It's exactly the opposite of the norm. Usually cash-strapped Americans during tough economic times will miss credit card payments before they'll miss mortgage payments. Welcome to the new world order.

I was a bit surprised to read an excerpt from former Treasury Secretary Henry Paulson's new book, that depicted Lockhart as "nervous" in those crucial few days leading up to the takeover of Fannie and Freddie and very reluctant to put the two into conservatorship. Paulson called the FHFA a "weak regulator," and seemed to imply the same of Lockhart.

Starting today home "Flippers" are now welcome at the FHA. That's right, with a glut of foreclosures plaguing the nation's neighborhoods, the FHA is temporarily removing restrictions on investors who buy and sell homes within 90 days.

I have to say I was a little surprised (read: disappointed) to hear so very little about housing in President Obama's State of the Union speech last night. Yes, he mentioned folks were losing their homes, in the long list of ills plaguing the American people.

The Federal Reserve is winding down its $1.25 trillion in agency mortgage-backed security, purchases, but it's still in there buying, and that is keeping interest rates on the 30-year fixed right around a very low 5 percent.

I'm trying to refinance my mortgage right now, not because I have to, but because I'd like to take advantage of historically low interest rates, which will likely rise after the government begins pulling out of the housing business this spring.

The economic recession and the housing depression will cause many Baby Boomers to push back retirement, but that doesn't mean they're not still eyeing and buying homes built specifically for retirees.  Builders of these "active adult communities" are therefore changing some of their models to reflect homeowners' new desires.

The lead story in commercial real estate today is the dynamic duo of Tishman Speyer and BlackRock walking away from Stuyvesant Town and Peter Cooper Village in Manhattan. The two have been trying to refi $4.4 billion in debt on the 11,200-apartment property, to no avail. So now they're handing over the keys to the lenders.

The good news is that homeowners are expected to spend more on home remodeling in 2010, the bad news is that "green" remodeling isn't adding to home values. Two reports from the International Builders Show in Las Vegas this week have served to put me, and many other potential remodelers, into a conundrum.

There are some interesting tallies in the 2009 report: Home prices began bouncing back moderately, up 6.3 percent on the National Index from its trough in Q2 2006. Peak to trough decline was 32 percent nationally. But one chart really stood out to me.

In a move to shore up the FHA's beleaguered balance sheet, Commissioner David Stevens on Wednesday announced big changes at the government mortgage insurer that now backs about half of all home loans to the nation's minorities. 

Our investigation into allegations of short sale fraud by some of the nation's major lenders certainly struck a nerve in the lending community, but it also served to show me just how uneducated many in that same community still are, even today.

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.

I wasn't exactly surprised to see the total year-end foreclosure tallies from RealtyTrac today, but I was surprised to see that foreclosures actually surged in December, which is traditionally/historically a slow month because lenders impose moratoria over the holidays.

This article was posted at http://sccrealestateuncensored.com/2007/taxes-shortsales-foreclosure/ and I thought I would share it with you here, enjoy.

Taxing Short Sales and Foreclosures

It is surprising to many that one can loose a home by selling it as a short sale or letting the bank foreclose on it and still be liable for payment of income tax on the amount the lender lost during the transaction (Read the: “Homeowner’s Guide: Short Sales and Preventing Foreclosure“)

Two types of income can result from a foreclosure or short sale: capital gains/loss, and relief of indebtedness income.

[UPDATE Dec 20, 2007: Tax relief for short sales & foreclosures signed (Mortgage Forgiveness Debt Relief Act of 2007 H.R. 3648)]

[UPDATE Sept 30, 2008: SB 1055 California State Tax Relief Applied To Forgiven Mortgage Debt]

Disclaimer: If you require specific legal or tax advice, you should contact an attorney or a professional CPA. This information is intended to provide general information and it is not substitute for individual legal and tax advice.

Federal Income tax results in a foreclosure

A completed foreclosure transaction is treated the same as a regular sale for income tax purposes on the year the foreclosure is finalized. So, just like with any other sale, a foreclosure can result in either gain or loss. In addition to capital gain or loss, you can also be taxed on the “debt relief” income.

Federal Income tax results in a short sale

A completed short sale transaction can result in both capital gains/loss and debt relief income. These are calculated separately. If the lender accepts less than what you owe on the full balance due in order to mark the loan paid in full, this difference will become “debt relief income” and it is taxed as “ordinary income” (See 26 U.S.C. § 61 and §§ 1001 through 1016)

Capital Assets and ordinary assets

If a property is purchased and held for resale or inventory (example: lots or subdivisions held by the developer), these assets are considered inventory or ordinary (non-capital) assets. Therefore, a gain or loss on the sale of theses assets is taxed as ordinary gain or loss.

If a property is purchased and held for any other purpose (example: personal residence or an office building used in a trade or business), these assets are generally considered “capital assets”. Whether there is a gain or a loss on the sale, these capital assets are taxed as capital gains or capital losses. (See 26 U.S.C. §§ 1221 and 1231.)

Debt relief income

Also known as “discharge of indebtedness income” or “relief from indebtedness income” or “cancellation of debt income” or “COD income” generally speaking is the amount of debt that is forgiven or discharged by the lender. This income is applied in a short sale, foreclosure or deed-in-lieu of foreclosure transaction.

Debt relief on recourse loans

The “debt relief” rules will apply if you are personally liable for the debt (recourse debt). You may have to pay ordinary income taxes on the amount of “debt relief income”. This tax is in addition to any “capital gain” income tax you may owe.

Debt relief on non-recourse loans

Per California anti-deficiency provisions (CCP 580b & 580.7), if you are not personally liable for the debt (non-recourse debt), meaning the lender’s only security is the property itself, not your personal assets, there is no “debt relief income” taxed.

Assuming the property is in California and the loan was not refinanced after the purchase, an example of a non-recourse loan is a loan obtained to purchase a personal residence (owner occupied) 1-4 unit residential or any seller carry back real estate loan secured by the property being sold (other restrictions apply).

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Exemptions to the debt relief income

Some exemptions from the debt relief income are when the borrower is discharged of the debt through bankruptcy or the borrower is insolvent. Insolvency means the taxpayer’s debts exceed his or her assets.

1099c issued by the lender after a short sale or foreclosure

The amount shown on the 1099c issued by the lender after the short sale or foreclosure should be carefully inspected to make sure it is correct. When you receive the 1099c, it is important for you to discuss the situation with a trained professional tax advisor. If you prepare the income tax return by yourself, there is a good chance that the amounts shown in the 1099c won’t be handled correctly, resulting in you paying way too much income tax; being audited or having to pay penalties and interest and other consequences.

More information

To obtain more information on the subjects covered above visit the Internal Revenue Service (IRS) web site which has free detailed publications on many tax related subjects. You can also call the IRS Tele-Tax system 800-829-4477, which is an automated voice message information system with recorded information on many commonly asked tax questions. And you may also contact a tax professional.

Information partly provided by the California Association of REALTORS®

Similar Posts:

• Federal Tax Relief for Short Sales & Foreclosures signed by the President (H.R. 3648)
• A Homeowner’s guide: Short Sales and preventing Foreclosure Pt4 (The ramifications)
• SB 1055 California State Tax Relief Applied To Forgiven Mortgage Debt
• A Homeowner’s guide: Short Sales and preventing Foreclosure Pt2 (Alternatives to selling)
• A Homeowner’s guide: Short Sales and preventing Foreclosure Pt3 (Selling your home)

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