Home foreclosures, Deeds in Lieu of foreclosure, short sales and tax ramifications. Although the economy is starting to improve, many clients are still facing unaffordable mortgage payments and/or homes which are “upside down” (mortgage balance is greater than property value). As a result, foreclosures, deeds in lieu of foreclosure and short sales are still commonplace.
Foreclosure. Payments are in default and lender repossesses home.
Credit. Severe impact; lowers FICO score 200-300 points; remains on credit report for 7 years from date of filing.
Ordinary Income Tax. Under the Mortgage Indebtedness Forgiveness Act, may excludeup to $2 million of “qualified debt” from federal income tax. ”Qualified Debt” is incurred in acquiring, constructing or substantially improving principal residence. Clients who used their HELOCs as ATMs will not have the unqualified debt portion forgiven. California conforms but with lower limits than the federal government. The Act is set to expire 12/31/12 but the administration has requested an extension through 2015.
Deed In Lieu Of Foreclosure. Borrower voluntarily conveys interest in property to satisfy the loan and avoid foreclosure. Borrower avoids public foreclosure proceeding.
Credit. Has substantial impact on FICO score, but less than foreclosure; remains on credit report for 5 years.
Ordinary Income Tax. Same as above. However, borrower has chance to negotiate market value of property which could reduce amount of debt forgiveness.
Short Sale. A third party offers to buy the property for less than the mortgage balance. Lender agrees to sale and forgives unpaid loan balance. Credit. The least Impact on FICO score; impacts ability to qualify for new loan for 2-3 years.
Ordinary Income Tax. Same as above. However, borrower has the chance to negotiate market value of property which could reduce amount of debt forgiven.
Caution: Capital Gains Tax. It is important to note that, although a house may be “under water”, there still may be capital gains. If the house has been occupied as the primary residence for 2 out of the last 5 years, capital gains can be excluded up to $500,000 for married couples and $250,000 for singles.
Information provided courtesy of Thea Glazer.
It’s important to know your mortgage options if you’re facing foreclosure. Lorraine Santirosa is a San Diego realtor that helps homeowners who are struggling to hold on to their homes with foreclosure looming. Call 619-248-5484 or http//:www.buyhousesinsandiego.com/sell