CALIFORNIA REAL ESTATE PRIMER – 1031 Tax-Deferred Exchanges

036 (572 x 428)

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

What Is A 1031 Tax-Deferred Exchange?

“1031” refers to Internal Revenue Code section 1031 which details a method of transferring the equity from one real property into one or more like-kind properties without incurring the tax burden associated with the gain on the investment.

A common misconception is that a 1031 trade is tax free, but this isn’t true. 1031 exchanges are not tax exempt, they are tax deferred. Even so, if performed correctly 1031 exchanges can provide considerable benefits by allowing taxes to be paid by tomorrow’s dollars instead of today’s dollars. (Tomorrow’s dollars are usually cheaper than today’s dollars.)

A properly executed 1031 exchange can result is significant savings in terms of today’s dollars. For example, in a given exchange the potential tax burden which might be deferred is seen below: (note: the rates cited are subject to change)

15.0 % Long Term Federal Capital Gains

+ 9.2 % California State Tax

= 24.2 % Tax Deferral

Plus 25 % Federal Depreciation Recapture, and potential 26 % Federal Alternative Minimum Tax

 

Types of 1031 Exchanges

There are a number of different types of 1031 exchanges which are recognized:

(1) Simultaneous Exchange – When an exchange between the relinquished property and replacement property occurs concurrently.

(2) Delayed (“Starker”) Exchange – The delayed exchange is the most common of all exchanges. Once a the relinquished property is sold, the delayed exchange allows a property owner a set deadline to identify and close on the replacement property while maintaining the ability to continue deferring any capital gains. Just the calculation of the correct deadline can be a complex matter involving not only the deadlines stated in the code, but also a calculation based on the taxpayer’s filing date for the tax year in which the relinquished property is transferred.

(3) Build-To-Suit – This exchange allows the exchanger to construct a new replacement property or renovate an existing property. (Note: Renovations after the owner takes title are considered “goods and services” and will taxed as boot.)

(4) Reverse Exchange – The opposite of the delayed (Starker) exchange, a reverse exchange occurs when an investor identifies and closes on a replacement property prior to the sale of the relinquished property.

 

Who Can Effectuate A 1031 Exchange

A third party must act as a qualified intermediary to accommodate the exchange. (The qualified intermediary is known as an Accommodator or Facilitator.) Since the facilitator may be holding significant funds on your behalf. It behooves you to inquire about such things as errors and omissions insurance, bonding, and interest etc. Remember, you’re looking for safety, as well as, experience. It’s not unreasonable to ask for references from past clients.

 

1031 Exchange Requirements

(1) “Like-Kind” Exchange – To be considered “like-kind” the relinquished property and the replacement property must both comply with the definition of investment property. The general rule is that real estate is “like-kind” to all other real estate. Provided like-kind property is initially acquired and held for either business or investment purposes. (Held for productive use in a trade or business, or property that is held for investment.)

Examples of “like-kind” exchanges include:

Raw land for commercial property

Residential rental for tenants in common interest

Single-family rental for multi-family rental

(Note: The qualified intermediary or facilitator and/or your accountant or tax attorney must be consulted to be sure the exchange will qualify.  For example, a partnership may exchange property for other property of “like-Kind”, but IRC section 1031(a)(2)(D) specifically prohibits exchanges of partnership interests.  The reason is partnership interests are considered to by personal property which isn’t “like-kind” property with real estate. )

(2) The replacement property or properties must be of equal or greater value than the relinquished property.

(3) The Exchanger must reinvest all net equity in the replacement properties.

(4) The exchange must result in equal or greater debt.

(5) Retain a Qualified Intermediary (Facilitator) – To effect a 1031 exchange and defer the capital gains liability due, you must not take possession of the proceeds from a sale.

(6) 45-Day Rule – The exchanger must identify the potential replacement property or properties within the first 45 days of the 180 exchange period. Once you have closed your relinquished property and placed your proceeds with your Accommodator, the 45 day clock starts ticking to identify a replacement property.

(7) 180-Day Rule – The Exchanger must acquire the replacement property or properties either within 180 days or the date when the Exchanger must file the tax return (including extensions) for the year of the transfer of the relinquished property, whichever occurs first.

You may choose among 3 types of identifications:

3 Property Rule (most common): The Exchanger may identify up to three properties of any value.

200% Rule: The Exchanger may identify more than properties if the total fair market value of what is identified does not exceed 200% of the fair market value of the relinquished property.

95% Exception: If the Exchanger identifies properties in excess of Rule 1 and Rule 2, then the Exchanger must acquire 95% of the value of all properties identified.

Important Notes:

There is no extension of deadlines for Saturdays, Sundays or Holidays.

The time limits begin to run on the day the Exchanger transfers the relinquished property to the buyer.

The “Date of Transfer” will be the date of recording or transfer of the benefits and burdens of ownership, whichever occurs first.

As you can see, sections 1031 Tax Deferred Exchanges are not for the faint hearted. Not only are the rules less than clear they are subject to change. So, remember, always consult the appropriate, legal, tax and financial advisors and retain the services of an experienced facilitator.

This article is intended as an overview only, and should not be construed as legal, financial, or tax advice. Consult your legal and/or tax professional.

 

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CALIFORNIA REAL ESTATE PRIMER – Transfer Your Property Tax Base Year To Your New Home

036 (572 x 428)

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

 

Transfer Your Property Tax Base Year Value New Home

Have you ever thought to yourself, “Gee it would be nice to sell the old house and get into a nice new one, but if I do I’ll have to pay property tax on the new purchase price.” Well, goods news. That may not necessarily be the case. If you meet the qualifications, California Propositions 13, 60 and 90 might just solve your dilemma.

 Proposition 13

Under Proposition 13 the value of a home, for property tax purposes, is reassessed to the new market level (the new purchase price) whenever a change in ownership occurs. This usually results in higher property taxes. (It is possible to get an informal assessment review and reduce your property tax basis, but that’s another story.)

 Proposition 60

Proposition 60 allows a transfer of base-year value of the principal residence sold of a senior citizen (55 and older) to a replacement dwelling of equal or lesser value within the same county.

Proposition 90

Proposition 90, enacted in California in November of 1988, provides an avenue for property tax relief to owners 55, and older, who sell their principal residence and purchase a replacement home of equal or lesser value in another county.

The County Assessors will require a copy of the tax bill from the other county and a copy of the applicant’s birth certificate to be included with the application. Also include a copy of the grant deed for the new purchase and a copy of the closing statements of both sale and purchase.

SUMMARY OF ELIGIBILITY REQUIREMENTS

The seller of the original residence, or a spouse residing with the seller, must be at least 55 years of age, as of the date that the original property is transferred.

The replacement property must be of equal or lesser “current market value” than the original.

The tax base year of the original property cannot be transferred to the replacement dwelling until the original property is sold.

The replacement property must be purchased or newly constructed within two years (before or after) of the sale of the original property.

The owner must file an application within three years following the purchase date or new construction completion date of the replacement property.

This is a one-time only filing. Proposition 60/90 relief cannot be granted if the claimant, or spouse, was granted relief in the past.

Proposition 60/90 relief includes, but is not limited to: single family residences, condominiums, units in planned unit developments, cooperative housing, corporation units or lots, community apartment units, mobile homes subject to local real property tax, and owner’s living premises which are a portion of a larger structure.

The taxpayer is not eligible for the tax relief until they actually own AND occupy and the replacement dwelling as their principle residence.

It is essential that you call the co-operating County in question, to verify that they are currently accepting the value transfer under Proposition 90, and what their requirements are. If you have any questions, the property tax office in Sacramento for all counties in California may be reached at (916) 445-4982.

Alameda (415) 272-3755 Ventura (805) 654-2181 Santa Clara (408) 299-4347 Kern (805) 861-2311 Modoc (916) 233-3939 San Diego (619) 531-5507 Los Angeles (213) 974-3101 Orange (714) 834-2746 San Mateo (415) 363-4500

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CALIFORNIA REAL ESTATE PRIMER – The California Foreclosure Consultant Act

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

 

The California Foreclosure Consultant Act

If you are, or are about to be, in default on your home mortgage, and are approached by an individual or company that is offering to, in some fashion, save your home from foreclosure. you should consult with an attorney, or at least read the law and do your research, before you sign a contract or pay any money.

California Civil Code sections 2945 through 2945.11 contain a law called the “California Foreclosure Consultant Act.” This law outlines the responsibilities of individuals or companies who fall within the legislature’s definition of a “Foreclosure Consultant.” (Civil Code Section 2945.1(a))

If a Notice of Default has been recorded against your home, this law will prevent a foreclosure consultant (even a real estate licensee) from charging an advance fee (in any form) to help you work out a loan modification or in some other fashion avoid foreclosure. (Civil Code Section 2945.4)  Attorneys licensed in California rendering services in the course of their legal practice are exempt from this law.  (Civil Code Section 2945.1(b))

If a Notice of Default hasn’t been recorded on your home it may be permissible for a California real estate broker to assist you in obtaining a loan modification. Although in this narrow circumstance the broker can ask for advance payment they must provide you with a written contract which satisfies certain specific statutory requirements.

Moreover, the contract must have been previously submitted to the California Department of Real Estate for review and received a “no objection letter” regarding its use. Real estate brokers who do not charge an advance fee for loan modifications or similar services are not required by the DRE to obtain a “no objection letter.” However, their work must be completed before they’re paid.

You should know that there are agencies, attorneys, and real estate licensees who will assist you with your loan workout for a fee payable after the work is completed.

 

California Civil Code Section 2945 – Legislative Findings and Intent

The California legislature has found that individuals facing a foreclosure are sometimes subject to unfair dealings by foreclosure consultants. As a result, the legislature has passed this act with the intention (among other things) of requiring that foreclosure consultant service agreements be in writing to safeguard against deceit, and to permit the homeowner to cancel the agreement, to encourage fair dealing, and prohibit representations that tend to mislead.

The legislature goes out of its way to explicitly state that the law “shall” (not “may” or “should”) be liberally construed to effect the legislative intent. This is good news for the owner and bad news for those who want to take advantage of owners in financial trouble.

Civil Code Section 2945.1 – Definitions

This section defines a “Foreclosure Consultant as anyone who offers for compensation to perform any service which “the person in any manner represents will in any manner do any of the following.”

  • Postpone or stop the foreclosure sale
  • Obtain any forbearance
  • Assist in the reinstatement of the loan
  • Obtain extensions to reinstate the loan
  • Obtain any waiver of an acceleration clause
  • Save the residence from foreclosure
  • Avoid or repair adverse credit reports resulting from a foreclosure sale
  • To assist in recovering residual proceeds from the foreclosure sale of the owner’s residence.

After setting forth in rather lose language who qualifies as a Foreclosure Consultant, the legislative lists some narrow and specific exceptions to the law, foremost of which are attorneys who are rendering service in their practice as an attorney at law.

Civil Code Section 2945.2 – Right to Cancel

Under this section the owner is given 3 business days to cancel the contract and specifies the method of notice of cancellation.

Civil Code Section 2945.3 – Writings Required

This section requires that every contract be in writing, specifies the elements, language, and print size of the contract. This section also requires specific notice be given to the owner regarding the prohibition against advance fees or requiring liens or title transfers. The section even specifies the wording of a Notice of Cancellation to be given to the owner, as well as a notice regarding recovery of surplus funds after foreclosure sale.

Civil Code Section 2945.4 and 2945.5 – Violations of the Act and Waivers

Section 2945.4 sets forth the acts which will constitute a violation of the law. This particular section will define for you the things the Foreclosure Consultant isn’t allowed to do. If you have any doubts about what a Foreclosure Consultant can’t do, it would be worth your while to read this section. The next section (2945.5) voids any waivers of the owner’s rights under the Act and even makes it a violation of the act for the Foreclosure Consultant to obtain a waiver from the owner.

Civil Code Sections 2945.6 through 2945.11 – Rights and Liabilities Under the Act

These section lay out the owner’s rights against the Foreclosure Consultant for any violation of the chapter, as well as the damages available to the owner, including but not limited to treble damages and attorney’s fees. These sections also set forth the potential criminal penalties and fines available against the Foreclosure Consultant for any violations of the act.

If you are approached by an individual or company (non attorney, non law firm) who is offering to assist you in any way to workout a loan modification for your home, remember to do your homework. Consult with an attorney licensed in the state of California, the California Department of Real Estate or the Office of the California Attorney General – Department of Justice Department.

While there are reputable Foreclosure Consultants it pays to be well informed.

DISCLAIMER

This article is intended to be a general discussion only, and must not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice. If you are dealing with a potential foreclosure or short-sale, you are advised to consult the appropriate licensed professional.

As the housing markets recover, fewer and fewer homes will be underwater until finally the short sale will again become an unusual event.

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“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

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CALIFORNIA REAL ESTATE PRIMER – Buyer’s Short Sale FAQs

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

Over the course of time, we have fielded a lot of questions from buyers regarding short sales and some of those questions are more frequently asked than others. The questions below are the more frequent ones we’ve been asked:

 1. What is a short sale?

A short sale is the process by which homeowners can sell their home for less money than they actually owe on the mortgage(s). This is accomplished by providing proper documentation to the lender(s) to convince them to reduce the mortgage balance to allow the sale. If the sale is approved, the mortgages lender(s) will actually take a loss on the mortgage.

If a bank approves the discount of a mortgage, the home can be sold for a price lower than the total debt on the property without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.

2. Why would a bank or mortgage lender want to cooperate with a short sale?

A common saying is that banks are in the business of lending money and do not want to own real estate. While this is a little misleading, it is essentially true. When banks foreclose on a property it is a long and expensive process and generally means holding the property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have strong incentives to get rid of the properties at discount prices.

For a lender, agreeing to a short sale avoids many of the costs associated with the foreclosure process. Attorney’s fees, delays from borrower bankruptcies, damage to the property, costs associated with resale, property tax, insurance, etc., must all be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster and at a lower cost.  The most important element in the lender’s decision process is whether or not the property is “underwater.”  If so, then it can’t be sold for an amount equal to or greater than the mortgage and a short sale may be a viable solution.

3. How does a bank determine the price it will accept on a short sale?

Every bank has a specific method of deciding how much they’ll accept on a short sale. Give me a call, Mikey Hall, at 949-887-1625 and I’ll explain it to you.

 4. Can I really get a deal on a short sale home?

Yes, you can, but not every short sale is a deal. You still have to do your research and estimate the current market value of the home. This is one of the areas where a knowledgeable real estate agent’s level of experience really pays off.

5. Who pays the real estate commissions on a short sale?

In a standard sale, commissions are subtracted from the seller’s funds and paid out of escrow to the Realtors. In a short sale, the seller has no funds in escrow which means the commissions end up being subtracted from the monies that would go to the lender. So, the lender ultimately is the one paying the entire sales commission.

6. Are short sales guaranteed to work?

No. All of the criteria must be met before a bank will even consider a short sale. Even then it isn’t easy to convince a bank that the market value of the home is lower than what they are owed.

Even if all the paperwork has been correctly completed it can take several weeks, or even months, only to be denied. If the lender does not approve the short sale, no transaction occurs. The Purchase Agreement becomes void and the listing continues. There are, however, ways to put a time limit on the lender’s time to issue approval.

In a rising market the delay in a short sale approval runs against the buyer for at least two reason 1) The buyer’s purchasing power decreases as prices increase; and, 2) there is no guarantee the lender will approve the sale and the delay may cause the buyer to be priced out of the market.

A falling market has just the opposite affect because a buyer’s purchasing power increases as prices decrease.

7. How long does a short sale take to complete?

From a few weeks to several months.

8. What if the house I want needs repairs.

Remember, when an owner short sells their home it’s because they are suffering a financial hardship. This means there is no money for repairs and as a buyer you can’t reasonably expect the seller to do much in the way of repairs. The good news is we have had some success convincing lenders to repair termite damage and to make reasonable repairs relating to safety. But, this type of cooperation is dependent on the expense involved, the nature of the repair, the purchase price being paid and the direction of the market.

9. What if the house I want has liens on it?

Liens can complicate matters because the owner will not have the financial capability of removing them. Depending on a number of factors, including the real estate market and the purchase price, the lender might be persuaded to clear the liens. Or, sometimes the lien holders themselves might be convinced to reduce their liens. A short sale in this circumstance will take substantially longer.

10. I’m an investor, can I buy a short sale?

The simple answer is yes, you can. However, there can be serious complications.

11. Can I buy the short sale for the price stated in the listing?

An experienced Realtor can quickly tell you whether or not the property is priced unusually low. If so, the home was probably intentionally priced that way to attract offers which might prompt the lender into letting the Realtor know what price it will accept. In which case, the chances of buying the property at the asking price may not be very good.

On the other hand , the property might be priced correctly and your chances of getting the property at the asking price will be reasonably good.

12. How long will it take to get bank approval of my offer?

The answer to this question depends on the expertise of the listing agent, which bank is involved, and how many loans are on the property. Once approval is obtained, the property can go into escrow which takes no longer than a standard sale.

14. Will the banks negotiate on price?

Yes.  More in down markets and less in up markets.

15. Do I get title to the property when I buy a short sale?

Yes, title is transferred to the buyer at the close of escrow, just like in a standard sale.

16. Are my property taxes based on the amount of debt that was on the short sale property?

No. In California, your property taxes are based on the purchase price of the home.

17. Can I transfer my property tax base to a sale short?

Possibly, depending on whether or not you meet the requirements. You might want to read our article entitled, “Transfer Your Property Tax Base Year Value To Your New Home“.

As the housing markets recover, fewer and fewer homes will be underwater until finally the short sale will again become an unusual event.

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“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

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CALIFORNIA REAL ESTATE PRIMER – Mortgage Forgiveness Debt Relief Act

001

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

 

THE MORTGAGE FORGIVENESS DEBT RELIEF ACT

Recall that in our article, “Short Sales From The Seller’s Point of View,” we mentioned that the tax implications, of a short sale, for the borrower can be significant and are relatively complex. In very general terms, mortgage relief (i.e. a discount on the amount owed) is viewed as income, and will be reported to the IRS by the lender, and must be included in the borrower’s gross income. Having said that, on December 20, 2007 President Bush signed into law a measure giving tax breaks to homeowners who have mortgage debt forgiven on their family residence.  This law was part of the “Bush Tax Cuts” you may have heard about.  Note: The Bush Mortgage Debt Relief Act applies only to Federal income tax.  State income tax rules are set by each individual state and which state laws might apply to you is another subject best covered with your tax advisor.

With the passage of “The Mortgage Forgiveness Debt Relief Act of 2007“, a taxpayer did not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. This tax break applies to debts discharged from January 1, 2007 to December 31, 2009.  Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the primary residence (up to $2 million for refinances).  The December 31, 2009 date was the date the law was initially set to expire.

Then in 2009, The Emergency Economic Stabilization Act of 2009 was passed.  This law extended the Bush exclusion of income for qualified debt relief.  This extension of the law was set to expire on December 31, 2012 and applied to discharges of qualified indebtedness occurring on, or after January 1, 2010.

On December 31, 2012 , at the 12th hour, congress passed yet another extension of the federal Mortgage Forgiveness Debt Relief Act through December 31, 2013.

Unfortunately, California did not renew its mortgage debt relief law.  In response, the California Association of Realtors has said it will sponsor California Senate Bill 30, introduced December 3, 2012, by Senator Calderon, D-Montebello.  If passed and signed into law, Senate Bill 30 will exempt mortgage debt forgiven on a principal residence as taxable income.  Until that happens however, it appears that in California mortgage debt relief from the short sale of a principal residence will be treated as taxable income.

On January 10, 2013, Senate Bill 30 was referred to the California Senate Governance and Finance Committee.

The following is a set of a set of IRS FAQs which may be helpful in understanding the nuances of the law:

What is the Mortgage Forgiveness Debt Relief Act of 2007?

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

“What does that mean?

Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

“Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?

No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

“What about refinanced homes?

Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

“Does this provision apply for the 2007 tax year only?

It applies to qualified debt forgiven in 2007, 2008 or 2009.

“If the forgiven debt is excluded from income, do I have to report it on my tax return?

Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

“Do I have to complete the entire Form 982?

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

“Where can I get this form?

You can download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

“How do I know or find out how much was forgiven?

Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

“Can I exclude debt forgiven on my second home, credit card or car loans?

Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

“If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

“Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.

“Is there anything else I need to know before filing?

Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008.”

Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

The information contained herein is deemed reliable, but must be independently verified.

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“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

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voice: 949-505-3838

fax: 866-764-6325

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.

 

CALIFORNIA REAL ESTATE PRIMER – Tips For Buying REO Properties

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Tips For Buying REO Properties

The acronym REO stands for the phrase “Real Estate Owned.” An REO is a lender owned property, meaning it has been acquired by the lender as the result of a foreclosure.

Buyers attempting to buy foreclosed properties will need to understand a few basic principals, because the competition on a well-priced REO can be intense. A well-priced REO will draw multiple offers and your competition may well include professional investors. The key to a successful conclusion is to be organized and to have the ability to move quickly.

Some helpful tips include:

1. Realistically establish your maximum down payment, your maximum affordable mortgage amount and your maximum purchase price. You need to be ruthless about these limits.

2. Get yourself either pre-qualified or pre-approved with your lender so that you can move quickly when the time comes.

3. Be prepared to pre-qualify with the selling bank and to allow the seller to run your credit scores should it be requested.

4. Understand that REO properties (that haven’t been destroyed by the prior owner) aren’t gifts. They are generally no more than 10% to 15% below other properties. A corollary to this is the fact that banks are skilled at understanding the market and assessing the market value of a property. As a result, low ball offers are almost never a productive activity.

5. If the property was priced right in the first place you can expect experienced, skilled competition.

6. If an REO property has been sitting on the market without drawing offers, a bank owner will usually not be shy about adjusting the price to move the property. Banks are not in the business of managing property and are generally pragmatic about their pricing.

7. To make your offer more appealing you might want to consider getting your mortgage from the bank selling the property. This tactic might make your offer more appealing, assuming the seller’s loan terms are reasonable.

8. Remember, REO properties are sold “AS IS” and it will be your responsibility to inspect the property and to determine how much money it will take to repair the property and bring it back up to condition. Don’t forget to factor this cost into your purchase limit, as well as the value of the property.

9. Get the most experienced Realtor you can to represent you. Look for a Realtor who is interested in understanding your situation and working toward your goals.

 

If ever there was a time to use a skilled real estate agent this would be it.

1 Mikey & Pixey Best 1

“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

DRE #00792478

Return To The Table of Contents

OTHER INTERESTING AND INFORMATIVE INFORMATION SOURCES

OC Property Management & Sales, Inc.

DRE Lic# 01886215

www.OCPropMgmt.com

OCPropertyMgmt@gmail.com

voice: 949-505-3838

fax: 866-764-6325

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.

 

CALIFORNIA REAL ESTATE PRIMER – REO Properties

036 (572 x 428)

REO PROPERTIES

The acronym REO stands for the phrase “Real Estate Owned.”  In the real estate trade, an REO is a lender owned property, meaning it has been acquired by the lender as the result of a foreclosure.  In California, this latter fact can be important, because it means  the lender has acquired “clear title” to the property.  This might not be the case if the property was acquired by a Deed in Lieu

Short Sale

In the normal course of events, a distressed home moves through a series of stages which are many times confused by the general public. In the beginning, when the homeowner is trying to sell the home for an amount less than the debt owed on the property it is called a Short Sale.

Foreclosure

Foreclosures begin when the Trustor (borrower) stops making the monthly payments to the Beneficiary (Lender). The first missed payment is a technical default, but in practical terms, most Beneficiaries do not begin the process until the third payment is missed. During this time period the property remains classified as a short sale.

When the owner becomes 90 days late on the mortgage payments, Beneficiaries typically record a Notice of Default (NOD) and the Foreclosure Process begins. The property is now called a Foreclosure and is sometimes typified as “being in Foreclosure”, however it is still a Short Sale.

REO

A trustee sale date is set for about three months after the NOD is recorded. On the sale date, the property is offered for sale at auction. The successful bidder must pay cash for the property. If no one purchases the property, title is transferred to the Beneficiary (Lender) and the property becomes an REO.

The Lender now has title to the property. The Lender will establish a market value for the property, then assign it to an inhouse Asset Manager (generally an outside company) which specializes in the handling of REOs. This company, in turn, will assign the property to a local real estate broker who will list the property for sale on as “AS IS” basis. This means generally there will be no repairs.

It must be remembered that the lender is an owner who has never “lived” in the property. That means there will be very few, if any, disclosures from the Lender. The burden will be on the buyer to determine what’s wrong with the property and how much it’s going to cost to fix it. Moreover, most lenders either use their own purchase contract instead of the CAR approved contract or require their own contract addendum. Many Lenders will also require the buyer to pre-qualify with them, and some will even require the buyer to submit FICO scores. In this case however, the effort might be worth it.

Typically, the Realtor who gets the REO listing will be responsible for evicting anyone who is squatting on the property, re-keying the property, turning on the utilities, adding a lock-box, and bringing the property up to some minimum saleable condition. In variably the REO listing agent will advance these costs out of their own pocket.

For some reason Lendors will habitually assign REO properties to a limited number of Realtors.  While this might be good from a proceedures point of view it can, and many times has, resulted in the concentration of large numbers of REO listings with a single agent.  As the number of REO’s listed with an agent increases, that listing agent’s available time disappears and the entire process becomes mechanized and unresponsive to the buyer.  As a result, REO buyers must be on top of their game.  There will be no listing agent to answer questions, chat up the property or even show it.

The Pipeline

It is extremely difficult to predict how many homes will move completely through the pipeline to the final REO stage. Some owners will “cure” their default, others will manage to sell their properties before the trustee sale. Some of the homes will be sold by the trustee, and what is left will finally become an REO. The whole process can easily take six to twelve months.

It is not unusual for only 10 or 12 homes out of 80 or 90 to become REOs. For example, in Aliso Viejo, California in May of 2008, there were 85 short sales, and only 14 REOs.  At that time, this was not an unusual ratio.  As markets improve and become more healthy, the number of REO listings decreases.  In a healthy real estate market driven by low unemployment the REO listing will become a rarity.

Are REOs Really A Good Deal?

REOs can be a great deal, but they aren’t necessarily so. While the price may no longer include any owner equity, the property may still be priced at, or even above, the market. On the other side of the coin, REOs priced below the market tend to draw multiple offers. Since Lenders are aren’t in the business of managing REO property, the multiple offer scenario is preferable because it tends to drive up the price on a quick sale.

In addition to a possible price discount, REOs (unlike short sales which require lender approval) provide an opportunity to deal with a single owner. REO purchases tend to be straightforward affairs. The caveat here is that the property is virtually always sold on an “AS IS” basis without the benefit of a Transfer Disclosure Statement.  Moreover, in California, the lender is exempt from certain statutory disclosures regarding the property.  If there’s a problem you must find it yourself.

If ever there was a time to use a skilled real estate agent this would be it.

1 Mikey & Pixey Best 1

“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

DRE #00792478

Return To The Table of Contents

OTHER INTERESTING AND INFORMATIVE INFORMATION SOURCES

OC Property Management & Sales, Inc.

DRE Lic# 01886215

www.OCPropMgmt.com

OCPropertyMgmt@gmail.com

voice: 949-505-3838

fax: 866-764-6325

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.