rate (www.bankrate.com). These FHA loan rates are quite low and you only need a 3.5% down payment in order to purchase a home. This 3.5% can also be a gift from a family member. Did you know you can also get up to $10,000 out of your IRA for a down payment if you are a first time homebuyer? You can also take a loan against your 401k in order to purchase; this is how I bought my first home in Frederick, Maryland.
The foreclosures in Frederick, Washington, Montgomery, Carroll and Howard Counties are all but gone. No one is quite sure how much “shadow inventory” will come on the market in the next 6 months, but economists seem to think we have hit bottom (undisclosed source). January records indicate a stable marketplace in 3 counties: Montgomery had a 3.5% month inventory, Frederick a 5.5% inventory and Washington a 7.4% inventory. Each percentage indicates how long it would take to sell all the houses on the market if no other homes listed. Now we know with spring almost here in March, more houses will list. The big question is: Will the markets get saturated with more listings? This is the question that remains to be answered. In my opinion, I don’t think so. Homeowners are still a bit leery about selling because prices are still too low. There are homeowners who are up-side-down and cannot sell unless they short sale their property. Investors don’t want to sell because they don’t think there are high enough yield investments to deposit their proceeds.
All this being said, it is a great time to buy! The Buyer’s Best Realtors are offering 2 seminars in March to help you, the prospective buyer. One is March 10th for First Time Homebuyers and one is March 13th for Investors. Call or email me and I’ll give you all the details and sign you up! Or just call me if you’re ready to start looking now!
With so many short sales still on the market in Frederick and Washington Counties, I’d just like to report that my closing success rate for short sales is 90% in the last 12 months. I have helped 6 out of 7 families successfully move into their desired homes; one client decided not to wait for the bank to respond to their offer. Since it seems impossible to predict how many more short sales and foreclosures, for that matter, will hit the market in 2012 and beyond, it is important that any Buyer Agent and especially, an Exclusive Buyer Agent, become certified and an expert in this segment of the market.
I took the CDPE class in January 2011 and it has certainly been an advantage to my buyers! I am able to explain the short sale process, walk my client through the whole process and get the home to closing. If you have extreme patience, it could be a great way for you to obtain your new home. Call me and we’ll get together and see if it’s the right way for you!!
Here’s to a happy, healthy and successful 2012!
The Washington, DC, real estate market has come to life this year. I’ve been able to help several home buyers through the purchase process and achieve their dream of home ownership. Only one buyer this year was not able
Yes, amidst the snowflakes and icy sidewalks, there are people out there shuffling through the muck, hoping to find a new home. Maybe some are first-time homebuyers who want that tax credit that expires soon. Maybe a few of you are moving back to the area. Maybe some are thinking of buying in the springtime and want to start looking now. All these reasons are great reasons! Why not buy yourself a new home for Christmas or Hanukkah?
I found a great cost analysis of buying vs. renting on our MRIS website. Continue reading Snowflake House-Hunters
Buying a home this winter or spring? The very First step is finding an Exclusive Buyer Agent who has your best interest and goals in mind. For a full description of Exclusive Buyer Agency, please go to their website at www.NAEBA.com.
Follow these steps with your Buyer Agent to make the experience fun and successful!
This information came to me from a lender in Frederick County, MD. I think it is a good summary of tax credits for a homebuyer. However, I urge you to double check with an accountant to make sure these figures are correct for YOUR tax situation.
If you have any questions, please call me or email me. I’m always here to help! – Joanne Spivey, Exclusive Buyer’s Agent, The Buyer’s Best Realtors, Urbana, MD
Great News! Congress has passed a bill extending and expanding the tax credit provisions for buying a home. These provisions become effective for homes that close on or before June 30, 2010. Here are some of the key elements of the bill.
FEATURE RULES AS THEY APPLY TO THE EXPANSION
1st Time Buyer $8,000.00 or 10% of the purchase price of the home for individuals
Amount of Credit or married couples. ($4,000 per individual if married filing separately) **
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1st Time Buyer May not have had an interest (title) in a principal residence for 3 years
Definition of Eligibility. prior to purchase
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Current Homeowner $6,500.00 ($3,250 married filing separately)
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Current Homeowner - Must have used the home sold or being sold as a principal residence
Definition of Eligibility consecutively for 5 of the previous 8 years
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Binding Contract Rule So long as a written binding contract to purchase is in effect on April 30,
2010, the purchaser will have until June 30, 2010 to close.
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Income Limits $125,000 – single (phase out up to a maximum $145,000 income)
$225,000 – married (same as above with a maximum of $245,000)
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Limitation on Cost $800,000.00
Of Purchased Home
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Anti-Fraud Rule Purchaser must attach documentation of purchase to tax returns
Note: If a parent, who will not live in the property, cosigns for a mortgage, the child will be eligible for the credit as long as they meet all other eligibility.
Other restrictions that might apply per the IRS in which no tax credit would be due:
- Buying the home from a close relative (spouse, parent, grandparent, child or grandchild. (purchase from a step-relative is allowed as long as there is not a direct blood relationship)
- They do not use the home as a principal residence
- They sell their home before the end of the year
- They are a nonresident alien.
- Their home financing comes from tax-exempt mortgage revenue bonds.
** Tax credit is not required to be paid back as long as the buyer lives in the property as their primary residence for at least 36 months.
Hello Homebuyers –
As many of you know, the first-time homebuyer’s credit was front-and-center on many peoples’ minds last week. We also mentioned that we thought chances were good the credit would be extended. This could be materializing… maybe.
Senate negotiators reached a tentative deal to not only extend the current credit but also add a few bells and whistles: namely, a new credit of up to $6,500 (with income limits). The new credit would be available to all homebuyers who resided in their current residence for a consecutive five-year period in the past eight years (effectively excluding real estate investors). But it’s not a done deal yet; a few House members have balked at the added costs.
Many property experts have cited the credit as the principal reason for the housing recovery. Although new home sales fell 3.6% in Sept., homebuilders could find comfort in the news that home prices continue to rise while inventory continues to fall. Based on the latest data, it should take only 7.5 months to sell all homes at the current sales pace. This is true for the Frederick, MD area as well. Keep your eyes and ears open for new housing reports this week too. They will show the latest in pending home sales.
Low home prices, low interest rates and an extended homebuyer tax credit make it a great time to buy a home. But buyers beware: housing inventory is dropping so the sooner you buy, the better.
Please contact me for your next purchase in Frederick, Washington, Montgomery County, MD; or the lower central-PA area! I’d love to help you find a home for your family or for an investment purpose.
Hello Homebuyers –
As many of you know, the first-time homebuyer’s credit was front-and-center on many peoples’ minds last week. We also mentioned that we thought chances were good the credit would be extended. This could be materializing… maybe.
Senate negotiators reached a tentative deal to not only extend the current credit but also add a few bells and whistles: namely, a new credit of up to $6,500 (with income limits). The new credit would be available to all homebuyers who resided in their current residence for a consecutive five-year period in the past eight years (effectively excluding real estate investors). But it’s not a done deal yet; a few House members have balked at the added costs.
Many property experts have cited the credit as the principal reason for the housing recovery. Although new home sales fell 3.6% in Sept., homebuilders could find comfort in the news that home prices continue to rise while inventory continues to fall. Based on the latest data, it should take only 7.5 months to sell all homes at the current sales pace. This is true for the Frederick, MD area as well. Keep your eyes and ears open for new housing reports this week too. They will show the latest in pending home sales.
Low home prices, low interest rates and an extended homebuyer tax credit make it a great time to buy a home. But buyers beware: housing inventory is dropping so the sooner you buy, the better.
Please contact me for your next purchase in Frederick, Washington, Montgomery County, MD; or the lower central-PA area! I’d love to help you find a home for your family or for an investment purpose.
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