Short Sale Market Advice & Support

MORTGAGE MODIFICATIONS AND DEBT FORGIVENESS

The present mortgage crisis blankets the entire country and affects homeowners across all economic levels. Because the problem is so widespread, many homeowners are finding that more relief is available to them now than would have been in the past. In no small part this is the result of important new tax breaks in the Mortgage Forgiveness Debt Relief Act of 2007, signed into law on December 20, 2007.

If you cannot --or anticipate that you will not be able to-- keep up with your monthly mortgage payments, you should immediately explore refinancing through another mortgage lender or renegotiation of your current mortgage terms with your present mortgage lender.

If you cannot refinance through another lender, a mortgage modification with your current lender should be pursued. With foreclosures generally netting lenders only 60 cents on the dollar, many lenders are willing to renegotiate terms to come up with lower monthly payments, at least on a temporary basis.

Mortgage modifications
If your lender agrees to lower your interest rate for a temporary period of several years (or to keep it at the rate before an ARM reset), either without cost to you or by extending the term, there generally will be no adverse tax consequences to you. Under the "tax benefit rule," the tax benefit of receiving a lower interest rate is offset by the loss of the interest deduction that you would have taken on that amount. The only exception would be if more than $100,000 of your mortgage was the result of a "cash out" home equity loan, which you did not put back into remodeling.

If instead of adjusting the interest or the term, your lender decides to simply lower the principal amount of your mortgage, the tax law does require you to treat that reduction immediately as income. However, if the loan is on your principal residence, thanks to a recent change in the tax laws you can exclude that income from your taxable income.

One major downside for many homeowners: The new law does not cover any debt that was not put back into the home, either as the initial purchase price or for improvements. Any "cash-out" amount on a refinancing or home equity loan will generate taxable income to the extent of any forgiveness debt. Also tax benefits are denied to the extent a mortgage loan exceeds $2 million.

Foreclosure
In a straight foreclosure, the lender --under its legal right to do so-- conducts a foreclosure sale in which the proceeds of the sale, less expenses, are used to pay off your mortgage. If the proceeds from the sale do not repay the entire mortgage, the lender can either pursue you on the mortgage note as a personal obligation or it can "forgive" any outstanding amount. We can help you in these negotiations if you require assistance.

If part of the mortgage debt is forgiven after the foreclosure sale, the income imputed to the former homeowner is usually excluded from tax under the principal residence exclusion, as explained earlier in this letter. As also mentioned, the shortfall reduces the tax basis you have in your home.

Short sale
If you can find a buyer for your home, your lender may allow you to sell the property by removing its lien and could agree to forgive any mortgage amount that otherwise may remain unpaid. This transaction is commonly called a short sale. As in a straight foreclosure situation, the forgiven debt is typically protected by the principal residence exclusion.

Deed in lieu of foreclosure
Instead of having your home sold in a foreclosure sale, a lender may allow you to transfer your deed to it "in lieu of foreclosure," and at that point let you off on any otherwise remaining mortgage liability. In a deed-in-lieu-of-foreclosure situation, forgiven indebtedness income is realized to the extent that the appraised value of your home at the time the deed is transferred is less than the principal amount remaining on your mortgage. As with the foreclosure situation, the same exclusion to income rules usually apply.

Sale of your home
If you use one of the foreclosure options, the IRS will treat you as having sold your residence. This "sale" in turn triggers the possibility of tax on any gain realized on the sale.
Fortunately, any gain on the sale or deemed sale of a principal residence is usually sheltered from tax based on the so-called "homesale exclusion" of up to $250,000 in gain ($500,000 for married couples filing jointly). If your gain is a greater or if your property does not qualify as a principal residence, it will be taxed.

If a sale or deemed sale produces a loss, on the other hand, you will receive no tax benefit from it. It is considered a "personal expense" and, as such, cannot offset any other income. The IRS also maintains that the loss cannot offset any indebtedness income that otherwise must be recognized.

Conclusion
The Mortgage Forgiveness Debt Relief Act of 2007 offers valuable tax breaks for homeowners who now find themselves in a credit squeeze. These tax breaks are available, however, only if you take steps to qualify yourself for favorable tax treatment. A qualfied tax professional can make sure that, under the tax laws, your qualifying property remains "qualified," that your qualified mortgage indebtedness remains "qualified," that any subsequent sale remains "qualified" for the most favorable tax treatment available.

IRS CIRCULAR 230 DISCLOSURE: "To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."