How to buy a foreclosure

How to buy a foreclosure
Many buyers, especially first-timers, hope to purchase a foreclosed property at a bargain price.  While purchasing a foreclosed home can be a wise choice for some buyers, it is important that buyers understand the differences in buying at different stages of foreclosure and be prepared to take on the challenges typically associated with each.

MAKING SENSE OF THE STORY FOR CONSUMERS

  • There are three basic stages of foreclosure in California: Pre-foreclosure, trustee’s sale, and repossession, often called an REO or real estate owned by the bank.
  • Pre-foreclosure homes are in the foreclosure process, but have not yet been auctioned.  Owners of pre-foreclosed homes often try to sell the properties because they are “underwater,” meaning they owe more on the mortgage than the home currently is worth.  Many homeowners attempt to sell via short sale, where the lender must agree to accept less than the amount owed on the mortgage.  Buying at this stage of foreclosure often is a complicated and slow process. However, buyers of pre-foreclosed properties often are given the opportunity to inspect the home prior to purchasing, whereas this is not always the case when buying at other stages of foreclosures.
  • The second basic stage of foreclosure is the public auction at a trustee’s or foreclosure sale.  Homes in this stage often are well priced, but also come with challenges to buy.  These homes may not be available for inspection and buyers may later discover the property needs numerous repairs.  As a result, many of the homes at auction are purchased by investors and contractors who have experience working with homes needing numerous repairs, or taken back as REO by the foreclosing lenders.
  • If a home does not sell to a third party at the trustee’s auction, the bank takes the property (REO Property)–the final stage of the foreclosure process. Although homes in this stage typically do not offer buyers the best prices, buyers generally can perform a thorough inspection of the property prior to closing.

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NO MORE STATE TAX ON FORGIVEN DEBT

Distressed homeowners no longer have to pay California state income tax on debt forgiven in a short sale, foreclosure, or loan modification.  Enacted into law yesterday, Senate Bill 401 generally aligns California’s tax treatment of mortgage debt relief income with federal law.  For debt forgiven on a loan secured by a “qualified principal residence,” borrowers will now be exempt from both federal and state income tax consequences.  The existing federal exemption is for indebtedness up to $2 million, whereas the new California exemption is for indebtedness up to $800,000 and forgiven debt up to $500,000.

“Qualified principal residence” indebtedness is defined as debt incurred in acquiring, constructing, or substantially improving a principal residence.  It includes both first and second trust deeds.  It also includes a refinance loan to the extent the funds were used to payoff a previous loan that would have qualified.

The tax breaks apply to debts discharged from 2009 through 2012.  Californians who have already filed their 2009 tax returns may claim the exemption by filing a Form 540X amendment.
 
Taxpayers who do not qualify for the above exemptions (e.g., second home or rental property) may nevertheless be exempt under other provisions.  Most notably, taxpayers who are bankrupt are exempt from debt relief income tax.  Also, taxpayers who are insolvent are exempt from debt relief income tax to the extent their current liabilities exceed current assets.

For more information about mortgage forgiveness tax consequences, go to California Franchise Tax Board’s Mortgage Forgiveness Debt Relief Extended webpage and the Internal Revenue Service’s Mortgage Forgiveness Debt Relief Act and Debt Cancellation webpage.  The full text of Senate Bill 401 is available at www.leginfo.ca.gov.

This article was provided by CAR.

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California Expected to Cancel Tax on Forgiven Mortgage Debts

California is finally working towards needed State income tax relief for Californians who have received mortgage forgiveness through selling their homes in a short-sale process. The Sacramento Bee published an article on April 6, 2010 outlining this process. It appears that this tax relief could be in place by the April 15th tax filing deadline.

To quote the Sacramento Bee article as provided by CAR:

Relief appears imminent for thousands of Sacramento homeowners hit with state tax bills for mortgage debts forgiven in 2009.

State lawmakers said Monday they plan to cancel the state tax obligations with a vote Thursday.

Shannon Murphy, spokeswoman for Assembly Speaker John Pérez, D-Los Angeles, said legislation will go before the Assembly Revenue and Tax Committee today and the Appropriations Committee on Wednesday, and will receive a full vote Thursday.

A similar Senate floor vote planned Thursday would send the bill immediately to Gov. Arnold Schwarzenegger, who has repeatedly stated his support. The new bill is similar to one he vetoed March 25. But this time it omits a part he opposed – financial penalties for businesses that routinely seek state tax refunds. Democrats removed the section despite their contention that some firms “fish” for refunds whether or not they’re owed.

Monday, Schwarzenegger spokesman Mike Naple said the governor “hopes the Legislature fully addresses the concerns raised in previous versions of this bill.”

The new movement means that Californians who got unexpected tax bills of $10,000 or more in recent weeks could soon be off the hook. Most are borrowers who received loan modifications last year or lost their houses in short sales, in which banks accept prices below what they’re owed. In both cases, lenders forgave some of the debts owed them, a process that exposes borrowers afterward to taxes.

“We want to get it done before the (April 15) tax deadline,” said Alicia Trost, spokeswoman for Sen. President Pro Tem Darrell Steinberg, D-Sacramento. “We don’t want to have people jump through hoops.”

Many across the state have anxiously waited for the state to resolve the issue before the tax filing deadline – or have filed extensions.

Typically the state and federal governments view forgiven home loan debt as additional income and tax it. But both have backed off amid the housing crash. The federal government has suspended taxes on forgiven mortgage debt from 2007 through 2012. California suspended it for the 2007 and 2008 tax years. But disagreements over the business tax refunds stalled a bill extending it to 2009.

The bill being considered this week, Senate Bill 401, would cancel state tax obligations for forgiven mortgage debt through the 2012 tax year. The Assembly planned Monday to rewrite SB 401 from a bill regarding tax shelters to one that aligns much of California’s tax law with that of the IRS. That includes canceling taxes on forgiven mortgage debt and on recipients of federal renewable energy grants.

“We haven’t done a tax- conforming bill for four years, so it’s important to get that done,” Trost said Monday.

This article was provided by CAR as written by Jim Wasserman of  The Sacramento Bee.

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