As real estate owners and investors, you are well aware of the current market challenges. 2008 was a tumultuous time. Lawmakers were busying trying to stave off crisis and grab headlines. The following are a few highlights that may have direct impact on you, as well as a heads up on what may be in store for 2009.
Thanks to the Mortgage Debt Relief Act of 2007, for the years of 2007, 2008 and 2009 taxpayers are generally allowed to exclude income from the discharge of debt on their principal residence. The Act provides relief from taxes on forgiven bank debt. Ordinarily, when debt is forgiven, it is considered income for tax purposes. This is especially important in the context of a Loan Modification by the lender, or a Deed in Lieu of Foreclosure where a homeowner persuades the lender to accept a conveyance of the home in full satisfaction of any amounts owed, or a Short Sale where a homeowner sells a home for less than is owed to the lender and the lender forgives the difference.
In further encouragement of Short Sales, Loan Modifications and Refinancing, the IRS announced an expedited process for dealing with a tax lien on a property. There are two options for a distressed homeowner when faced with a lien placed by the IRS. A tax payer may submit a request for lien subordination or apply for a tax lien discharge. In a lien subordination case, the IRS agrees to release its current priority lien position for a position behind a lender. This allows and encourages the lender as they are given the first secured position. In a discharge case, the IRS agrees to release its lien (but not necessarily the debt) in recognition that the taxpayer will be more likely to pay the debt if they can sell the property. Under normal circumstances the process takes approximately 30 days, however, they have committed to shorten the time period.
Just last month, Fannie Mae started a pilot program aimed at reducing foreclosures by pre-approving Short Sales. One of the largest obstacles in a Short Sale is whether the Bank will accept the deal, not to mention the time it takes to get an answer from the Bank. With this program, Fannie Mae will determine an acceptable listing price before a buyer is found. Currently, the program is only available in Arizona and Florida. If program is found to be effective there are plans to extend the program nation wide.
The Hope for Homeowners program was enacted to assist distressed homeowners by refinancing mortgages for borrowers who are having difficulty making payments. The Federal Housing Authority (“FHA”) will insure the new loan. In most cases, the bank is required to write down the existing mortgage to 90 percent of the new appraised value of the home and waive all prepayment penalties and late payment fees. The program is only available to owner occupied residences who obtained their mortgages on or before January 1, 2008. A candidate for the program must also agree to share both the equity created at the beginning of the new mortgage and any future appreciation in the value of the home. The program began on October 1, 2008 and will end on September 30, 2011.
For first time homebuyers, the IRS is offering a First-Time Homebuyer Credit of up to $7,500. In essence it works as a 15 year interest free loan. The credit is taken in the year of purchase but then must be paid back over time. It is available from April 9, 2008 to June 30, 2009. The FHA is also offering first time homebuyers flexible financing with down payments as low as 3.5 percent.
On the State level, in June the Distressed Homeowners Act was enacted to protect distressed homeowners from so-called “equity stripping”. Equity stripping is a practice where a person buys a home and offers to lease the house back to the original owner on terms that are not likely to place the original owner back in the home. The Act governs the selling of distressed homes and those that market or assist people who are in a distressed home ownership position. The Act mandates certain disclosure and creates a fiduciary relationship between the parties. Violations of the Act carry severe penalties. The Act does not apply to bank owned properties.
In contrast to the efforts on the federal level, the State of Washington’s Department of Revenue issued a statement in December 2008 that it would continue to tax any amount forgiven by a bank as part of the total sales price. Thus, while a seller/owner would not have to pay income tax on a federal level on any forgiven mortgage loan amount, they would have to pay State excise tax. Thankfully, after a bombardment of protest from the industry, the Department reversed its’ position and now mirrors the federal approach. For anyone who previously paid an excise amount on the amount of forgiven debt in a Short Sale transaction, a refund may be requested.
There are currently two proposals offered in the legislative session, House Bill 1372 and Senate Bill 5425 requesting alternative valuation dates for real properties for years of substantial decline. Created out of the responses that the value of real property the government uses to base taxes does not reflect the true price an owner would receive.
Whether you are seeking relief through a negotiated bank work out, or seizing the opportunity of real estate bargains with the use of a self-directed IRA, the attorneys of Lineberry Kenney are ready to assist you in achieving your goals for 2009.
