A lot of homeowners in trouble have been pleasantly surprised that their lender has not sent the dreaded Notice of Default, followed by a Notice of Trustee Sale. If you are going to loose a property, later is better, right? Well, I would like to suggest that you question this wisdom.
Under the current general understanding of the Tax Forgiveness, the Federal Legislation for the forgiveness runs out at the end of 2009, the state timeframe is actually a little sooner than the end of the year in California.
So, thinking as a Realtor and not being a tax professional – and I encourage anyone in foreclosure to seek both professional tax and legal advice – I think maybe there is a downside to a later foreclosure action. If your lender does not get to foreclosing on your property until later in the year or they have started the process but fail to proceed timely, a homeowner in trouble right now could find that their foreclosure action does not take place in this tax year. Consider this, if your foreclosure action is on a note of 500,000 and your property value is, lets be generous, 400,000, the lender has a loss of 100,000 that they will 1099 the homeowner for. The homeowner then receives this as ordinary income. At a 30% tax bracket you don’t have to be a tax professional or a rocket scientist to determine that for someone who just lost their house, their next fight could be with the IRS on taxes of nearly $30,000 for $100,000 they never really earned.
For this reason, I would recommend that homeowners in foreclosure seek tax advice to determine how a later foreclosure proceeding will affect them. If it seems that they will be adversely affected, they may want to consider other options. A short sale might still be a possible resolution that could occur before the end of the calendar year. A deed in lieu of foreclosure may be an action that could be negotiated before the end of the calendar year. Bankruptcy may be an option for some borrowers to consider.
For this reason too, I would caution people to be careful when considering a loan modification. If you cant afford the new payments think twice about accepting an agreement that will result in your default occurring in the next calendar year. More than 50% of people who accept a loan modification are falling back into default within the first 12 months. And, listen up, if your loan modification includes a principal reduction, expect a 1099 for the principal reduction amount and consider with your tax professional how that will affect you. The amount may not be eligible for automatic tax forgiveness.
Will our government extend the tax forgiveness, well it seems that we need another year to really alleviate considerable hardship. BUT we also have a government that needs your tax dollars. It’s anyone’s guess. For many of you in trouble, I am sorry for your hardship.
