UTAH REAL ESTATE INVESTOR

reprint: Realty Times

Realtors, home builders and consumers hoping not just for an extension of the $8,000 tax credit, but an expansion to all buyers in 2010, shouldn’t hold their breath.

That’s because it’s looking more likely that Congress will only agree to a continuation of the current credit beyond its scheduled November 30 termination date.

But that’s not bad news. Just a few weeks back the key question was: will Congress extend the credit at all? Now that looks like a pretty safe bet.

When it comes to tax issues, you’ve got to follow what New York Congressman Charlie Rangel is saying. He’s the chairman of the Ways and Means committee, and no tax legislation has even a chance of getting anywhere without his say-so.

On the other hand, bills he supports, they just about always make it at least to the House floor, and usually beyond.

Here’s what Rangel told reporters last week about the housing tax credit: “There’s no question I think it should be extended,” he said. How long, I haven’t discussed.” Rangel also said he doesn’t thing that “eligibility should be expanded beyond the first-time home buyers,” according to Dow Jones Newswires.

That’s probably the kiss of death for lobbyists pushing for an increase in the maximum credit to $15,000, and expansion of coverage to nearly all buyers of homes in 2010, and an increase in the income limits for eligible purchasers.

The National Association of Realtors and the National Association of Home Builders have been the most outspoken advocates of a year long extension and expansion of the credit, up to a maximum $15,000.

Informed of Rangel’s comments, home builders president Jerry Howard said he’s no longer as “optimistic about expansion” as he once was.

But, on the other hand, chairman Rangel’s endorsement of an extension of the credit — for a yet-to-be specified period of months — has got be a lifesaver for thousands of buyers who’ve been worried they’d miss out on this year’s credit because they can’t close their transactions by November 30.

The politics of the tax credit, and the likely rejection of a bigger credit, are all about the budget deficit. Lawmakers on both sides of the aisle are looking for ways to cover the multi-billion-dollar revenue costs of an extension of the credit. Some estimates go as high as $15 billion.

One idea advanced by Georgia Republican Sen. Johnny Isakson: tap into some of the unspent economic stimulus bill money still sitting in the $800 billion economic stimulus bill.

President Barack Obama’s “Making Work Pay” massive economic recovery package enacted in February, might be more appropriately names “Making Workers Pay” after American’s enjoying these tax credits discover they may have to pay them back next April.

Obama has boosted the tax credit as one of the big achievements of his first 100 days in office, stating that 95 percent of working families will qualify in 2009 and 2010.

The tax credit pays workers 6.2 percent of their earned income, up to a maximum of $400 for individuals and $800 for married couples who file jointly. Individuals making more than $95,000 and couples making more than $190,000 are ineligible.

The tax credit was designed to help boost the economy by getting more money to consumers in their regular paychecks. Employers were required to start using the new withholding tables by April 1, 2009.

So what’s the problem with the plan? Most workers started receiving the credit through small increases in their paychecks in the past months. But the new tax withholding tables issued by the IRS may cause millions of taxpayers to get more money than they are entitled to under the credit, and this money will have to be repaid next April.

The Internal Revenue Service (IRS) acknowledges these problems with the withholding tables but has done little to warn average taxpayers to date.

Problems for Single Workers with Two Jobs:

A single worker with two jobs making $20,000 a year at each job will get a $400 boost in take-home pay at each of them, for a total of $800. That worker, however, is eligible for a maximum credit of $400, so the remaining $400 will have to be paid back at tax time – either through a smaller refund of a payment to the IRS.

Problems for married couples with spouses who both work:

A married couple with a combined income of $50,000 is eligible for an $800 credit. However, if both spouses work and make more than $13,000, the new withholding tables give them both a $600 boost – for a total of $1,200. (There were 33 million married couples in 2008 in which both spouses worked. That’s 55 percent of all married couples, according to Census Bureau data.)

Problems for college students:

A single college student with a part-time job making $10,000 would get a $400 boost in pay. However, if that student is claimed as a dependent on a parent’s tax return, they don’t qualify for the credit and would have to repay it when they file next year.

Problems for retirees:

The Social Security Administration is sending out $250 payments to more than 50 million retirees in May as part of the economic stimulus package. The payments will go to people who receive Social Security, Supplemental Security Income, railroad retirement benefits or veteran’s disability benefits. The payments are meant to provide a boost for people who don’t qualify for the tax credit. However, they will go to retirees even if they have earned income and receive the credit. Those retirees will have the $250 payment deducted from their tax credit – but not until they file their tax returns next year, long after the money may have been spent.

Retirees who have federal income taxes withheld from pension benefits also are getting an income boost as a result of the new withholding tables. However, pension benefits are not earned income, so they don’t qualify for the tax credit. That money will have to be paid back next year when tax returns are filed. (More than 20 million retirees and survivors receive payments from defined benefit pension plans, according to the Employee Benefit Research Institute. However, it is unclear how many have federal taxes withheld from their payments.)

Tax Tip: Check your federal withholding to make sure sufficient taxes are being taken out of your paychecks. If you are married and both spouses work, you might consider having taxes withheld at the higher rate for single filers. If you have multiple jobs, you might consider having extra taxes withheld by one of your employers. You can make that request with a form W-4. The IRS has an online withholding calculator to help you check your withholding amounts. You can find this calculator at www.irs.gov or you can call your accountant or tax attorney to ask for assistance with adjusting your withholdings.

This information is provided by the tax professionals at Kingman Winslow LLC

In order to be a “real estate professional” under the law you must spend 50% or more of your time actively managing your properties AND perform 750 hours or more of your activities spent on your real estate activities. IF YOUR QUALIFY, then you can take additional passive activity losses against any type of income, including your spouses (BIG BENEFIT).

TIP: Being a licensed Real Estate Agent does NOT make you a “real estate professional” under the tax laws. This is one of the greatest myths and pieces of bad information that real estate investors get given to them that I see over and over again.

WARNING: The IRS is auditing tax returns that have selected the “real estate professional” box in order to take more of their rental losses. Thus, you must document all your activities spent managing your real estate investment properties and rentals. Keep emails, letters, a log-book of calls, etc…You as the taxpayer have the burden of proof and the IRS is making this classification a priority on audits.

This information has been provided by the tax professionals at Kingman Winslow LLC.

I have a simple strategy that I use when I want to get a short sale sold. Here is the process:

1. List the Property
2. Get an Investor Offer on the Property
3. Collect current Financials & other Short Sale Documents
4. Submit entire short sale packet to lender(s)
5. Order BPO/Appraisal and lender’s BPO/Appraisal
6. Start a “Dutch Auction” list price weekly reduction
7. Negotiate lowest acceptable net price to lender
8. Compare Highest & Best offer with lender’s approved price/value
9. Close transaction

Here is a short summary of the reasoning behind each step:

1. List the Property
The lender wants to know that we are doing everything we can to facilitate a sale. If the lender knows that it is listed and marketed on the MLS then we have the best chance of finding a qualified end buyer. They also know that the offers from a listed property represent “market value” and are more willing to negotiate a good settlement value.

2. Get an Investor Offer on the Property
Investors will always offer a low price on any property in order to get the best deal available. At this stage of the game it doesn’t matter, we just need a legitimate offer that we can submit to the lender to get the short sale process started (we are always honest and never fabricate an offer). We also want that offer to be low so that we can find the lowest acceptable value that the lender will approve.

3. Collect current Financials & other Short Sale Documents
The financial information needs to be current so it is collected when we have an offer. I have a network of investors so I know I’ll have an offer within a couple days of listing the property so I begin to collect this information immediately. The short sale documents include all the financial information to “prove” to the lender that the seller can no longer afford to keep the property and that they need to sell it. These documents also show what happened to the seller because they could afford the property when they bought it and now they can’t they afford it. All information needs to be truthful and honest.

4. Submit entire short sale packet to lender(s)
All the information is submitted in one packet to the lender. This keeps information from becoming lost and allows the process to move forward more quickly. Since most lenders are backed up with other short sales and foreclosures, the first several calls to the lender will just be checking on information and making sure that all information then lender needs has been submitted. Any missing information can quickly be resubmitted.

5. Order BPO/Appraisal and lender’s BPO/Appraisal
While almost no one does this, we order our own BPO on each property. We want to have an independent opinion of value and price. The 1st mortgage lender will almost always order their own BPO (an appraisal if the loan is over FHA limits) to establish value. With our own BPO in hand we will meet the BPO agent and show them the property and give them a copy of the BPO as a second opinion. We will point out those things which are important to the value of the property but that may not be obvious to someone not already familiar with the property. Our main objective is to get an idea of where that agent feels the value of the property will be (although they never tell us their value). We also use our BPO to send to any junior lein-holders so they are also aware of value (which makes negotiations with them go more smoothly).

6. Start a “Dutch Auction” list price weekly reduction
To get the best price available we need to have competing offers. Once the BPO has been completed by the lender we start to lower the price each week until we start to get offers on the property. If we don’t see any offers during the week we lower the price. (I like to lower the price on Thursday so that anyone looking for homes to view over the weekend will see the price change and come to see the home.)

7. Negotiate lowest acceptable net price to lender
Once all of the paperwork has been received by the lender the case/file is assigned to a negotiator who then orders the BPO/appraisal. (Note: We hold any subsequent offers until the negotiation is concluded to establish the best possible pay-off/settlement the lender will allow for the seller.) Once the BPO has been received by the lender we begin the actual negotiations. We know that the lender’s BPO value represents the price that the lender believes they can sell the property for (should they take the property back through foreclosure). We know that the lender’s bottom line is below that number because the foreclosure process is very expensive (attorney’s fees, property insurance, loan interest to Fed, selling costs, commissions, concessions, and dropping property values…not to mention the problems the lenders are having with too much bad debt on their books). Those costs generally add up to 15-20% of the property value (they can be significantly higher in upper-end homes). The lender will negotiate a value that is as high as possible but at least higher than their bottom line through the foreclosure process. Once they agree to a net value it is logged into their system.

8. Compare Highest & Best offer with lender’s approved price/value
Once we have determined the lender’s bottom line we will compare that value with our highest & best offer on the property. If the H&B offer is significantly higher than the lender’s approved bottom line then the investor will buy the property and resell it to the buyer with the H&B offer. However, if the H&B offer is not significantly higher then the lender’s bottom line then the H&B offer is submitted to the lender for approval and that buyer will close a single transaction. (Significantly higher means about 12-15% of the property value. The investor will have costs associated with 2 closings: 1% 1st closing costs, 3% money costs, 1% 2nd closing costs, 3% commission to 2nd buyer’s agent and the investor’s profit. So if the investor finds their own buyer they can reduce the sales price by 3% and still be profitable.)

9. Close transaction
Finally we close the transaction, either with or without the investor. The seller should be done with this settlement and no further negative reporting from the lender (our agreement with the lender states something to the effect of “satisfaction in full to seller”). Because the lender is writing off the “bad debt” lost in the negotiations, the seller may see a 1099 tax form which shows the lender’s loss as income for the seller. If the property was the seller’s principle residence then that “income” may be excluded from their taxes (some restrictions apply so consult your tax advisor).

Conclusion
At the end of the day this process is not 100% successful. However, it is a process that gives the seller the best chance of getting an approved short sale from their lender that is sellable in today’s market.

The economy has hurt a lot of people and many families have been forced our of their homes through the foreclosure process. With all the economic problems already weighing you down, what do you do when your mortgage company sends you a tax form 1099-C showing their loss as your gain? Does that mean you have to pay taxes on that money the mortgage company lost when you already have no money (which is why you lost your home in the first place)?

Not necessarily! There may be help through the Mortgage Forgiveness Debt Relief Act of 2007 (enacted Dec. 20, 2006). According to this act, up to $1,000,000 of forgiven debt on your principle residence may be excluded from your taxes (up to $2,000,000 if filing jointly). This debt forgiveness does not apply to second homes, investment property, business property, credit cards or car loans. Also, the debt on the principle residence must have been used to purchase, build or substantially improve the property (so if the loan was to get cash to pay for a new car, kid’s college, investments, etc., then this debt is not exempt under this act).

For most Americans this is extremely good news! Because of our country’s economic struggles, this debt relief act has been extended through 2012. To take advantage of this legislation you will need to fill out IRS form 982 and submit it with your other tax documents.

Have you heard about the new housing rescue bill that passed in July? One of the most exciting new provisions of the Housing and Economic Recovery Act of 2008 is the First-Time Home Buyer Tax Credit. The credit is designed to encourage first-time home buyers to go ahead and make the leap to purchase their first homes.

First Time Home Buyer Tax Credit Rules:

• The home must be purchased as a primary residence.
• You must not have owned a primary residence in the last three years. For couples, both individuals must not have owned a primary residence in the last three years.
• Must not be a non-resident alien as defined by the IRS in Publication 519.
• Individuals must have a modified adjusted gross income of less than $75,000 annually and couples less than $150,000 to qualify for the full amount.
• The home must be closed between April 9th, 2008 and July 1st, 2009.

How the tax credit works:

• The tax credit is 10% of the home’s sale price with a maximum of $7,500.
• You can claim the credit on taxes filed in 2008 or 2009.
• It’s a credit and not a deduction.
• It’s refundable, so if your tax liability is less than the credit, you can get the money back.

Tax Credit Loan Repayment Terms

The tax credit isn’t really a tax credit, it’s really just an interest free loan with some qualifications. You have to start paying back this loan within two years and you make equal payments over 15 years. When you sell your home, any profits will go first into paying off that loan. If you sell at a loss, the difference will be forgiven.

This tax credit (loan) along with the low prices and low fixed-rate loans make now the ultimate time to purchase your first home. For more information please call me at (801) 787-7797 or email me at khayyam@khayyamjones.com.