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Today in the newspaper I read that President Obama wants to pursue relief for “responsible homeowners”. Could just be election-year rhetoric, however, who is to judge what is “responsible”?
Common sense may dictate that responsible homeowners have:
- made their mortgage payments on time every month
- NOT used their home as an ATM machine to buy new cars or boats or ugly jewelry or trips to Barbados
- actually READ their loan papers when they signed for their mortgages
In two short sale scenarios with seller clients this past week, the lenders stated that the sellers “do not meet the investor’s criteria for imminent default” of their mortgage.
Wait a minute here. So, our clients have been working diligently to save their money, have NOT made frivolous purchases while being homeowners, and now when they’re honestly and truly under-employed and half of the married couple is out of work, they’re not given relief?
Must they be nearly broke to be granted a short sale right off the bat? Must being responsible invite punishment in the form of nobody offering to help them until they’re further distressed?
What is the incentive to BE responsible when so many homeowners are feeling punished for BEING responsible?
Initial turn-downs are common in short sale negotiations when the sellers are on time with their payments. It’s when the mortgage payments are NOT being paid that we often see lenders ramping up to make the short sale happen favorably for all parties. However, homeowners must consider the credit implications of being behind on mortgage payments…
After a foreclosure or a short sale, the former homeowner is not taxed on the forgiven debt under federal and state laws that will expire at the end of this year. When a homeowner can no longer afford to make their mortgage payments two things can happen. The homeowner can negotiate a short sale with their lender in which the lender agrees to let the borrower sell the house for less than the outstanding amount of the mortgage and turn the proceeds from the sale over to the lender as payment in full. Or, the homeowner fails to make the regular mortgage payments and the lender forecloses on the home which results in the lender selling the home to satisfy all or a portion of the outstanding mortgage loan balance.
In both cases, the lender likely ends up receiving less than the full amount of the outstanding balance. If so, the amount the borrower is no longer responsible for paying to the lender is considered “cancellation of debt” (COD) income and, thus, income to the borrower that – prior to the adoption of the federal and state protections – was subject to income tax. However, if any portion of the debt obligation is eliminated – like in a short sale or foreclosure – that portion is considered income and, absent legislation exempting it, subject to taxation.
(Aside from debt forgiveness legislation, there are three instances in which income tax does not have to be paid on COD income. Two are bankruptcy and insolvency. The third is if the mortgage is “non-recourse” debt. There is no personal liability for a purchase money mortgage for a personal residence or financing carried back by the seller. The borrower can simply walk away from the debt and the lender has no recourse for recovering the amount of the outstanding mortgage other than foreclosing and selling the residence. However, if the home was refinanced, any amount financed is “recourse” debt and the lender can pursue the former homeowner for the outstanding balance which previously was subject to income tax. The same is also true of second mortgages and home equity lines of credit.)
The federal Mortgage Debt Relief Act of 2007 applies to debt forgiven through the 2012 calendar year. Senate Bill 401 (Chapter 14, Statutes of 2010) is California’s conforming legislation and applies to discharges of indebtedness occurring before January 1, 2013. The rationale for these measures is that it is unfair to a taxpayer who has just lost their home to also be taxed on “income” which they never actually received (which is sometimes called “phantom income”). Both the federal and state debt forgiveness protections will expire at the end of next year. It is unlikely that the California Legislature would extend the debt forgiveness protections independent of the federal government. If California is going to extend these protections, it will in all likelihood only do so in conformity with federal legislation.
CLICK HERE to read our blog-post about “The Burn Rate of Short Sales”. For a real-life short sale scenario of a property we listed, CLICK HERE.
Note: We are not attorneys or tax experts. If you need advice, consult with an appropriate tax or legal advisor. We can refer you to some good folks we’ve worked with if you need options.
This week I’ll be on the “Wisdom Panel of Experts at Acacia Creek for their free discussion and luncheon on senior housing issues. My topic will answer the question of “In This Market Should I Sell My Home?” Attendees MUST pre-register – space is limited!
I love being around older folks who’ve experienced life in a different way than I have. There’s so much to learn from them. What I have found in my work with seniors is their ability to just tell it like they see it. They are at a point in their lives where they’re way past being politically correct and have a certain honesty about them that can’t be found in folks my own age.
One of the most rewarding parts of my business is working with seniors. In fact, MOST of my clients are much older than me. For my clients who are my grandparents’ age, I take extra care to help them feel safe in their decisions and keep them well-informed about the process of (most of the time) selling the home they’ve lived in for most of their lives.
In honor of my favorite senior friends and clients, here’s a little story called “Grandma’s Nuts”, sent by my Aunt Linda in Florida:
Donny is out with his friend and stops by his grandmother’s house for a visit. There’s a bowl of peanuts on the coffee table. So Donny and his friend start snacking on them. When they’re ready to leave, his friend says, “Nice to meet you, ma’am and thank you for the peanuts.” Then Grandma says, “You’re welcome. Eat all you want…ever since I lost my dentures, all I can do is suck the chocolate off ‘em.”
Love it! This week on Tuesday January 24th at 11 a.m., I’ll be serving as a Panelist at the Acacia Creek Retirement Community at 34400 Mission Blvd. in Union City, CA. My topic is “In This Market Should I Sell My Home?” Seating is limited, so if you or someone you know is interested in attending, please call 510-441-3740 and ask for Mary Jane Hodges or email her at firstname.lastname@example.org.
Wednesday, January 18th, from 11:30 am – 1:30 pm at the Newark Hilton, the Tri Cities Chapter of WCR will hold its first program of the new year! Come listen to Deborah Biron of the Speaking Bridge, who will provide tips to better sell your services and how to communicate more effectively to boldly accomplish your goals in the new year.
“We are excited to be presenting programs you can’t get anywhere else, and programs that are not just of interest to REALTORS but of interest to the broader community” said Greg Jones, President Elect for the Chapter. “Members of the community are encouraged to attend and can sign up by going to our website at www.wcrtricities.com ”
The Women’s Council of REALTORS is a network of successful REALTORS empowering women to exercise their potential as entrepreneurs and industry leaders.
If you are interested in being a program sponsor this year, contact Greg Jones at GregJones@GregJonesRealEstate.com for more information.