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Posts Tagged ‘distressed property’

If you owe a debt to someone else and they cancel or forgive that debt, the cancelled amount may be taxable.

Cancelled or forgiven debts happen every day in the Real Estate world. Short sales and foreclosures result in substantial, cancelled or forgiven debts. The Bank’s loss may be considered the home owner’s gain – a taxable, forgiven debt. A short sale happens when the proceeds of a home sale are not enough to pay off the mortgage. The bank agrees to take a “short” payoff and may cancel or forgive the shortage.

For the last 5 years, most homeowners were exempt from paying taxes on that forgiven or cancelled debt. Unless Congress acts soon, homeowners will have to start paying income taxes on that debt.

Taxable Income

If you owe $200,000 on your home but your sale only results in $150,000 in proceeds, you will be “short” by $50,000. You would likely need to count that $50,000 as taxable income to the IRS! In this case, you might owe and additional $12,500 in tax liability. In fact, you may owe this tax even if your house is foreclosed if it results in a shortfall to the bank.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007 exempts many home owners from paying taxes on the forgiven debt. This law, however, is set to expire at the end of 2012. If it does, it may have a chilling effect on short sales and loan modifications. Many experts and commentators believe Congress will extend the law. It was originally effective until 2009 and Congress extended it to 2012 as part of the Emergency Economic Stabilization Act of 2008. In August, the Senate Finance committee approved a one-year extension, with bipartisan support (this was not a full vote of Congress). Others are more skeptical. A lame-duck Congress has its plate full with the looming “Fiscal Cliff.”

If the law is not extended, many believe the Real Estate market will suffer. Indeed, over 20% of Dane County sales are distressed property sales. These distressed sellers would be faced with another, “phantom” tax just to walk away from their homes.

 

 

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2011 December Home Sales Report – Wisconsin REALTORS® Association.

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Distressed Property Resources

 

Education and expertise are critical to serving distressed homeowners and buyers of distressed properties. Beware of internet sites that often contain incorrect information or involve scams. We have found the following resources to be helpful for Wisconsin Realtors, attorneys, and distressed home owners.

Trusted Web Sites:

 




 

 

Trusted Sources of Education:

 

 

The best resources are local. Feel free to contact Homestead Title to see if we can answer your questions or point you in the right direction. We’re here to help!

Ph: (608)203-4800

Email: home@homesteadtitle.net

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The new Federal Program designed to aid distressed home owners went into effect on April 5, 2010. The HAFA Program is designed to assist distressed home owners in selling their home, even if they owe more than the home is worth. The program allows owners to participate in a “short sale” with standardized procedures and expedited timelines. Short sales are traditionally the hardest and longest transactions to complete and involve dozens of hours of phone calls and paperwork and a very high level of expertise. HAFA, it is hoped, will streamline this process.

Homestead has provided some basic information on HAFA in a previous post. Click Here. And, we are always available to answer your short sale or foreclosure questions (relating to Wisconsin properties).

On March 26, the Federal government announced a few changes to HAFA including:

  1. Sellers who are relocating can receive up to $3000 as an incentive to close (the original amount was $1,500).
  2. Changing some of the requirements when a homeowner declares bankruptcy and allows them to apply for HAFA (if you are considering a short sale and bankruptcy, you really need an attorney!)
  3. Allows for certain home owners to apply for the HAFA program even if they have not previously applied for a HAMP loan modification.
  4. Clarifies how third-party vendors (negotiators) may be paid.

Bloomberg news recently reported that this new program could be a “game changer.” Indeed, MoodysEconomy.com predicts that the HAFA program may stave off nearly 1.5 Million foreclosures over the next 2 years. While this may be a positive over the long term, it could mean more short sales over the short term. This has the potential to dampen sales prices in certain markets.

One key provision of HAFA is that it REQUIRES the use of a Realtor. All short sales are difficult and require expertise and the federal government recognizes that licensed Realtors will need to be a part of the transaction. Likewise, it is critical to use a title company with an incredibly high level of expertise and experience. Homestead Title has closed hundreds of distressed properties over the last 3 years and provides guidance and expertise whenever appropriate.

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In an effort to end the foreclosure crisis, the Federal Government has been trying to keep owners in their homes through Mortgage Modifications. Now, under a new plan, it will try to make short sales easier.

The Home Affordable Foreclosure Alternative Program (HAFA for short) is a complex program designed to simplify, streamline, and standardize the short sale process. HAFA not only streamlines the short sale process, it allows some distressed owners to walk away with a little cash.


HAFA is an extension of the Home Affordable Modification Program (HAMP) that sought to assist home-owners through mortgage modifications. Unfortunately, the HAMP program has not been very successful. Thus, HAFA offers incentives to both home owners and their lenders to facilitate a short sale. According to the National Association of Realtors, HAFA does not apply to Fannie Mae or Freddie Mac loans, which will issue their own versions of HAFA. The new HAFA program takes effect on April 15, 2010 and provides the following benefits:

  • Short Sale pre-approval much earlier – before even signing a listing agreement or an offer.
  • Prohibits commission reductions below 6% (unless required by private mortgage insurance)
  • Requires full release of any 1st mortgage deficiencies – borrowers must be released from their debt
  • Provides financial incentives to lenders and owners: $1500 for owners and $1,000 for lenders.
  • Institutes uniformed and streamlined procedures that all participating banks must follow.

HAFA is a complex program with dozens upon dozens of pages of guidelines and forms. Fannie Mae and Freddie Mac will likely add hundreds of pages of their own programs.   HAFA is a new program and there is very little guidance.   We found the following resources helpful:

Homestead Title is committed to providing the most up to date information and will be offering updates often.

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