A History lesson: Last time we had all this financial "doom and gloom" in Texas, markets tightened up and we had interest rates hovering around 12% to 13%!
Today, we are experiencing the lowest rates we’ve seen in over 20 years…and the largest amount of inventory on the market! What’s wrong with this picture? Why, it’s perfect for us! And it is pretty logical that these rates will not stay depressed like this forever.
But WAIT...??? Nothing happens until we are able to convince those buyers that waiting doesn’t really make sense. Reminding them that low rates rarely tend to stay down, you can create a believable sense of urgency that our buyers can truly identify with.
Let’s say a buyer says, “I think prices may fall another 10%” (which we doubt). But, for the sake of a good example, they should know this:
* Today’s sales price: $225,000
* 90% LTV @ 6.25% -30yr = $1,247 P&I
Prices might fall 10% but what happens if the interest rate goes up 1% in the process?
* Lower Sales Price $202,500
* 90% LTV @ 7.25% - 30 yr = $1,243 P&I
In this case, the buyer may get a lower price, but the change in the interest rate makes it basically irrelevant. Even though the sales price is lower, the payment remains about the same - because of the time spent waiting. Buyers simply need to be educated...and, that's why I'M here! Helping buyers understand what happens "while they are waiting" might create a sense of urgency instead of the "fear of buying"! Ask yourself, what is more likely to happen? Even if prices fall a bit, due to the principle of amortization, if the rates go up, the buyer loses anyway!! BUY NOW!! There's no better time then the present!
The message is obvious: WAITING MAKES NO SENSE!
Friday, November 14, 2008
Wednesday, November 12, 2008
Mortgage Forgiveness Debt Relief Act
Nov 4, 2008
by Chris Kaucnik, Director of Marketing for Home Warranty of America and Michael J. Greenen, CPA, CFP
No matter the circumstances, there's a lot of stress a homeowner goes through in a foreclosure or a short sale. The loss of the home itself and any equity can add a lot of anguish to a situation that may be beyond the control of the homeowner from job loss or illness to changing market conditions.
Brief Background
Prior to December of 2007 if a homeowner lost his house due to a bank foreclosure, and the bank forgave any difference between the price it was sold for and what was owed, the homeowner would owe additional income tax on that portion. Yes, it's hard to believe, but true.
Let's say the homeowner owed $300,000 on the mortgage, but the foreclosure sale only brought in $200,000. Then the bank forgave the $100,000 shortfall. The homeowner would have been liable for the income tax on the $100,000 debt forgiveness from the bank.
The IRS considered this money effectively paid to the homeowner, and it would be taxable in their top bracket. The special reporting form 1099-C depicts the explanation of this exactly - the "C" stands for cancellation of debt and the law said this was taxable income.
Now, because of the unique stresses in the housing industry lately and on our whole economy, last December Congress stepped in to provide temporary relief in the form of forgiving this debt, but only for the 2007, 2008 and 2009 tax years. After that, the old rule applies again.
But Wait, There's More
To be eligible for this tax relief, the mortgage must be for your principal residence. It does NOT apply to vacation, investment or other properties. And no more than $2,000,000 of forgiven debt can be excluded from taxable income. Well, most of us would fall below that threshold anyway.
Home Equity Loans
Another very important detail in this temporary tax break is if part of the forgiven debt was a home equity loan and used for purposes other than to build, buy or substantially improve the property, that portion is STILL taxable. In other words, home equity loans used for vacations aren't included.
Short Sales
Now, what happens in a short sale? In brief, this can occur when a borrower is behind on the mortgage payments and the lender agrees he can sell his house for less than what is owed on the mortgage. But all proceeds must be turned over to the bank.
The portion of the mortgage the bank forgives, PLUS any commission expenses or other selling costs ARE taxable income if this debt is canceled. Yes, even the commission and selling expenses count. No free rides. But, again for taxable years 2007, 2008 and 2009 Congress has provided the same temporary relief in this short sale situation.
A short sale is not always the answer. First, the bank must agree to it and generally will weigh the cost of the short sale against the cost of a foreclosure.
Other Scenarios
There are situations where the bank sees a homeowner with a great credit history, but who is having trouble making mortgage payments for a legitimate reason. If the bank agrees to reduce the mortgage by say 25%, this is again considered a cancellation of debt and would have been subject to income tax. But for the above stated tax periods, this new, temporary tax provision forgives this income.
Why is there always a catch! If the homeowner does take advantage of debt cancellation by the lender, they are required, when they do eventually sell, to reduce the basis (original price of the home) equal to the amount forgiven.
What does that mean? A homeowner can now receive a $250,000 (single) and $500,000 (married) capital gain exclusion on the sale of their primary residence.
Here's an example where the home was originally purchased for $300,000, there was a $100,000 debt cancellation, and a married couple is selling the home:
Home Sells for $750,000
Less Original Basis* ($200,000)
Less Capital Gain Exclusion ($500,000)
Gain on Sale $50,000
Capital Gains Tax at 15% $7500 (Owed by homeowner)
*This is the original basis or price of home $300,000, less the $100,000 debt cancellation from the lender.
While $7500 capital gains tax is surely a lot less than the $100,000 cancelled by the lender, the homeowner may not think of this or be aware it could happen down the road, perhaps just prior to retirement. And capital gains taxes are always subject to change.
It gets a bit more complicated when one spouse dies and the other is left to sell the home. Consult your tax accountant or attorney for planning purposes.
Mortgage Insurance Affected
It is important to also note that this act extended mortgage insurance as an itemized deduction all the way through 2010. Yes, there's a restriction. The mortgage contract has to be entered into between December 31, 2006 and January 1, 2011.
Housing Market Stabilization
All of this is being done in an effort to stabilize our housing market and should help many homeowners in these situations. Always consult with a professional tax accountant or attorney to be sure you are taking the right road to solving your mortgage crisis and will be covered under this new tax relief act.
Michael J. Greenen is a Certified Public Accountant and Certified Financial Planner located outside of Chicago, IL. For the past decade, his firm has been working with small to medium businesses as well as high net worth individuals who need comprehensive tax and financial planning. Michael and his staff take pride in their commitment to helping their clients achieve their financial goals. Contact: Michael@GreenenCPA.com or at 630.365.1647.
Home Warranty of America, Inc. of Buffalo Grove, IL, was founded in 1996 to provide home warranty coverage for houses, town homes, and condominiums. The Company has experienced remarkable growth to become a leading supplier of home warranties across the United States. More information is available at www.hwahomewarranty.com.
by Chris Kaucnik, Director of Marketing for Home Warranty of America and Michael J. Greenen, CPA, CFP
No matter the circumstances, there's a lot of stress a homeowner goes through in a foreclosure or a short sale. The loss of the home itself and any equity can add a lot of anguish to a situation that may be beyond the control of the homeowner from job loss or illness to changing market conditions.
Brief Background
Prior to December of 2007 if a homeowner lost his house due to a bank foreclosure, and the bank forgave any difference between the price it was sold for and what was owed, the homeowner would owe additional income tax on that portion. Yes, it's hard to believe, but true.
Let's say the homeowner owed $300,000 on the mortgage, but the foreclosure sale only brought in $200,000. Then the bank forgave the $100,000 shortfall. The homeowner would have been liable for the income tax on the $100,000 debt forgiveness from the bank.
The IRS considered this money effectively paid to the homeowner, and it would be taxable in their top bracket. The special reporting form 1099-C depicts the explanation of this exactly - the "C" stands for cancellation of debt and the law said this was taxable income.
Now, because of the unique stresses in the housing industry lately and on our whole economy, last December Congress stepped in to provide temporary relief in the form of forgiving this debt, but only for the 2007, 2008 and 2009 tax years. After that, the old rule applies again.
But Wait, There's More
To be eligible for this tax relief, the mortgage must be for your principal residence. It does NOT apply to vacation, investment or other properties. And no more than $2,000,000 of forgiven debt can be excluded from taxable income. Well, most of us would fall below that threshold anyway.
Home Equity Loans
Another very important detail in this temporary tax break is if part of the forgiven debt was a home equity loan and used for purposes other than to build, buy or substantially improve the property, that portion is STILL taxable. In other words, home equity loans used for vacations aren't included.
Short Sales
Now, what happens in a short sale? In brief, this can occur when a borrower is behind on the mortgage payments and the lender agrees he can sell his house for less than what is owed on the mortgage. But all proceeds must be turned over to the bank.
The portion of the mortgage the bank forgives, PLUS any commission expenses or other selling costs ARE taxable income if this debt is canceled. Yes, even the commission and selling expenses count. No free rides. But, again for taxable years 2007, 2008 and 2009 Congress has provided the same temporary relief in this short sale situation.
A short sale is not always the answer. First, the bank must agree to it and generally will weigh the cost of the short sale against the cost of a foreclosure.
Other Scenarios
There are situations where the bank sees a homeowner with a great credit history, but who is having trouble making mortgage payments for a legitimate reason. If the bank agrees to reduce the mortgage by say 25%, this is again considered a cancellation of debt and would have been subject to income tax. But for the above stated tax periods, this new, temporary tax provision forgives this income.
Why is there always a catch! If the homeowner does take advantage of debt cancellation by the lender, they are required, when they do eventually sell, to reduce the basis (original price of the home) equal to the amount forgiven.
What does that mean? A homeowner can now receive a $250,000 (single) and $500,000 (married) capital gain exclusion on the sale of their primary residence.
Here's an example where the home was originally purchased for $300,000, there was a $100,000 debt cancellation, and a married couple is selling the home:
Home Sells for $750,000
Less Original Basis* ($200,000)
Less Capital Gain Exclusion ($500,000)
Gain on Sale $50,000
Capital Gains Tax at 15% $7500 (Owed by homeowner)
*This is the original basis or price of home $300,000, less the $100,000 debt cancellation from the lender.
While $7500 capital gains tax is surely a lot less than the $100,000 cancelled by the lender, the homeowner may not think of this or be aware it could happen down the road, perhaps just prior to retirement. And capital gains taxes are always subject to change.
It gets a bit more complicated when one spouse dies and the other is left to sell the home. Consult your tax accountant or attorney for planning purposes.
Mortgage Insurance Affected
It is important to also note that this act extended mortgage insurance as an itemized deduction all the way through 2010. Yes, there's a restriction. The mortgage contract has to be entered into between December 31, 2006 and January 1, 2011.
Housing Market Stabilization
All of this is being done in an effort to stabilize our housing market and should help many homeowners in these situations. Always consult with a professional tax accountant or attorney to be sure you are taking the right road to solving your mortgage crisis and will be covered under this new tax relief act.
Michael J. Greenen is a Certified Public Accountant and Certified Financial Planner located outside of Chicago, IL. For the past decade, his firm has been working with small to medium businesses as well as high net worth individuals who need comprehensive tax and financial planning. Michael and his staff take pride in their commitment to helping their clients achieve their financial goals. Contact: Michael@GreenenCPA.com or at 630.365.1647.
Home Warranty of America, Inc. of Buffalo Grove, IL, was founded in 1996 to provide home warranty coverage for houses, town homes, and condominiums. The Company has experienced remarkable growth to become a leading supplier of home warranties across the United States. More information is available at www.hwahomewarranty.com.
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