Palos Verdes Foreclosures

Were you aware that time is running out for distressed homeowners who are upside down in their homes?

The Federal Mortgage Forgiveness Debt Relief Act of 2007 provided enormous benefits for distressed owners of Palos Verdes homes and Palos Verdes real estate. 

These benefits EXPIRE on December 31, 2012.  Trust me on this … if you’re in a position where you need to capture the benefits of a short sale, you do NOT want to wait to the last minute.  It could cost you tens of thousands of dollars with added tax liability to the federal government and state government.

Before this Act was passed, when a home goes to foreclosure or short sale, the loss to the bank (or debt forgiveness) is considered income to the homeowner. The bank will report that income to the Internal Revenue Service on a 1099 form, and a taxpayer in the 28 percent tax bracket could owe as much as $28,000 on a $100,000 loss to the bank.

For a homeowner, it’s like salt in the wound – not only did they lose their home to foreclosure, but they now the IRS is calling?

Lawmakers enacted the Debt Relief Act to shield distressed homeowners from such a financially devastating event.

The Debt Relief Act covers:

TIMEFRAME: Up to $2 million of debt ($1 million if married filing separately) forgiven between Jan. 1, 2007, and Dec. 31, 2012.

PRINCIPAL RESIDENCE: The forgiven debt must be on a qualified principal residence, generally considered to be a home in which you have lived full time two out of the last five years. Check with your tax preparer to determine if your home falls into this category.

Debt forgiven on a second home, income property, credit cards, car loans, etc. do not qualify for the tax forgiveness, according to the legislation.

PURCHASE MONEY: The debt must have been used to “buy, build or substantially improve” your principal residence and be secured by that property. If you refinanced the home and took cash out to remodel the home, it may be covered. Cash out to pay other bills or make purchases would not qualify, however.

Though some property owners may not qualify for the protections of the Debt Relief Act, there are alternatives.

INSOLVENCY: If a consumer’s liabilities exceed their assets, they may fall under the IRS definition of “insolvency,” and some or all of their canceled debt may not be taxable. Your tax preparer can help you determine if you are insolvent and help you complete a Form 982 as part of your tax return.

BANKRUPTCY: Debts discharged through bankruptcy are not taxable income.

DEFICIENCY BALANCE: Tax liability on a discharged debt differs from a deficiency. In California, the owner of a home lost through foreclosure or sold in a short sale often is not liable for the balance owed.

Loan modifications and short sales can take several months or longer. Homeowners facing difficulties should not wait until the last moment to take action. The rush to complete a short sale or loan mod at the end of 2012 will keep many from taking advantage of the federal protections.

If you know someone that needs to understand the benefits of short selling their home OR you want to know about what advantages there are as an investor to buying a short sale, contact me today!