Archive for the ‘Taxes’ Category

Real Estate Tax Affects A Very Small % Of Transactions

Monday, February 20th, 2012

It must be Spring (or close to it) because my inbox is filling up with claims of all kinds of things, from people who lost their wallets in Spain and need me to wire them funds, to an incredible number of dating websites with singles waiting for me to join (how much do they really know about me if I get these?).  The one that is being forwarded commonly in the last few weeks, that causes a high level of concern by anybody involved in real estate is the message that starting next year, all real estate transaction will carry a 3.8% transfer tax as part of the Obama health care law.

As much fun as it might be to debate whether real estate transfers or transactions can, should, or will ever, be taxed…this is not the Great Satan that you should lose much sleep over.   The facts are this transfer tax applies to the so called “wealthy” earning $250,000 or more jointly or $200,000 as an individual, if the sale of a house produces a gain of $250,000 (filing single) or $500,000 (married filing jointly).  Even if the gain falls under these qualifiers, there are additional considerations that involve the household’s tax situation.  Keep in mind, this tax also only applies on principal residence sales after the $250,000/$500,000 gain exclusion.

I know taxes get everybody in an uproar when they potentially apply to their own interests.   Housing affects a significant portion of the population so this tax does get people upset.  Just please understand who needs to be upset and who likely will not be affected.  Here is a link to an article the National Association of Realtors have posted.  Also, if you want a deeper understanding, a down loadable brochure has been made available.

 

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Tax Relief For Certain Homeowners Ends in 2012

Tuesday, January 10th, 2012

Mark it on your calendar.  Without an extension, the 2007 Mortgage Foregiveness Debt Relief Act (MFDR) will expire at the end of this year.  How could it have been almost five years since this important law was created to help address a portion of the housing crisis??

The MFDR was originally created by Congress to assist people who needed to sell their homes with an approved short sale.  It also found value for foreclosed homeowners…in some very limited cases.  Basically, owner occupants who had borrowed up to $2 million are able to exclude what otherwise would be a taxable event-the forgiveness of mortgage debt.    So, a homeowner with a mortgage balance of $250,000, and an approved short sale for $175,000, had a bank forgiveness of $75,000.  This gift was taxable and reported with a 1099-C tax form with a potential cost to a 25% tax bracket of $18,750.  Up to the creation of the MFDR I had watched homeowners choose to file bankruptcy rather than be burdened with the tax debt as a bankruptcy provided a similar tax forgiveness-along with many years of credit problems.   After the MFDR was created, the IRS essentially could not tax the homeowner for what is otherwise considered a gift, and the homeowner did not have to file bankruptcy to receive this protection.

What do you think the chances are that this very helpful law for continuing to create a positive environment for owner occupied short sales will be extended?  I think that is anybodys guess based on election year politics.  If you have been considering selling and have been on the fence, and a short sale is likely, start now to make a decision.  Avoiding taxation on the amount forgiven by the lender is an important part of your future financial well-being.

 

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Posted in Laws, Short Sales, Taxes | No Comments »

Military Families Get An Extra Year for the Expiring Tax Credit

Thursday, April 29th, 2010

A forgotten, but nice part of the tax credit program expiring tomorrow night is that members of the military, foreign service and intelligence employees have an extra year to claim thepossible $8,000 maximum homebuyer tax credit.  In addition, the repayment rule, requiring a taxpayer to pay back the credit if they move from the home in the first three years, has been waived for military families if the move is job related.

To qualify for the extended tax credit, service members must have served on official extended duty outside of the United States for 90 days or more at any time between Jan. 1, 2009, and April 30, 2010. If so, they have until April 30, 2011, to sign a sales contract, and until June 30, 2011, to settle and close on the home. The rule includes both the $8,000 first-time and $6,500 repeat homebuyer tax credit.

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Posted in Buyers, Taxes | 1 Comment »

Do Not Submit Purchase Agreements Backdated To April 30th!!

Monday, April 26th, 2010

This was posted late last week by the Metropolitan Indianapolis Board of Realtors based on discussions that buyer clients are starting to request if a home is not found prior to 4/30, that their Purchase Agreement be written (or re-written) to show it was agreed to prior to 4/30.  In short, this is one of those bonehead moves that will basically ruin your life.  It is not worth it and don’t even try to make that request with us.

As a reminder, the Home Buyer Tax Credits are set to expire April 30, 2010. This means that buyers who wish to benefit from the tax credit must have an accepted binding purchase agreement as of that date.

With the tax credit deadline looming, however, home buyers or REALTORS® may be tempted to backdate post-April 30th purchase agreements. REALTORS® must resist this temptation or face severe criminal consequences.

Specifically, Title 26, Section 7206 of the United States Code, warns that any person who aids or assists in a fraudulent or false document in connection with any matter under the Internal Revenue laws is guilty of a felony and subject to:

(1) Imprisonment for not more than 3 years in a Federal prison;
 
(2) A fine of $250,000 for individuals or $500,000 for corporations; or
 
(3) Both

In fact, just last week, a Los Angeles REALTOR® pleaded guilty to federal tax charges after she helped five new home buyers fraudulently obtain the $8,000 credit. She also assisted five others in scamming the IRS under the Earned Income Tax Credit. As a result, the REALTOR® faces up to 50 years in prison and a $2.5 million fine.

Like the fraudulent LA REALTOR®, any REALTOR® who backdates a post-April 30th purchase agreement will be guilty of criminal tax fraud and subject to a lengthy prison term and pricey fine.

So, think before you backdate a purchase agreement: Is committing criminal fraud for an $8,000 or $6,500 tax credit worth risking your career, a prison sentence, and fine? Do not let a misguided desire to help your client ruin your life. Your agency duties do not require it, and the Code of Ethics and the law forbid it!

Shelley McCoy is an attorney with the law firm Drewry Simmons Vornehm, LLP. John Q. Herrin is MIBOR Legal Counsel.

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Walk Aways And Short Sellers May Not Be Able To Escape The Tax Man

Monday, April 12th, 2010

There seems to be a lot of confusion about who gets to pay taxes when they sell their home with a short sale or complete a deed in lieu of foreclosure.  The confusion started in 2007 when the Mortgage Forgiveness  Debt Act was passed and offered a key to the lock that had stalled homeowners trying to get out from an underwater mortgage.  Basically, through 2012, the act provides a pass from tax liability for mortgage debt forgiveness.  Formerly, if a mortgage holder forgave part of the debt, a taxable event ensued.  I was involved in numerous potential sales that the ensuing taxation of this forgiveness ended up stopping the owner from proceeding with a sale…actually choosing to allow a foreclosure on their record instead of the tax liability they could not pay.

So, this is a good law with some built in safeguards that limit the ability for certain more speculative borrowers to enjoy its benefits.  As anybody who has read much of my writing knows, I have a problem with the government providing assistance to people in states where so much phantom equity was created, who then borrowed against this equity and bought investment properties in states where prices stayed affordable.  This happened a lot and I witnessed it.  I also heard stories of phantom equity being used for paying off credit card debt and taking of vacations.  

Buying an investment property or paying off debt with funds later forgiven by a lender (or now the government) should be a taxable event.  And it is a good idea to reinforce that there are exceptions to this law and in these types of cases, logic wins.  I write this after talking to a business contact in one of these situations who firmly believes they are going to be able to complete a short sale on an investment property purchased with phantom equity…and under the new HAFA short sale program sell the original property with no tax burden!  It just does not work that way..and it shouldn’t!

The following is an outline of the exceptions with much more detail available here:

• A cash-out refinance where the money was spent on something not housing related, then the borrower got in trouble and lost their home to a foreclosure or short sale, will owe the IRS.

• The IRS will forgive tax liability only on money from home-equity loans that was spent to improve the property.

• Anyone who lost a vacation home or investment property to foreclosure or short sale will owe taxes

• Multi-million dollar homes  are always subject to tax.

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Posted in Short Sales, Taxes | 1 Comment »