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By Tara-Nicholle Nelson, MA, Esq., FrontDoor.com | Published: 2/24/2009
Stimulus and recovery -- what sound like the elements of a physical therapy regimen are, in fact, the keywords of the federal government's therapeutic interventions into the economy. Tax rules are a key weapon in the governmental recession-fighting arsenal; tax cuts and credits are some of the easiest ways the feds can try to encourage different groups to do different activities that might stimulate or minimize the damage to the housing market.
Fence-sitting buyers. Despite the strong buyer's market and the virtually impossible task of detecting the bottom of the market, many would-be buyers have been holding off, waiting for the market and prices to bottom out. To push folks off the fence, in 2008, the Bush Administration created an interest-free $7,500 loan from the government for first-time homebuyers who bought homes before July 1, 2009. This was a tax credit in the first year of homeownership that had to be paid back over six years.
However, in the stimulus package he signed in February, President Obama increased this tax credit to $8,000 and, more importantly, eliminated the repayment requirement! First-time homebuyers who close escrow between Jan. 1, 2009, and Dec. 1, 2009, will get an $8,000 refundable tax credit on their next return. Because the tax credit is refundable, if you owe less than $8,000 on your taxes, you will actually get a refund of the difference between the $8,000 and what you owe. There are income and other restrictions on who can take advantage of this tax credit.
Consult with your tax professional about timing your transaction and your tax filing -- some homeowners with firm plans to buy before fall 2009 are filing extensions and paying the taxes they owe by April 15 (to avoid penalties and interest), then waiting to file until after they close escrow, so they can immediately reap their $8,000 credit.
Upside-down sellers. A short sale is a transaction in which the sales price is less than what the seller owes on their mortgage(s), and the mortgage lender(s) agree to forgive some portion of what is owed to allow the home to be sold. The lender writes off the forgiven amount as "bad debt," and issues a Form 1099 to the seller, charging that seller with taxable income in the amount of the forgiven debt. Talk about kicking someone while they are down, right? You have to sell your home at a loss and then have to pay income taxes on the amount of debt waived by the lender! Some owners would rather lose their home to foreclosure than do a short sale and incur this sort of tax liability.
Well, sellers who complete short sales in 2009 can cross that particular tax issue off their lengthy-enough list of worries. Under the Mortgage Debt Forgiveness Relief Act, in most cases the IRS will not charge the usual income taxes on mortgage debt forgiven -- that is, short sales and even foreclosures -- which occur on or before December 31, 2012. There are exceptions, and short sellers will still receive and need to file their Forms 1099, as issued by the lender, to claim the temporary exemption. Consult with your tax advisor before you decide whether to sell your home short.
Owners of homes with property taxes disproportionate to their current market value. Many local property tax assessors operate on institutional assumptions that keep flat or increase the assessed value of homes in their area every year. Accordingly these homes' property taxes stay flat or increase in direct proportion to their assessed values.
As such, in a market with declining values, many homeowners experience sticker shock and pocketbook dismay when they open their annual tax bills to find the assessed value of their home has continued on an upward trajectory despite the fact that the real market value of their home has plummeted.
No matter the jurisdiction, an assessed value that is inaccurate due to declining home values may be contested -- either formally or informally. If the homeowner can provide proof of a lower market value, both the assessment and the corresponding tax bill can be reduced, sometimes saving the owner thousands of dollars! Visit your county tax assessor's Web site for information on what you must do to request a reduced assessment on grounds that the market value of your home has declined.
NOTE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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