Mortgage Forgiveness

CONGRESS NEARING PASSAGE OF THE EXTENSION OF THE MORTGAGE FORGIVENESS TAX RELIEF ACT

Christmas is coming early to Washington D.C. this year. The Congress is again busy trying to again pass a budget. Politicians are all packing in their favorite items into that new budget bill and it appears its passage is inevitable and will become law soon.

For many who read our updates, this will appear like a reenactment of everything that occurred last year right at this time.  Last year at this time, the Mortgage Forgiveness Tax Relief Act, that eliminated forgiveness of debt tax for most homeowners, had actually previously expired on December 31, 2013.

Most were surprised to see promises of its extension, but were disappointed when the extension ended on December 31, 2014, which was too little too late for most of our clients, as they had already made decisions based upon other criteria.  It was frosting on the cake for many clients, but it was no help for the future as it expired about eight (8) days later on December 31, 2014. Back to ground zero. No longer did we have this favorable tax treatment going into 2015.

So we spent 2015, again in a quandary, not knowing if this favorable tax law for short sale sellers would be extended or not.  Frankly, in many articles I wrote, I did not expect Congress to further extend this favorable tax benefit for short sellers.  All of our attorneys, being conservative in our consultations, advised clients not to expect any further extensions. So here we are again back in Congress with a big budget bill and a tax package contained within those overall budget negotiations.

As part of the overall budget bill, a group of tax benefit items are pretty much coming in as part of the overall budget package.  Some affect us positively in Washington State, such as extending the sales tax deduction, allowing a deduction for mortgage insurance premiums and, most importantly the extension of the Mortgage Forgiveness Tax Relief Act.

This positively affects those of you dealing with short sale sellers. It is a wonderful Congressional Christmas present of a further extension of the Mortgage Forgiveness Tax Relief Act, not only retroactively starting January 1, 2015, but extending to December 31, 2016 !!!!

This is wonderful news as it allows us another year in which we can give all our customers good, strong and current advice knowing that they can plan and not be hesitant as to whether they should sell or not. Planning opportunities now abound for us in 2015.

Tax considerations are an integral part of every consultation we have with our clients.  This extension pretty dramatically changes our consultations as we have only had the insolvency exception available up to now to assist clients down this tax path.

WHAT EXACTLY IS THIS SPECIAL TAX EXCEPTION THAT IS BEING FORGIVEN?

This was a special exemption that originally came into existence in 2006/2007 and was extended literally until 2014. It allows homeowners, who have lived in their property as a primary residence two out of the last five years, to in most instances, be able to avoid any forgiveness of debt tax that would be payable except for the exemption. It is not as simple as that and we always go over this statute in detail with clients in consultations. There are exceptions.

The forgiveness of debt creates income subject to ordinary income tax that, in many instances, could create a tax cost of upwards of $30K or $40K or more for a short sale seller.

Happy Holidays! Happy Investing!

Today's blog courtesy of Ed McFerran, McFerran Law

Forgiveness of Debt

So let’s really be straight about this entire Forgiveness of Debt Tax thing:

*It is a tax;

*It comes to us from the federal government (IRS);

*It involves anytime we have a debt owed;

*When a lender forgives that debt owed (as in a short sale or foreclosure), we have additional income of a like amount.

*That income is taxed to us at the same rate of our ordinary employment earnings;

*Every short sale will generally produce some forgiveness of debt;

*Every foreclosure will also generally produce forgiveness of debt (commonly misunderstood);

*Up until December 31st last year, most of your customers were exempted by a law that expired at the end of last year.

*That law is not expected to be extended or reintroduced as far as we can determine.


So how do we handle this tax matter in 2015?

*It is still a tax;

*It did not go away;

*The previous Mortgage Debt Forgiveness Relief Act did expire last year;

*We have a marvelous law still in place that provides an identical outcome;

*We call it the insolvency exemption;

*It is a well-established tax law that is a huge part of our practice.


So what is this insolvency exemption and how does it work?

*It also has been a good law for many years before the Recession;

*It is a good law now and won’t expire;

*It helps owner occupants as well as non-owner occupants avoid taxes;

*It eliminates forgiveness of debt tax for most of our clients;

*We look at the seller’s debts and assets and determine what level of assets versus liabilities (debts);

*If debts exceed assets, then no tax;

*If assets exceed debts, tax only payable to the extent of the solvency.

*It causes sellers to feel comfortable selling short knowing their tax outcome is favorable.

*Most sellers will qualify and pay no tax. Others pay reduced amount of tax


What is the Biggest Misunderstanding regarding this Rule?

*Many parties are out there today advising parties to just go through foreclosure as that is a more favorable outcome… WRONG!;

*Foreclosure will almost always produce a greater tax cost and far greater credit impairment than a short sale;

*A seller has far more control in a short sale.

Here is a link to a video explaining all of this:
The Link: https://www.youtube.com/watch?v=FOKjjJnXl48

Happy Investing! 


Today's blog courtesy of Ed McFerran, McFerran and Burns

Debt Foregiveness in a Short Sale

WELL THEY DIDN’T EXTEND THAT FORGIVENESS OF DEBT TAX LAW PAST THIS YEAR.  NOW WHAT DO WE DO? WE HAVE A TOOL TO HELP YOU… TOOL NUMBER ONE:

I have had many emails, discussions and classes regarding matters of the forgiveness of debt tax. Suffice it to say that the Congress did NOT extend that favorable tax rule past December 31st of LAST YEAR!!! Of course, you know that. It is old news as I reported that in a news brief at the beginning of January.

Before you get all upset and abandon opportunities to help and assist parties, let me share with you our FIRST TOOL FOR 2015, an alternative to that Mortgage Debt Forgiveness Act, that allows us to assist homeowners in NOT having to pay any tax on debt forgiven .


WE HAVE ANOTHER FAVORABLE TAX LAW… THIS ONE DID NOT EXPIRE ON DEC. 31ST!!

Some of you have heard about this favorable tax law. Most haven’t. Don’t feel bad. It is the domain of attorneys and CPA’s. It can get a bit complicated and it requires some credentials that are really beyond the scope of your license out there my friends.

I want you all to be aware that it exists and then get your seller in for a consultation with one of our attorneys and we will be happy to go over all their tax issues associated with any real estate that they own. We call this the insolvency exception and it can be as good for your seller as that tax law that will expire on December 31st this year.


THE INSOLVENCY EXEMPTION FROM THE INTERNAL REVENUE SERVICE IS AN INTEGRAL PART OF OUR TAX PRACTICE

This exemption has been a part of the tax code for a long time. This exemption does NOT expire on December 31st. This exemption is useful even if your seller is not occupying the subject short sale property. It is a far broader exception than the law that expires this year.

We ALWAYS go over the insolvency exemption in each of our consultations. We have a whole raft of literature including worksheets and the like to allow sellers to feel comfortable EVEN AS the Congress sat on its hands and did nothing (as we expect) and failed to reintroduce that law that  expired this past December 31st.

In short, we also have literature and videos on these matters that can be of help and assistance. [See below for a list of helpful videos that you can give your customers].


BE CAREFUL USING THIS SPECIAL TAX LAW AS IT HAS A LOT OF MOVING PARTS

Never blindly say, “…don’t worry about it as you can claim insolvency”. I hear that time and again and I would never be so bold as to say such a thing without going through the analysis to help the client know for sure.

I think the best practice here is “talk tax with your sellers” [but not give tax advice to your sellers], and make sure that they talk with one of our attorneys about that aspect of it and buy yourself insurance and confidence that you can proceed with your deal regardless of what the Congress has done.

Happy Investing!

Today's blog courtesy of Ed McFrerran, McFerran & Burns