Housing market in recovery? Yes, but signs show there will be a slow down in 2013

Writing for Housing Wire, Megan Hopkins reports that the housing prices are likely to top out at modest increase in value:

Despite beginning the year with market lows, most home prices gained momentum toward the end up 2012, finishing the year at 4.9% year-over-year price gains. Some markets, though they are few, may also suffer a backslide in values.

According to the latest Clear Capital home data report, national home prices are expected to increase by only 2.1% this year. The 2013 yearly gains are expected to be smaller partly because homes are starting on a higher price base, but the entire explanation is more complex than that, Clear Capital notes.

While many western localities are seeing the firming up of housing prices, there are still several areas that could potentially see a shift down in pricing:

Only eight markets are projected to see prices fall in 2013, including Denver; Louisville, Ky.; Charlotte, N.C.; Philadelphia; Atlanta; Baltimore; Chicago and St. Louis. For those eight markets, average declines should come in at just 0.9%.

Thankfully, the Seattle area housing market continues to lead the charge in the beleaguered housing recovery:

Seattle, a market with a strong recovery already in the works, is expected to see the highest gains of the top 50 major metro markets at 13.5%.

Taxes and loan modifications: what’s the impact?

How does a loan modification effect a person’s taxable income?

1.      The general rule is that when debt for which a person is liable is canceled or forgiven, the canceled amount must be included in a party’s reported income.

Generally, if a debt for which a person is personally liable is forgiven, the forgiven amount must be included in that person’s income.   The IRS defines debt to include any indebtedness for which one is personally liable, or subject to which one holds property.  If a person is not personally liable for a debt, the cancellation income will need to be included if a person retains the collateral and either: (1) the lender offers a discount for the early payment of the debt, or (2) the lender agrees to a loan modification that results in the reduction of the principal balance of the debt.

Taxes2.      There is an exception to the general rule for debt incurred to finance the purchase, construction or substantial improvement of a person’s residence.

A person can exclude canceled debt from income if it is qualified principal residence indebtedness.  Qualified principal residence indebtedness is any mortgage a person took out to buy, build or substantially improve his or her main home.  The mortgage must be secured by the main home.  A person’s main home is the home where he or she ordinarily lives most of the time.  A person may only have one main home at any one time. The IRS has not provided guidance on what it considers a “main home,” but does say it will look at the facts and circumstances in every case.  A person is limited to excluding $2 million of qualified principal residence indebtedness.  If a person excludes canceled qualified principal residence indebtedness and continues to own the home after the cancellation, the person must reduce the basis of the home by the amount of the canceled indebtedness, but may only reduce the basis to zero.  The legal authority for this memo comes from IRS Publication 4681, except where other authorities are cited.

Photo: cooldesign

Who can be compensated for negotiating short sales?

Late last year, the Department of Financial Institutions published a helpful guide regarding short sales and loan modifications. In particular, the DFI intended to provide clarification in plain terms to the RCW 31.04 (Consumer Loan Act or “CLA”) and RCW 19.146 (Mortgage Broker Practices Act or “MBPA”).

Because short sales deal with two specific areas of expertise, in particular real estate transactions and negotiation with creditors (for forgiveness of debt), the regulations outlined in the MBPA and CLA are relevant.  This is because the DFI monitors and regulates loan modification and short sale negotiation services.  Simultaneously, the Department of Licensing regulates the real estate brokerage services that pertain to the actual short sale transactions.

Put simply: because short sales involve both a (1) transaction of real estate and (2) a negotiation with creditors regarding loans (and usually, deficiencies), the DFI and the Dept. of Licensing have an interest.  So, the broader question is “who can get compensated for short sale negotiation services?”  The short answer is “it depends.”

The DFI’s December 2010 bulletin on the subject states the following:

Entities engaging in short sale negotiations for compensation must obtain a license under the CLA or the MBPA, and the individuals who conduct loan modification activities on behalf of such entities must obtain a mortgage loan originator license under one of those two acts. Short sales conducted as part of the negotiation of a real estate transaction by a licensed real estate broker do not require licensure under the CLA or the MBPA, unless the real estate broker is paid separately for the short sale negotiation, in addition to receiving a commission for the real estate transaction. However, this does not extend to unlicensed assistants.
The MBPA and the CLA licensing exclusions for real estate brokers do not apply to real estate brokers who act solely as third-party short sale negotiators or loan modification services providers.Negotiating short sales for a fee is not an activity that requires a real estate license; therefore, a loan originator license from DFI is required if that is the only service the real estate licensee provides.
Real Estate licensees must be providing real estate brokerage services for the transaction in order to negotiate a short sale on behalf of either party to the transaction. Real Estate licensees may not charge any additional fee above the normal and customary commission to provide short sale negotiation services.

In plain English, the following may receive compensation for negotiating a short sale:

1.  Real estate broker — A broker can get paid for a short sale, BUT only if the fee is not in addition to the commission.  The broker cannot be paid anything above the commission, regardless of how much effort was expended in facilitating the short sale.

2.  Loan originator licensee OR Attorney — This individual can get paid for the actual short sale negotiations, even if he is a third-party to the transaction, however, he cannot be paid commission from a sale in the same fashion as a real estate broker.  If short sale negotiations is the only service provided, a loan originator’s license is required.

3.  Real estate broker with a loan originator OR law license — If someone has both their real estate broker’s license AND a loan originator or law license, he is eligible for both the commission and a separate fee for negotiating the short sale.  Think of this as the best of both worlds.

The above regulations can be summed up the following way — if you are hoping to get a fee for a short sale, you have to be a lawyer or a loan originator.  You cannot only be a real estate broker and expect to receive payment beyond the commission you would otherwise be entitled to in a normal real estate transaction.  For those of you reading this article who are homeowners or prospective short sale buyers, do not be fooled.  If someone is asking for payment beyond the commission for short sale negotiation services, make sure they have the proper licensing.

For more information on this subject, please visit or, or review RCWs 31.04 and 19.146.  If you wish to search someone’s licensing status, you can also find that information at the DFI and DOL websites.  For attorney’s, you can search for that individual’s status at

Tax implications for short sales and foreclosures

I am often asked by clients what the tax implications are should they choose to pursue a short sale or their property is the subject of a foreclosure. Technically, and they’re right. Debt obligations that are forgiven are usually counted as income to that individual. For example, if you obtain a home loan for $300,000 but sell the property via the short sale process for $200,000, that $100,000 difference that you are no longer required to pay would be taxable as income under normal circumstances. In 2007, the federal government passed the “Mortgage Forgiveness and Debt Relief Act.”

The IRS describes it as follows:

“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.”

Cancellation of Debt is not always taxable, however. According to the IRS there are some exceptions:

–Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
–Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
–Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
–Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
–Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences

See Publication 4681.

The Mortgage Forgiveness Debt Relief Act of 2007 allows homeowners who have benefited from debt cancellation—usually from a short sale, deed-in-lieu of foreclosure, or foreclosure—to exclude the “income realized” from the forgiveness. Exclusion of income resulting from a cancellation of debt means that the amount forgiven or waived from the creditor (usually a bank) is not considered income and is excluded from determining your federal income tax basis.

Going back to the example in the first paragraph, the $100,000 debt that was cancelled would be excluded from that individual’s income of that year. In a normal year (without the Act in place), if that person made $50,000, but was forgiven $100,000 through a short sale, he or she would be required to include that sum as income for that year, making his income $150,000 and subject to the corresponding tax rate. Because that $100,000 is excluded from his income by virtue of the Mortgage Forgiveness Debt Relief Act, his tax rate is preserved at the $50,000 level.

The above information can be found at the following link:,,id=179414,00.html

I would also refer you to an in-depth review of the law at

*Lawyers at Dickson Steinacker, PS are NOT tax specialists. Federal income taxes are a serious matter and should be dealt with through counsel from a qualified accountant or tax attorney. Because much of our business deals with real estate issues such as short sales, foreclosures and loan modifications, we feel it is important to be cognizant of the broader implications of debt cancellation (hence, the above blog entry). If you are in need of more detailed/specific guidance for your tax matters, we recommend contacting a tax attorney or qualified accountant. Do not rely solely on this entry for your tax strategy.

Interesting article on how to purchase a foreclosure or short sale home

The above link provides an exhaustive outline of what someone interested in purchasing a foreclosure/short sale home should consider.