Tag Archives: homeowners

housing.prices

TCA Assists 10K Arizona Homeowners with Counseling

Take Charge America, Inc., a non-profit credit counseling and housing counseling agency in Phoenix, marked a milestone this year. It has now assisted more than 10,000 Arizona homeowners with housing counseling. Most of this assistance was for foreclosure prevention, a free service that helps homeowners avoid foreclosure or mitigate losses caused by foreclosure.

As a response to economic conditions, Take Charge America introduced foreclosure prevention counseling in 2008. The organization is approved by the U.S. Department of Housing and Urban Development (HUD) to assist distressed homeowners statewide with a variety of solutions that could potentially save their homes, such as accessing and sustaining loan modifications, refinancing and principal reduction.

To date, Take Charge America has helped more than 1,100 individuals and families save their homes, primarily through mortgage modifications. Specially trained counselors work directly with homeowners’ mortgage companies to achieve the best possible solution based on their circumstances.

“Headquartered in one of the hardest-hit states, we were compelled to help Arizona families navigate the housing crisis,” said David Richardson, chief executive officer of Take Charge America. “While we’ve made significant strides, there are still many homeowners who need our help. Foreclosures may be declining, but the threat is still far above normal levels.”

Foreclosure prevention counseling is a free service mainly funded by grants and government awards. Take Charge America was recently awarded $300,000 by the Arizona Attorney General’s Office to expand one-on-one foreclosure prevention counseling, enabling the organization to expand its reach.

Homeowners who are at risk of foreclosure can call Take Charge America at (623) 266-6382 or (866) 987-2008 to speak with a counselor.

Take Charge America is also HUD-approved to provide reverse mortgage counseling to senior homeowners and pre-purchase counseling to new homebuyers.

For more information about Take Charge America’s services, visit www.takechargeamerica.org.

foreclosure

TCA Awarded $300K for Foreclosure Counseling

Take Charge America, Inc., a non-profit credit counseling and housing counseling agency in Phoenix, was awarded $300,000 by the Arizona Attorney General’s Office over the next three years to provide free foreclosure intervention counseling to Arizona homeowners.

Take Charge America will use the funds to assist more homeowners with one-on-one counseling, primarily individuals and families with low-to-moderate income, and who are Spanish-speaking.

Housing counseling services at Take Charge America are approved by the U.S. Department of Housing and Urban Development (HUD). Take Charge America’s counselors can help homeowners avoid foreclosure or mitigate losses caused by foreclosure with a variety of solutions, such as accessing and sustaining loan modifications, refinancing and principal reduction.

“Arizona families are among the hardest hit by the economic downturn, and many are still struggling to meet their mortgage payments,” said Take Charge America Chief Executive Officer David Richardson. “This award will enable us to assist even more residents in need, helping them navigate the complex mortgage loan industry and possibly save their home.”

Take Charge America is one of 16 organizations throughout Arizona selected by the Attorney General’s Office to receive a share of the $5 million in housing counseling assistance available through a national mortgage settlement with the nation’s five largest mortgage loan servicers.  The funds help pay for the cost of the foreclosure intervention counseling that is provided free to Arizona homeowners.

Take Charge America introduced foreclosure prevention counseling in 2008 as a response to the mortgage crisis. It is HUD-approved to assist distressed homeowners statewide. To date, the non-profit has helped more than 10,000 homeowners with housing counseling.

Homeowners who are at risk of foreclosure can call Take Charge America at (623) 266-6382 or (866) 987-2008 to speak with a counselor.

For more information about Take Charge America’s services, visit www.takechargeamerica.org.

home prices are rising

Phoenix-Area Home Prices Continue To Rise

Phoenix-area home prices continue to rise, but a short supply of available homes is causing the amount of activity in the market to fall. A new report from the W. P. Carey School of Business at Arizona State University gives an update on the hard-hit housing market of Maricopa and Pinal counties, as of April:

  • The median single-family home prices are up 25 percent from a year ago.
  • The overall supply of homes for sale is down 54 percent from last April.
  • The number of single-family homes sold this April was down 11.5 percent from last April, largely due to the lack of supply.

Anxious Phoenix-area homeowners will be relieved to see the median single-family home prices in the area went up 25 percent, from $112,000 to $140,000, between April 2011 and April 2012. Realtors will note the average price per square foot went up 16.5 percent in the same timeframe. However, the new W. P. Carey School report indicates we could be seeing even more activity, if more homes were available for sale.

“April is normally a very busy month for home sales, but this year’s sales are weaker than last year’s due to the unusual lack of supply,” says Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business. “We’re looking at only about 8,800 single-family homes for sale in the Greater Phoenix area, and more than 25 percent are priced at more than $500,000. The inventory of single-family homes for sale under $250,000 with no existing contract is equal to only 21 days of supply.”

Orr says we have a very unbalanced market with many more buyers than sellers. Home prices have been going up since they reached a low point in September 2011. Condominiums and townhomes are included in the boost. Their median sales price rose about 23 percent from April 2011 to April 2012, going from $72,500 to $89,050.

“Demand remains strong in the market, as evidenced by multiple-bid situations for the majority of resale home listings,” says Orr. “Most homes priced well are attracting multiple offers within a couple of days. Up to 20 or 30 offers for a home are becoming common, and often, many offers exceed the asking price. As a result, in the single month from March to April, the overall median sales price increased by 3.8 percent.”

The areas that suffered the most price damage during the recession, such as El Mirage, Maricopa, Tolleson and Glendale, are now seeing the most positive price movement. A few areas that were least affected by foreclosures, such as Cave Creek, Fountain Hills and Wickenburg, are still showing negative price movement.

Overall, foreclosures are down 62 percent in the Phoenix area from last April. However, one note of concern comes from the number of foreclosure starts – homeowners receiving notice their lenders may foreclose in 90 days. That number went up 4.7 percent from last April. Orr says he has seen a slight uptick in the rate of foreclosure notices since the signing of a recent legal settlement between the states and five of the nation’s largest housing lenders.

New-home sales, normal resales and short sales are up year-over-year, and most lenders have recently encouraged troubled homeowners to use short sales as a preferred alternative to foreclosure. Meantime, sales of homes owned by banks, Fannie Mae, Freddie Mac and the government are going down. In fact, so-called “distressed supply” dropped 81 percent from April to April.

“In order for us to see a more stable housing recovery, the basic rules of economics require prices to change enough to bring a new wave of sellers onto the market,” explains Orr. “That hasn’t happened yet, and so far, supply remains insufficient to meet demand.”

Orr’s full report on Phoenix-area home prices, including statistics, charts and a breakdown by different areas of the Valley, can be downloaded. More analysis is also available from knowWPCarey, the business school’s online resource and newsletter.

centurylink digging project

CenturyLink Celebrates National Safe Digging Month

This April marks the fifth annual National Safe Digging Month, and CenturyLink, Inc. is reminding Arizona residents to always call 811 a few days before any digging project.

When calling 811, homeowners and contractors are connected to the local one-call center, which notifies CenturyLink and other appropriate utility companies of their intent to dig. Professional locators are then sent to the requested digging site to mark the approximate locations of underground lines with flags, paint or both. According to the Common Ground Alliance’s Damage Information Reporting Tool (DIRT) report, a utility line is damaged by digging once every three minutes nationwide, and one-third of these incidents are caused by failure of the professional excavator or homeowner to call 811 before beginning their digging project.

Striking a single line can cause injury, repair costs, fines and inconvenient outages. Every digging project, no matter how large or small, warrants a call to 811. Installing a mailbox, building a deck and planting a tree or garden are all examples of digging projects that should only begin after calling 811 to have underground lines appropriately marked.

“As April marks the traditional start of digging season, we are reminding individuals and companies to call 811 before they begin digging,” said Ken McMahon, CenturyLink’s vice president and general manager for Phoenix. “By calling 811 to have the underground utility lines in their area marked, homeowners and professionals are making an important decision that can help keep them and their communities safe and connected.”

The depth of utility lines can vary for a number of reasons, such as erosion, previous digging projects and uneven surfaces. Utility lines need to be properly marked because even when digging only a few inches, the risk of striking an underground utility line still exists.

For more information, visit www.call811.com.

Income Tax Traps

Short Sales And Foreclosures: Income Tax Traps For The Unwary Homeowner

Short Sales and Foreclosures: Income Tax Traps for the Unwary Homeowner

by Stuart Pack, J.D. and Kelly C. Mooney, J.D., L.L.M.

When considering a short sale, foreclosure or other strategic default under the terms of a mortgage or deed of trust, most homeowners and many professionals focus on the immediate concern of whether the transaction will result in personal liability for any debt deficiency resulting from the short sale or foreclosure.

However, the income tax consequences of a short sale or foreclosure should also be given serious consideration, as, in many cases, the possibility of negative income tax consequences could outweigh any potential benefits of a decision to short sell or walk away from the property.

For federal income tax purposes, a short sale of real property or a foreclosure upon real property (whether via a judicial foreclosure or a trustee’s sale) can trigger two distinct types of income tax consequences, depending on whether the debt at issue is “recourse” or “non-recourse” for federal tax purposes. These income tax consequences and the differences between recourse and non-recourse debt are discussed below.

1. Tax Consequences of a Short Sale or Foreclosure With Respect to Recourse Debt

If the debt in question is recourse debt for federal tax purposes, any short sale or foreclosure that involves the forgiveness or cancellation of all or a portion of the debt typically triggers the recognition of (a) cancellation of indebtedness (“COD”) income to extent that the amount of the forgiven debt exceeds the fair market value of the foreclosed upon or short sold property; and (b) gain or loss from a “deemed” sale or exchange of the foreclosed upon or short sold property (i.e., the taxpayer is treated as though he or she sold the property for federal income tax purposes). Consequently, the federal income tax consequences of a short sale or foreclosure with respect to recourse debt are bifurcated between the recognition of COD income on the one hand and the recognition of gain or loss on a deemed sale or exchange of the property on the other.

(a) The COD Income Component

COD income is the term tax professionals use to describe the kind of income that arises for tax purposes when debt is cancelled or forgiven for less than its full face or principal amount.  COD income is specifically included in a taxpayer’s gross income under Section 61(a)(12) of the Internal Revenue Code.  Importantly, COD income is always treated as “ordinary” income for federal tax purposes, such that the tax rates applicable to ordinary income (which can be as high as 35% for individuals) apply to COD income.

(b) The Sale or Exchange Component

Like any sale or exchange of real property, the “deemed” sale or exchange of the short sold or foreclosed upon property that occurs upon the cancellation of recourse debt can trigger the recognition of gain or loss.  The amount of gain or loss is determined by comparing the fair market value of the property at the time of the short sale or foreclosure to the taxpayer’s adjusted tax basis in the property.

Most often, due to the current economic situation, short sales or foreclosures result in a loss because the taxpayer’s basis in the property exceeds the property’s fair market value.  In the event that the taxpayer held the property as a capital asset for a sufficient period of time, the gain or loss recognized on the deemed sale will be treated as capital gain or capital loss for federal income tax purposes.

While the recognition of capital gain can be beneficial, due to the lower (i.e., 15%) tax rate on capital gain, the recognition of capital loss may not be as helpful.  In general, capital losses can only be used to offset capital gain and cannot be used to offset ordinary income (like COD income), although individuals can use up to $3,000 in capital losses each year to offset ordinary income.

2. Tax Consequences of a Short Sale or Foreclosure With Respect to Non-Recourse Debt

If the debt in question is non-recourse debt, any short sale or foreclosure that involves the forgiveness or cancellation of all of a portion of the debt will only trigger the recognition of gain or loss on a “deemed” sale or exchange of property.  The forgiveness of non-recourse debt, in cases involving a short sale or foreclosure on real property, does not trigger the recognition of COD income.  In cases involving non-recourse debt, the amount of the gain or loss is determined by comparing the outstanding amount of the debt to the taxpayer’s adjusted tax basis in the property.  Again, the character of the gain or loss depends on whether the taxpayer held the property as a capital asset.

3. Distinguishing Recourse from Non-Recourse Debt

Often, the most difficult component in determining the likely tax consequences of a short sale or foreclosure is ascertaining whether the debt at issue is recourse or non-recourse for federal tax purposes.  In essence, “recourse” debt is debt for which the borrower is personally liable and “non-recourse” debt is debt for which the borrower is not personally liable, but which is usually secured by other assets, such as real estate.  That being said, a number of factors go into determining whether a particular debt is recourse or non-recourse, such as the language of the debt instrument, the applicability of any State anti-deficiency statutes (for example, Arizona’s anti-deficiency statutes may be viewed as turning an otherwise recourse debt into a non-recourse debt in cases in which the debt is purchase money and the other statutory requirements are satisfied), and, in some cases, the manner in which the debt is foreclosed upon.  Given the complexities that can arise, it is recommended that a tax or real estate professional be contacted for appropriate advice.

4. Exceptions and Exclusions

In cases in which a foreclosure or short sale is likely to trigger the recognition of taxable income, whether the income is COD income or capital gain, all may not be lost.  The Internal Revenue Code provides a number of exceptions and exclusions to the recognition of these types of income, one or more of which might apply.  Again, in cases in which the recognition of COD income is likely, a tax professional should be consulted to determine if any exceptions or exclusions are likely to apply.

(a) COD Income

Section 108 of the Internal Revenue Code provides a number of exclusions and exceptions to the recognition of COD income.  In cases involving a short sale or foreclosure, the most commonly applicable exclusions include:

i. Mortgage Forgiveness Debt Relief Act

Codified as Section 108(a)(1)(E) of the Internal Revenue Code, this Act enables taxpayers to exclude up to $2 Million of COD income, so long as the cancelled debt was secured by the taxpayer’s principal residence and was incurred in the purchase, construction, or substantial improvement of the principal residence.  However, this exclusion is only in effect through December 31, 2012.

ii. Insolvency

When a taxpayer is “insolvent” for federal income tax purposes immediately before the event triggering the recognition of COD income, the COD income can be excluded from federal income tax to the extent of the taxpayer’s insolvency.

iii. Bankruptcy

If a bankruptcy petition is filed prior to the short sale or foreclosure, the taxpayer will not be required to recognize COD income by reason of the discharge.  However, if the bankruptcy petition is filed after the short sale or foreclosure then, unless some other exclusion applies, COD income would be recognized.

(b) Capital Gain

Under Section 121 of the Internal Revenue Code, any capital gain recognized on a “deemed” sale or exchange of a principal residence can be excluded from taxable income to the extent of $500,000 for married persons filing joint tax returns or $250,000 for unmarried persons.

Example
Taxpayer (T), a confirmed bachelor, buys a one family house in 1990 for $100,000 and finances it, in part, with a $50,000, 15-year mortgage loan.  In 2005, immediately after the mortgage loan is paid off in full, T decides to take advantage of the skyrocketing increase in real estate prices by taking out a new interest only mortgage loan in the amount of $300,000.  As part of the mortgage process, T’s house was appraised by his mortgage lender at $400,000.  T uses $250,000 of the new mortgage loan to buy a vintage DeLorean automobile and pay off his credit card debt and uses the other $50,000 to substantially improve the house.  In 2010, T comes to the unhappy realization that the fair market value of his house has plummeted to $200,000 and decides to short-sale the house.  T finds a buyer for $200,000 and T’s lender agrees to accept the $200,000 short sale proceeds to release the house from the lender’s deed of trust (and, in writing, the lender also agrees to release T from personal liability for the $100,000 deficiency).  What are the likely federal income tax consequences to T?

1. Capital Gain from the “Deemed” Sale of House

Since T bought the house in 1990 for $100,000 and made $50,000 of substantial improvements to the house, T’s adjusted tax basis in the house is $150,000.  Since T was deemed to have sold the house as part of the short sale in 2010 for $200,000, T will recognize $50,000 of capital gain (even thought T’s lender and not T, will receive all of the proceeds from the short sale).  If the house is T’s primary residence and other requirements of Internal Revenue Code Section 121 are satisfied, the $50,000 capital gain can be excluded from T’s taxable income because of the $250,000 exclusion right.  If the house was not T’s primary residence, then the $250,000 exclusion does not apply and T will be required to recognize the $50,000 of capital gain.

2. Cancellation of Debt Income

Assuming the new mortgage loan is recourse debt for federal tax purposes (because the debt is non-purchase money, the debt may not be treated as non-recourse under an applicable anti-deficiency statute in the case of a short sale), T would also recognize $100,000 of COD income.  If the house was T’s primary residence, then the Mortgage Forgiveness Debt Relief Act would enable T to exclude up to $50,000 of the $100,000 of COD income (because $50,000 of the $300,000 loan was used to substantially improve the house, it would be considered “qualified principal residence indebtedness”).  However, because the other $50,000 of the $100,000 deficiency was used to purchase the DeLorean and pay off T’s credit card debt, the other $50,000 would be taxable as ordinary COD income, unless T can establish he was insolvent at the time of the short sale or one of the other exclusions to the recognition of COD income applies.  If the house was not T’s primary residence, then the Mortgage Forgiveness Debt Relief Act would not apply and the entire $100,000 deficiency would be treated as taxable COD income, unless T can establish he was insolvent at the time of the short sale or one of the other exclusions to the recognition of COD income applies.

Of course, as each individual homeowner’s situation may vary, it is vital in considering any short sale or foreclosure to discuss your individual income tax situation with a tax professional.

For more information about income tax traps:

Stuart Pack, J.D. is a partner with the law firm of Nagle Law Group, P.C. in Scottsdale, Ariz. He concentrates his practice in the area of commercial and residential real estate law. He can be reached at Stuart.Pack@naglelaw.com or 602-595-6951 (x122).

Kelly C. Mooney, J.D., L.L.M. (Taxation) is a shareholder with the law firm of Gallagher & Kennedy, P.A. in Phoenix, Ariz. She practices in the area of federal tax law, with an emphasis on the taxation of individuals, corporations, partnerships, tax-exempt entities, and civil tax controversy matters. She can be reached at kcm@gknet.com or 602-530-8075.