The New York Times: Lose homes, pay more tax

Investors in second or multiple homes stand to be among the biggest losers from the housing downturn.   That’s because proposed mortgage bailout programs don’t address second homes and investment properties.  Many owners of multiple properties don’t realize that investments they thought would help them build long-term wealth may in fact leave them in bankruptcy and facing a sizeable tax debt.

MAKING SENSE OF THE STORY FOR CONSUMERS

• Homeowners who borrowed against the value of their second home, or who financed the purchase of their second home and subsequent homes by pledging their primary home or other properties as security, may be liable for taxes on the difference in value should they sell any of their properties for a price less than the value owed on the mortgage.
• Under the Mortgage Forgiveness Debt Relief Act, a homeowner doesn’t have to pay taxes on forgiven debt if the collateral behind the mortgage is owner-occupied.  That provision doesn’t apply to a growing number of homeowners renting out their second home or investment property.  Of some 7.5 million vacation homes, only about 10 percent are considered owner-occupied, according to the NATIONAL ASSOCIATION of REALTORS® (NAR).  Many of these homeowners borrowed against the ever-increasing (or so it seemed) value of these properties to finance improvements or to buy other properties.
• There may be a way out for some, one bankruptcy lawyer counsels:  Get a lender to agree that foreclosure “fully satisfies all obligations under the loan.”  That might protect the seller from having to pay taxes on the forgiven debt – although one attorney said, “I sure don’t want to be the one litigating it” in court.

SOURCE: New York Times By JONATHAN GLATER  Published: May 30, 2008

IMPORTANT: Always consult a tax advisor for tax questions. Consult an attorney for legal advise. Brokers, Realtors and real estate agents do not have expertise in these areas. 

CNNMoney.com: Banks miss an easy housing fix

Mortgage lenders say they are there to help homeowners who are having trouble making their monthly payments but who can’t sell their home for what it is worth in today’s market.  But real estate agents and others say both homeowners and the banks themselves lose out when banks are unable to close so-called “short sale” transactions.

MAKING SENSE OF THE STORY FOR CONSUMERS

• In a short sale, homesellers ask their lender to accept a buyer’s offer that is less than the amount needed to pay off the balance of the mortgage.  Lenders who agree to a short sale also typically agree to forgive the remaining debt.
• Many call short sales a win-win for lenders and homeowners.  The homeowner avoids foreclosure and banks avoid the cost of carrying the property through the lengthy foreclosure process, not to mention the hassles of selling an empty property in a market saturated with other foreclosures.
• On average, lenders lose approximately 19 percent of a mortgage’s value with a short sale but lose an average of 40 percent on mortgages that proceed to foreclosure, according to one source.
• The problem with short sales?  Like other foreclosure mitigation efforts, the challenge is in determining which financial entity “owns” the loan and, thus, has the final say on a short sale offer.  Banks also have been slow to ramp up internal processes needed to review and approve short sale packages.  Delays and last-minute dickering often prolong or even derail transaction closings and creates frustration for potential homebuyers and their real estate agents.

SOURCE: By Les Christie, CNNMoney.com staff writer Last Updated: May 28, 2008: 11:16 AM EDT