Real Estate Agents need to become familiar with the latest Federal initiatives to assist the housing market and to minimize some of the most difficult challenges in our market place. The first major change in the law is under the Mortgage Forgiveness Debt Relief Act of 2007.
Prior to the change in the law, owners who were able to negotiate a “short sale” with their lending institution then encountered an often unexpected tax surprise. “Short sales” involve the payment of less than the full amount owed under an existing loan or loans. Frequently, there is also forgiveness by the lender of the amount of money that is not to be repaid by the borrower. Under the IRS tax code prior to the 2007 change, forgiveness of indebtedness had to be treated as ordinary income to the borrower. For example, if a borrower had a principal balance on their loan of $350,000, but the lender was willing to accept $300,000 as a full and final payoff, the difference of $50,000 would be considered income to the borrower. At a combined Federal/State tax rate of 27%, that would result in a tax bill to the borrower of $13,500.00.
Under the new provisions of the Federal tax code, forgiveness of indebtedness that was incurred to acquire or improve the taxpayer’s primary residence, would not be included in their gross income calculation. The Code provision requires that the discharge of indebtedness occur prior to January 1, 2010.
The second major initiative is designed to try to generate interest in buying homes. The Housing and Economic Recovery Act of 2008 provides up to a $7500 tax credit for certain “First Time Home Buyers”. In a very liberal definition of First Time Home Buyers, anyone who has not owned a principal residence for the prior three year period qualifies for the credit. The purchase must occur between April 9, 2008 and July 1, 2009. The credit will not apply to singe taxpayers with income over $75,000, nor married couples earning over $150,000.
A tax credit is a direct reduction in the amount of taxes due, not just a tax deduction that would reduce taxable income. Amazingly, if a qualified purchaser under this program has taxes due of less than the $7,500 credit amount, the IRS will actually send them a check for the balance of the unused credit amount. Nothing, however, is free. The $7,500 must be repaid to the government over a 15 year period at the rate of $500 per year, or when the house is sold (provided there is sufficient capital available to pay off the loan).
The above is but a brief introduction to these two important new tax provisions. Realtors should not attempt to give tax or legal advice, but you must be familiar with the laws affecting your customers. You will then be in a position to recognize issues that may help or hurt them, and refer them to the proper professionals to understand how the laws will affect them.