Short Sale Debt Forgiveness Deadline Extended Through 2013

For distressed homeowners who stressed and crammed to short sale their homes prior to Dec. 31, 2012, hoping to catch a major tax break on the difference owed to their lenders, y’all can take a collective sigh of relief.

That’s because the teacher, which in this case is the United States government, has given you one more full year — at a minimum — to get your financial affairs in order.

While most of us were doing our best to enjoy the 2012 holiday season, lawmakers on Capitol Hill were scurrying to ensure that the United States did not fly off the “fiscal cliff,” a complicated morass of tax cuts, tax hikes and tax breaks, which would have essentially curbed any and all progress made to restore the struggling national economy.

At the eleventh-hour (Jan. 1, 2013), Congress passed the “fiscal cliff bill” — “American Taxpayer Relief Act of 2012” (see .pdf here) — to avoid the potential disaster. The bill has many nuances, however, a key provision is the extension of the aforementioned Mortgage Debt Relief Act of 2007 through 2013.

Cash-strapped homeowners who are considering a short sale and/or loan modification will now remain eligible for tax relief, meaning that they will not be required to pay taxes on forgiven debt if they are involved in a short sale, foreclosure and/or loan modification prior to Dec. 31, 2013.

Inman News breaks it all down:

“Had Congress not acted, the tax code would have reverted to its pre-2007 treatment of mortgage principal reductions or cancellations by lenders, whether through loan modifications, short sales, deeds-in-lieu or foreclosures: All principal balances written off would be treated as ordinary income to the homeowners who received them. For illustration, if a lender wrote off $100,000 of debt to facilitate a short sale, the seller would be taxed on that $100,000 at regular marginal rates, just as if he or she had earned it as salary. A return to taxation of principal reductions would have disrupted short sales — a growing segment of the home real estate market — in 2013, and almost certainly would have encouraged more distressed owners to opt for foreclosure and bankruptcy.”

The message is simple: If you want to avoid “scary tax bills” in 2014 as a result of your current (or even potential) distressed housing situation, do everything you can to avoid it right now. Research online, contact your lender(s), reach out to a local real estate professional and understand your options … and consequences. You’ve been given a second chance — don’t squander it.

Other key housing-related matters that were included in the bill covered deduction of mortgage insurance premiums, tax credits for energy-efficiency home improvements and tax credits for new energy-efficient new houses.

For more on the Mortgage Debt Relief Act of 2007 be sure to hit up our complete archive right here.

Short Sale Scam: ‘Flopping’ Real Estate Report

Most homeowners who consider short-selling their properties are well intentioned, eager to unload them for personal or financial reasons beyond their control. Unemployment, divorce or even absurd inequity are all among the many reasons underwater water homeowners attempt to sell their homes for less than what is owed on the mortgage balances.

Unfortunately, opportunistic scammers who see dollar signs — or possibly even desperate underwater homeowners who feel the current system is convoluted, broken and/or unhelpful — have also set their sights on short sales.

The latter, dishonest group of folks are considered “floppers,” which is a creative spinoff of the “flippers” who actually follow the letter of the law to invest, rehab and re-sell short sales. “Floppers,” meanwhile, hatch schemes to devalue their homes as much as possible and then agree to sell them as cheap as possible to their like-minded crooked associates.

Les Christie on CNN (via breaks it down:

“Flopping is the latest in mortgage fraud, in which sellers actually want as low a price as possible. The scheme works if they are underwater on their mortgage, and their lender agrees to a short-sale, forgiving the difference between the sale price and the amount owed. The seller unloads the home for the sandbagged price to an accomplice, who can then clean it up and flip it for a quick gain.”

How exactly does a upside-down homeowner devalue or “sandbag” his or her home? As you would imagine, it’s pretty simple to create a mess or the illusion of costly disrepair. Banks and their appraisers are so overwhelmed with properties that pulling the wool over their eyes under the guise of distress isn’t such a tough trick to turn.

The report mentions a few of the endless possibilities:

  • Removing appliances
  • Taking cupboard doors off their hinges
  • Leaving dirty laundry lying around
  • Painting what looks like water damage on the ceiling
  • Invent plumbing or electrical problems
  • Colluding with local contractors to fake repair estimates

It seems like a huge effort to undertake, especially when there are no guarantees that banks will approve — much less consider — short sales, as well as when other variables and wildcards that could derail the purchase process are factored into the equation.

Then again, with an average 34 percent gain and average profit of $55,000, it’s perhaps too enticing for some (less than 2 percent of all short sale transactions, according to the report) — to pass up.

Anyone with information about illegal or suspicious short sale “flopping” is encouraged to call 1-800-4fraud8.

Short Sales, HOAs And Liens

Short sales are heating up thanks in large part to major lenders getting their systems up to snuff and a looming Mortgage Forgiveness Debt Relief Act deadline (Dec. 31, 2012) , which cancels/erases taxable debt on the difference owed on the mortgage.

For example, if a homeowner owes $300,000 on his or her mortgage, but the property is only worth $225,000, a $75,000 difference exists for which he or she is financially responsible. Rather than selling the home for a loss and cutting a $75,000 check to the bank, the homeowner, lender and buyer can negotiate a “short sale” that ensures the seller can avoid foreclosure, as well as a huge $75,000 tax liability (for now), while the seller gets a sweet deal on a new home.

The lender, meanwhile, actually saves money by not having to foreclose on the house and then attempt to preserve, market and re-sell it to a new buyer months — possibly even a year or more — down the road.

But, short sales are typically anything but “short.” The process has been streamlined and improvements have been made; however, there are several roadblocks that can and often do gum up the process.

Homeowners Associations (HOAs) are among the many culprits that can kill deals.

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Warren Buffett advice on investing: ‘Load up’ on single-family homes at distressed prices (Video)

“Single-family homes are cheap right now. If I had a way of buying a couple 100,000 single-family homes, and had a way of managing them — the management is an enormous problem because they are one-by-one, not apartment houses — I would load up on them. I would take mortgages out at very low rates — if anyone was thinking of buying homes five years ago, they couldn’t do it fast enough because they thought the [prices] were going to go up. Now they don’t buy them because they think they are going to go down and interest rates are going to go far lower. It’s a way, in effect, to short the dollar because you can take a 30-year mortgage — and if it turns out your interest rate is too high next week — you can refinance lower. And if it turns out it’s too low, the other guy is stuck with if for 30 years. So it’s a very attractive asset class now…. It’s a terrific deal. If I was an investor who was the handy type, which I am not, I would be a couple of them at distressed prices and find renters. It’s a leveraged way of owning a very cheap asset now. I think it’s about as an attractive asset as you can make.”

Warren Buffett, perhaps the shrewdest — and likely the most successful — investor in modern history is telling folks to go big on real estate. Not stocks, bonds, metals or mutual funds. On the contrary, good old fashioned real estate.  Well, real estate that is significantly discounted or in a state of distress, which would include Real Estate-Owned (REO) homes, foreclosures, short sales and other property types that have built-in equity and/or can generate a monthly revenue stream until the market completely corrects. Buy, hold and sell — it’s a classic investment strategy that can pay tremendous dividends down the road as home prices begin to climb after their historically-low dip. Don’t know how to get started? We’ve got a pretty good idea about where you can dip your toes into the water determine whether or not you are willing to follow the advice of the third richest man in the WORLD. Buffett kind of knows what he’s talking about when it comes to investments. See what single-family homes at distressed prices are available in your neck of the woods right now at Maybe now you’ll believe what we’ve been saying this whole time thanks to a little independent third-party coaxing.

Short sales, mortgage debt relief act deadline and scary tax bills in 2013

The Mortgage Debt Relief Act of 2007 is set to expire at the end of 2012.

What’s that mean?

It means that if you are considering a short sale and/or foreclosure the time to act is yesterday. That’s because the amount a lender forgives on a primary residence will be taxable on federal income taxes the second the clock strikes midnight on Jan. 1, 2013.

Indeed, banks must sign off on a deal, as well as agree to release the distressed homeowner from the debt/shortfall before Dec. 31, 2011.

Currently, under the five-year plan, the Internal Revenue Service (IRS) “allows taxpayers to exclude income from the discharge of debt on their principal residence…. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.”

In 2013?

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