My husband and I just made an offer on a bank owned home in Mesa, AZ. We are first time home buyers. The house needs no work at all and has only been on the market about three weeks - my realtor suggests that we pay the bank what it wants $229K and then try to get 6% closing costs and 3% toward downpayment. We also qualify for the Ameridream program for FHA. Is that good advice if it is all about the price? It is in a great community, etc., and the house was appraised at 255K last year. Even with this market, the bank got a previous offer. In this market, how does one go about making an offer and knowing it is fair? We just don’t want to get ripped off. Thanks for any advice you can give us.

Not being in Mesa, I can’t intelligently comment on the price of the property, but I can tell you how I approach it with my clients here. It starts with questions:

Question: How long do you expect to keep the house?
The reason is that the value of the property when you sell is just as important as when you buy. If the value of the property drops another 10% before the market bottoms out, and it costs you 5-6% to sell, you need more than 16% in appreciation to break even.

Question: Does it pencil out?
Can you cover the monthly nut if you have to rent it out? If for some reason you have to move and you are upside down - and that isn’t hard with 97% loan, can you rent it out while you wait it out?

Question: Why buy now?
This one usually surprises people because the mantra of Realtors is always “Now is a good time to buy”. They take away our lapel pins if we don’t chant this into the mirror every morning.

Seriously though, every economic expert out there that doesn’t benefit from the sale of real estate believes that this down market has a ways to go. In a research note published today, Goldman Sachs revised their 2nd half ‘08 projections, stating:

“[W]e are on the cusp of a renewed deceleration in growth.”

Chase, which used to benefit from the sale of real estate, made the following statement today:

It has been quite a tumultuous time in mortgage banking for the past 12 months. In fact, we are in the midst of the worst mortgage and real estate crisis in American history.

Notice the phrase “in the midst”? So the question remains, why buy today?

That answer is different for everyone. If you can own for the same as rent, then it might make sense. The answer can also be property specific.

If you have a fairly certain longterm outlook and the right property comes along - one that you could see yourself staying in for 7-10 years, then it can make sense.

The one person who probably shouldn’t help you answer that is the Realtor.

Ok, let’s move past the whys and look at the hows.

Both of our respective markets are over inflated bubble markets. Both are making regular appearances at the top of the Case-Shiller Index for markets that are seeing double digit drops. Both have a ton of lender owned (REO) inventory. So the question here is how do you determine the price and the offer and how do you know if it’s fair.

Price is a moving target, and moving downward. How bad do you want it? If you lose it, how many others can you find that you would consider to be just as acceptable? How many REOs have sold in this neighborhood (are they a rarity or commonplace)? How many of the neighbors are upside down and could be tomorrow’s distressed property that will sell for less than this one?

Terms of the offer.
The 3% down payment assistance program (DAP) from the seller is going bye-bye October 1st. The new housing bill put a temporary end to that. Temporary because it will be back in a new bill in one form or another after the election. As a result, agents and lenders will tell you that you need to move now, or miss the boat (haven’t we heard that before) and only be able to buy once you have saved either a 3% down payment for FHA or 20% for anything else.

Asking for the closing costs is a no brainer. I would ask for the 3% down as well, even if you have it. The trick here is whether to come in lower, understanding that you are hitting the lender up for close to $30k. Since I would bet your down payment that the value of whatever you buy today will be less tomorrow, and that by New Years you’ll owe more than it’s worth, I would lowball and risk losing it, but that assumes certain answers to the “how” questions.

The bottom line - fair or ripped off?
There are deals to be made that will be highly profitable and there are deals that will be made that will have disastrous results. As much as I don’t really care for most real estate agents, there are quite a few that are honest and look out for the client. Some just won’t volunteer information that would kill a deal unless you ask. I don’t think you are getting ripped off per se, but you are making a financial decision that involves, at least for the immediate future, a depreciating asset. Go into this knowing that this property will go down in value before it goes up. Are you good with that?

That leaves us with the issue of fair. From my perspective, the only fair part of buying in bubble markets is fair warning.

In essence, this would provide for a government guaranteed short refinance, where, like a short sale, the lender on the distressed loan takes less than is owed. I will post my analysis of the bill in a future post.

Here is the full text of the bill:

110th CONGRESS

2d Session H. R. 5830

To create a voluntary FHA program that provides mortgage refinancing assistance to allow families to stay in their homes, protect neighborhoods, and help stabilize the housing market.

IN THE HOUSE OF REPRESENTATIVES

April 17, 2008

Mr. FRANK of Massachusetts (for himself, Ms. WATERS, Mrs. MALONEY of New York, Mr. WATT, Mr. ACKERMAN, Mr. MEEKS of New York, Mr. CLAY, Mr. LYNCH, Mr. AL GREEN of Texas, Ms. MOORE of Wisconsin, Mr. LINCOLN DAVIS of Tennessee, Mr. HODES, Mr. WILSON of Ohio, Mr. PERLMUTTER, Mr. MURPHY of Connecticut, Mr. DONNELLY, Mr. WEXLER, Mr. SHAYS, Ms. GINNY BROWN-WAITE of Florida, Mr. DINGELL, Ms. SCHAKOWSKY, Mr. LEVIN, Mr. HINCHEY, Mr. FATTAH, Mr. JACKSON of Illinois, Mrs. CHRISTENSEN, Ms. LEE, Mr. WU, Ms. MCCOLLUM of Minnesota, Mr. VAN HOLLEN, Mr. BUTTERFIELD, Mr. COURTNEY, Mr. SESTAK, Mr. SIRES, and Ms. TSONGAS) introduced the following bill; which was referred to the Committee on Financial Services

To create a voluntary FHA program that provides mortgage refinancing assistance to allow families to stay in their homes, protect neighborhoods, and help stabilize the housing market.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `FHA Housing Stabilization and Homeownership Retention Act of 2008′.

SEC. 2. PURPOSES.

The purposes of this Act are–

(1) to create an FHA program, which is voluntary on the part of borrowers and existing mortgage loan holders, to insure refinance loans for substantial numbers of borrowers at risk of foreclosure, at levels which are reasonably likely to be sustainable through enhanced affordability of debt service;

(2) to provide flexible underwriting for FHA-insured loans under such a program to provide refinancing opportunities under fiscally responsible terms, including higher fees commensurate with higher risk levels, a seasoning requirement for higher debt to income loans, and additional program controls to limit and control risk;

(3) to bar speculators and second home owners from participation in such program;

(4) to require existing mortgage loan holders to take substantial loan writedowns in exchange for having the Federal Government and the borrower assume the ongoing risk of the refinanced loan;

(5) to set a loan-to-value limit on such loans that provides the FHA with an equity buffer against potential loan losses, provides protections against the risk of future home price declines, and creates incentives for borrowers to maintain payments on the loan;

(6) to protect the FHA against losses which may exceed normal FHA loss levels by establishing higher fee levels, including an exit fee and profit sharing during the first five years of the loan, with such higher fee levels effectively being funded through the required lender writedown;

(7) to provide a fair level of incentives for junior lien holders to provide the necessary releases of their lien interests, in order to meet program requirements that all outstanding liens must be extinguished, and thereby permit the refinancing to be completed;

(8) to enhance the administrative capacity of the FHA to carry out its expanded role under the program through establishment of an Oversight Board which adds expertise from the Federal Reserve and the Department of the Treasury, through additional funding to contract out for the provision of any needed expertise in designing program requirements and oversight, and through additional funding to increase FHA personnel resources as needed to handle the increased loan volume resulting from the program;

(9) to sunset the program when it is no longer needed; and

(10) to study the need for and efficacy of an auction or bulk refinancing mechanism to facilitate more expeditious refinancing of larger volumes of existing mortgages that are at risk for foreclosure into FHA-insured mortgages.

SEC. 3. INSURANCE OF HOMEOWNERSHIP RETENTION MORTGAGES.

(a) Mortgage Insurance Program- Title II of the National Housing Act (12 U.S.C. 1707 et seq.) is amended by adding at the end the following new section:

SEC. 4. STUDY OF AUCTION OR BULK REFINANCE PROGRAM.

(a) Study- The Board of Governors of the Federal Reserve System (in this section referred to as the `Board of Governors’), in consultation with other members of the Oversight Board established by section 257(a) of the National Housing Act (as added by the amendment made by section 3(a) of this Act), shall conduct a study of the need for and efficacy of an auction or bulk refinancing mechanism to facilitate refinancing of existing residential mortgages that are at risk for foreclosure into mortgages insured under the mortgage insurance program under title II of the National Housing Act. The study shall identify and exa
mine various options for mechanisms under which lenders and servicers of such mortgages may make bids for forward commitments for such insurance in an expedited manner.

(b) Content-

(1) ANALYSIS- The study required under subsection (a) shall analyze–

(A) the feasibility of establishing a mechanism that would facilitate the more rapid refinancing of borrowers at risk of foreclosure into performing mortgages insured under title II of the National Housing Act;

(B) whether such a mechanism would provide an effective and efficient mechanism to reduce foreclosures on qualified existing mortgages;

(C) whether the use of an auction or bulk refinance program is necessary to stabilize the housing market and reduce the impact of turmoil in that market on the economy of the United States;

(D) whether there are other mechanisms or authority that would be useful to reduce foreclosure; and

(E) and any other factors that the Board of Governors considers relevant.

(2) DETERMINATIONS- To the extent that the Board of Governors finds that a facility of the type described in paragraph (1) is feasible and useful, the study shall–

(A) determine and identify any additional authority or resources needed to establish and operate such a mechanism;

(B) determine whether there is a need for additional authority with respect to the loan underwriting criteria included in the amendment made by section 3(a) of this Act or with respect to eligibility of participating borrowers, lenders, or holders of liens;

(C) determine whether such underwriting criteria should be established on the basis of individual loans, in the aggregate, or otherwise to facilitate the goal of refinancing borrowers at risk of foreclosure into viable loans insured under the National Housing Act.

(c) Report- Not later than the expiration of the 60-day period beginning on the date of the enactment of this Act, the Board of Governors shall submit a report regarding the results of the study conducted under this section to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate. The report shall include a detailed description of the analysis required under subsection (b)(1) and of the determinations made pursuant to subsection (b)(2), and shall include any other findings and recommendations of the Board of Governors pursuant to the study, including identifying various options for mechanisms described in subsection (a).

It is somewhat confusing just reading a bill with only references to other sections of the law. Below is the text of Section 2 of H.R. 3648 that specifically pertains to mortgage forgiveness. To save you the hassle of cross-referencing all this, I have included the sections of the IRS Tax Code that were added to or modified as a result of Section 2 of H.R. 3648.

SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Mortgage Forgiveness Debt Relief Act of 2007’’.

SECTION 2. DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE EXCLUDED FROM GROSS INCOME.
(a) IN GENERAL. Paragraph (1) of section 108(a) of the Internal Revenue Code of 1986 is amended by striking ‘‘or’’ at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting ‘‘, or’’, and by inserting after subparagraph (D) the following new subparagraph: ‘‘(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.’’.
(b) SPECIAL RULES RELATING TO QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.  Section 108 of such Code is amended by adding at the end the following new subsection:
‘‘(h) SPECIAL RULES RELATING TO QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—
‘‘(1) BASIS REDUCTION.—The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer.
‘‘(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS.—For purposes of this section, the term ‘qualified principal residence indebtedness’ means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting ‘$2,000,000 ($1,000,000’ for ‘$1,000,000 ($500,000’ in clause (ii) thereof) with respect to the principal residence of the taxpayer.
‘‘(3) EXCEPTION FOR CERTAIN DISCHARGES NOT RELATED TO TAXPAYER’S FINANCIAL CONDITION.—Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.
‘‘(4) ORDERING RULE.—If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount H. R. 3648—2 of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness.
‘‘(5) PRINCIPAL RESIDENCE.—For purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.’’.
(c) COORDINATION.
(1) Subparagraph (A) of section 108(a)(2) of such Code is amended by striking ‘‘and (D)’’ and inserting ‘‘(D), and (E)’’.
(2) Paragraph (2) of section 108(a) of such Code is amended by adding at the end the following new subparagraph: ‘‘(C) PRINCIPAL RESIDENCE EXCLUSION TAKES PRECEDENCE OVER INSOLVENCY EXCLUSION UNLESS ELECTED OTHERWISE. Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).’’.
(d) EFFECTIVE DATE. The amendments made by this section shall apply to discharges of indebtedness on or after January 1, 2007.  

The following are the sections of the IRS Tax Code that were added to or modified as a result of Section 2 of H.R. 3648. Anything that was to be deleted is still there, but with a strikethrough. Additions are highlighted in yellow.

Section 108. Income from discharge of indebtedness

(a) Exclusion from gross income
    (1) In general
    Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if -
        (A) the discharge occurs in a title 11 case,
        (B) the discharge occurs when the taxpayer is insolvent,
        (C) the indebtedness discharged is qualified farm indebtedness, or
        (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness. , or,
        (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.

    (2) Coordination of exclusions
         (A) Title 11 exclusion takes precedence
Subparagraphs (B), (C), and (D) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case.
(B) Insolvency exclusion takes precedence over qualified farm exclusion and qualified real property business exclusion
Subparagraphs (C) and (D) , (D) and (E) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent.

Section 108. Income from discharge of indebtedness

(h) Special rules relating to qualified principal residence indebtedness
    (1) Basis reduction
    The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer.
    (2) Qualified principal residence indebtedness
    For purp
oses of this section, the term ‘qualified principal residence indebtedness’ means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting ‘$2,000,000 ($1,000,000’ for ‘$1,000,000 ($500,000’ in clause (ii) thereof) with respect to the principal residence of the taxpayer.
    (3) Exception for certain discharges not related to taxpayer’s financial condition
    Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.
    (4) Ordering rule
    If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount H. R. 3648—2 of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness.
    (5) Principle residence
    For purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.

Two key terms require defining within the context of the Code.

• Principal residence is defined in this link to Section 121. 
• Acquisition indebtedness  is defined in Section 163 cited below.

Section 163(h)(3)(B)
(B) Acquisition indebtedness
   (i) In general
    The term ”acquisition indebtedness” means any indebtedness which -
        (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and
        (II) is secured by such residence.
         Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

While this bill has been long awaited by homeowners who would be penalized by the potential phantom tax, and real estate agents praying that it will open the flood gates to more business via short sale listings, the goal of the Administration and legislators is to reduce the number of foreclosures and the need for short sales by allowing homeowners to renegotiate their loans without tax consequences.

The President welcomed those in attendance, saying,

"Thank you all for coming. Welcome to the White House. I’m pleased to sign a bill that will help homeowners who are struggling with rising mortgage payments. The Mortgage Forgiveness Debt Relief Act of 2007 will protect families from higher taxes when they refinance their homes. It will help hardworking Americans take steps to avoid foreclosure during a period of uncertainty in the housing market."

After thanking House and Senate members, staff, HUD and the Treasury Department, Bush continued.

"In recent months, our nation’s housing market has faced serious strains. Home values have fallen in many parts of our country. At the same time, many homeowners with adjustable rate mortgages have seen their monthly payments increase faster than their ability to pay. And now some homeowners face the prospect of foreclosure.

"My administration has taken strong steps to help homeowners avoid foreclosure by making it easier to refinance loans. We gave the Federal Housing Administration greater flexibility to refinance loans for struggling homeowners. We helped assemble a private sector group of lenders, loan servicers, investors, and mortgage counselors called the HOPE NOW Alliance. This group has agreed on a set of industry-wide standards to help those with subprime loans refinance or modify their mortgages, so more families can stay in their homes.

"The bill I sign today will help this effort by ensuring that refinancing a mortgage does not result in a higher tax bill. Under current law, if the value of your house declines and your bank or lender forgives a portion of your mortgage, the tax code treats the amount forgiven as money that can be taxed. And of course, this makes a difficult situation even worse. When you’re worried about making your payments, higher taxes are the last thing you need to worry about. So this bill will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive. And it’s a really good piece of legislation. The provision will increase the incentive for borrowers and lenders to work together to refinance loans — and it will allow American families to secure lower mortgage payments without facing higher taxes."

Earlier in the week, the Treasury Department released a statement from Treasury Secretary Henry M. Paulson, Jr. regarding the Congressional passage of the legislation.

"I thank both the Senate and the House for their quick passage of this important piece of legislation.  Homeowners who restructure their mortgages to avoid foreclosure should not be hit with a tax bill as a result.  This legislation will temporarily exclude homeowners who have restructured their mortgage loans from having to paying taxes on the mortgage debt forgiven.  

"Today’s legislation is one piece of a larger plan the President has put forward to help able homeowners avoid foreclosure.  I’m also eager to see final Congressional action on the other pieces, including GSE and FHA reform and allowing state and local authorities more tax-exempt bond authority to help homeowners refinance their existing loans.

"Preventing avoidable foreclosures will reduce the impact of the housing slowdown on homeowners, our communities, and our economy."    

Also notable was the National Association of Realtors response:

WASHINGTON, December 20, 2007 - “On behalf of the many individuals and families who would have been burdened by a tax after losing their home, the National Assn. of REALTORS® thanks President George W. Bush for signing the Mortgage Forgiveness Debt Relief Act into law. Today the president offered a Christmas present to many people who have suffered the agony and humiliation of losing their home due to a short sale, foreclosure, deed in lieu of foreclosure or any similar arrangement that relieves the borrower of the obligation to pay some portion of their debt.

“NAR has been advocating for such a change to the IRS tax code for nearly 10 years. We have always believed that it is clearly an issue of fairness and of not kicking people when they are down. By making the forgiven debt taxable income, individuals in already unfortunate situations most likely faced IRS actions because they did not have the money to pay the additional taxes. This legislation will relieve that additional burden and may also encourage families to work with their lender to negotiate terms, knowing they will now not be subject to an IRS bill.

“Today’s bill will ensure that any debt forgiven on a mortgage secured for a principal residence will not be taxed. This is very significant legislation. This may also mean that some day in the future these families can once again achieve the dream of homeownership.”

While this bill has been long awaited by homeowners who would be penalized by the potential phantom tax, and real estate agents who pray that it will open the flood gates to more business via short sale listings, the goal of the Administration and legislators is to reduce the number of foreclosures and the need for short sales by allowing homeowners to renegotiate their loans without tax consequences.

Here is the full text of The Mortgage Forgiveness Debt Relief Act of 2007

Overview of the debt forgiveness portion  - Short Sale and Phantom Tax Debt Relief Overview

It took them close to two and half months, but the U.S. Senate finally got around to passing H.R. 3648, The Mortgage Forgiveness Debt Relief Act of 2007. Initially sent to the Senate on October 4th, the Senate passed this legislation on Friday, December 14th, allowing Senate Finance Committee Chairman Max Baucus to crow a bit about helping the U.S. homeowner dealing with foreclosure or a short sale.

Sen. Baucus released the following press release on Friday:

Washington, DC – Senate Finance Committee Chairman Max Baucus (D-Mont.) won passage today of legislation offering tax relief to American families caught in the subprime mortgage crisis. When debt is forgiven on a home loan, the homeowner must normally count that debt forgiveness as income and pay taxes on it. The bill approved today as an amendment to H.R. 3648 creates a three-year exception for debt forgiveness on home loans – helping families already unable to meet their mortgages to avoid incurring large tax bills as well. The bill also extends a provision allowing homeowners to deduct mortgage insurance payments from their taxable income.

“Homeowners who are already in trouble on the mortgage certainly can’t afford a big hit from the tax man too,” said Baucus. “Upheaval in the housing market has turned the world upside down for far too many families, and Congress needs to help these folks climb out of a financial hole. This mortgage tax bill will help to ease the burdens of homeowners who are hurting today.”

In addition to tax relief for debt forgiveness and mortgage insurance payments, the bill includes:

- Tax relief for volunteer firefighters and emergency medical technicians
- Help to expand housing options for college students with children
- Protection of tax relief for homeowners after the death of a spouse
- Flexibility to help co-op tenant/owners deduct real estate taxes and mortgage insurance

The bill is fully offset by increased penalties for failure to file S corporation returns or partnership returns, and new requirements for the payment of corporate estimated taxes. It is now necessary for the House to pass the updated legislation and send it to the President for signature into law.

While I’m thrilled they have finally got this close to a done deal, waiting for 10 weeks to act hurt many homeowners.

"Senate Finance Committee Chairman Max Baucus (D-Mont.) won passage today of legislation offering tax relief to American families caught in the subprime mortgage crisis."

Baucus and Finance Committee member Chuck Schumer could have "won" this months ago. Michigan Senator Debbie Stabenow introduced similar legislation, S. 1394, back in May. While this topic didn’t gain momentum until August when the mortgage crisis took over the the front pages of the NY Times and Wall Street Journal, they could have passed this in October when they returned from their break. Since then, thousands of distressed homeowners, forced to choose between the lesser of two evils, made the decision to give the property back to the bank to avoid the phantom income tax potential of a short sale.

Don’t you just love politics?

*Short Sale and Phantom Tax Debt Relief Overview - an overview of the debt forgiveness portion of the bill.

UPDATE: 12/14/2007 - Senate Passes Mortgage Forgiveness Debt Relief Bill

Given the current state of the San Diego real estate market, it is no surprise that the most frequently asked question we get revolves around the potential tax consequences of a short sale. A short sale occurs when a property is sold for less than what is needed to pay off any loans on the property. When this debt is cancelled, the lender’s obligation by law is to file a 1099-C with the Internal Revenue Service.

The IRS has published Questions and Answers on Home Foreclosure and Debt Cancellation. The following excerpt should provide a starting point for questions to be asked a CPA or tax attorney:

1. What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender.When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form1099-C, Cancellation of Debt.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value ofyour total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

• Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income. The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default.

  Overview of the debt forgiveness bill  - Short Sale and Phantom Tax Debt Relief Overview

From Bloomberg:

"Buyers just want price,” says Mike Morgan, a Stuart, Florida-based lawyer, real-estate broker and consultant who researches property markets for hedge funds and financial institutions. "Buyers have become educated and they can easily cut through the fluffy incentives.” 

"On one $429,000 home a client wanted me to sell, the seller wanted to give the broker a $30,000 bonus on top of the commission. I told him it wouldn’t help. I told him to just drop the price.”

Then there was this advice about marketing strategy:

Morgan suggests you sell exclusively through Internet-based property sites and local Multiple Listing Services. He has found that newspaper ads, signs and open houses don’t work as well as the Internet.

"If you don’t get any calls on your listing price after a week, drop your price $10,000 or about 2 percent of your original asking price,” Morgan says.

"The market will tell you what the price of your home is. You better be priced 10 percent under your competition — and then be prepared to think about accepting offers under that.”

This isn’t news, or at least it shouldn’t be. It is an inconvenient truth many agents won’t speak. In the spirit of the current election season, I have this message for those agents who tell you that you need to siphon off what’s left of your equity to pay them more: "It’s the price, stupid."

If print advertising worked, 20,000 properties would be advertised in the local paper. But instead of being flush with real estate advertising dollars, newspapers are cutting back or shutting down because ad revenue has moved online. Incentives and bonuses to agents don’t work as well in the San Diego real estate market of today like they did in the 90s.

The reason - the Internet.

Once the real estate industry woke up and realized that the Internet was winning the war for the eyeballs of consumers, and yes, prospective home buyers, they allowed listings to be shared online. Buyers are often now the first to identify the properties they want to see, taking agents out of the role of gatekeeper of MLS information. The listing information made available online does not include the commission amount and any bonuses offered to the buyer’s agents, so these agent incentives rarely play a role in selling a property.

Offer any bonus to the buyer in the form of closing costs or an interest rate buy down and you will get the attention of those who matter - the buyer and the agent who has their buyer’s best interests at heart (that concept is called fiduciary, and it’s actually the law). If you really want to leverage a monetary incentive and trump the neighboring competition, offer to pay off any Mello-Roos on the property. It will save the buyer more money every month than a price reduction of the same amount, and it makes the property more salable for them when its their turn.

In this market if the buyer likes the property enough to write an offer, an ethical agent won’t get in the way because you are not offering them a bribe.

Well… not quite. But how about $90,000 under market, when the market is was $399,000 based on identical units selling just two days earlier?

Our client needed a place near SDSU for the freshman son. The call came in on a Sunday morning, "Two bedrooms with two baths and walking distance to campus. And since it has to be within walking distance, we need off street parking."

On it’s surface that seems like an easy request. There is a ton of condo inventory around San Diego State. The problem is that the reason for the unsold inventory is price. One of the defining characteristics of that segment of the real estate market is that those tend to be "kiddie condos". Mom and dad buy a condo for the kid, add a roommate or two, and the property carries itself until Johnny graduates, 5 or 6 years later (it’s SDSU - 4 years and out is almost unheard of here). Mom and Dad sell to the next parental unit(s) and in the process walk away with a tidy profit. 

Something happened in 2005 though. Prices stopped going up. Now a large portion of the inventory is worth less today than it was 2-3 years ago. Mom and dad have some interesting choices. Rent it out, sell it for a loss if they have equity or can bring money to the table, try a short sale, or let the bank foreclose.

The only below market deal to be found in the above scenario is buying from the bank, and then only if there was two loans where the foreclosure on the first wiped out the second. That is the deal we found for our clients. The property originally had two loans; an 80% first for $319,000 and a 20% second for $80,000. When the buyer defaulted, the lender on the first foreclosed. The lien holder of the second got zilch.

So how did we land the deal?

We didn’t give anyone else a chance. The first day the property was ready to be put on the market with their agent, we were waiting. The offer was on the bank’s desk the next business day. Knowing the hot buttons for this particular lender, we structured it in such a way that made it impossible for them to say "No". A quick escrow and now we get email updates with their soon to be marketed REOs.

Anybody else want to find a deal? 

DATES TO REMEMBER:

The following late payment penalties are required by California law:

• A 10% penalty added 5:00 p.m. on December 10.*
• A 10% penalty and $10.00 cost added after 5:00 p.m. on April 10.*
• After the end of the fiscal year (June 30), a $15.00 redemption fee and a 1-½% per month (18% per annum) penalty is added on the unpaid tax amount.

Penalties can be reduced by paying any prior year back taxes or by initiating a five-year installment plan of redemption.
* If a delinquent date falls on a weekend or holiday, the delinquent date is the next business day.

Property taxes in San Diego County are collected by the San Diego County Treasurer and Tax Collector’s office and can be paid in person, by mailing in your payment, over the phone with a Visa card, and online at www.sdtreastax.com.

Last week we had Bank of America notify 7,000 mortgage brokers that their services will no longer be needed after New Years Eve, only to have Citi take it one step further on Halloween and tell California home buyers, "Thanks, but no thanks".

As of October 31, 2007, Citi is out of the purchase money lending biz in California. Clearly they think the ghosts and goblins that are haunting the real estate market are staying awhile longer.

Citi Home Equity

Urgent Policy Notification:

California Purchase Money Business

Effective Wednesday, October 31st 2007 Citi Home Equity will discontinue lending on all Purchase Money transactions for properties in California.

Impact to pipeline applications:

• California Purchase Money applications that have received Conditional Approval or Final Approval will be honored
• California Purchase Money applications that have not received any level of approval and are in process will be declined.
• Operations will actively work the list of impacted applications

All other policies will continue to apply.

Note: Until our website is updated, brokers will have the ability to submit applications for Purchase Money transactions in California. These applications will be declined.

This Policy only affects applications where the subject property state is California.
 

So what’s it mean if a lender doesn’t want your business at any price?