Showing posts with label short sales. Show all posts
Showing posts with label short sales. Show all posts
Saturday, January 3, 2009
Do You Really Know the Difference?
REOs Foreclosures Regular Sales Online Auctions Short Sales Pre-Foreclosure
In today’s San Francisco Bay Area market there are numerous properties for sale. I have been working with buyers and sellers in this challenging market. For the most part, prices ranging from $200,000 to $400,000 are being sold as Short Sale or REO properties. There are some being sold on Auction websites. Very few homes in the above price range are being sold by homeowners as what we call a Regular sale. Below are a summarized definition of these types of transactions.
Regular Sale - A sale where the seller has equity in the property. The buyer and seller will the
negotiate price and terms of the sale. The seller is required to provide Disclosures according
to California Law and statute. The transactions in this type of sale are generally much easier to come together as there are timelines in which the seller needs to abide by in the transaction. The seller is motivated to sell and move on in his/her life.
Short Sale - A short sale is the sale of real property where the fair market sale price is less than the loan(s) on the property. A short sale means the seller's lender is accepting a less than the existing loans on the property. Just because a property is listed with short “sale terms” does not mean the lender will accept your offer. These properties must be purchased “As Is” without any repairs or warranties. Some are in need of repair. The lender is already taking a 30% to 50% loss on the property. This is why a majority of the time, they will NOT negotiate on the price. In fact, in most cases in our area, there are multiple offers on most properties that are in good condition and the price will higher than the listed price.
If the property in encumbered with more than one loan, there could be a problem. All of the lenders must agree to a short sale or a contract can never be ratified. There is no guarantee the lender will approve of the sale. My buyers have waited over 4 months for the lender to respond to their offer. We are still waiting for an acceptance! I have heard of circumstances where it took the lender over 9 months to respond and did not accept the offer. Statistics show over the last six months that only 20 % of these sales have closed. The homeowner should consult their CPA or Tax Attorney before entering into a Short Sale agreement.
REO/Bank Owned Property - REO is an acronym for a real estate owned property that has been
foreclosed on or repossessed by banks or lenders. These properties are also sold in “As Is” condition without any repairs or warranties. The seller (lender) is exempt by law from completing any disclosures. The agents involved in the transaction are not exempt from completing their visual inspection as per California’s disclosure laws.
Prior to these properties going on the market, the lender has had an agent submit a BPO (Broker’s Price Opinion). So, just as in a short sale transaction, the lender is already taking a 30% to 50% loss on the property. This is why a majority of the time, they will NOT negotiate on the price. In fact, in most cases in my area, there are multiple offers on most properties that are in good condition and the price will higher than the listed price. Again, some properties are in need of repair. The process for bank approval can be anywhere from 3 – 10 days.
Pre-Foreclosure Property - A property where the homeowner has fallen behind in their payments or when a Notice of Default (NOD) has been filed against the property by the lender. May not have much flexibility in negotiating. These properties may be regular sales or potential Short Sales. The homeowner should consult their CPA or Tax Attorney before entering into a Short Sale agreement.
Online Auctions - Recently I have found that some of the REOs that have not sold were placed on an online auction website. Do not be fooled in thinking that you can purchase these properties lower than what they were listed for by an agency. The agency still has the listing. The website starts with a minimum bid and the buyer is made to believe that they can purchase this property for this amount if there are no other bidders. Not so, there is a reserve amount that the lender expects to get for the property. This price is usually what the real estate agency has listed the property for in the multiple listing service. There is a 5–10% fee paid to the auction house in addition to the final bid price. These properties are all “As Is” sales without inspections or warranties.
For All Your Real Estate Needs:
Jean Powers CRS,ASP®,PMN,e-PRO
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Homes@JeanPowers.com
Sunday, August 10, 2008
Do You Know the Difference?
Buyers and Sellers! Do You Really Know the Difference?
In today’s San Francisco Bay Area market there are numerous properties for sale. I have been working with buyers and sellers in this challenging market. For the most part, prices ranging from $200,000 to $400,000 are being sold as Short Sale or REO properties. There are some being sold on Auction websites. Very few homes in the above price range are being sold by homeowners as what we call a Regular sale. Below are a summarized definition of these types of transactions.
Regular Sale - A sale where the seller has equity in the property. The buyer and seller will the
negotiate price and terms of the sale. The seller is required to provide Disclosures according
to California Law and statute. The transactions in this type of sale are generally much easier to come together as there are timelines in which the seller needs to abide by in the transaction. The seller is motivated to sell and move on in his/her life.
Short Sale - A short sale is the sale of real property where the fair market sale price is less than the loan(s) on the property. A short sale means the seller's lender is accepting a less than the existing loanson the property. Just because a property is listed with short “sale terms” does not mean the lenderwill accept your offer. These properties must be purchased “As Is” without any repairs or warranties. Some are in need of repair.The lender is already taking a 30% to 50% loss on the property. This is why a majority of the time, they will NOT negotiate on the price. In fact, in most cases in our area, there are multiple offers on most properties that are in good condition and the price will higher than the listed price.
If the property in encumbered with more than one loan, there could be a problem. All of the lenders must agree to a short sale or a contract can never be ratified. There is no guarantee the lender will
approve of the sale. My buyers have waited over 4 months for the lender to respond to their offer. We are still waiting for an acceptance! I have heard of circumstances where it took the lender over 9 months to respond and did not accept the offer. Statistics show over the last six months that only 20 % of these sales have closed. The homeowner should consult their CPA or Tax Attorney before entering into a Short Sale agreement.
REO/Bank Owned Property - REO is an acronym for a real estate owned property that has been
foreclosed on or repossessed by banks or lenders. These properties are also sold in “As Is” condition without any repairs or warranties. The seller (lender) is exempt by law from completing any disclosures. The agents involved in the transaction are not exempt from completing their visual inspection as per California’s disclosure laws.
Prior to these properties going on the market, the lender has had an agent submit a BPO (Broker’s Price Opinion). So, just as in a short sale transaction, the lender is already taking a 30% to 50% loss on the property. This is why a majority of the time, they will NOT negotiate on the price. In fact, in most cases in my area, there are multiple offers on most properties that are in good condition and the price will higher than the listed price. Again, some properties are in need of repair. The process for bank approval can be anywhere from 3 – 10 days.
Pre-Foreclosure Property - A property where the homeowner has fallen behind in their payments or when a Notice of Default (NOD) has been filed against the property by the lender. May not have much flexibility in negotiating. These properties may be regular sales or potential Short Sales. The homeowner should consult their CPA or Tax Attorney before entering into a Short Sale agreement.
Online Auctions - Recently I have found that some of the REOs that have not sold were placed on an online auction website. Do not be fooled in thinking that you can purchase these properties lower than what they were listed for by an agency. The agency still has the listing. The website starts with a minimum bid and the buyer is made to believe that they can purchase this property for this amount if there are no other bidders. Not so, there is a reserve amount that the lender expects to get for the property. This price is usually what the real estate agency has listed the property for in the multiple listing service. There is a 5–10% fee paid to the auction house in addition to the final bid price. These properties are all “As Is” sales without inspections or warranties.
Call me for more information and help!
In today’s San Francisco Bay Area market there are numerous properties for sale. I have been working with buyers and sellers in this challenging market. For the most part, prices ranging from $200,000 to $400,000 are being sold as Short Sale or REO properties. There are some being sold on Auction websites. Very few homes in the above price range are being sold by homeowners as what we call a Regular sale. Below are a summarized definition of these types of transactions.
Regular Sale - A sale where the seller has equity in the property. The buyer and seller will the
negotiate price and terms of the sale. The seller is required to provide Disclosures according
to California Law and statute. The transactions in this type of sale are generally much easier to come together as there are timelines in which the seller needs to abide by in the transaction. The seller is motivated to sell and move on in his/her life.
Short Sale - A short sale is the sale of real property where the fair market sale price is less than the loan(s) on the property. A short sale means the seller's lender is accepting a less than the existing loanson the property. Just because a property is listed with short “sale terms” does not mean the lenderwill accept your offer. These properties must be purchased “As Is” without any repairs or warranties. Some are in need of repair.The lender is already taking a 30% to 50% loss on the property. This is why a majority of the time, they will NOT negotiate on the price. In fact, in most cases in our area, there are multiple offers on most properties that are in good condition and the price will higher than the listed price.
If the property in encumbered with more than one loan, there could be a problem. All of the lenders must agree to a short sale or a contract can never be ratified. There is no guarantee the lender will
approve of the sale. My buyers have waited over 4 months for the lender to respond to their offer. We are still waiting for an acceptance! I have heard of circumstances where it took the lender over 9 months to respond and did not accept the offer. Statistics show over the last six months that only 20 % of these sales have closed. The homeowner should consult their CPA or Tax Attorney before entering into a Short Sale agreement.
REO/Bank Owned Property - REO is an acronym for a real estate owned property that has been
foreclosed on or repossessed by banks or lenders. These properties are also sold in “As Is” condition without any repairs or warranties. The seller (lender) is exempt by law from completing any disclosures. The agents involved in the transaction are not exempt from completing their visual inspection as per California’s disclosure laws.
Prior to these properties going on the market, the lender has had an agent submit a BPO (Broker’s Price Opinion). So, just as in a short sale transaction, the lender is already taking a 30% to 50% loss on the property. This is why a majority of the time, they will NOT negotiate on the price. In fact, in most cases in my area, there are multiple offers on most properties that are in good condition and the price will higher than the listed price. Again, some properties are in need of repair. The process for bank approval can be anywhere from 3 – 10 days.
Pre-Foreclosure Property - A property where the homeowner has fallen behind in their payments or when a Notice of Default (NOD) has been filed against the property by the lender. May not have much flexibility in negotiating. These properties may be regular sales or potential Short Sales. The homeowner should consult their CPA or Tax Attorney before entering into a Short Sale agreement.
Online Auctions - Recently I have found that some of the REOs that have not sold were placed on an online auction website. Do not be fooled in thinking that you can purchase these properties lower than what they were listed for by an agency. The agency still has the listing. The website starts with a minimum bid and the buyer is made to believe that they can purchase this property for this amount if there are no other bidders. Not so, there is a reserve amount that the lender expects to get for the property. This price is usually what the real estate agency has listed the property for in the multiple listing service. There is a 5–10% fee paid to the auction house in addition to the final bid price. These properties are all “As Is” sales without inspections or warranties.
Call me for more information and help!
Thursday, March 6, 2008
There are Pockets of Pain around the US but Not as if Most Americans are Losing Their Homes!
Sure, there are pockets of pain around the US, but it's not as if most Americans are losing their homes. More than 99% of homes aren't in foreclosure.
By Scott Burns
A recent list of year-end mortgage foreclosure rates in 100 top metropolitan areas drew a lot of attention. Released by RealtyTrac, a company that compiles data on home foreclosures, the list showed the number of foreclosure filings in each metro area, the percentage of homes being foreclosed and the percentage change from the previous year.
Though the report had some dismal news -- such as the nearly 4.9% foreclosure rate in the Stockton, Calif., area -- a close look at the data also provides some reassuring information. It tells me, for instance, that the foreclosure crisis is a regional problem, not a systemic one. It could become a systemic problem, of course, but we're a long way from that now.
This news will disappoint the gloom-and-doom crew and all those seeking the excitement of financial upheaval. But it may be time to temper our worry and take a closer look at some of the year-over-year foreclosure statistics:
Though the national rate of foreclosure increased by a whopping 79% between December 2006 and December 2007, the rate was still only 1.033%. Because about 30% of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1% of all homes were in foreclosure.
In the top 100 housing markets, the average foreclosure rate was somewhat higher -- 1.38% -- and it was up 78% over the previous year. But if you rank-ordered the list of the top 100 areas, only 34 had foreclosure rates above the group average. Fifty-one areas had rates of 1% or less.
Foreclosure rates actually fell in 14 of the 100 areas. More important, many of the areas with the highest increases in foreclosure rates were rising off rates that were tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288% -- to a rate of 0.682%. In other words, foreclosures there were virtually nonexistent the year before. Today they are still well below the national average. The same can be said for the Albany, N.Y., area (up 638% to 0.25%), the Baltimore area (up 544% to 0.73%) and the Providence, R.I., area (up 354% to 0.41%).
Another pattern emerges if you cross the foreclosure rates with the Office of Federal Housing Enterprise Oversight (OFHEO) index of home prices. It shows that the top 10 foreclosure areas in America are areas of extreme price change -- changes far from the national average of 46.92% over the past five years. (See the table below.)
Talk back: Do you think the foreclosure crisis is overblown?
Seven of the top 10 foreclosure areas had experienced major price spikes in the past five years. Three of the top 10 foreclosure areas had experienced price increases that were dramatically lower than the national average. That pattern continues when you examine the top 25 foreclosure areas.
A tale of two extremes:
Metro area-Foreclosure rate 12/07 -Year to year increase of foreclosures- 5-year home-appreciation rate
Detroit/Livonia/Dearborn, Mich. 4.92% 68.15% -0.92%
Stockton, Calif. 4.87% 271.3% 65.07%
Las Vegas/Paradise, Nev. 4.23% 169.11% 88.33%
Riverside/San Bernardino, Calif. 3.83% 186.14% 107.80%
Sacramento, Calif. 3.12% 272.54% 56.9%
Cleveland/Lorain/Elyria/Mentor, Ohio 2.97% 112.43% 9.36%
Bakersfield, Calif. 2.96% 244.82% 113.82%
Miami 2.72% 106.13% 114.98%
Denver/Aurora, Colo. 2.64% 27.19% 10.83%
Fort Lauderdale, Fla. 2.63% 110.05% 94.29%
National average 1.03% 79.21% 46.92%
Average of top 100 metro areas 1.38% 78.23% Not available
Sources: RealtyTrac, OFHEO
The seven areas with the top price appreciation for the past five years averaged a stunning 91.6% increase, nearly double the national average. The national average, in turn, was about triple the inflation rate for the period.
Small wonder the foreclosure rate is booming as well. Anyone who bought in the past few years with a 5% or 10% down payment has a good chance of being upside down as froth comes off the market. In those areas the problem is about irrational price spikes and the hazards they bring to homeownership.
Some would call this "a Cadillac problem" -- a great problem to have, like having more boats than you have water-skiers. Though 5% of the homeowners may be losing their homes, most of the other 95% probably feel significantly richer.
Smart Spending blog: When is it OK to walk away from your home?
How much richer? Try this. Suppose you paid three times your income for a house and it nearly doubled in value over five years. What does that mean? It means your net worth grew by nearly three years of income. Try achieving that with your 401(k) plan. Even if you bought halfway through the surge, your gain is likely to be well more than one year of income. However you cut it, the change compares quite favorably with working and saving.
Should you rent or buy?Owning your own home is an idea so popular that it's known as the American dream. But as prices fall and foreclosures rise, for many it's become a nightmare instead.
The three metro areas with low price appreciations are a different matter. Homeowners in Detroit have actually lost money on their homes over the past five years. That, in turn, has limited their ability to make up for income shortfalls by borrowing against home equity. Add a shrinking job market, and places such as Detroit are coping with a perpetual surplus of sellers over buyers.
One indication is the cost of renting a U-Haul truck. It recently cost $1,447 to rent a 26-foot truck to move from Detroit to Dallas but only $521 to rent the same truck to move from Dallas to Detroit. The real economic problem, for the most people, isn't the price-spike states. It's the deflation states.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com
Article is Compliments of California Association of Realtors
By Scott Burns
A recent list of year-end mortgage foreclosure rates in 100 top metropolitan areas drew a lot of attention. Released by RealtyTrac, a company that compiles data on home foreclosures, the list showed the number of foreclosure filings in each metro area, the percentage of homes being foreclosed and the percentage change from the previous year.
Though the report had some dismal news -- such as the nearly 4.9% foreclosure rate in the Stockton, Calif., area -- a close look at the data also provides some reassuring information. It tells me, for instance, that the foreclosure crisis is a regional problem, not a systemic one. It could become a systemic problem, of course, but we're a long way from that now.
This news will disappoint the gloom-and-doom crew and all those seeking the excitement of financial upheaval. But it may be time to temper our worry and take a closer look at some of the year-over-year foreclosure statistics:
Though the national rate of foreclosure increased by a whopping 79% between December 2006 and December 2007, the rate was still only 1.033%. Because about 30% of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1% of all homes were in foreclosure.
In the top 100 housing markets, the average foreclosure rate was somewhat higher -- 1.38% -- and it was up 78% over the previous year. But if you rank-ordered the list of the top 100 areas, only 34 had foreclosure rates above the group average. Fifty-one areas had rates of 1% or less.
Foreclosure rates actually fell in 14 of the 100 areas. More important, many of the areas with the highest increases in foreclosure rates were rising off rates that were tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288% -- to a rate of 0.682%. In other words, foreclosures there were virtually nonexistent the year before. Today they are still well below the national average. The same can be said for the Albany, N.Y., area (up 638% to 0.25%), the Baltimore area (up 544% to 0.73%) and the Providence, R.I., area (up 354% to 0.41%).
Another pattern emerges if you cross the foreclosure rates with the Office of Federal Housing Enterprise Oversight (OFHEO) index of home prices. It shows that the top 10 foreclosure areas in America are areas of extreme price change -- changes far from the national average of 46.92% over the past five years. (See the table below.)
Talk back: Do you think the foreclosure crisis is overblown?
Seven of the top 10 foreclosure areas had experienced major price spikes in the past five years. Three of the top 10 foreclosure areas had experienced price increases that were dramatically lower than the national average. That pattern continues when you examine the top 25 foreclosure areas.
A tale of two extremes:
Metro area-Foreclosure rate 12/07 -Year to year increase of foreclosures- 5-year home-appreciation rate
Detroit/Livonia/Dearborn, Mich. 4.92% 68.15% -0.92%
Stockton, Calif. 4.87% 271.3% 65.07%
Las Vegas/Paradise, Nev. 4.23% 169.11% 88.33%
Riverside/San Bernardino, Calif. 3.83% 186.14% 107.80%
Sacramento, Calif. 3.12% 272.54% 56.9%
Cleveland/Lorain/Elyria/Mentor, Ohio 2.97% 112.43% 9.36%
Bakersfield, Calif. 2.96% 244.82% 113.82%
Miami 2.72% 106.13% 114.98%
Denver/Aurora, Colo. 2.64% 27.19% 10.83%
Fort Lauderdale, Fla. 2.63% 110.05% 94.29%
National average 1.03% 79.21% 46.92%
Average of top 100 metro areas 1.38% 78.23% Not available
Sources: RealtyTrac, OFHEO
The seven areas with the top price appreciation for the past five years averaged a stunning 91.6% increase, nearly double the national average. The national average, in turn, was about triple the inflation rate for the period.
Small wonder the foreclosure rate is booming as well. Anyone who bought in the past few years with a 5% or 10% down payment has a good chance of being upside down as froth comes off the market. In those areas the problem is about irrational price spikes and the hazards they bring to homeownership.
Some would call this "a Cadillac problem" -- a great problem to have, like having more boats than you have water-skiers. Though 5% of the homeowners may be losing their homes, most of the other 95% probably feel significantly richer.
Smart Spending blog: When is it OK to walk away from your home?
How much richer? Try this. Suppose you paid three times your income for a house and it nearly doubled in value over five years. What does that mean? It means your net worth grew by nearly three years of income. Try achieving that with your 401(k) plan. Even if you bought halfway through the surge, your gain is likely to be well more than one year of income. However you cut it, the change compares quite favorably with working and saving.
Should you rent or buy?Owning your own home is an idea so popular that it's known as the American dream. But as prices fall and foreclosures rise, for many it's become a nightmare instead.
The three metro areas with low price appreciations are a different matter. Homeowners in Detroit have actually lost money on their homes over the past five years. That, in turn, has limited their ability to make up for income shortfalls by borrowing against home equity. Add a shrinking job market, and places such as Detroit are coping with a perpetual surplus of sellers over buyers.
One indication is the cost of renting a U-Haul truck. It recently cost $1,447 to rent a 26-foot truck to move from Detroit to Dallas but only $521 to rent the same truck to move from Dallas to Detroit. The real economic problem, for the most people, isn't the price-spike states. It's the deflation states.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com
Article is Compliments of California Association of Realtors
Tuesday, March 4, 2008
Short Sales versus Foreclosure and Deeds in Lieu
Short Sales and Deeds in Lieu After the Mortgage Forgiveness Debt Relief Act of 2007
by Richard A. Goodman
Hardly a day goes by without alarming new statistics concerning real estate sales, mortgages and foreclosures. To cite but one, in 2007, there were 84,375 trustee’s sales in California, an all time record. Since the rates on $385 billion of subprime and other nontraditional loans are expected to reset in 2008, nearly as much as in 2007, relief is not expected at any time soon.
Legislative and regulatory proposals abound to stem the tide of foreclosure. At least ten states (not including California) have enacted foreclosure related legislation within the past year. In December, the Federal Reserve proposed rules under the Home Ownership and Equity Protection Act (“HOEPA”) to address the problem. The House of Representatives recently passed the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.B. 3915) and similar legislation has been passed by the Senate (S.B. 2338).
The harsh reality is that, confronted with loan payments they no longer can afford, owners have only three alternatives short of bankruptcy: giving the lender a deed in lieu of foreclosure; by doing a short sale (i.e., a sale in which the lender agrees to accept less than a full payoff of its loan balance); or walking away from the property and allowing the lender to foreclose. The article will address the differences between these three alternatives and show how the recently enacted Mortgage Forgiveness Debt Relief Act of 2007 affects the tax consequences of each of them.
Major Issues and Considerations
Costs, Timing and Title: In California, a non-judicial foreclosure sale cannot occur until at least three months and twenty-one days after the recordation of a notice of default. If the owner brings a civil action to stop foreclosure or files for bankruptcy, the process can take far longer. In addition, a foreclosure sale costs the lender several thousand dollars, much more if there is litigation. Furthermore, the lender cannot even commence eviction proceedings until after the trustee’s sale. By contrast, if a lender accepts a deed in lieu of foreclosure or approves a short sale, the process can be completed within days rather than months, at minimal cost, and can be conditioned on the owner’s relinquishing possession.
Given the disadvantages of and obstacles to foreclosure, why do so many trustee’s sales occur? One reason is that owners frequently are too dispirited to avoid foreclosure or are unaware that they may be better off attempting to transfer the property through a “deeds in lieu” or a short sale. In addition, lenders frequently require owners to pay all escrow and closing costs as a condition of accepting a deed in lieu. Equally significant, however, is that only by completing a foreclosure sale can junior liens be wiped out. By accepting a “deed in lieu,” the lender takes title to the property subject to all junior liens and encumbrances!
Example 1: Mary Green’s home is worth $500,000 in the current market but is encumbered both by a $500,000 Deed of Trust in favor of Lender A and a $100,000 Deed of Trust in favor of Lender B and she is in default on both loans. She offers a deed in lieu of foreclosure to Lender A, but it declines.
If Lender A were to accept the deed in lieu, it would acquire the property subject to the $100,000 Deed of Trust while if it forecloses, the purchaser at the trustee’s sale will acquire the property free and clear of the $100,000 Deed of Trust.
This is not an insignificant problem since distressed property frequently is encumbered by several deeds of trust. Therefore, any lender willing to consider accepting a deed in lieu invariably requires the issuance of a new title policy to insure that there are no junior liens against the property.
A short sale, like a deed in lieu, can be completed quickly and cheaply. Furthermore, unlike a deed in lieu, the owner rarely is required to pay for escrow and closing costs. However, as with deeds in lieu, the existence of junior liens presents nearly insuperable problems. The reason is that a short sale requires the cooperation of all lenders. The senior lender has little reason to offer any of the proceeds to a junior lender, since all junior liens will be wiped out if the senior lender forecloses. Therefore, the senior lender typically requires that it receive all of the net proceeds of sale or that the junior lienholder be paid only a token amount. If the senior loan has been securitized, the loan securitization agreement may explicitly prohibit the loan servicer from negotiating in this situation. However, if the junior lienholder will receive nothing from a short sale, it has no incentive to cooperate.
Credit Impairment: A foreclosure, which is considered a "major derogatory," typically results in the lowering of one’s FICO credit score by 250-280 points. This can severely hamper someone's ability to get credit for many years. In addition, since many insurance companies now utilize credit histories to evaluate applicants, a foreclosure can later prevent an owner from obtaining life, health or disability insurance.
However, the effect of a major derogatory depends in part upon the circumstances under which it occurred. For example, if the borrower lost his property because of medical bills from a catastrophic illness, a subsequent lender may overlook even a major derogatory. Similarly, a borrower who has been candid and forthcoming with the lender as soon as financial problems occur will be viewed in a far more positive light than one who simply stops making payments, or worse, misleads the lender in any way. Potential lenders are most hostile to borrowers who have defrauded prior lenders or have intentionally delayed foreclosure proceedings in the past.
Although giving a deed in lieu may also have serious credit consequences, these frequently can be ameliorated. For example, an owner can negotiate for the lender, in a deed in lieu transaction to report the loan as “paid” or “settled” rather than as a foreclosure. In addition, loan applications do not always flag such transfers, although the application for conforming loans does request information on deeds in lieu as well as on prior foreclosures.
A short sale usually has significantly less effect than either a foreclosure or a deed in lieu, usually lowering one’s FICO score by 80-100 points. Furthermore, the owner can negotiate, as a condition of a short sale, that, in a short sale, the lender reports its loan as “paid” or “settled” to credit reporting bureaus. In addition, many applications for non-conforming loans do not ask about short sales at all.
Even if a new lender becomes aware that a loan applicant previously completed a short sale, the lender may not treat this as a major derogatory. Many lenders look favorably on a potential borrower who has taken affirmative steps to minimize the prior lender's loss.
Personal liability: As difficult as it is for an owner to face the loss of his entire equity, the possibility that the owner may have personal liability, in addition, is an even greater nightmare. In deciding how to dispose of a distressed property, the owner must understand whether there is any risk of personal liability and, if so, under what circumstances.
In California, "purchase money" loans are automatically non-recourse. A "purchase money" loan is a loan made by a seller to finance the purchase of property of any type or a loan made by a third party lender for the purchase of an owner-occupied, one-to-four unit property. The refinancing of a purchase money loan through the original lender is treated as a purchase money loan up to the amount of the original loan. Any loan other than a purchase money loan is a recourse loan unless it is specifically made non-recourse. This is typically accomplished by including a provision that the lender’s only recourse is to property and that the borrower has no personal liability on the note.
If a loan is non-recourse, either because it is a purchase money loan or because the note contains non-recourse language, the borrower need have no concern about potential personal liability.
But what if the loan is a recourse liability? The first thing to recognize is that even when lenders are entitled to pursue claims for personal liability, they rarely do so because of the expense, delay and uncertainty involved. In order to seek personal liability against the borrower, the lender must utilize a judicial foreclosure rather than a non-judicial foreclosure, which lengthens the foreclosure process by many months. After a decree of foreclosure is obtained, the court must hold a "fair value" hearing to determine if a deficiency judgment will be allowed. And even if a deficiency judgment is awarded, the lender may be unable to collect it. Potential buyers usually are scared away as the prior owner has a one-year right of redemption.
It is no wonder, therefore, most lenders prefer to conduct non-judicial foreclosures even though, by doing so, they must relinquish the possibility of obtaining deficiency judgments. In fact, the only situation in which an owner is likely to face personal liability is where the property is encumbered by a recourse junior lien. If the senior lender forecloses, the holder of the junior lien becomes a "sold out junior lienor." As such, that lender can sue directly on its note and seek personal liability against the borrower. Therefore, an owner whose property is encumbered by a recourse junior lien should take all reasonable steps to avoid a foreclosure of the senior lien. These steps might include agreeing to sign a new, relatively small note in favor of an existing lender in order to overcome the lender’s reluctance to agree to a short sale.
Lender Cooperation: If a short sale is contemplated, the lender should be consulted as soon as possible, as lenders typically require detailed financial information from the borrower as well as the listing and purchase documentation.
The most important factor influencing a lender's decision is whether the lender is likely to recoup more by foreclosing and selling the property as an REO or by accepting the short sale payoff. This decision is usually influenced by the following considerations:
• Has the property been fairly exposed to the market?
• Are the real estate brokers willing to accept a reduced commission?
• How quickly can the short sale be consummated and the loan payoff made?
• How much expense would the lender incur in a non-judicial foreclosure?
• Would the lender undertake significant toxic or other liability risks by
acquiring the property?
Tax Considerations: If a loan is non-recourse, the tax consequences of a short sale, a deed in lieu and a foreclosure are identical: the taxpayer is treated as having taxable gain to the extent that the loan balance exceeds the taxpayer's adjusted basis in the property. This gain generally is treated as capital gain.
Example 2: In 2004, John Doe purchases Blackacre, a vacation home, for $500,000, making a $50,000 down payment and obtaining a purchase money loan from Lender A for $450,000. In 2005, Doe refinances with a $600,000 loan from Lender A, which is secured by a non-recourse deed of trust. In 2006, Doe sells Blackacre for $550,000 in a short sale, paying all of the net proceeds to Lender A.
The $450,000 loan is non-recourse because it is used for the acquisition of Doe’s principal residence. The $600,000 is non-recourse by its terms. In 2006, Doe has a capital gain of $100,000 (i.e., $600,000-$500,000). Similarly, Doe would have had a $100,000 capital gain if he gave a deed in lieu to Lender A or if Lender A foreclosed.
Of course, if the property is the owner’s principal residence, all or part of the gain may be excluded.
Example 3: The facts are the same as in Example 2 except that Blackacre is Doe’s principal residence.
If Doe has owned and resided in Blackacre for at least two years as of the date of the short sale (or deed in lieu or foreclosure) and otherwise meets the requirements of IRC section 121, he will be entitled to an exclusion of up to $250,000 of gain if he is unmarried, $500,000 if he is married (the “Personal Residence Exclusion”).
Prior to 2007, the rule was that if the loan is recourse, an owner will have cancellation of debt income (“COD”) to the extent that the loan balance exceeds the fair market value of the property, regardless of how he disposes of the property. COD income is not eligible for the Personal Residence Exclusion and is taxable as ordinary income, not as capital gain!
Example 4: The facts are the same as in Example 3 except that the refinance in 2005 is through Lender B and is not specifically made non-recourse.
Because the purchase money loan is not refinanced through the original lender, the $600,000 loan is recourse. Therefore, on his 2006 tax return, Doe must report a capital gain of $50,000 (i.e., $550,000-500,000) unless the Personal Residence Exclusion applies. Doe also must report $50,000 of COD income (i.e., $600,000-$550,000).
In theory, the result was the same whether a recourse loan was cancelled through a foreclosure, the giving of a deed in lieu or a short sale. However, in either a foreclosure or a deed in lieu, the seller can contend, with the support of expert appraisals, that the fair market value of the property is at least as great as the loan balance. In a short sale, by contrast, the seller is stuck with the sale price as establishing the property’s fair market value.
The Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”), signed by President Bush on December 20, 2007, provides that certain debt cancellation is not treated as COD income. The Act applies only to “Qualified Personal Residence Indebtedness” (“QPRI”). QPRI is defined as indebtedness incurred in the acquisition of the taxpayer’s principal residence (not exceeding $2,000,000) or the refinancing of that loan up to its initial amount. Thus, a refinancing loan through a different lender is treated as QPRI even though it is a recourse loan. To the extent that COD income is excluded under the Act, the owner’s basis in the property is reduced. The Act applies to QPRI discharged after 2006 and before 2010.
Example 5: The facts are the same as in Example 4 except that the short sale occurs in 2007 rather than in 2006.
The $600,000 loan is QPRI under the Act. Therefore, Doe does not have COD income. However, he has a capital gain of $100,000 (i.e., $550,000-$450,000), unless the Personal Residence Exclusion Applies.
The computations become more complex if some but not all of an owner’s refinancing debt is treated as QPRI.
Example 6: Ray and Janet Burke purchase Greenacre, their personal residence, in 2006. The purchase price is $1,000,000, payable $100,000 down, with a $900,000 loan from Lender X. In 2007, they obtain a $1,100,000 refinancing loan from Lender Y. In 2008, they complete a short sale of Greenacre for $750,000.
Although the $1,100,000 loan is recourse, $900,000 of it is treated as QPRI and the $200,000 balance is treated as COD, which the Burkes must report in 2008 as ordinary income. Since the Burkes have been relieved of $150,000 of COD income (i.e., $900,000-$750,000), their basis in Greenacre is reduced by $150,000 to $850,000 (i.e., $1,000,000 basis-$150,000 basis reduction). Therefore, in addition to reporting, as ordinary income, the $200,000 COD income, the Burkes have a non-deductible loss of $100,000 (i.e., $750,000 sales price-$850,000 adjusted basis).
Conclusion
From the standpoint of cost, credit impairment and personal liability, a short sale usually is preferable to a deed in lieu and both generally are advantageous as compared with a foreclosure. However, if a property is encumbered by a junior lien, the holder of the senior lien is unlikely to approve either a deed in lieu or a short sale. If the junior lien is recourse, avoiding foreclosure becomes all the more important since foreclosure of the senior lien may well expose the owner to personal liability on the junior lien. From a tax standpoint, some owners will be relieved of COD income under the Act. However, in situations where the Act does not apply (such as vacation homes and investment property), the tax consequences of a short sale will continue to be harsher than those of either a deed in lieu or of a foreclosure.
Information is compliments of Placer Title Company
Looking for a California Realtor contact: Jean Powers 800 378-7300
by Richard A. Goodman
Hardly a day goes by without alarming new statistics concerning real estate sales, mortgages and foreclosures. To cite but one, in 2007, there were 84,375 trustee’s sales in California, an all time record. Since the rates on $385 billion of subprime and other nontraditional loans are expected to reset in 2008, nearly as much as in 2007, relief is not expected at any time soon.
Legislative and regulatory proposals abound to stem the tide of foreclosure. At least ten states (not including California) have enacted foreclosure related legislation within the past year. In December, the Federal Reserve proposed rules under the Home Ownership and Equity Protection Act (“HOEPA”) to address the problem. The House of Representatives recently passed the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.B. 3915) and similar legislation has been passed by the Senate (S.B. 2338).
The harsh reality is that, confronted with loan payments they no longer can afford, owners have only three alternatives short of bankruptcy: giving the lender a deed in lieu of foreclosure; by doing a short sale (i.e., a sale in which the lender agrees to accept less than a full payoff of its loan balance); or walking away from the property and allowing the lender to foreclose. The article will address the differences between these three alternatives and show how the recently enacted Mortgage Forgiveness Debt Relief Act of 2007 affects the tax consequences of each of them.
Major Issues and Considerations
Costs, Timing and Title: In California, a non-judicial foreclosure sale cannot occur until at least three months and twenty-one days after the recordation of a notice of default. If the owner brings a civil action to stop foreclosure or files for bankruptcy, the process can take far longer. In addition, a foreclosure sale costs the lender several thousand dollars, much more if there is litigation. Furthermore, the lender cannot even commence eviction proceedings until after the trustee’s sale. By contrast, if a lender accepts a deed in lieu of foreclosure or approves a short sale, the process can be completed within days rather than months, at minimal cost, and can be conditioned on the owner’s relinquishing possession.
Given the disadvantages of and obstacles to foreclosure, why do so many trustee’s sales occur? One reason is that owners frequently are too dispirited to avoid foreclosure or are unaware that they may be better off attempting to transfer the property through a “deeds in lieu” or a short sale. In addition, lenders frequently require owners to pay all escrow and closing costs as a condition of accepting a deed in lieu. Equally significant, however, is that only by completing a foreclosure sale can junior liens be wiped out. By accepting a “deed in lieu,” the lender takes title to the property subject to all junior liens and encumbrances!
Example 1: Mary Green’s home is worth $500,000 in the current market but is encumbered both by a $500,000 Deed of Trust in favor of Lender A and a $100,000 Deed of Trust in favor of Lender B and she is in default on both loans. She offers a deed in lieu of foreclosure to Lender A, but it declines.
If Lender A were to accept the deed in lieu, it would acquire the property subject to the $100,000 Deed of Trust while if it forecloses, the purchaser at the trustee’s sale will acquire the property free and clear of the $100,000 Deed of Trust.
This is not an insignificant problem since distressed property frequently is encumbered by several deeds of trust. Therefore, any lender willing to consider accepting a deed in lieu invariably requires the issuance of a new title policy to insure that there are no junior liens against the property.
A short sale, like a deed in lieu, can be completed quickly and cheaply. Furthermore, unlike a deed in lieu, the owner rarely is required to pay for escrow and closing costs. However, as with deeds in lieu, the existence of junior liens presents nearly insuperable problems. The reason is that a short sale requires the cooperation of all lenders. The senior lender has little reason to offer any of the proceeds to a junior lender, since all junior liens will be wiped out if the senior lender forecloses. Therefore, the senior lender typically requires that it receive all of the net proceeds of sale or that the junior lienholder be paid only a token amount. If the senior loan has been securitized, the loan securitization agreement may explicitly prohibit the loan servicer from negotiating in this situation. However, if the junior lienholder will receive nothing from a short sale, it has no incentive to cooperate.
Credit Impairment: A foreclosure, which is considered a "major derogatory," typically results in the lowering of one’s FICO credit score by 250-280 points. This can severely hamper someone's ability to get credit for many years. In addition, since many insurance companies now utilize credit histories to evaluate applicants, a foreclosure can later prevent an owner from obtaining life, health or disability insurance.
However, the effect of a major derogatory depends in part upon the circumstances under which it occurred. For example, if the borrower lost his property because of medical bills from a catastrophic illness, a subsequent lender may overlook even a major derogatory. Similarly, a borrower who has been candid and forthcoming with the lender as soon as financial problems occur will be viewed in a far more positive light than one who simply stops making payments, or worse, misleads the lender in any way. Potential lenders are most hostile to borrowers who have defrauded prior lenders or have intentionally delayed foreclosure proceedings in the past.
Although giving a deed in lieu may also have serious credit consequences, these frequently can be ameliorated. For example, an owner can negotiate for the lender, in a deed in lieu transaction to report the loan as “paid” or “settled” rather than as a foreclosure. In addition, loan applications do not always flag such transfers, although the application for conforming loans does request information on deeds in lieu as well as on prior foreclosures.
A short sale usually has significantly less effect than either a foreclosure or a deed in lieu, usually lowering one’s FICO score by 80-100 points. Furthermore, the owner can negotiate, as a condition of a short sale, that, in a short sale, the lender reports its loan as “paid” or “settled” to credit reporting bureaus. In addition, many applications for non-conforming loans do not ask about short sales at all.
Even if a new lender becomes aware that a loan applicant previously completed a short sale, the lender may not treat this as a major derogatory. Many lenders look favorably on a potential borrower who has taken affirmative steps to minimize the prior lender's loss.
Personal liability: As difficult as it is for an owner to face the loss of his entire equity, the possibility that the owner may have personal liability, in addition, is an even greater nightmare. In deciding how to dispose of a distressed property, the owner must understand whether there is any risk of personal liability and, if so, under what circumstances.
In California, "purchase money" loans are automatically non-recourse. A "purchase money" loan is a loan made by a seller to finance the purchase of property of any type or a loan made by a third party lender for the purchase of an owner-occupied, one-to-four unit property. The refinancing of a purchase money loan through the original lender is treated as a purchase money loan up to the amount of the original loan. Any loan other than a purchase money loan is a recourse loan unless it is specifically made non-recourse. This is typically accomplished by including a provision that the lender’s only recourse is to property and that the borrower has no personal liability on the note.
If a loan is non-recourse, either because it is a purchase money loan or because the note contains non-recourse language, the borrower need have no concern about potential personal liability.
But what if the loan is a recourse liability? The first thing to recognize is that even when lenders are entitled to pursue claims for personal liability, they rarely do so because of the expense, delay and uncertainty involved. In order to seek personal liability against the borrower, the lender must utilize a judicial foreclosure rather than a non-judicial foreclosure, which lengthens the foreclosure process by many months. After a decree of foreclosure is obtained, the court must hold a "fair value" hearing to determine if a deficiency judgment will be allowed. And even if a deficiency judgment is awarded, the lender may be unable to collect it. Potential buyers usually are scared away as the prior owner has a one-year right of redemption.
It is no wonder, therefore, most lenders prefer to conduct non-judicial foreclosures even though, by doing so, they must relinquish the possibility of obtaining deficiency judgments. In fact, the only situation in which an owner is likely to face personal liability is where the property is encumbered by a recourse junior lien. If the senior lender forecloses, the holder of the junior lien becomes a "sold out junior lienor." As such, that lender can sue directly on its note and seek personal liability against the borrower. Therefore, an owner whose property is encumbered by a recourse junior lien should take all reasonable steps to avoid a foreclosure of the senior lien. These steps might include agreeing to sign a new, relatively small note in favor of an existing lender in order to overcome the lender’s reluctance to agree to a short sale.
Lender Cooperation: If a short sale is contemplated, the lender should be consulted as soon as possible, as lenders typically require detailed financial information from the borrower as well as the listing and purchase documentation.
The most important factor influencing a lender's decision is whether the lender is likely to recoup more by foreclosing and selling the property as an REO or by accepting the short sale payoff. This decision is usually influenced by the following considerations:
• Has the property been fairly exposed to the market?
• Are the real estate brokers willing to accept a reduced commission?
• How quickly can the short sale be consummated and the loan payoff made?
• How much expense would the lender incur in a non-judicial foreclosure?
• Would the lender undertake significant toxic or other liability risks by
acquiring the property?
Tax Considerations: If a loan is non-recourse, the tax consequences of a short sale, a deed in lieu and a foreclosure are identical: the taxpayer is treated as having taxable gain to the extent that the loan balance exceeds the taxpayer's adjusted basis in the property. This gain generally is treated as capital gain.
Example 2: In 2004, John Doe purchases Blackacre, a vacation home, for $500,000, making a $50,000 down payment and obtaining a purchase money loan from Lender A for $450,000. In 2005, Doe refinances with a $600,000 loan from Lender A, which is secured by a non-recourse deed of trust. In 2006, Doe sells Blackacre for $550,000 in a short sale, paying all of the net proceeds to Lender A.
The $450,000 loan is non-recourse because it is used for the acquisition of Doe’s principal residence. The $600,000 is non-recourse by its terms. In 2006, Doe has a capital gain of $100,000 (i.e., $600,000-$500,000). Similarly, Doe would have had a $100,000 capital gain if he gave a deed in lieu to Lender A or if Lender A foreclosed.
Of course, if the property is the owner’s principal residence, all or part of the gain may be excluded.
Example 3: The facts are the same as in Example 2 except that Blackacre is Doe’s principal residence.
If Doe has owned and resided in Blackacre for at least two years as of the date of the short sale (or deed in lieu or foreclosure) and otherwise meets the requirements of IRC section 121, he will be entitled to an exclusion of up to $250,000 of gain if he is unmarried, $500,000 if he is married (the “Personal Residence Exclusion”).
Prior to 2007, the rule was that if the loan is recourse, an owner will have cancellation of debt income (“COD”) to the extent that the loan balance exceeds the fair market value of the property, regardless of how he disposes of the property. COD income is not eligible for the Personal Residence Exclusion and is taxable as ordinary income, not as capital gain!
Example 4: The facts are the same as in Example 3 except that the refinance in 2005 is through Lender B and is not specifically made non-recourse.
Because the purchase money loan is not refinanced through the original lender, the $600,000 loan is recourse. Therefore, on his 2006 tax return, Doe must report a capital gain of $50,000 (i.e., $550,000-500,000) unless the Personal Residence Exclusion applies. Doe also must report $50,000 of COD income (i.e., $600,000-$550,000).
In theory, the result was the same whether a recourse loan was cancelled through a foreclosure, the giving of a deed in lieu or a short sale. However, in either a foreclosure or a deed in lieu, the seller can contend, with the support of expert appraisals, that the fair market value of the property is at least as great as the loan balance. In a short sale, by contrast, the seller is stuck with the sale price as establishing the property’s fair market value.
The Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”), signed by President Bush on December 20, 2007, provides that certain debt cancellation is not treated as COD income. The Act applies only to “Qualified Personal Residence Indebtedness” (“QPRI”). QPRI is defined as indebtedness incurred in the acquisition of the taxpayer’s principal residence (not exceeding $2,000,000) or the refinancing of that loan up to its initial amount. Thus, a refinancing loan through a different lender is treated as QPRI even though it is a recourse loan. To the extent that COD income is excluded under the Act, the owner’s basis in the property is reduced. The Act applies to QPRI discharged after 2006 and before 2010.
Example 5: The facts are the same as in Example 4 except that the short sale occurs in 2007 rather than in 2006.
The $600,000 loan is QPRI under the Act. Therefore, Doe does not have COD income. However, he has a capital gain of $100,000 (i.e., $550,000-$450,000), unless the Personal Residence Exclusion Applies.
The computations become more complex if some but not all of an owner’s refinancing debt is treated as QPRI.
Example 6: Ray and Janet Burke purchase Greenacre, their personal residence, in 2006. The purchase price is $1,000,000, payable $100,000 down, with a $900,000 loan from Lender X. In 2007, they obtain a $1,100,000 refinancing loan from Lender Y. In 2008, they complete a short sale of Greenacre for $750,000.
Although the $1,100,000 loan is recourse, $900,000 of it is treated as QPRI and the $200,000 balance is treated as COD, which the Burkes must report in 2008 as ordinary income. Since the Burkes have been relieved of $150,000 of COD income (i.e., $900,000-$750,000), their basis in Greenacre is reduced by $150,000 to $850,000 (i.e., $1,000,000 basis-$150,000 basis reduction). Therefore, in addition to reporting, as ordinary income, the $200,000 COD income, the Burkes have a non-deductible loss of $100,000 (i.e., $750,000 sales price-$850,000 adjusted basis).
Conclusion
From the standpoint of cost, credit impairment and personal liability, a short sale usually is preferable to a deed in lieu and both generally are advantageous as compared with a foreclosure. However, if a property is encumbered by a junior lien, the holder of the senior lien is unlikely to approve either a deed in lieu or a short sale. If the junior lien is recourse, avoiding foreclosure becomes all the more important since foreclosure of the senior lien may well expose the owner to personal liability on the junior lien. From a tax standpoint, some owners will be relieved of COD income under the Act. However, in situations where the Act does not apply (such as vacation homes and investment property), the tax consequences of a short sale will continue to be harsher than those of either a deed in lieu or of a foreclosure.
Information is compliments of Placer Title Company
Looking for a California Realtor contact: Jean Powers 800 378-7300
Friday, February 29, 2008
More About Mortgage Debt Relief Act of 2007
TAX RELIEF FOR SHORT SALES
As many of you may know, one of the big impediments to short sales was the fact that the taxpayer would be charged with ordinary income for any debt which was forgiven by a lender in the short sale. So the taxpayer might get out from under the property but was left with a big income tax bill. The long awaited tax relief from this provision has now been signed into law. On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) which greatly reduces the negative tax implications of a short sale if the debt being forgiven meets certain criteria. Under this new law, there is a permanent exclusion for discharges of debt of up to $2,000,000 (which was forgiven by the lender after January 1, 2007) if the debt was secured by a principal residence and was incurred in the acquisition, construction or substantial improvement of the principal residence. Instead of including the amount forgiven as income, the basis of the individual's principal residence will be reduced by the amount excluded under the bill. This new law does not change existing law as it relates to forgiveness of a debt which was used for purposes other than acquisition, construction or improvement. So lines of credit and home equity loans which were used for paying off credit cards, buying second homes, boats, etc. will still be treated as ordinary income if forgiven by the lender.
Info compliments of Placer Title Company
As many of you may know, one of the big impediments to short sales was the fact that the taxpayer would be charged with ordinary income for any debt which was forgiven by a lender in the short sale. So the taxpayer might get out from under the property but was left with a big income tax bill. The long awaited tax relief from this provision has now been signed into law. On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) which greatly reduces the negative tax implications of a short sale if the debt being forgiven meets certain criteria. Under this new law, there is a permanent exclusion for discharges of debt of up to $2,000,000 (which was forgiven by the lender after January 1, 2007) if the debt was secured by a principal residence and was incurred in the acquisition, construction or substantial improvement of the principal residence. Instead of including the amount forgiven as income, the basis of the individual's principal residence will be reduced by the amount excluded under the bill. This new law does not change existing law as it relates to forgiveness of a debt which was used for purposes other than acquisition, construction or improvement. So lines of credit and home equity loans which were used for paying off credit cards, buying second homes, boats, etc. will still be treated as ordinary income if forgiven by the lender.
Info compliments of Placer Title Company
Tuesday, February 26, 2008
IRS Will Send Stimulus Payments Automatically!
IRS Will Send Stimulus Payments Automatically Starting in May;Eligible Taxpayers Must File a 2007 Tax Return to Receive Rebate!
IR-2008-18, Feb. 13, 2008
WASHINGTON - The Internal Revenue Service today advised taxpayers that in most cases they will not have to do anything extra this year to get the economic stimulus payments beginning in May.
"If you are eligible for a payment, all you have to do is file a 2007 tax return and the IRS will do the rest," said Acting IRS Commissioner Linda Stiff.
The IRS will use information on the 2007 tax return filed by the taxpayer to determine eligibility and calculate the amount of the stimulus payments.
The IRS will begin sending taxpayers their payments in early May after the current tax season concludes. Payments to more than 130 million taxpayers will continue over several weeks during the spring and summer. A payment schedule for taxpayers will be announced in the near future.
Stimulus payments will be direct deposited for taxpayers selecting that option when filing their 2007 tax returns. Taxpayers who have already filed with direct deposit won't need to do anything else to receive the stimulus payment. For taxpayers who haven't filed their 2007 returns yet, the IRS reminds them that direct deposit is the fastest way to get both regular refunds and stimulus payments.
Most taxpayers just need to file a 2007 tax return as usual. No other action, extra form or call is necessary. This Web site will be the best information source for all updates and taxpayer questions.
In most cases, the payment will equal the amount of tax liability on the tax return, with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return).
The law also allows for payments for select taxpayers who have no tax liability, such as low-income workers or those who receive Social Security benefits or veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans Affairs in 2007. These taxpayers will be eligible to receive a payment of $300 ($600 on a joint return) if they had at least $3,000 of qualifying income.
Qualifying income includes Social Security benefits, certain Railroad Retirement benefits, certain veterans' benefits and earned income, such as income from wages, salaries, tips and self-employment. While these people may not be normally required to file a tax return because they do not meet the filing requirement, the IRS emphasizes they must file a 2007 return in order to receive a payment.
Recipients of Social Security, certain Railroad Retirement and certain veterans' benefits should report their 2007 benefits on Line 14a of Form 1040A or Line 20a of Form 1040. Taxpayers who already have filed but failed to report these benefits can file an amended return by using Form 1040X. The IRS is working with the Social Security Administration and Department of Veterans Affairs to ensure that recipients are aware of this issue.
"Some people receiving Social Security and veterans' benefits may not realize they will need to file a tax return to get the stimulus payment," Stiff said. "To reach these people, the IRS and Treasury will work closely with the Department of Veterans Affairs, the Social Security Administration and key beneficiary groups on outreach efforts."
Eligible taxpayers who qualify for a payment will receive an additional $300 for each child who qualifies for the child tax credit.
Payments to higher income taxpayers will be reduced by 5 percent of the amount of adjusted gross income above $75,000 for individuals and $150,000 for those filing jointly.
Taxpayers must have valid Social Security Numbers to qualify for the stimulus payment. If married filing jointly, both taxpayers must have a valid Social Security Number. And, children must have valid Social Security Numbers to be eligible as qualifying children.
Taxpayers who file their tax returns using an Individual Taxpayer Identification Number issued by the IRS or any number issued by the IRS are ineligible. Also ineligible are individuals who can be claimed as dependents on someone else's return, or taxpayers who file Form 1040-NR, 1040-PR or 1040-SS.
To accommodate taxpayers who file tax returns later in the year, the IRS will continue sending payments until December 31, 2008. The IRS also cautions taxpayers that if they file their 2007 tax return and then move their residence that they should file a change of address card with the U.S. Postal Service.
The IRS will mail two informational notices to taxpayers advising them of the stimulus payments. However, taxpayers should be alert for tax rebate scams such as telephone calls or e-mails claiming to be from the IRS and asking for sensitive financial information. The IRS will not call or e-mail taxpayers about these payments nor will it ask for financial information. Scam e-mails and information about scam calls should be forwarded to phishing@irs.gov.
This information was taken from the IRS website
IR-2008-18, Feb. 13, 2008
WASHINGTON - The Internal Revenue Service today advised taxpayers that in most cases they will not have to do anything extra this year to get the economic stimulus payments beginning in May.
"If you are eligible for a payment, all you have to do is file a 2007 tax return and the IRS will do the rest," said Acting IRS Commissioner Linda Stiff.
The IRS will use information on the 2007 tax return filed by the taxpayer to determine eligibility and calculate the amount of the stimulus payments.
The IRS will begin sending taxpayers their payments in early May after the current tax season concludes. Payments to more than 130 million taxpayers will continue over several weeks during the spring and summer. A payment schedule for taxpayers will be announced in the near future.
Stimulus payments will be direct deposited for taxpayers selecting that option when filing their 2007 tax returns. Taxpayers who have already filed with direct deposit won't need to do anything else to receive the stimulus payment. For taxpayers who haven't filed their 2007 returns yet, the IRS reminds them that direct deposit is the fastest way to get both regular refunds and stimulus payments.
Most taxpayers just need to file a 2007 tax return as usual. No other action, extra form or call is necessary. This Web site will be the best information source for all updates and taxpayer questions.
In most cases, the payment will equal the amount of tax liability on the tax return, with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return).
The law also allows for payments for select taxpayers who have no tax liability, such as low-income workers or those who receive Social Security benefits or veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans Affairs in 2007. These taxpayers will be eligible to receive a payment of $300 ($600 on a joint return) if they had at least $3,000 of qualifying income.
Qualifying income includes Social Security benefits, certain Railroad Retirement benefits, certain veterans' benefits and earned income, such as income from wages, salaries, tips and self-employment. While these people may not be normally required to file a tax return because they do not meet the filing requirement, the IRS emphasizes they must file a 2007 return in order to receive a payment.
Recipients of Social Security, certain Railroad Retirement and certain veterans' benefits should report their 2007 benefits on Line 14a of Form 1040A or Line 20a of Form 1040. Taxpayers who already have filed but failed to report these benefits can file an amended return by using Form 1040X. The IRS is working with the Social Security Administration and Department of Veterans Affairs to ensure that recipients are aware of this issue.
"Some people receiving Social Security and veterans' benefits may not realize they will need to file a tax return to get the stimulus payment," Stiff said. "To reach these people, the IRS and Treasury will work closely with the Department of Veterans Affairs, the Social Security Administration and key beneficiary groups on outreach efforts."
Eligible taxpayers who qualify for a payment will receive an additional $300 for each child who qualifies for the child tax credit.
Payments to higher income taxpayers will be reduced by 5 percent of the amount of adjusted gross income above $75,000 for individuals and $150,000 for those filing jointly.
Taxpayers must have valid Social Security Numbers to qualify for the stimulus payment. If married filing jointly, both taxpayers must have a valid Social Security Number. And, children must have valid Social Security Numbers to be eligible as qualifying children.
Taxpayers who file their tax returns using an Individual Taxpayer Identification Number issued by the IRS or any number issued by the IRS are ineligible. Also ineligible are individuals who can be claimed as dependents on someone else's return, or taxpayers who file Form 1040-NR, 1040-PR or 1040-SS.
To accommodate taxpayers who file tax returns later in the year, the IRS will continue sending payments until December 31, 2008. The IRS also cautions taxpayers that if they file their 2007 tax return and then move their residence that they should file a change of address card with the U.S. Postal Service.
The IRS will mail two informational notices to taxpayers advising them of the stimulus payments. However, taxpayers should be alert for tax rebate scams such as telephone calls or e-mails claiming to be from the IRS and asking for sensitive financial information. The IRS will not call or e-mail taxpayers about these payments nor will it ask for financial information. Scam e-mails and information about scam calls should be forwarded to phishing@irs.gov.
This information was taken from the IRS website
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