The Tax Goddess Blog

Next Short Sale Myth: Lenders lose more on foreclosures than short sales.

Since the lender may be protected by mortgage insurance or may have sold a loan into pools, the investor may receive more sales proceeds through a foreclosure at a lower sale price than through a short sale. In a foreclosure, the senior note holder (investor) gets paid before junior tranch holders are paid. This could result in a better payout for the senior note holder as a result of foreclosure (the senior note holder carries the majority vote on decisions related to this loan). Lenders also use NPV (Net Present Value) calculations to determine their best option. This takes into consideration many factors that consider the econimic interests only of the lender/investor. Hence, the reason that lenders/investors will sometimes make decisions to foreclose that seem on the surface not to make sense is often the result of the NPV test.

Short Sale Myth: Arizona is a non-recourse state.

While there are laws that protect the homeowner from deficiency in a foreclosure or deed-in-lieu, these laws do not apply in a short sale. Only an experienced real estate attorney, after reviewing all loan documents, deeds-of-trust and short sale documents can properly ascertain that liability. A Realtor should NEVER give advice as to the homeowner's potential for deficiency liability. Even if that advice is technically correct, some lenders may file lawsuits regardless of the merits of the case, knowing that a certain percentage of borrowers will pay just to avoid going to court. Additionally, homeowners will often make incorrect statements as to the nature of their loans. Currently, we find about 60% of our clients are incorrect as to the nature of their loans which affects the potential for anti-deficiency protection. If a borrower is sued by their lender, there is a reasonable chance they will file a suit against the Realtor that handled the short sale. These suits can be difficult to defend, even if the Realtor made no representations as to the homeowners potential liability resulting from a short sale.

More short sales myths coming...

Real Estate - What Status are you?

The IRS, in an effort to help their pockets (of course!), has tightened restrictions on the use of the real estate professional status.

There are 3 levels of real estate status that an individual can elect to take on their tax return:

1) (Lowest Level) Investor - Basically meaning that your interest in real estate does not extend beyond a passive purchase, maintenance (sometimes even thru a management company), and sale.  In these cases, even if you have the property set up as a rental property, any losses from the property are "held" on your tax return and not used against any other type of income (whether it be by sale or be by ordinary income like W-2 income) until the property is sold.

2) (Mid-Level) Active Participant - Meaning that you spend at LEAST 500 hours working on real estate, thinking real estate, dreaming real estate, reading books, taking classes, viewing properties, etc.  This, depending on your AGI (Adjusted Gross Income) Level, means that you might be able to deduct up to $25,000 worth of any losses each year (normally on properties used as rentals) against ordinary income.

3) (Highest level) Professional - In this status, all losses are taken against ordinary / any other kind of income in the current real (if there are losses, once again, normally from rental of the properties).  In this status, you must have at least 750 hours AND you work on real estate MORE THAN 50% of your time.  You often see these rules met when one spouse has a W-2 job and the other is the one involved in the real estate (not necessarily a licensed real estate person, such as a broker, or agent).

The IRS has tightened their standards for audit on which they allow the professional status to be taken.  Previously the profession of CPA's were told that you could log hours for any of the following:
- Classes taken
- Viewing properties
- Signing any real estate documentation (purchases, rental agreements, etc.) and the drafting of such
- Repairs and Maintenance hours on the property
- Lunches and Meetings regarding real estate
- Basically anything that had to do with thinking, breathing, loving, and living real estate.

Now, the IRS is taking a much more strict view on what is acceptable for achieving the 2nd and 3rd status levels.  Basically, if you aren't actually handling the real estate (such as repairs and maintenance) or taking specifically logged class hours, etc. the IRS may have issue with the hours requirement of whichever status you elected to choose on your tax return!

PLEASE speak with your CPA (our Tax Goddess can be found here if you have any questions :) to make sure that the activities that you are doing will continue to qualify you for the status and tax strategy you have choosen!

Looking our for your best interests,

Your Tax Goddess~

Mortgage Industry Melt-Down?

Do you Know???

Today's Article is about the mortgage / real estate meltdown.

There are a lot of clients being affected by the changes happening in the mortgage industry;

-  The increase in rates on those Adjustable Rate Mortgages (don't we wish they could have stayed at 1% interest forever!)

- Short and Forclosure Sales

- No Cash flow on rental properties and more so Negative Cash Flow

It is an unfortunate time if you've overextended yourself or got caught up in the hype of the idea of "Make Millions in Real Estate," but, for those that are still floating there are some good things coming about from this mess:

1.  The government has been promoting a new FHASecure program. 

The purpose of this program is to assist borrowers with ARM mortgages that have become delinquent due to the reset of the interest rate. FHA Secure loans have the following features:

ü No prepayment penalties

ü No low initial teaser rates

ü Full documentation of ability to repay the mortgage

ü Require mortgage insurance paid by the borrower

ü Require taxes and insurance to be paid via an impound account

The website (set up by the HUD) has all the information you'll ever need on the FHA Secure program: http://www.fha.gov/about/fhascusqa.cfm

2. Due to the high forclosure rates and short sales rate, if you are in the mode to BUY property right now is a great time!  There are a lot of open properties on the market and a lot of people trying to get out and hold on to their shirt tales.

3.  For those that are staying in the market, depreciation is a wonderous write off that can be taken on any property.  A brief example of it's benefits:

- It's a non-cash expense - meaning you are not shelling out more than you have to

- For every 100k in purchase price on a rental property you can get approximately $7,200 in depreciation!  That is a fabulous deal if you have other income to write that off against!

PLEASE BE ON AWARE!!! This market is NOT for the weak of stomach or the uneducated. 

SWC HIGHLY recommends that you find a real estate agent and a mortgage broker that are familiar with this market and it's perks and windfalls BEFORE you make any decision to get into it!

If you have any questions about the above information, need a referral to a great mortgage or real estate person, or need some advice, please contact your CPA and ask some questions! 

Bad Feng Shui is a Cause to Not pay Singapore Taxes!

Bad Feng Shui = No Tax!

What an interesting look into the taxes of foreign countries.  It always amazes me that we have such diverse taxing and collection systems all over the world. 

I wonder if bad Feng Shui would be a defensible unforeseen circumstance in the U.S. to be able to utilize the §121 exclusion and not pay tax on the gains on the sale of your home!

If anyone has any input, I would be thrilled to hear what you think!  As I have read the court cases, people are starting to take unforeseen circumstances fairly far, and beyond what the IRS thinks is reasonable!

The "IRS" (Theirs) can't let us get away with too much eh?!

Tax Tricks - Building Depreciation

Tax Tricks! - Building Depreciation
Dear Agatha the Auditor,

I have been looking at the real estate market here in Arizona and boy is it HOT!  I am really interested in buying a piece of commercial property, renting it out to some tenents, but I've heard that even though I buy this really expensive building, I can only write off a little bit over each of the next 39 years?  There has to be more of an incentive to buy this thing, isnt' there?????

Help,

Sticker Shocked in Scottsdale,

-------------------------------------------------------
Dear Sticker Shocked in Scottsdale,

It is true that the regulations say that real property in the form of commercial buildings is depreciable over 39 years (meaning you only get to write of 1/39th of your purchase price each year), however there is hope!

The IRS uses something called class lives for each different type of property.  So, for example:

- Commercial Buildings - 39 years
- Residential Rental Properties - 27.5 years
- Land Improvements - 15 years
- Building Improvements - 3-15 years (depending)

Of course, what this means, is that if you as a building owner have something called a "Cost Segregation Study" performed on your building, you will have additional depreciation for the first years you own the building.  This is great if you are planning on selling the building after 10 or so years.

Now, Sticker Shocked in Scottsdale, please realise that most Cost Segregation Studies are not cheap, but, even if it takes a 1,000,000 building from situation A to situation B you are getting quite an additional benefit.

Situation A: 1,000,000 at 39 years = 25,641 / year
Situation B: 1,000,000 - 70% at 39 Years = 17,949
                                 - 30% at 5 years = 60,000
                                   -------------------------------------
for a total of                                            77,949

in depreication - the savings are worth the cost!

Of course, talk to your CPA regarding the details of your building and what else can be done to help you deduct additional depreciation, but remember to look in the little places for BIG deductions!

Yours,

Agatha the Auditor