Short Sales / Loan Modification
A Loan Modification: is a change in one or more of the original loan terms of the original mortgage, which allows re-instatement of the loan to stop foreclosure. A loan modification can also be beneficial if you are not currently behind on mortgage payments and having a financial hardship with current loan terms. Due to the current mortgage crisis, there are also many other programs that you may be eligible for.
Here at USA Real Estate we provide you with up-to-date and accurate information with expert advice so you can make the right decision. As a foreclosure alternative the lender may consider modifications and/or other alternatives. At USA Real Estate we are experts at determining what your best actions should be and we work for you to get the best possible option to stop foreclosure.
Modification Options:
- Capitalize delinquent interest, escrow, fees and costs based on investor guidelines.
- Implement a step rate mortgage
- Extend term of mortgage
- Reduce or modify the interest rate on mortgage
- Deferment and/or Principal Balance reductions
SHORT SALES
There are many reasons people fall behind in payments on their home. We are here to tell you there are options other than Foreclosure.
If you are unable to sell your home for a profit, are unable to re-finance or modify and are considering walking away, let us try to negotiate with the bank on your behalf and sell your home to a qualified buyer before it's too late.
Kathy West, Agent (951) 323-1150
www.USARealtyAndLoans.com
A SHORT SALE PRICE IS THE BEST APPROXIMATION
OF THE FINAL SALES PRICE THAT THE BANK WILL APPROVE.
NO LISTING PRICE IS A GUARANTEED SALES PRICE.
A Short Sale is an option to bankruptcy or foreclosure. When the lender agrees to a short sale they are agreeing to accept less than they are owed.
Not all lenders will accept short sales, if they do it may be a better alternative than foreclosure.
Do not forget, there are always drawbacks to any financial decision.
For your protection please consult a tax advisor or legal counsel to advise you in your specific needs.
As a Licensed Real Estate Agent, I am not licensed to give financial or legal advice as to the tax ramifications to your decision.
Each lender has specific documentation they require, but most require at least the following.
* Call the lender and request a Short Sale package
* Give authorization to your real estate broker to speak directly with the lender
* Sign a Listing contract
* Complete net sheet showing the expenses involved in the sale of your home
* Hardship letter which describes your hardship
* Income & Expense report to show your inability to keep up with the payments
* Copies of bank statements-up to 2 years
* Copies of paychecks and tax returns, 2 or more months worth
*Comparative Market Analysis to show the value of your home
* Purchase agreement from your qualified borrower
Tax Consequence Articles
Loan forgiveness
After the Short Sale: Taxing What Isn't There
Too often, real estate practitioners are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly.
BY LANCE CHURCHILL
You’ve just spent several stressful weeks helping your beleaguered seller negotiate a short sale. You’ve helped 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 the seller’s 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 the seller walks 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, real estate practitioners are unaware of the tax liabilities arising from the cancellation of debt and fail to advise their clients accordingly. Don’t make that mistake with your clients.
How Debt Forgiveness 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 balanceas 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. The seller’s home state would also consider the cancelled debt as ordinary income.
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. A seller may avoid tax liability:
In many short sales, a seller would be able to qualify under the first two of these exemptions, especially since it was almost certainly necessary to show financial hardship in order to convince the lender to agree to a short sale. However, it is the seller’s responsibility to notify the IRS why the amount in the 1099-C should not be counted as ordinary income. Otherwise, the IRS will consider the forgiven debt as income and penalize the seller for unpaid taxes.
What to Tell Clients
To ensure that your sellers don’t run afoul of the IRS and blame you, you should notify all sellers in writing that they should seek professional tax advice regarding the possible tax consequences of selling their home.
While you certainly don’t want to give specific tax advice, you should also alert short sellers 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, real estate sales associates must be aware of the potential tax issues for a seller in a short sale.
Editor’s note: The NATIONAL ASSOCIATION OF REALTORS® has long worked to change the tax laws and eliminate this “phantom tax” on income. Currently NAR is supporting the passage of S. 1394, the Mortgage Cancellation Tax Relief Act, which would repeal the law that requires home owners to pay taxes on forgiven debt for their principal residents as part of a short sale or foreclosure. Learn more about this topic at REALTOR.org.
About the Author: Lance Churchill is vice president of FrontLine Seminars, which educates and certifies real estate practitioners in foreclosure, preforeclosure, and short sales. Visit the company's Web site for information about courses on foreclosures and short sales. It's blog, FrontlineForeclosureForum.com, includes a discussion board for real estate practitioners working with foreclosures and short sales. Churchill can be reached at 208/846-9644 or lance@frontlinescompanies.com.
US Congress Moves a Step Closer Towards Amending Tax Code to Relieve Those in Foreclosure As the Ways and Means Committee Approves Mortgage Forgiveness Debt Relief Bill
WASHINGTON – The House Committee on Ways and Means unanimously approved H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007, today in response to some of the tax issues that have arisen as a result of problems in the subprime mortgage market.
Under current law, debt forgiven following mortgage foreclosure or renegotiation is considered income for tax purposes, resulting in tax liability for individuals and families.
The legislation advanced by the Committee today would provide relief to those families by permanently excluding debt forgiven under these circumstances from tax liability. The bill would also help would-be homeowners secure their investments through a long-term extension of the tax deduction for private mortgage insurance, and would ease restrictions for qualifying as housing cooperative corporations.
Finally, the bipartisan bill would tighten requirements taxpayers must meet to exclude gain from the sale of certain homes that have been used as a vacation home or rental property.
Families dealing with the pain of a foreclosure should not have the double whammy of a large tax bill for terminating their mortgage through no fault of their own," said Ways and Means Committee Chairman Charles B. Rangel. I am pleased the Committee joined together to unanimously pass this critical legislation and I look forward to bringing this measure before the full House."
This proposed legislation is supported by both the National Association of Realtors and the Mortgage Bankers Association.
Daily Real Estate News | September 27, 2007
Eliminating 'Phantom Tax' on Foreclosures Lauded
The NATIONAL ASSOCIATION OF REALTORS® praised the House Ways and Means Committee for taking positive action this week on the Mortgage Cancellation Tax Relief Act, H.R. 3648. Since the early 1990s, NAR has pursued repealing the law, which forces individuals to pay an income tax on mortgages that have been forgiven or foreclosed.
“NAR is encouraged by today’s House Ways and Means Committee vote,” says NAR President Pat V. Combs of Grand Rapids, Mich., and vice president of Coldwell Banker-AJS-Schmidt. “Changing the IRS code for these situations will relieve a tax burden for families who are already in financial distress and are most likely unable to pay additional taxes.”
With many families affected by resetting interest rates on subprime mortgages and the ongoing rise in foreclosures, NAR has been working to help more homeowners and their families keep their homes. “Clearly it is unfair to tax people on phantom income when they most likely have no cash with which to pay that tax,” says Combs. “Realtors® don’t just sell homes; we build communities, and NAR is committed to efforts that will help make the nightmare of losing a home less burdensome for families.”
The current tax code requires a lender who forgives debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven. This disclosure applies whether a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement relieves the borrower of the obligation to pay some portion of his or her debt. If the property is sold at foreclosure or is sold for less than the amount borrowed, that difference is considered income and is subject to the tax.
H.R. 3648 would ensure that any mortgage debt secured by a principal residence will not be taxed. “NAR stands strongly with Chairman Rangel, D-N.Y., and Ranking Member McCrery, R-La. Their relief proposal addresses a fundamental unfairness that affects the lives of those who find themselves in truly unfortunate circumstances. We must all work together to prevent the dream of homeownership from becoming a nightmare,” said Combs.
The legislation includes a provision to safeguard against abuses. The provision, similar to one that already exists for commercial real estate owners, would treat commercial and residential property equally. In addition, NAR supports the proposed offset, which tightens the requirements for taking advantage of some tax benefits while retaining all of them.
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