Rebecca E. Leider, CPA

www.leidercpa.com

I have learned there is so much confusion when it comes to cancellation of debt income. The first thing to understand is each person has their own unique tax situation that cannot be compared to their neighbors, friends and family. I am only covering select information in this article as there are many facts and circumstances to consider and too much information to cover every situation.

Most people don’t understand that whether the property is foreclosed or sold in a short sale, there are two things happening on the tax return.  There is the sale of the property and the potential cancellation of debt income.  Cancellation of debt income is the difference between the fair market value of the property minus the amount of debt owed as of the cancellation date.

We need to look at your loan to determine if there is cancellation of debt.  If you purchased your residence and never refinanced the property the debt is most likely non-recourse debt.  Non-Recourse means the lender can only take back the property to satisfy the debt and therefore there would be no cancellation of debt income. If the loan was ever refinanced (even if no additional monies were borrowed on the refinance) the loan is now considered Recourse debt and the lender can now pursue you personally.  When the lender decides not collect for the short fall of funds, they will cancel the debt and report the transaction to the IRS on a Form 1099-C.

Next we look to see if the taxpayer qualifies for an exclusion under the Mortgage Forgiveness Debt Relief Act.  The most common exclusions are:

Bankruptcy Exclusion:  Debts discharged through a bankruptcy are not considered cancellation of Debt.

Insolvency Exclusion:  If your debts are larger than the fair market value (FMV) of your assets, you are considered insolvent.  If the  FMV of your assets are $200,000 and your debts are $250,000, you are insolvent by $50,000.  $50,000 could be excluded from income.

Personal Residence Exclusion:  If the property qualifies as your personal residence the cancellation of debt could be excluded IF all the debt is qualified principal residence indebtedness.  Monies taken out on a refinance that did not go back into the property does not qualify under this exclusion.  Say you took out $50,000 on a refinance to purchase a boat and pay off credit cards. The $50,000 does not qualify as principal residence indebtedness.  The IRS has a cap of $2 million in debt while California has a cap of $800,000 of debt for consideration of the personal residence exclusion.

There are different reasons to elect which exclusion to take and there could be different elections for Federal and California, based on your personal circumstance.

The most looked over fact is that  because the cancellation of debt is excluded from income, it does not mean that it just goes away.  The taxpayer has to lower their tax attributes  or the basis of the property still owned as of January 1^st of the following year or an election could be made to lower the basis of the property that was sold.  This could potentially create gain on the sale of the property or you lose future tax deductions.

As I stated before, I have only covered select information, therefore you should contact your tax professional for guidance when dealing with your short sale and cancellation of debt.  Publication 4681 that can be found on  www.irs.gov is a great resource and has many examples in figuring gain/loss and cancellation of debt.

UPDATED to include PNC Financial’s reported foreclosure freeze and impending joint investigation of 40 states into servicers’ foreclosure procedures.

The nation’s largest mortgage lender, Bank of America announced Friday that it is expanding its foreclosure moratorium from 23 states, as announced by the bank last week, to include all 50 states.

The company explained in a statement, “Bank of America has extended our review of foreclosure documents to all fifty states. We will stop foreclosure sales until our assessment has been satisfactorily completed.”

The company added, “Our ongoing assessment shows the basis for foreclosure decisions is accurate. We continue to serve the interests of our customers, investors, and communities. Providing solutions for distressed homeowners remains our primary focus.”

BofA called for a halt on foreclosures in certain states when evidence surfaced that its internal staff may not have followed the letter of the law in reviewing and processing case paperwork.

Such actions were spelled out in black and white when the Associated Press uncovered court documents with testimony from one of BofA’s top executives at a bankruptcy hearing in February. The exec admitted that she signed off on 7,000 to 8,000 foreclosure documents a month without even reading them or verifying their legitimacy.

Article by Carrie Bay  DS News.com

An experienced real estate agent can help you to find the right home, determine how much to pay and negotiate the offer for you. Moreover, an agent can guide you every step of the way throughout the home buying process. But that doesn’t mean you won’t encounter stumbling blocks or obstacles.

Home Buying Obstacle #1: Finding a Down Payment

Unless you’re independently wealthy or just won the lottery, you will probably need to get a mortgage. Only VA loans, available to veterans, let a buyer put down zero. All other loans require a down payment. The two most popular types of mortgages are FHA loans and conventional loans, which require minimum down payments ranging from 3.5% to 10% of the sales price.

Home Buying Obstacle #2: Obtaining a Minimum FICO Score

The two magical numbers are 620 for FHA and 720 for conventional loans with mortgage insurance. If your FICO score falls below that number, you may not qualify for those mortgages. For conventional loans without mortgage insurance, your FICO can dip as low as 620, but the pricing is ugly.

To find out your FICO score, you should ask your lender to run your credit report. You can obtain a FICO score online, but it will cost you, and it most likely will differ from the score your lender obtains. Your lender will pull your credit scores from 3 credit reporting agencies and take the middle FICO score.

Home Buying Obstacle #3: Meeting Lender Ratios

Most lenders expect a buyer to have a maximum 33% front-end ratio. This means your mortgage payment, plus taxes and insurance (PITI), cannot exceed 33% of your monthly gross income. If you earn $5,000 a month, the maximum PITI payment for which you may qualify is $1,650.

The back-end ratio is trickier. This involves adding together your PITI payment with all monthly revolving debt payments. That percentage of your gross monthly income should fall between 41% and 50%, depending on the type of loan and lender. With mortgage insurance, your highest back-end ratio cannot exceed 41%, which means to qualify for a higher back-end ratio, you may need to put down at least 20%.

Home Buying Obstacle #4: Receiving an Appraisal at Value

The Home Valuation Code of Conduct, HVCC, became effective May 1, 2009, and applies to all conventional transactions. Since January 1, 2010, it now applies to FHA transactions as well. It’s a well meaning process that is flawed.

In the past, a lender could select its own appraiser. That appraiser was generally experienced, knew the neighborhood and had appraised many homes in specific areas, which typically would result in a fair and balanced appraisal. Now, appraisal management companies pluck an appraiser at random from a pool of appraisers. Your appraiser could be from another area or unfamiliar with the neighborhood, which often results in a low appraisal.

If the appraisal does not come in at value, and if the seller refuses to adjust the price, buyers with an appraisal contingency can either walk away from the transaction or pay the difference in cash.

Home Buying Obstacle #5: Satisfying Loan Conditions

Underwriting can be frightening. An underwriter reviews the file and can make demands. These demands can include more documentation, a review appraisal and, even then, the underwriter could reject the loan for a variety of reasons.

If you have remarried, for example, and your former spouse had owned a home that went through foreclosure or a short sale, if your name was still on the mortgage, you could be disqualified from buying a home with your new spouse. The way to increase the odds of underwriting approval is to disclose everything about yourself and your financials to your lender, and make sure the loan officer has been in the business long enough to foresee future problems before you get that far.  Your Real Estate agent should be able to suggest a qualified loan officer.

Of all available options, foreclosure is the worst

The inevitable result of a foreclosure is the lender taking your house. Not only will you lose your house, but the lender can get a judgment against you for the arrearages you owe plus the costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

Consider a short sale when foreclosure seems inevitable

A short sale is a popular option for homeowners mired down with financial problems. In this case, you would sell your home for less than what you owe your lender; the biggest problem you will face is getting your lender to agree to a short sale. In some situations, they will not. Experts advise pursuing this option the minute you realize that you are falling behind in your payments and most likely won’t be able to catch up. The longer you wait and the greater the amount you are in arrears, the less likely it becomes that your lender will even be willing to discuss a short sale.

short sale has disadvantages too

While a short sale will save you from foreclosure, it will also have a negative effect on your credit score, frequently lowering it by as much as 200 points. This can be overcome more quickly than the black mark of a foreclosure, especially if you manage to retain one or two credit cards and keep them current. Perhaps equally distressing, the Internal Revenue Service frequently deemed the difference between the mortgage balance and the amount realized from the short sale to be taxable as income despite the fact that the debtor never saw a dime of it. There is new federal legislation called the Mortgage Forgiveness Debt Relief Act 0f 2007 that just went into effect on January 1st, 2008. The new act essentially eliminates this problem.

Almost any option is better than foreclosure

Simply stated, do everything you can before foreclosure occurs and do it as quickly as humanly possible. Don’t sit back and keep thinking, “What can I do?” Instead, consider that short sale and check with your lender before your options become more limited.

The One Best Tip I Can Give You: Don’t Do This Alone

Having someone who can work on your behalf is essential. Don’t just get any real estate agent to help you! Hire an agent who has lots of short sale experience, and it will make all the difference. Make sure they know who to talk to, when to talk to them, and how to handle all the paperwork to get the deal done.

You Need An Experienced Short Sale Agent!

I have extensive experience in processing short sales. If you are considering a short sale please contact me for a free consultation to see if this is the right chose for you.

Horse property is ideally grassy, rolling land for the most part, with good draining soil. Horses benefit from living on rolling or sloped land as they need exercise, but it should not be more than a 15% slope. Ideally, most horse folks are looking for 3-5 acres when shopping for a horse property. However, extra land is always useful for pasturing, breeding, casual riding, lay-up, access to trails, roping, cutting or even team penning. People without horses sometimes shop for horse property just because they know it is mostly usable property, easy to build on, and of greater value.

When looking  you must ask yourself “What is the main reason for purchasing a horse property/horse farm and will this property satisfy that need?” How do I use my horse? Does my family mainly like to trail ride or also do arena work? Does this property have access to trails? How far do we have to trailer to public trails or horse events? Does my show horse require a state-of-the-art barn, dressage arena?  How much of the property is fenced and is it adequate or is it dangerous to horses and/or need to be replaced? Installing a barn, arena, and fencing can be quite an expense so it is very important to take these items into consideration when purchasing a horse property.

It would be my advice to employ a Realtor with experience in selling horse type properties.  He or She would be familiar with the type of inspection you may need to protect yourself.  Most horse/ranch type properties are on well and septic systems.  You need to be familiar with how many gallons a minute a well should pump in order to supply enough water to your animals and your domestic uses.  Your Realtor should also be familiar with fencing which is safe for your horse, barns and arenas.  It is also helpful if your Realtor is familiar with veterinary services, tack supplies, where you can buy grain and hay in the area along with riding areas if you have to trailer out.

I get asked when is the best time to buy horse property??  I say when you are ready…  It is not a bad idea however to look at horse property in the winter/rainy months to determine if the land drains well or gets to soggy and floods.  Your Realtor should also have a good idea which properties may have a tendency to flood or be soggy in the Winter months.