Mortgage Forgiveness Debt Relief Act of 2007

Earlier this week I had a conversation with an accountant who was asking me about people who were selling their houses in short sales. We discussed the increase of this in the St. Louis area and he suggested that he put together some information that my clients might find helpful regarding the Mortgage Forgiveness Debt Relief Act of 2007. Here is the letter in its entirety.

August 15, 2008

Dear friend:

With the economy in its current challenged state, coupled with the real estate market and its issues, there has been a lot of activity regarding foreclosures, short sales, and debt restructuring. I continue to get a lot of questions regarding the tax consequences for home owners in these situations. The rules have changed in this area. Under the old rules, forgiveness of debt could trigger taxable income for the person being relieved of debt. The new rules drastically help taxpayers needing forgiveness of debt associated with their primary residences, but it only applies to debts discharged from January 1, 2007 to December 31, 2009. With the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on up to $2 million of debt forgiven for a loan secured by a qualified principal residence. More details are highlighted below.

Discharge of indebtedness income: background

For income tax purposes, a discharge of indebtedness (“forgiveness of debt”) is generally treated as taxable income. However, a discharge of indebtedness doesn’t trigger gross income if it: (1) occurs in a Title 11 bankruptcy case, (2) occurs when the taxpayer is insolvent, (3) is a discharge of qualified farm indebtedness, or (4) is a discharge of qualified real property business indebtedness.

Before the 2007 Mortgage Relief Act, there were no special rules applicable to discharges of acquisition debt on the taxpayer’s principal residence. For example, assume a taxpayer who isn’t in bankruptcy and isn’t insolvent owns a principal residence subject to a $200,000 mortgage debt for which the taxpayer has personal liability. The creditor forecloses and the home is sold for $180,000 in satisfaction of the debt. Under old rules, the debtor had $20,000 of debt discharge income.

Current law relief provision

The 2007 Mortgage Relief Act excludes from a taxpayer’s gross income any discharge of indebtedness income by reason of a discharge (in whole or in part) of qualified principal residence indebtedness before January 1, 2010. The exclusion applies where taxpayers restructure their acquisition debt on a principal residence or lose their principal residence in a foreclosure.

Here is some of the critical fine print in this new relief provision:

• The tax relief applies to the original purchase price, plus improvements, of the taxpayer’s principal residence. It doesn’t apply to discharges of second mortgages or home equity loans unless the loan proceeds were used to acquire, construct, or substantially improve the taxpayer’s principal residence. Refinanced indebtedness qualifies only to the extent it does not exceed the amount of indebtedness being refinanced. (Cash out from refinancing will not qualify for the exclusion.)

• The indebtedness must be incurred specifically in respect to the taxpayer’s principal residence. The exclusion rule does not apply to second homes, vacation homes, business property, or investment property since these properties are not the taxpayer’s principal residence.

• The relief provision is not a permanent fixture of the tax code. It only applies to forgiveness during 2007, 2008, or 2009.

• Nontaxable forgiven mortgage debt is capped at $2 million ($1 million for married individuals filing separately).

• When the relief provision applies, the tax basis of the individual’s principal residence is reduced by the amount excluded from income. As a result of this basis reduction rule, the discharged indebtedness is technically subject to taxation at a later time. However, in many cases the reduction will not result in any additional tax because any gain on that sale or exchange will qualify for the $250,000 ($500,000 for married couples filing jointly) home-sale exclusion.
  

Please keep in mind that this is only a summary of this important tax relief provision. If you would like more details about this change, or any other aspect of the new law, please do not hesitate to call. Keep in mind that every taxpayer’s situation is different and should be analyzed with his or her tax advisor and counsel to determine what applies for the given circumstances.

Best regards,

HOFFMAN CLARK, LLC

Bryan Shaw, CPA

www.hoffmanclark.com

Miracles Never Cease!

Back by popular demand, at least in my mind! I will be returning to the airwaves on Tuesday, August 12, 2008 on the mighty mox; that is KMOX for all of you who are not hip to the lingo of St. Louis and our toasted ravioli, hwy farty far, and pork steaks.

At 10:20 in the morning, please tune your radio to 1120 on your am dial or go to www.kmox.com to listen live over the internet. I will be on the air with Dave Simons of Merrill Lynch discussing the new legislation that was signed by the President on July 30, 2008.

Thanks for your support! By the way, if you know anyone who is looking to purchase or refinance please send me their information and I will be happy to keep you posted on how things go!

As always, for questions or comments please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.

The Housing Act

On July 30, 2008, President Bush signed into law the “Housing Assistance Tax Act of 2008” (the Housing Act). It includes a $15.1 billion package of housing tax incentives.

Here are the highlights of the bill for homeowners and first time home buyers.

Property Tax Deductions for Non-Itemizers

The Housing Act created a new, temporary property tax deduction for non-itemizers (i.e., for taxpayers who claim the standard deduction rather than itemizing their deductions).

Highlights include:

· The provision creates a new standard deduction for state and local real property taxes paid by non-itemizers. Since most homeowners who are paying on a mortgage have enough deductions (e.g., mortgage interest and property taxes) to justify itemizing them on their return, this new provision chiefly benefits homeowners who have paid off their homes.

· The deduction is currently only available for tax years that begin in 2008.

· The amount of deduction will be as much as $500 for single filers and $1,000 for joint filers. Since this is a deduction and not a credit (i.e., a dollar-for-dollar reduction in tax liability) the actual tax benefit will not be all that substantial. For example, it only proves a maximum of $100 to a couple in the ten percent tax bracket and $150 to a couple in the fifteen percent bracket (and only $50 and $75, respectively, to singles in those brackets). Granted, in this economy every little bit helps.

Credit for First-Time Homebuyers

The single largest provision in the Housing Act is a measure allowing taxpayers buying their first home to take a tax credit of up to $7,500 of the purchase price. Qualified homebuyers can subtract the credit amount from their federal income tax when they buy a home and even get a refund if the credit exceeds their tax. However, they are then required to pay the credit back over fifteen years. The result is that the credit resembles an interest-free loan that must be repaid to the government.

Here are the details of the new credit:

· The home must be located in the United States and must be the taxpayer's principal residence. The taxpayer (and the taxpayer's spouse if married) must not have owned another principal residence in the United States in the three-year period before purchasing the new home. Accordingly, the home does not literally have to be the taxpayer's first home ever purchased in the United States.

· The home must be purchased between April 9, 2008 and June 30, 2009. Purchases from certain related persons and acquisitions by gift or inheritance do not qualify. A home constructed by the taxpayer does qualify if the taxpayer moves in between April 9, 2008 and June 30, 2009.

· There is also a special rule that allows taxpayers who purchase a qualifying principal residence in the first six months of 2009 to treat the purchase as if made on December 31, 2008. This allows the credit to be claimed on the taxpayer’s 2008 taxes rather than waiting to claim it on the taxpayer’s 2009 taxes.

· The credit is equal to ten percent of the price paid for the home, up to a maximum of $7,500. The $7,500 maximum credit applies both to individuals and married couples filing a joint return. A married individual filing separately can only claim a maximum credit of $3,750.

· The credit is phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. Taxpayers with modified AGI over $95,000 ($170,000 for joint filers) can't claim the credit at all.

· The credit is refundable, which means that households with incomes too low to owe any income tax can still benefit as the excess credit available after applying to any income taxes will be refunded to the taxpayer.

· In the second year after purchase (note that the payback doesn’t immediately start in the subsequent tax year), taxpayers who took the credit must start paying back the credit in equal interest-free installments over fifteen years. For example, suppose a first-time homebuyer purchases a home for $100,000 in December 2008 and claims the maximum credit of $7,500 on his 2008 tax return. He would then be required to pay back $500 (one-fifteenth of the credit) on his tax return for 2010 and for each subsequent return for the following fourteen years, finishing in 2024.

· If the taxpayer sells the home (or the home ceases to be the principal residence of the taxpayer or the taxpayer's spouse) before the complete repayment of the credit, any remaining credit is due on the tax return for the year in which the home is sold (or ceases to be the principal residence). If the home was sold at a loss to an unrelated person, repayment of the remaining credit is forgiven to the extent of the loss.

· No credit is allowed if certain conditions exist: the taxpayer was ever entitled to a District of Columbia homebuyer credit, the home purchase was financed through tax-exempt mortgage revenue bonds, the taxpayer is a nonresident alien, or the taxpayer disposes of the residence (or it ceases to be a principal residence) in the same year as it was purchased.

For a chart of the tax credit information, click here:

http://www.realtor.org/GAPublic.nsf/files/chart_homebuyer_tax_credit_.pdf/$FILE/chart_homebuyer_tax_credit_.pdf

For the Mortgage Bankers of Americas' comments on the bill click here:

http://image.exct.net/lib/ff3611707560/d/1/MBAA_Housing_Bill_Summary_072508_Final.pdf

The majority of the information for this piece was provided by Bryan Shaw of Hoffman Clark LLC.

www.hoffmanclark.com

For Questions or Comments, please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.

New MHDC

Here we go! It is actually going to happen! The new rates for the 2008B are as follows:

CAL for Government loans 6.9%

NON CAL for Government loans 6.45%

CAL for Conventional loans 7.3%

NON CAL for Conventional loans 6.85%

The window for reservations will open at 8 am on Monday August 4th. As soon as you have a confirmed reservation you may close loans. All loans in this bond issue will be sold to the new master servicer US Bank. Training with the master servicer will start on Tuesday August 5th in Columbia and on Wednesday August 6th in St. Louis. I will go over the changes to the program in depth at the training but I will state the changes briefly in this email.

Rates

As you can see we will have 4 rates instead of 2 due to the conventional market. Only Fannie Mae's My Community Mortgage or Freddie Macs Home Possible programs can be used with this bond issue. There will be no charge of 1.25% for LLP and adverse market fee in this issue only. However, there will have to be a $175 servicing fee charged to the borrower for the all CAL loans.

Down payment Assistance

As you can see I have changed the acronym from CAP to CAL. This stands for Cash Assistance Loan and will help differentiate between the two programs. The assistance will still be 3% of the loan amount but it will be in the form of a soft second mortgage that will be forgiven over a 5 year period. The loan will actually diminish 1/60 per month over the 5 year period. The borrower will then be given a 1099 every year for the amount that was forgiven that year and will have to claim that as income on the federal tax return. If the borrower sells or refinances the loan in the first five years the remainder of the amount will have to be paid back. We have been discussing the just-enacted housing stimulus bill with FHA staff and they told us today that the just-enacted housing bill does not impose a 100% CLTV cap on FHA loans. It imposes a 100% LTV cap on the FHA-insured first mortgage and requires the FHA mortgage insurance premium to be counted toward the LTV ratio for purposes of the 100% cap. HUD will continue to allow second liens from state housing agencies that result in CLTVs that exceed 100%.

For Questions or comments, please contact Chris Scheer at cscheer@cornerstonestl.com or 314.223.9824.