Real Estate Information Archive

Thinking of short selling your home? 2012 is the year to do it because beginning in 2013, the Federal Government will require homeowners to pay income taxes on their short sold home. Make the difficult decision now: What to do with your underwater home?

A short sale home is the sale of a home in which the value of the property is less than the balance of the mortgage or liens owed against the property.  The lender agrees to the terms of the deal, and releases the property to the buyer. For buyers it is a good deal and for the sellers it helps them avoid bankruptcy or Foreclosure. But the rules governing income tax for homeowners short selling their homes are about to change.

The Mortgage Debt Relief Act, which is set to change in 2013, was passed by Congress five years ago when the national housing market went bust. The IRS has allowed income tax to be excluded from the short sale on a home up until 2013. After December 31^st, the rules change and homeowners who have not closed their short sale deals will face paying income tax on the sale.

The law breaks down like this:

A house sold for $50,000 less than what is owed on the mortgage means the selling homeowner will owe federal income taxes on that sale. Typically a homeowner would pay $12,500 if they are in the 25 percent income bracket or $7,500 if they are in the 15 percent income bracket.

The IRS will forgive up to $2 million this year and $1 million if one is married and filing separately.

If the lender has not formally forgiven the debt before December 31^st, the homeowner is still on the hook to pay income tax. The bank must officially sign off on the deal before the end of year.  Lenders have been “gearing up” for the process as it often times takes up to 6 months or even a year for a short sale home to close. 

Homeowners declaring bankruptcy may avoid having to pay income tax on a short sale as bankruptcy tends to trump everything. Federal guidelines also allow a homeowner to not pay income tax if their debts exceed the value of their assets.

Now is the time for homeowners considering listing their homes as short sales to take action and start the process because beginning in 2013, the amount a lender forgives on short sale or Foreclosure will be subjected to federal income tax.

Parents along with local, state and the federal government have been looking at what our children are being taught in public schools for quite some time. From the No Child Left Behind Act of 2001 to the current debate on charter schools and school vouchers, there is concern about ensuring that students are learning. However, many schools are stepping up to the challenge of teaching in a new way through the use of technology.

The students in Charles County Schools have access to some of this new technology due to a partnership between Charles County Public Schools and the Community Bank of the Tri-County. Jim DiMisa of the CBTC recognized the need for students to have a solid grounding in financial training due to the dangers of credit card debt, uncertainty in the economy and the need to save for retirement.

At no cost to the school, the CBTC works to help create a program of online financial training using the Financial Literacy Platform for High Schools or EverFi™ system. This program is an online tutorial where the students learn in an interactive, visual format. It uses examples taken from real life using a format modeled in part on the popular and recognizable SimCity games. By using this format, the program walks the student through the training in which their financial decisions directly impact their online avatar’s life. These direct impacts bring home the lesson in a way traditional lecture and books simply cannot match.

The students using the program reap the benefits using a format which the United States Air Force found beneficial in its own training. By fashioning the lesson in the form of a familiar game, students learn the program faster so they have more time for learning rather than spending time digesting how to operate the program itself. The familiarity increases retention of the lessons and students enjoy the lesson as well.

The EverFi system trains students on a number of important financial concepts:

• Use and risk of Credit Cards
• Budgeting and Managing Debt
• Savings and Retirement Planning
• Different Loan types and College financing
• Home ownership versus renting
• How the U.S. financial system works
• Stock trading and how the Stock Exchange works

The overall reaction to the program has been very positive. Teachers enjoy being able to track their students’ progress through the program and they can provide one-on-one lessons as needed. Teachers also found students using the program were more knowledgeable and asked better questions in class. To everyone involved the program has been a win for the Charles County schools, the teachers, students and the community in general.

Charles County’s property values have encountered some tough sledding. The melt-down of the housing bubble, the fallout from the robo-signing scandal and an explosion of foreclosures have caused property values to drop all across the country. The housing market is still struggling to correct from the over-inflated boom era vales. Charles County, Maryland has been hit hard in this environment and seen median property values drop for the fourth year in a row. What does this mean for someone interested in moving to the area?  What affect does this steady decline have?

The Good and Bad of Declining Property Values

The key to looking at declining property values is to see that it’s not necessarily negative. Certainly those who whose home values were inflated are facing losing a lot of money. However, when one buys a home, there is always the risk the value will go down instead of up. In the volatile housing market of the last decade, many home buyers bought homes under the faulty idea that home values would always go up.

So now we are seeing a correction to where the market is returning to realistic home property values. To use one example, this presents an opportunity for buyers to buy a home which once sold for $450,000 for as low as $350,000 and to have confidence that this value will hold.

The bad, of course, is felt acutely if one happens to be the owner of a $450,000 mortgage on a home which now has a value of only $350,000. Another negative accrues to Charles County because it must make do with tax receipts on a home that has dropped $100,000 in value. This has led to tight budgets not only in Charles County but for counties across the nation. However, the current problems obscure the fact that Charles County remains an excellent place to live.

The Ground Truth

While property values have dropped for the fourth time in as many years, one has to remind oneself why they were high to begin with. The answer is simply that it was worth paying $450,000 to live in Charles County. Why? There are many reasons ranging from the scenic beauty of the area, to the excellent schools and colleges, to the availability of work in the Washington D.C. metro area. None of these factors have changed. So, in the short term there will be budget issues for city and county politicians to deal with, but the fact remains that Charles County is an attractive place to live.

Viewed from this standpoint, Charles County property values declining means prospective buyers are well positioned to be able to purchase a home and reap the rewards of a buyer’s market.

In March, 2009 the federal government initiated the Home Affordable Refinance Program (what is now called HARP 1.0) in order to help struggling homeowners in cases where the value of their mortgage exceeded the value of their home. The larger goal was to help move the housing market towards stability. To many observers, HARP 1.0 failed to achieve its objectives. In response, the government has launched an updated version of the program, now called HARP 2.0. The hope for “underwater” or “upside-down” homeowners is that, this time, relief will materialize. Let’s look at how the new edition of HARP works.

The original version of HARP required that participants have a loan-to-value (LTV) ratio less than 125% but many homeowners’ LTV fell below this level so HARP was unavailable to them. Now, under HARP 2.0, homeowners must simply have homes valued less than their mortgage (and the loan must be owned or guaranteed by Fannie Mae or Freddie Mac). It also requires that the loan be in good standing with 12 months history of good payments.

Next, the original HARP was mainly designed for the five largest banks (Citigroup, Wells Fargo, Bank of America, Ally Financial and JPMorgan Chase), but HARP 2.0 includes mortgage companies across the nation. These loan servicers are able to qualify people for a loan even where the borrower previously had loan insurance attached – a problem with the first version of HARP.

Here are some additional changes in HARP 2.0:

• It limits lender’s liability if loans default. Fannie and Freddie will not force lenders to buy back a problem loan. In short, this will increase HARP’s reach. Lenders will be more interested in participating so homeowners will face an easier time obtaining a loan modification.
• Fees charged by Fannie and Freddie to lenders for high LTV loans have been removed so loans will be cheaper for homeowners.
• Credit and income requirements have been eased. Provided that one’s new HARP monthly payment is not more than 20% more than the current payment, specific credit and income guidelines do not apply. This means that low credit scores or high debt-to-income ratios don’t automatically disqualify applicants.

There are a number of additional changes in HARP 2.0, all of which are designed to benefit homeowners in difficult situations. To read more visit here and here.

For more information about the HARP 2.0 program and all of your real estate needs contact DeHanas Real Estate Services at (301) 870-1717. We're here to help!