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DEDUCT INTEREST WHEN NOT ON TITLE?

I’m seeing more situations where a parent will step in to buy a home for their adult child since the parent has better credit, even though the child will be living in the home and making all the payments. There is typically a question about whether the child can write off the interest on the loan, and the answer is “probably.”

Regulation 1.163-1(b) of the IRS reads: “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”

The IRS has challenged this type of situation before – sometimes they allow the deduction, but other times they don’t. They want to see that the party claiming the deduction has all “the benefits and burdens of ownership…”

Here are the factors in the cases allowed in the past that seemed to sway the IRS towards approval: 1. The child must live in the property. Their driver’s license, voter registration and utility bills should be in their name and should list the property address. 2.
Parent and child should sign a written agreement saying that the child is fully obligated to make mortgage payments, that parent can evict in the event of default, and that parent recognizes that the child has an “equitable interest” in the property. 3. Child should be responsible for all maintenance and upkeep of the property. 4. Parent and child should sign a Quit Claim Deed, conveying the property to the child. This will not be recorded, but shows your intent that the child really “owns” the property.

Please see a tax expert and/or attorney for specifics to your situation.

Huge News About Forgiven Debt Tax!

For the past few years, one of the more complicated and distressing questions my clients had to deal with was whether or not they’d have to pay tax on the forgiven debt in a short sale. Congress passed a law to try to deal with this, which the California legislature tried to mirror. Then the laws expired, but only the federal law was extended, but the state law wasn’t, etc. and it was just a big mess. Some legal and tax experts have told me over the past few year that they thought that after California passed another law saying that in most cases a lender couldn’t pursue the borrower after a short sale, that made the tax issue moot, since there is no forgiven debt tax due on non-recourse loans. Well, see below to read a news release that seems to clear all this up! Keep in mind that this is specific to short sales, so you may still owe the forgiven debt tax on loan mods with principal reduction and/or a foreclosure, so a short sale may be preferred in those cases.
“The CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.) announced today it received a letter from the California Franchise Tax Board (FTB), obtained by Board of Equalization (BOE) member George Runner, clarifying that California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.
Last month, in a letter to California Sen. Barbara Boxer, the Internal Revenue Service (IRS) recognized that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB. Now with the FTB’s clarification, underwater home sellers also are assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.”
I AM NOT A TAX EXPERT. PLEASE CONSULT ONE IN REGARDS TO YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). #1 in Brentwood listings sold since 2000. To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty.

Ca Forgiven Debt Tax Update

I’ve written extensively in the past about the forgiven debt tax that you may or may not have to pay when you have debt forgiven in a foreclosure, loan mod with principal reduction or short sale. It is an extremely complicated issue, especially since we are dealing with Federal and State tax law. Up until the end of 2012, Federal and State laws were basically the same. So far this year, they are different. California has been considering a bill to make California law match up to IRS rules, but it hasn’t passed yet. The California legislature has adjourned for this year. However, all hope is not lost because if they reconsider it when they come back in session again and pass it by April 14, 2014, it will be retroactive for 2013 tax returns. So there is still hope!

I don’t have room to get into all the details, but let me address a few myths. First, this has NOTHING to do with your lender “coming after you” for the deficiency on your loan balance after the fact. The topic of the forgiven debt tax is only about the TAX that you may owe on the forgiven debt. Second, this situation is NOT unique to short sales. It drives me crazy to see so many articles and blog postings about how this tax could KILL short sales. What they don’t seem to realize is that if you let it foreclose, you very well may still owe the tax. So if you are thinking to yourself, “Hey, I may owe that tax, so I won’t do a short sale, I’ll just let it foreclose…” that may not be wise thinking. In fact, depending on the legal classification of your loan (purchase money or recourse) and the method of how your lender forecloses, it’s possible that a short sale WOULD protect you from the forgiven debt tax when a foreclosure wouldn’t! Third, there are still other exemptions available, so even if both of the Federal and State governing bodies let this laws lapse, it’s not a given that you will owe on the forgiven debt tax.

I AM NOT A TAX OR LEGAL EXPERT. PLEASE CONSULT ONE FOR YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). #1 in Brentwood listings sold since 2000. To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty.

Update On Ca Mortgage Forgiveness

Sometimes in a short sale or a foreclosure, you may have to pay tax on the debt that was forgiven. There are many exclusions to this, so many people DON’T pay this tax. Several years ago, the federal government passed a law call the Mortgage Forgiveness Debt Relief Act which added even more exclusions to existing law, which meant that MOST people don’t pay this tax. The State of California mirrored that law. When the federal law first expired, they renewed it through the end of 2012, and the State of California also renewed theirs. When it expired again at the end of last year, the federal law was again renewed through the end of this year, but the State of California has NOT renewed theirs yet.

A bill (SB 30) was put forth to have California law again mirror federal law and it looked likely to pass. However, another bill was recently linked to this bill that now puts doubt on that. This new bill (SB 391) implements a $75 fee on many standard real estate documents that get filed, but not those associated with the sale of a property. So this fee would apply if you were to file a quit claim deed, lot line adjustment, do a refinance, etc. Something other than a sale.

Most real estate trade groups and consumer groups are very much IN FAVOR of SB 30 passing because it helps distressed homeowners and can help our real estate recovery, but are AGAINST  SB 391 because it raises the cost to consumers to do routine real estate activities. Look for this to be hotly debated and hopefully they’ll work it out. If you don’t agree with these two bills being linked, and you want them to pass SB 30, be sure to let them know. You can contact the CA legislature at http://www.legislature.ca.gov.

I AM NOT A TAX EXPERT, PLEASE CONSULT A TAX EXPERT FOR ADVICE FOR YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

Update on Ca Mortg Forgiveness

When you have a foreclosure, deed-in-lieu of foreclosure, loan mod with principal reduction or a short sale, it’s possible that you will have “phantom income” in the form of forgiven debt. The Federal government extended the Mortgage Forgiveness Debt Relief Act through the end of 2013. So if your loan was used to buy, build or improve a principal residence, or you are insolvent or have filed for bankruptcy, you probably won’t owe Federal tax. You may owe California tax because California’s Mortgage Forgiveness Act expired 12/31/2013. Regardless of either the Federal or State Acts, if you are solvent and you pulled cash out of a property, you may owe phantom income tax.

However, there is possible good news on two fronts. First, SB 30 (Calderon, D-Montebello) was recently introduced as a CA Senate bill, which will make California’s law like the Federal law again if it passes. I would say odds are better than 50% that it will pass.

The other good news is hard to explain in the remaining space because it’s a complicated legal argument, so I can only summarize. Back in 2011 California law changed to where if a lender agrees to a short sale, in most cases, they are forbidden from pursuing the borrower for the deficiency. So the argument goes that when you do a short sale, the loan becomes equivalent to a “purchase-money loan,” which means the lender’s only option in the event of default is to pursue the property, not the borrower. That means there WAS no “forgiveness of debt” and therefore there should be NO 1099. So if this argument holds up, that COULD mean that ALL short sales in California for 1-4 unit properties are free from ANY phantom income taxes for California. So this is one more reason to consider a short sale if you are facing difficulties paying your mortgage instead of letting it foreclose because it MAY have favorable tax treatment, depending on your situation. I AM NOT A TAX OR LEGAL EXPERT. I’VE JUST DONE SOME RESEARCH ONLINE. CHECK WITH TAX AND LEGAL EXPERTS FOR YOUR SITUATION. THIS IS A CONFUSING AREA OF LAW AND THERE ARE DIFFERENCES IF PROPERTY IS A RESIDENCE, RENTAL OR LAND BEYOND WHAT I HAVE SPACE TO EXPLAIN.

If you have questions on this or any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

Mortg Forgive Update

So a lot of people took a big collective sigh of relief when we heard that the US Congress agreed to extend the Mortgage Forgiveness Debt Relief Act for another year. Just to clarify, this Act means that forgiven debt on your mortgage is generally not taxable, but only to the extent that the loan was used to buy, build or improve the property. So if you took cash out, you could still face a tax liability. There are other exemptions, notably bankruptcy or if you are insolvent (your debts exceed your assets). But there is more to the story, unfortunately….

Don’t you pay both federal AND state income taxes? That’s right. California has their OWN rules in regards to taxing mortgage forgiveness. For a while several years ago, the federal government was not taxing most mortgage forgiveness, but California (and some other states) were. After a sufficient hue and cry, California agreed to match the federal rules on this topic. But their rules also expired on 12/31/2012 just like the federal program.

I checked in with the Franchise Tax Board in Sacramento and asked if they had extended theirs to match the federal rules again. The answer was a disappointing, “No.” That means that some people may be in a situation where you don’t pay federal income taxes on your forgiven mortgage debt, but you may owe California income tax. I then asked if there are any bills pending to match up the rules to the federal rules again, and they didn’t think so. I would imagine someone will submit a bill shortly. The question is whether California will extend theirs again. If they do, it’s also likely that they will back-date it to 1/1/2013. And as a reminder, if you will owe tax on the forgiven debt, letting it go to foreclosure will probably NOT solve your tax problem! PLEASE CHECK WITH A TAX EXPERT FOR SPECIFICS TO YOUR SITUATION.

If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

Mortg Forgive Act Update

So we’ve been holding our breath the last few months to see if our politicians would let us fall us the Fiscal Cliff on Jan. 1. Well, they did! But it was only for a short time. They hammered out some compromises to get a deal put together before the stock markets opened, which was the true deadline. It kicks a lot of cans down the road, but at least the emergency is over (for now).

The good news is that the Mortgage Forgiveness Debt Relief Act has been extended for another year. So this is good news for those that would have paid taxes on their loan mod with principal reduction, or a short sale or a foreclosure but can now meet the requirements covered by this Act. However, this Act does NOT make all forgiven debt tax-free. So this is not a blanket that covers ALL short sales and foreclosures. The biggest gotcha is that if you took cash out of your property, you may still owe on the forgiven debt, unless you are insolvent or file bankruptcy. In basic terms, if you didn’t take cash out of your property, and/or you are insolvent, you probably won’t pay forgiven debt tax.

When I talk to clients about a loan mod vs. short sale vs. foreclosure, this is the one topic that tends to come up the most. But what most people don’t understand is that if you are going to owe on the forgiven debt tax after a short sale, then foregoing the short sale and letting it go to foreclosure instead does not solve your tax problem! You’ll still owe it after the foreclosure because that still represents forgiven debt! The only way to get around it is to keep the payments current and keep the property until the loan is paid off (unless you file bankruptcy).

PLEASE CHECK WITH LEGAL/TAX EXPERTS ABOUT YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

Free loan mod/short sale seminar

Updated for 2012. New loan mod/short sale laws and incentives will be discussed along
with the following topics:

  • Who is a good
    candidate for a loan modification vs. a short sale?
  • Can lenders
    pursue you after a short sale, foreclosure or loan modification?
  • Impact on your
    credit score and waiting period to buy another home.
  • Which lenders may
    pay you up to $30,000 to do a short sale.
  • Discussion of the
    “1099 issue” and the two big exceptions to it.
  • How the
    expiration of the Mortgage Forgiveness Act at the end of 2012 affects you.

June 12th at 6 pm or 7:30 pm or June 16th at 10 am or Noon. All will be the same
one-hour presentation including time for Q&A.

Presented by: Brian Sharp, Certified Distressed Property Expert.

««« MUST R.S.V.P. TO RESERVE A SEAT «««

Phone:
925.998.9712  Email:
Brian@SharpHomesOnline.com

 

PHANTOM INCOME UPDATE

I’m going to start with a disclaimer that I am NOT a tax accountant, so you should verify all of this with your tax expert prior to making any personal decisions. I’m just sharing some general information readily available at IRS.gov. I’m getting a lot of calls the past two weeks from people that want to hurry up and do a short sale before the end of this year, “…so they don’t have to pay taxes on it.” There are several myths out there about this issue that I wanted to shed some light on.

If your lender forgives any portion of a loan that you owe them, you may owe cancellation of debt income, also known as “phantom income.” The first myth is that this ONLY applies to short sales, but that isn’t true. It’s for any forgiven debt of any kind. So it applies in a short sale, foreclosure, and any loan mod with principal forgiveness. The good news is that there are several exemptions to this tax. First, there is insolvency, where your debts exceed your assets. Then there is bankruptcy. There is also an exemption for non-recourse loans or purchase-money loans. These are loans used to buy or build a home, or seller carry-back, and the loan has never been refinanced.

Where people are getting confused is that several years ago President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007. This opened up the exemption a bit more to include loans that had been refinanced, or home equity loans for home improvement, but only up to the amount used to buy, build or substantially improve the property. It did NOT cover cash-out loans, 2nd homes, rental property or business property. The Act is good through the 2012 tax year, so it should cover transactions that close up until 12/31/2012. Many people think it expires 1/1/2012. Even with this extra time, I think it’s possible, even likely that Congress will extend it. When they first passed it, they thought we’d be back on our feet by 1/1/2013. Even if they don’t extend it, there are still the other exemptions you can fall back on. But check with your tax expert…

TAX SURPRISES NEXT MONTH

Income tax returns are due next month. I wanted to cover two items that are highly misunderstood. Both of these may surprise you, and depending on your situation, either in a really good way, or a really bad way!

The first is one is in regards to the 1099 issue on forgiven debt, what’s known as “phantom income.” If you have had forgiven debt due to a foreclosure, short sale, loan mod, etc. you should receive a 1099 from the lender. There are several important exemptions. One of the biggest is that purchase-money debt is exempt, which means money used to buy, build or substantially improve a principal residence (so a loan for investment property, or taking cash out may be taxable). The second exemption is if you are insolvent, which means your debts exceed your assets. [See IRS pub. 4681.]

The second one has to do with the homebuyer tax credits. Not all homebuyer tax credits are the same. First, there was the federal tax credit that came out in 2008. Then in 2009-2010 there was another federal tax credit, but it was significantly different from the prior year’s credit. Then California had a homebuyer tax credit in 2010. I don’t have space to get into all the details of how all these tax credits are different. I can only focus on the federal 2008 credit, because that is the one that you have to start paying back. That’s right, starting with your 2010 return (the one that’s due next month), you need to start paying back the credit over a 15-year period. The good news is that it is an interest-free loan, so you simply take the amount of your credit and divide by 15. The bad news is that if you sell your home prior to 15 years, the remainder of your loan will be due that tax year. Now, if you got one of the other credits in 2009 or 2010, you don’t have to pay it back UNLESS you sell your home within 3 years for Federal credit and 2 years for California credit.

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