Sunday, March 21, 2010

Thursday, March 18, 2010

Short Sales From a Tax Perspective - Myth vs Truth

Wednesday, March 10, 2010

Short Sales From a Tax Perspective - Myth vs Truth

Short sales, principal reduction loan modifications, deeds in lieu and foreclosures all present unique tax consequences, and they vary from one person to another. Much of what we are hearing from clients, which they are hearing from others, is either not true or not true for them.

Here are my Top 10 Myths --and the corresponding truths-- in this area. With a few exceptions, the myths stem from a grain of truth. But just like the game of telephone, the fact that it began as truth doesn’t mean what you’re hearing is reliable.

Myth #1 - “I won’t owe any income tax because this is homestead property.”

This myth began with the passage of the Mortgage Debt Forgiveness Relief Act (“MDFRA”) in December 2007, which does provide some relief to those taxpayers who face debt forgiveness (which would otherwise be taxable) relating to their real estate.

There are significant limits on the relief, however. Here are the requirements:

  • The debt applies to a principal residence as defined in Internal Revenue Code Section 121. (Principal residence is NOT necessarily homestead property in Florida.)
  • The debt was used to acquire, construct or substantially improve the principal residence (as defined in Internal Revenue Code Section 163(h)).
  • The amount of the forgiven debt is not included in the taxpayer’s income, but it reduces the taxpayer’s basis in the property.(This will increase the gain on the sale if the property is sold, and that gain is taxable).
  • The amount of the forgiven debt also reduces, dollar for dollar, the amount of gain that can be excluded under other provisions (IRC Section 121).
  • Only the first $2 million of forgiven debt is excluded from income.

A principal residence for IRS purposes is not the same as homestead property under Florida law. A principal residence is property which has been owned and used, during the 5-year period ending on the date of the sale or the debt forgiveness, as the seller’s primary residence for a total of at least 2 years. Often, a seller did not use the property as a principal residence for 2 years or more during the prior 5 years, even if he declared it as homestead property. If it’s not a principal residence under this definition, there is no tax relief under the MDFRA.

The other requirement that is often not met is the use of the debt to acquire, construct or substantially improve the principal residence. Many property owners refinanced to access cash for reasons unrelated to the property: they started a business, paid off a car loan or credit cards, or took a vacation. Any part of the funds used for those purposes remains taxable. However, if the proceeds were used to add a pool, renovate a kitchen or replace the roof, that portion of the debt forgiven will be excluded from taxable income.

Myth #2 - “I’ll have a loss on the property, so I don’t need to worry about tax.”

Capital losses resulting from the sale of the property will not offset the income resulting from the forgiveness of debt. Also, sellers often believe they have a “loss” on their property when in fact they don’t – selling it for less than you owe isn’t the test. If your basis is less than the debt forgiven, you can actually have a gain. This often happens in the short sale situation, due to the reduction of basis (see 1c above).

Myth #3 - “I can use the $500,000 capital gain exclusion to wipe out any taxable income from the short sale.”

The $500,000 exclusion (for married filing joint, $250,000 for single taxpayers) is a capital gain exclusion only. Income from debt forgiveness is ordinary income, not capital gain. This exclusion is only helpful if a capital gain results from the reduction in the basis of the property. But beware, (as mentioned in 1d above) the amount of the forgiven debt which is excluded from taxable income also reduces the amount of gain that can be excluded under this provision, dollar for dollar.

Myth #4 - “I’m in a low tax bracket, so the tax won’t be that much.”

Before the transaction in question, the seller probably was in a low tax bracket. If the debt forgiven is large (and it’s not unusual these days to see amounts of $50,000-$150,000 and higher), this increases the seller’s taxable income by that amount. It’s like getting a big fat paycheck that you never see, and it puts many sellers into higher tax brackets than their historical rates.

Myth #5 - “I have no assets, so I’m insolvent and don’t need to worry about the tax consequences of a short sale.”

This is true as far as it goes: Section 108 of the IRC indeed provides for excluding forgiven debt from income to the extent the seller is insolvent. However, just because a seller is upside down on their property doesn’t mean they’re insolvent for this purpose. The extent of insolvency for IRS purposes is the difference between the outstanding liabilities and fair market value of the assets (this is all assets, including protected assets such as retirement accounts) owned by the Seller on the date of the short sale. It is virtually impossible to reach a conclusion on insolvency for this purpose without a detailed analysis of all of the seller’s assets and liabilities, including those unrelated to the property, as well as the basis reduction that would occur in the short sale.

The good news on this one is that, unlike the MDFRA, the insolvency exclusion applies to investors. This is an important aspect to explore for them particularly.

Myth #6 - “I heard that the IRS isn’t going after people due to the economic climate.”

Ok, this one doesn’t stem from a grain of truth; it’s just wishful thinking. The IRS is actually increasing its enforcement and collection efforts in the current economic climate. It’s primary purpose is to collect revenue; and the government needs revenue as much as anyone else these days.

Myth #7 - “I’ll just tell the lender that I don’t want a 1099.”

Good luck with that. The 1099-C requirement is not negotiable: it’s the law. If the debt is forgiven, the tax liability has been generated. The lender must report it, and so must the property owner (even if they don’t receive a 1099-C by January 31 of the year following the short sale). Sellers can be subject to a 25% reporting penalty if they don’t report the debt forgiveness; this is not one to be taken lightly.

Myth #8- “I heard on the news that there is no tax on short sales anymore.”

See Myth #1. And stop watching the news.

Myth #9 - “I’ll just let the property go into foreclosure, rather than do a short sale, to avoid the taxes.”

This wouldn’t necessarily help you. The tax is the same regardless of how the debt forgiveness comes about: a  short sale, principal reduction loan modification, deed in lieu of foreclosure or foreclosure all have the same effect. The only potential difference is the amount of the debt forgiven. For example, default interest, attorney’s fees and costs continue to add up during a foreclosure, which might be avoided or reduced in a short sale, typically making the unpaid balance of the loan (and resulting debt forgiveness) in a foreclosure higher than if a short sale were completed.

Myth #10 - “If I end up owing tax, I’ll just file bankruptcy.”

Chances are, you’ll still owe the tax. Income tax is not typically discharged in bankruptcy. While there are a few exceptions, most will not apply in these cases.

The tax implications of foreclosures and short sales are more complex than mass media would lead us to believe, and there is considerable misunderstanding among property owners as to what the rules are and how they would apply. Hopefully we can help to dispel the myths by steering our clients toward tax professionals who can help and help them plan appropriately.

-JoAnn M. Koontz, Esq., CPA
Yesner & Boss, P.L. 

posted by Yesner and Boss, P.L. at 1:55 PM 0 Comments

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This is a great guide to frequently asked questions for homeowners considering a short sale.

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Wednesday, March 17, 2010

6940 Prosperity Circle- Perfect Condo Living

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Joseph C Murphy P.A.

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Tuesday, March 16, 2010

45 days left to qualify for 8k tax credit. One exception here.

Exception for Home Buyer's Tax Credit. This is one that I was unaware of. But I am glad to hear there is additional help for our active duty service soldiers. 

Courtesy of Michael Taylor 

We are fast approaching the deadline for the Home Buyer’s Tax Credit, remember that Buyers need to be under contract by 4/30 (only 45 days away) and closing must take place on or before June 30th!  There is one exception to the rule that you need to be aware of:  U.S. servicemen out of the country for 90 days (since 2008) may have an extra year to get the tax credit, up to $8,000, for buying a home.  The active-duty rule is not new. It’s part of the current tax credit law, though its use is limited. The qualification must be for “official extended duty outside the United States for at least 90 days after 2008 and before May 1, 2010.”   Should that be the case, however, the homebuyer has an extra year to buy a home. He or she has until April 30, 2011, to secure a binding contract, and until June 30, 2011 to close on the home. Other conditions such as a maximum $8,000 for first-time buyers and $6,500 for move-up buyers still apply.  For advice in any specific case, consult a qualified tax advisor. The applicable IRS publication is posted online (PDF format) at:


J. Michael Taylor|Managing Broker| Coldwell Banker Residential Real Estate | 8334 Market Street |Bradenton, FL 34202 | P: 941-907-1033| F: 941- 907-1055| E: | visit

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Sunday, March 14, 2010

Is Freddie mac's new offer approval system a good thing?

It's getting pretty common for well priced foreclosure homes to get multiple bids. Here in Manatee County I sell a lot of Bank owned homes to buyers looking for a great deal.  Our prices have dropped to about Half of the peak prices, and our inventory is tight.  Manatee County now has about half the homes from three years ago. Multiple offers is something that I am used to dealing with, but this week I was thrown a curve from Freddie Mac.

As a Bradenton real Estate agent with plenty of experience I am not afraid of multiple offers.  As a listing agent multiple offers are a great thing, for a buyer's agent not so much..

As a buyer's agent multiple offers to compete against is never good news!

That "low-ball" offer with all the contingencies does not look as enticing now..

In the past when I was involved with a multiple bid situation the listing agent would present a "

highest and  best offer form"
  This would give notice to all bidders that they had one last chance to improve the offer prior to the seller accepting one.

I was writing an offer for a Freddie Mac owned home in Parrish, FL, and was told that the seller only considers "one offer at a time".  There was also another offer in, and it would only be considered if the first was not successful.

I am not sure if I like the new system.  As I see it, the only person benefiting is the "first" buyer to come along since they do not have to compete with any offers.  

this procedure is bad for pretty much everyone else

  • Other buyers do not benefit since their offers are not seen until the prior offer fails.
  • The Seller loses too. No question that buyer that are allowed to outbid their competitors will drive up the price.  This would be more money for the lender/investor.  
  • This does not helps out the former homeowner, with potential reduced deficiencies,
  • The neighbors lose too.  A lower selling price keeps the property values down for homes in the area.  this puts further pressure on neighbors doing short sales, or strategic defaults.

I know that if I had the buyer with the first offer I would probably be less annoyed by the new procedure.  I am concerned that homes sell for a fair market value.  This is fair to everyone involved.

Also, from presenting a lot of offers on bank owned homes, slow response time from the sellers would allow for a verbally accepted offer to be delayed and a new offer pops in, beating out the buyer.

I think the best solution would be a predetermined time to present bids, and speeding up the process to get these contracts fully executed.

Buying or Selling in Bradenton or Sarasota give me a call for all your real estate needs.



Joseph C Murphy P.A.

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