It’s now January 2011 and borrowers who may have experienced a short sale or foreclosure in 2010 should be receiving 1099 Misc. Income statements from their lenders.  Most people are aware of the risk of lenders coming after them for a deficiency judgment after a foreclosure and they know how this may be avoided.  But few people understand or appreciate the tax liability that also can occur with any unpaid loan and how this too may be avoided.

“Debt Forgiveness” occurs anytime you don’t have to pay back a debt that you owe someone. In today’s world, that most commonly occurs through a foreclosure or a short sale when a lender or lenders are not paid in full. Unless the lender is pursuing a judgment for the deficiency (which is rare), our IRS Code states that the amount not paid, ie: forgiven, is taxable income to the borrower.  The amount of that income is shown on the 1099 form. This gets filed with your next tax return and, unless you have an exemption, you must pay taxes on the forgiven income. Fortunately there are numerous exemptions that apply that can enable you to avoid this tax. The most common are:

1.    2007 Federal Debt Forgiveness Relief Act - The Act (which has also been adopted in California) provides that there will be NO debt forgiveness tax if (1) the forgiven debt is on your personal residence; (2) the loss occurred between January 1, 2007 and December 31, 2012; and (3) any refinance monies went into the property. There are additional limitations on the amount of debt and how “personal residence” is defined. But this exemption may apply to most homeowners.

2.  Capital Loss Offset for Investment Properties - Many people who have lost or sold an investment property suffer debt forgiveness as a result. But, unlike a personal residence, an investor may claim a “capital loss” for the difference between what they have invested in the property (capital basis) and what the sale or foreclosure price was.  To the extent that the capital loss is greater than the debt forgiveness, the loss can be offset against the forgiveness and the tax may be avoided.

3.  Insolvency - If a person lists all of their liabilities, ie: everything they owe everyone else; and under that lists the fair market value of everything they own; if the liabilities exceed the value then that person is deemed to be “insolvent”. Under the tax law, there is NO debt forgiveness tax if a person is insolvent.  In this downturned economy, a great many people may fit this definition.  More importantly, the Insolvency Exclusion applies to any type of property and is not limited to a time period.

4.   Bankruptcy - a person who filed Bankruptcy is deemed to be insolvent and there is NO debt forgiveness tax.  However, for this to apply, the debt forgiveness must occur in the bankruptcy or after the debt has been discharged, not before.

5.  Purchase Money Debt - In order for there to be debt forgiveness, there must have been personal liability in the first place to be forgiven.  Under California law, debt that is incurred to enable a person to buy a 1-4 unit dwelling for their personal residence is non-recourse debt. There is no personal liability. Therefore, there can be no debt forgiveness tax on purchase money debt.

Obviously, when discussing taxation and tax avoidance, everyone’s particular situation can be different.  This Article is meant to be a general and limited updating on the status of debt forgiveness relief laws and is not to be relied upon for your personal situation.  To determine whether these apply to your situation, you must obtain the advice of a competent accountant or CPA.  Additional information on debt forgiveness tax can be obtained from IRS Publication 4681 “Cancelled Debts, Foreclosures, Repossessions, and Abandonment” (2009) which is available for download at: http://www.irs.gov/pub/irs-pdf/p4681.pdf . This appears to be the most current IRS publication on this topic.

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If you have specific questions about your liability in California or about short sales, foreclosure, or any legal issues, feel free to contact  sjbeede@bpelaw.com.  They offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested,call 916-966-2260.

The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.

We are offering a FREE Foreclosure Prevention Workshop where anyone facing foreclosure can get their important questions answered by a well known and trusted Real Estate Attorney and Accountant  as well as myself on Thursday, January 20th. If you know of anyone who may benefit from talking to these professionals, please pass this on to them. The consultations with these professionals normally cost $300 and this is a chance for consumers to get free advice. To register go to www.mortgagesolutionsforum.info or call 916-779-6706. 

 
Without our clients, friends, and family we would not be able to get the word out about this great event that will help many people gain clarity on their situation.
 
As always, we are here for all your real estate needs in 2011 and beyond. We are excited to have helped many people avoid foreclosure last year and hope to help many more this coming year. As we get information on timelines to re-purchase after foreclosure or short sale, we will definitely be sharing those.

 
Founders of Mortgage Solutions Forum-

-Jenica Williams and Suzanne Rentz-Realtors

Anyone facing foreclosure should come to this event. Seats are filling up fast! Secure your spot today!–check for us on news channel CBS 13 on Wednesday the 19th where we will be discussing the event–This is a great resource for anyone facing foreclosure. I talked to a client yesterday who was in tears because her bank offered her the same temporary modification they did before and in the long run, it does not make it more affordable for her. She came to our last event and is going to be listing her home with us as a short sale because for her that is the best outcome–who do you know in a situation like this this that wants answers from an attorney and an accountant to plan for a good exit strategy? Invite them to this FREE event…

To register for this event, visit www.mortgagesolutionsforum.info

HAFA (Home Affordable Foreclosure Alternatives-http://www.jenicawilliams.com/short-sales/?preview=true&preview_id=109&preview_nonce=661ebebab8) is still relatively new and I as well as other agents in my office have yet to see very many approved recently.

I just got off the phone with a Wachovia representative to get detailed information about how HAFA works with Wachovia Loans vs their traditional short sale route. The biggest incentive for sellers and choosing to go through HAFA when short selling is that the bank will not pursue the borrower for the deficiency (the difference between what the home sells through the short sale for and the amount owed on the loan) ,the relocation incentive for the seller in the amount of $3000, and the bank not being able to foreclose on you when giong through HAFA. For Wachovia, there are instances where they will pay the seller up to $5,000 without having to go through HAFA (HAFA can take up to 6 months with certain banks) and the process is much quicker this way usually–which may or may not benefit the seller if they are looking to stay in the home a bit longer.

Many sellers have missed payments and are facing foreclosure and their foreclosure sale date is coming up soon. My seller’s question was whether or not it was in his best interest to go HAFA or to just do the traditional route. With Wachovia and doing the short sale the traditional route (non-HAFA), you do not have to provide your financials which for some sellers can be their biggest challenge. For HAFA you do have to provide financials. So my seller has two choices. He should be receiving his foreclosure sale notice on or about February 10th.  This means that his foreclosure sale date (the date he could lose his home on the courthouse steps is on or around March 2nd, 2011) My job as his Realtor is to get the home sold before it goes to foreclosure. Below is information directly from the horse’s mouth about each program and how it directly relates to each option:

Traditional Route

• possibility to get relocation assistance money–not sure of amount and not guaranteed–depends on if seller received letter from HAFA about relocation money (in my seller’s case, he did not)
• if we do not get offer before Feb 10th, trustees sale date will be set-(average days on market right now are about 42 for Sac County in month of Nov. )
• deficiency in letter (but is waived according to new LAW Sb 931 effective on January 1st–http://www.msfresource.com/?page_id=133 )
• If we do get offer and short sale is approved by Feb 10th, trustees sale date (foreclosure sale date) will not be set
• If we do get offer-borrower will  be solicited for HAFA and can choose to go through HAFA if prequalified at this time ***if borrower/seller chooses not to go HAFA at this time, seller cannot go back to HAFA later on if we can not get current offer to work with numbers for bank. This would mean if offer does not work out traditionally that property would most likely be foreclosed upon due to tight time frame.

HAFA

• must provide financials
• cannot get foreclosed on as long as you apply 10 days before foreclosure sale
• if approved, seller will get $3000 in relocation assistance and lender cannot pursue borrower for deficiency
• sounds like HAFA approval process with Wachoviais not done by 3rd party so turn around time is relatively quick as long as borrower provides documentation quickly
• ok for property to be listed initially and have offer
• may be able to stay in property longer

Sounds like for this borrower/seller HAFA would be more  beneficial as long as he qualifies and it will be up to him to decide. The only way the traditional route would seem to work for the benefit of the seller is if we get an offer relatively quickly. Fore more information on short sales or any foreclosure prevention matter, please call or email us at 916-779-6706 jenica@jenicawilliams.com or visit www.mortgagesolutionsforum.info for our next Foreclosure Prevention Workshop featuring Attorney Steven Beede and Accountant Dona Riolo

November 2010 Sacramento Real Estate News-prices increase-Foreclosure Prevention Workshop January 20th-New Law out soon to protect short sale sellers

More info about upcoming foreclosure prevention event at www.mortgagesolutionsforum.info and our resource site www.msfresource.com

Valuable for anyone facing foreclosure! Attorney Steven Beede and Accountant Dona Riolo will be present to answer your questions.

For all details on next FREE event, please visit www.mortgagesolutionsforum.info

Hi All!

I am in the process of working on this website to provide you a wealth of information about Sacramento real estate, short sales, foreclosures, statistics, resources, references, testimonials, foreclosure prevention information, and much more. Please check back periodically for new posts and information. I hope to have this site completed by the end of January 2011. In the meantime, feel free to call or email jenica@jenicawilliams.com or 916-779-6706 for all real estate needs.

Thanks

Jenica

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