Nancy Moeller's Blog

This morning I participated in an Active Rain dialog regarding the "unfairness" of the IRS imposing a tax on the forgiven portion of a loan secured by real estate. I'm also reading a lot about how we need to step in and help those who have lost their homes to foreclosure and relax the credit implications.

While I like to limit my blogs to informative pieces, tips and market updates, I do feel strongly about this issue and find it worthy of a blog to end the dialog and set forth my opinion on the matter.

Of course, the requisite disclaimer ... this is not tax or legal advice, so please consult with your tax advisor and/or attorney for a complete discussion on these matters. (Why we have to overdisclaim is also a pet-peeve of mine, but who wants to be sued by the guy who makes a decision based soley on information in a blog!)

Anyway, back on point. When it comes to foreclosure and bankruptcy, many people in and outside the cyber world of Active Rain whine about the gross injustice of destroying someone's credit for nearly a decade, and the possibility of paying tax on the forgiven debt.

My questions: Shouldn't there be serious consequences for our financial decisions? Doesn't it make sense to have this system in place to protect future creditors from taking unnecessary risks? After all, there is no magical fairyland that absorbs these loses. It's not a "phantom loss" like I read in one blog. A lender loans $500,000 and forecloses on the house now worth $400,000. That is a very real $100,000 loss. The fact the homeowner does not have to pay the difference, is a very real gain.

Like most people, I've made bad business decisions and lost money. Had those loses been "forgiven", I would have realized a gain and happily paid tax on the gain! But instead, I had to work hard to build back my lost wealth. Frankly, I believe it should we the same with Real Estate.

I'm tired of our clients, especially the most admirable ones who are struggling from behind, refusing to walk away from their debt, paying for the mistakes of uneducated buyers who bought $500,000 condos with no money down and $75,000 in "stated income". When did we start thinking it would be okay to have $4,000 in housing expenses with a gross monthly income of $6,250 and no savings in case of a temporary employment lapse.

The reality is that businesses go under, people lose jobs and solvent taxpayers eventually pay the price in higher interest rates, tougher qualifying requirements and more fees. I'm glad it's tougher to buy a house right now. I believe bankruptcy laws should be tougher. I believe it's too easy to walk away from financial commitments.  

I'm also glad overinflated housing prices, brought forth by easy lending and pure momentum is correcting itself. As a Realtor, is it costing me money? Most definitely, but it's also making me stronger in my profession. Bottom line, regional housing prices must keep pace with affordability. The net impact is a reduction in the number of foreclosures and the favorable financial ripple that comes along with it for our overall economy.

That's it. Tomorow's blog will be on a lighter topic. I promise.

Have a great day,

Nancy

When it comes to shopping for homes, it can get confusing for a buyer comparing many different homes - especially in Orange County with close to 18,000 homes on the market. One question that comes up, one way or another when showing homes, is the extra monthly cost of a $10,000 (pick a number) house.

To provide our buyers with their own "rule of thumb", I investigate to find their marginal interest rate (from their lender) and marginal tax rate. The key word is "marginal" - which means the interest and tax being paid on the next dollar. Average doesn't work. If you're not sure why - just email me and I'll explain in greater length.   

Anyway, after discovering these rates, I calculate each buyer's unique "rule of thumb" answer. Here's a scenario:

Marginal interest rate: 7% (probably requires a down payment!)

Marginal tax rate: 35% (Federal and California combined)

Property tax rate: 1.1%

In this scenario, I would tell my buyer that ... assuming that rates held constant at each level of home we were considering, disclaimer, disclaimer, disclaimer ...

Each additional $10,000 in house price will cost them an extra $44 per month NET AFTER TAX and AFTER EQUITY PAY DOWN.  Here's the math: $10,000 X 7% ÷ 12 months = $58 plus $9 prop tax = $67. less $23 tax savings = $44. By the way, the reason to eliminate equity pay down from the equation is to keep "true costs" constant, since this amount is similar to a "savings" account. 

There's another interesting rule of thumb for this buyer, since expenses like Mello Roos and Association Dues are NOT deductible, the inverse relationship is also true:

Each additional $67 of nondeductible expense is equivalent to $10,000 in net house payment!  Makes you rethink those high association dues and other monthly expenses, doesn't it!

Have a great day,

Nancy Moeller, CPA, Realtor

If you're like me, you may lose sleep at night trying to figure out how to save time, be more organized and reach the utopia of a "paperless office". I also collect gadgets and play with spreadsheets for fun. So you know who you're dealing with - I prefer Staples and Best Buy over Nordstroms and Macy's.

Here's my latest gadget acquisition and I absolutely love it ... so I wanted to share it with you. It's a Neat Receipts Scanalizer. It was easy to install.  It's small and portable. It scans receipts, business cards and 8.5 X 11 paper into PDF. It exports (fairly easily) into Quickbooks, Outlook and most other formats. The business card feature isn't perfect, but still pretty awesome. The IRS accepts these scanned receipts for tax purposes, so as long as you back up, you can toss the original receipts ... ah, I'm getting closer to utopia.

It cost me $230 and so far, it seems like a bargain.

Have a great day,

Nancy Moeller, Gadget Addict

The follow up question on this topic is typically ... what about on a refinance.

Typically (which again means - check with your tax advisor for the rest of the rules) interest paid on refinance home acquisition debt is deductible up to the amount of the balance of the old mortgage principal just before the refinancing. The amount over your previous principal due is NOT home acquisition debt, but may qualify as home equity debt and deductible up to $100,000 of the debt not used to build or improve upon your home.

For complete details, read this IRS publication and call your tax advisor.

http://www.irs.gov/publications/p936/ar02.html

Have a great day,

Nancy Moeller, CPA, Realtor

As with most tax questions ... the answer is "it depends". The area of tax law regarding the deductibility of interest and points is very complicated and you must contact your tax advisor for proper treatment - especially in the year of sale.

As a rule, if you took out a loan for reasons other than to buy, build, or substantially improve your home, it is considered home equity debt. You can typically (that means check with your tax advisor!) deduct the interest paid on up to $100,000 of the debt ($50,000 for married filing separately).

So if you took out a home equity loan for more than $100,000 to use for purposes other than refinancing or improving your home, and you have been deducting ALL of the interest, be sure to contact your tax advisor for advice on how to handle the situation in filed as well as future years.

If you can't sleep tonight, you can learn all about this exciting area of tax law by reading this IRS publication:

http://www.irs.gov/publications/p936/ar02.html

Have a great day,

Nancy Moeller, CPA, Realtor

I was reading Chris Pollinger's fantasic blog this morning. Check it out at Marketing Plan for your B2B if you don't already subscribe. It's this strategy that Chris shared in a meeting about a year ago that encouraged me to join a Le Tip chapter in my area. The group is about developing business to business relationships and actively working to promote each other's businesses. It's like having a salesforce out there working for you and it feels great to be helping other business owners grow their business.  It's a total win/win. Our clients love it because when we refer them to these professionals, it's not random. These are people that I visit with for 1 1/2 hours each and every Wednesday morning. I know them and know the job they have done for our other clients.

If you're interested, check out Le Tip or BNI (I've heard things about their organization, too). I think you'll find that they are tough to get into for Realtors and Mortgage Brokers because they only allow one person per category and the group works so people that have those positions don't give them up!  If you are still interested, contact a chapter anyway and ask to attend a meeting. If you like the concept, the Chapter President can give you the name of the person in charge of starting new chapters and you can build your own. 

Have a great day, Nancy

I spend a crazy amount of time on the computer. Here are some of my favorite "must have" applications, internet sites and tips.  Just back regularly for new posts on this topic.

1. Adobe Professional - Create PDFs from any application, merge PDF documents, create fill-in forms and much more. I use it everyday and couldn't imagine computing without it.  Just want to print to PDF from any application - try PrimoPDF for free.

2. Windows Keys (Press the Windows Key and then the letter)

• Windows - M (Minimizes all open windows and shows your desktop)  This is great when you have too much open and want to look on your desktop.
• Windows - Shift - M (This brings it back to the way you had it before you minimized it)
• Windows - L (Locks your computer) Very handy when you need to quickly leave your computer

3.  Remove line breaks from documents - have you ever copied text from an internet site or PDF file only to find a ton of line breaks.  Try this really cool site to quickly rid the text of all line breaks.

http://www.sfu.ca/~mjordan/remove-line-breaks.htm

Have a great day,

Nancy

I hope the best thing that comes out of the mortgage mess is that only people who can afford a house, buy a house. The rest of the population needs to wait until they rebuild their credit, increase their income and save some money, not only for a down payment, but also a cushion of a savings account in case something goes wrong in their world.

When we get together with our clients, we go over our Rent vs. Buy calculator and plug in their numbers so they can compare apples to apples. We are able to change any of the assumptions and look at many different scenarios. Naturally, rates and closing costs are determined by speaking to a qualified lender.

If you'd like me to email you the spreadsheet in Excel, just shot me an email at Nancy@TheOCExperts.com.

Have a great day, Nancy

While they "sound" deductible, they often are not. If you own or are considering buying a home with Mello Roos, be sure to contact your Mello Roos District and ask them specifically what the assessment covers. If questioned, you must prove that the tax is deductible. Better to be safe than sorry. Be sure to also consult with your tax adviser - just be sure to get clarity as it's not a simple "yes or no" answer.

Here's a great summary from the California FTB with some commentary of my own in parenthesis.

You cannot deduct Mello-Roos taxes if they are assessed to fund local benefits and improvements that tend to increase the value of your property. (Which is usually the case!) Mello-Roos taxes may appear on your annual county property tax bill with other deductible property taxes. That does not mean you can deduct the Mello-Roos taxes. You may only be able to deduct a portion of the total property tax shown on your bill.

Most of the time, you cannot deduct real estate taxes assessed for local benefits and improvements. However, you can deduct them if they are for maintenance, repair, or interest charges related to those benefits. Some examples of (nondeductible!) local benefits are:

• Sidewalks
• Streets
• Sewer lines
• Water mains
• Public parking facilities
• Other similar improvements

To deduct local benefit taxes, you must be able to show the amount of the taxes that are for maintenance, repair, or interest. If you cannot show what part of the local benefit taxes are for these charges, you cannot deduct the taxes.

Again, check with the Mello Roos District.

Have a great day,

Nancy Moeller, CPA, REALTOR

There is a lot of misunderstanding about the taxability of forgiven debt from a short sale or foreclosure. Naturally, you want to check with your CPA or tax advisor. But for a quick education, here's what the IRS has to say on the matter:

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. Here's a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

Is Cancellation of Debt income always taxable?

Not always.  There are some exceptions.  The most common situations when cancellation of debt income is not taxable involve:

• 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.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.
• 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, like capital gains ... again check with your tax advisor.

I hope this post clears up some misconceptions.

Have a great day,

Nancy Moeller, CPA, REALTOR