Real Estate Information Archive

The Debt Forgiveness Act, scheduled to expire on December 31, 2012 could impact many homeowners of distressed properties. Those are homes in a state of pre-Foreclosure where homeowners are attempting to avoid foreclosure by selling them as a short sale.

Federal tax law generally requires that a taxpayer who has indebtedness that is forgiven by a lender is required to claim and pay taxes on the amount of the forgiven indebtedness, which is classified as "income." As a result, prior to 2007 homeowners whose homes were foreclosed upon or who completed short sale transactions (or received principal reductions in loan modifications) were potentially required to pay taxes on the amount of indebtedness which was forgiven in those transactions. The Mortgage Forgiveness Debt Relief Act of 2007 was passed by Congress in order to modify the law by providing taxpayers who met certain requirements an exemption from taxation on the forgiven indebtedness. That law, however, is scheduled to expire at the end of 2012 and, unless extended by Congress, will result in the loss of this exemption and the imposition of additional and potentially significant taxes on thousands of distressed homeowners.

More than 50,000 homeowners go through Foreclosure each month and the number of short sales has increased significantly over the last few years to approximately 500,000 per year. In addition, as a result of the $25 billion foreclosure irregularity settlement which the nation's largest mortgage lenders recently entered into with the federal government, thousands of homeowners may receive principal debt reductions over the next few years. Although an extension of the exemption would seem to be a "no brainer," the fact that Congress is entering a "lame-duck" session creates the possibility that little legislation will move ahead through the end of the year.         

Even if the law does expire, some homeowners will still be eligible to exclude the income from forgiven indebtedness. For example, if the debt is discharged in bankruptcy or the homeowner is "insolvent" (meaning they have more debt than assets) at the time of the debt forgiveness, no tax is due. But homeowners who are considering a short sale and their agents should take this pending expiration into account and seek competent legal or tax advice so they will be prepared for the ramifications to them, if any, that will result if the law is not extended by Congress prior to the end of the year.

Thinking of short selling your home? 2012 is the year to do it because beginning in 2013, the Federal Government will require homeowners to pay income taxes on their short sold home. Make the difficult decision now: What to do with your underwater home?

A short sale home is the sale of a home in which the value of the property is less than the balance of the mortgage or liens owed against the property.  The lender agrees to the terms of the deal, and releases the property to the buyer. For buyers it is a good deal and for the sellers it helps them avoid bankruptcy or Foreclosure. But the rules governing income tax for homeowners short selling their homes are about to change.

The Mortgage Debt Relief Act, which is set to change in 2013, was passed by Congress five years ago when the national housing market went bust. The IRS has allowed income tax to be excluded from the short sale on a home up until 2013. After December 31^st, the rules change and homeowners who have not closed their short sale deals will face paying income tax on the sale.

The law breaks down like this:

A house sold for $50,000 less than what is owed on the mortgage means the selling homeowner will owe federal income taxes on that sale. Typically a homeowner would pay $12,500 if they are in the 25 percent income bracket or $7,500 if they are in the 15 percent income bracket.

The IRS will forgive up to $2 million this year and $1 million if one is married and filing separately.

If the lender has not formally forgiven the debt before December 31^st, the homeowner is still on the hook to pay income tax. The bank must officially sign off on the deal before the end of year.  Lenders have been “gearing up” for the process as it often times takes up to 6 months or even a year for a short sale home to close. 

Homeowners declaring bankruptcy may avoid having to pay income tax on a short sale as bankruptcy tends to trump everything. Federal guidelines also allow a homeowner to not pay income tax if their debts exceed the value of their assets.

Now is the time for homeowners considering listing their homes as short sales to take action and start the process because beginning in 2013, the amount a lender forgives on short sale or Foreclosure will be subjected to federal income tax.

Sales of previously owned homes fell back 0.8 percent in April, according to a new report just released by the National Association of Realtors. The trade group says an unexpected recovery should be expected and notes that existing-home sales have risen in six of the last nine months. The share of distressed home sales also dropped last month, accounting for 37 percent of total sales volume, down from 40 percent in March.

Contrary to this report, my office has actually seen a consistant increase in traffic since the first of the year.  Additionally, we have seen a rise in new short sale listings. Alarmingly, many are homeowners who purchased within the past 1-2 years asking for short sale assistance, further contributing to the inventory of distressed properties.

If you know of someone who owes more on their home than it is worth, and are experiencing a hardship causing them to fall behind in their mortgage payments, please have them call me at 301-870-1717 x106. There are alternatives to Foreclosure.

I have worked with a large number of clients to date, helping them to avoid Foreclosure by short selling their home.  Many of my clients have been military, or Government employees who have been relocated out of the area, and for one reason or another are unable to sell their homes. Often, the only recourse many homeowners have is either short sale or providing the mortgage company with a deed in lieu of foreclosure.

A short sale is a lengthy process by which the property owners mortgage company agrees to allow the owner to sell their home for less than the current mortgage.  It allows the homeowner to avoid the pain and humiliation of Foreclosure as well as the devastating damage to their credit score A credit score can see a drop of as much as 250 points with a foreclosure.  In some cases, as will military and Government employees who have security clearances, job-loss can occur with a foreclosure on a credit report.

There are possible drawbacks, however.  The I.R.S. will see the debt forgiveness as income, and your lender may want to pursue a deficiency judgment, meaning that they may want that money back.  I highly encourage anyone considering a short sale to consult with a lawyer and/or CPA.  Each lender treats short sales a little differently, but this is an overview of what to expect. 

Communicate with your Lender

Do not avoid communications with the lender.  This will only make matters worse for you.  In some cases the lender will be able to work with you on a “Mortgage Modification”, adjusting your payments to make them fit into your current budget, allowing you to stay in your home.  This process, however, can be very tedious, and time consuming. Take plenty of notes and stay on top of correspondence. If this fails, consult a Realtor who has plenty of experience with short sales.

Locate an Experienced Full-Time Realtor

This costs you nothing, and anyone asking for up-front payment should be avoided.  An experienced Realtor should have a history of successful transactions.  Do not be afraid to ask for references.  An experienced short sale Realtor also has a designation as a Certified Distressed Property Expert (CDPE), which provides them with the tools and knowledge to get the job done  quickly.  In the case of a Foreclosure, “time is not your friend”.

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Be Prepared to Provide Documentation

Your mortgage company is going to want to know your complete financial history.  You will be asked to submit a financial worksheet, recent pay check stubs, recent bank statements, and in some cases the last two years of tax returns.  You will also need to send a letter of explanation, called a “hardship letter”.  Your Realtor should be able to help you with all of the documents.

Do Not Move!

Stay put until you get word from your Realtor.  Maintain all of the utilities and continue to maintain the property.  If a lender suspects the property is vacant, they will immediately seize the home and change the locks, making it difficult to sell.  You will have plenty of time to make other living arrangements.  Speaking of which, your Realtor will be able to assist you in locating a new home as well.

I can help you!

Call me! My advice and expertise is free to you.  My primary goal is the keep you in your home if at all possible.  When that is not possible I can guide you the entire way through the short sale process.  Call me at 301-870-1717 x106 or e-mail at [email protected].

If you are interested in viewing homes for sale in the Southern Maryland Real Estate area visit Charles County Real Estate, or call DeHanas Real Estate Services at 301-870-1717.

New statistics from mortgage data collector, Realtytrac, have come out with news about the future rate of foreclosures that has not surprised some forecasters.

Nearly 528,000 homes were taken over by lenders in the first six months of the year, a rate that is on track to pale in comparison, the more than 900,000 homes repossessed in 2009, according to data released Thursday by RealtyTrac Inc., a Foreclosure listing service.

"That would be unprecedented," said Rick Sharga, a senior vice president at RealtyTrac.

By comparison, lenders have historically taken over about 100,000 homes a year, Sharga said.

The surge in home repossessions remains a crippling drag on the housing market.

The pace at which new homes falling behind in payments and entering the Foreclosure process has slowed as banks continue to let delinquent borrowers stay longer in their homes rather than adding to the glut of foreclosed properties on the market. At the same time, lenders have stepped up repossessions in an effort to clear out the backlog of distressed inventory on their books.

The number of households facing Foreclosure in the first half of the year climbed 8 percent versus the same period last year, but dropped 5 percent from the last six months of 2009, according to RealtyTrac, which tracks notices for defaults, scheduled home auctions and home repossessions.

In all, about 1.7 million homeowners received a Foreclosure-related warning between January and June. That translates to one in 78 U.S. homes.

Foreclosure notices posted monthly declines in April, May and June, but Sharga said one shouldn't read too much into that.

"The banks are really sort of controlling or managing the dial on how fast these things get processed so they can ultimately manage the inventory of distressed assets on the market," he said.

On average, it takes about 15 months for a home loan to go from being 30 days late to the property being foreclosed and sold, according to Lender Processing Services Inc., which tracks mortgages.

Assuming the U.S. economy doesn't worsen, aggravating the Foreclosure crisis, Sharga projects it will take lenders through 2013 to resolve the backlog of distressed properties that have on their books right now.

And a new wave of foreclosures could be coming in the second half of the year, especially if the unemployment rate remains high, mortgage-assistance programs fail, and the economy doesn't improve fast enough to lift home sales.

The prospect of lenders taking over more than a million homes this year is likely to push housing values down, experts say.

Foreclosed homes are typically sold at steep discounts, lowering the value of surrounding properties. 

The Federal Governments most recent Foreclosure Alternative initiative directs homeowners to act responsibly by attepmting to short sale their home with a local Realtor.  Fore more information on the short sale process, call DeHanas Real Estate Services at 301-870-1717 x106.

Website presents information and answers questions on homeowner eligibility with new Foreclosure avoidance resource.

Waldorf, MD - Local Certified Distressed Property Expert, and community advocate, Don DeHanas, of Dehanas Real Estate Services, has announcd the expansion of an information website for Southern Maryland homeowners in distress.

http://hosted.cdpe.com/DonDeHanasHelpsHomeowners

Click on Government Eligibility Survey.  "These surveys will let homeowners quickly discover new options made available by the Governement," DeHanas said. "When faced with the possibility of Foreclosure, I've seen too many homeowners make mistakes because they hadn't been advised by a qualified professional.  These people didn't know the options available, or even how to find any information on their situation. My website helps to solve this problem."

This site acts as a hub for information on the facts and issues for struggling homeowners, putting all the necessary information in one, easy-to-use location. With the addition of these new eligibility surveys, the site lets homeowners make educated decisions about their future.

"Seven out of ten homes that have gone into Foreclosure did so without even being listed on the market," Alex Charfen, co-founder and CEO of the Distressed Property Institute. "Agents like Don DeHanas with the CDPE designation are helping distressed homeowners understand that there may be options available to avoid Foreclosure."

The CDPE designation provides real estate professionals with specific understanding of the complex issues confronting the real estate industry.  Through comprehensive training and experience, CDPEs are able to provide solutions for homeowners facing financial hardship in today's Market.

Fore more information, contact Don DeHanas at [email protected] or call 301-870-1717 x106