Justin W. Richards

A short sale is when the bank allows a Home Owner to sell their home for LESS than the current balance on their loan.

Why would a bank do this?

Banks are in the business of making loans NOT mananging properties.

Banks don’t want these non-performing assets on their books because it hinders their ability to continue to make loans. They lose out on potential interest and incur costs related with the home such as fixing it up, marketing it with a realtor, going through the foreclosure process, etc.
The short sale process allows homeowners to avoid having a foreclosure on their credit record, therefore positioning them in a better financial situation for the future. Homeowners who choose to complete a short sale vs. a foreclosure are able qualify for a home loan in the future much quicker and don’t have to deal with the stress of having the bank foreclose on their home.
While there is a lot to know about short sales it doesn’t have to be scary or intimidating!

If you are a homeowner facing foreclosure and you would like to commit to a short sale, you need to know what to expect.

Qualifying for a short sale is very similar to applying for home loan except in reverse! Just like when you went into the bank to apply for your loan, you’re going to need to put a package of financials together, including your: tax records, pay stubs, bank statements and a hardship letter explaining why you can no longer afford to make payments on your loan. You need to SHOW the bank that due to unexpected circumstances, you’re no longer able to keep the loan.

There are extensive tax, legal and miscellaneous implications that occur from a short sale. While it’s not criticial that you understand every detail at this very moment, it’s critical that you work with professional experts that do! Please be sure to seek sound legal and tax advice before moving forward with a short sale.

Most Home Owners don't understand the distinction between Recourse and Non-Recourse Debt and whether the debt forgiveness is taxable.


What is Recourse Debt?
1. Recourse debt is debt for which the taxpayer is personally liable. In the event of default, "the lender can look beyond the collateral pledged for the loan and hold the borrower accountable for the unpaid balance."

2. When a lender takes over a property as part of a foreclosure, deed in lieu or as part of a short sale in satisfaction of a recourse note "the deemed sale price will be the lesser of the FMV (Fair Market Value) of the property at the time of foreclosure or the amount of secured debt."

3. If the taxpayers debt exceeds the FMV, the difference is treated as "debt discharge income" if it is forgiven.


What Non-Recourse Debt?
1. Non-recourse debt is debt where the lender can only look to the loan collateral in the event the taxpayers default's on the loan.

2. In a foreclosure, short sale, or deed in lieu, the sale proceeds from the deemed sale is equal to the balance of the non-recourse debt. Accordingly, there is no debt forgiveness when the note is a non-recourse note.

The importance of understanding the distinction between a non-recourse debt and a recourse debt is that a foreclosure or short sale on property involving recourse debt could result in both a gain or loss from the sale of property, and debt discharge income.

** The information provided here is not intended to be legal, accounting, tax, investment or other professional advice. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser who understands your particular factual situation. **

Information provided by AskTaxGuru.com "A free tax resource"

A little-known IRS provision lets you extend your real estate purchasing with tax-deferred dollars.

Are stock market woes preventing you from building wealth in your retirement account? If so, you might be interested in a small, but growing, trend among individual retirement account owners—investing their retirement funds in real estate.

How It Works
If the option of using tax-deferred funds to purchase property sounds appealing, you’ll need to locate an independent IRA custodian that allows real estate investments and work with that company to set up an IRA account. Most banks and brokerage companies—the most common IRA account options—limit your choices to certificates of deposit, stocks, mutual funds, annuities, and similar financial instruments. But Section 408 of the Internal Revenue Code permits individuals to purchase land, commercial property, condominiums, residential property, trust deeds, or real estate contracts with funds held in many common forms of IRAs, including a traditional IRA, a Roth IRA , and a Simplified Employee Pension plan, or SEP-IRA.

To find a custodian that specializes in real estate, search under terms such as “real estate IRA” or “self-directed IRA.” This latter term was coined by the financial industry in the 1980s to distinguish the self-directed IRA from other IRAs that focus on stocks and bonds. The IRA account holder can’t serve as the custodian of his or her own account. However, it’s important to select a custodian knowledgeable about the types of investment you’re interested in, because the custodian holds title to the real estate. Do your homework, and understand what you’re getting into.

Fees can vary widely among custodians, as can the flexibility of the services provided for account holders. If the custodian holds real estate on your behalf, but does not service it (collect the rent, etc.), you may have to contract with other providers. However, be sure that all rents are paid into the IRA and that all taxes are paid by the IRA.

Purchasing the Property
Most IRA custodians that hold real estate will usually allow you to purchase raw or vacant land, residential properties, or commercial buildings for your portfolio. In addition, some custodians may permit foreign property or leveraged property.

Since buying a property may require more funds than you currently have available in your IRA, you also can have your IRA purchase an interest in the property in conjunction with other individuals, such as a spouse, business associate, or friend. Also keep in mind that if the property is leveraged, the debt must be a non-recourse promissory note.

Unfortunately, Internal Revenue Service regulations will not let you use the real estate owned by your IRA as your residence or vacation home. Nor can your business lease space in your IRA-held property. The underlying premise for any real estate investment purchased with IRA funds is that you can’t have any personal use or benefit of the property. To do so may cost you plenty in taxes and penalties.

There are a few other IRS limitations as well. You cannot place a real estate property that you already own into your IRA. Your spouse, your parents, or your children also couldn’t have owned the property before it was purchased by your IRA. Property owned by siblings may be allowed, since the Internal Revenue Code (section 4975) specifies that only “lineal descendants” be disqualified.

Once you’ve chosen a property, your IRA custodian—not you personally—must actually purchase it. The title will reflect the name of your IRA custodian for your benefit (such as Silver Trust Co., Custodian FBO John Doe IRA). In addition, if you put up earnest money with your personal funds, you’ll need to make sure you include that amount in the total due so that the title company can reimburse you upon closing.

Operating an IRA-held Property
Because all property expenses, including taxes, insurance, and repairs, must be paid from funds in your IRA, you’ll need liquid funds available in your account. Of course, all income generated from the property will be deposited in your IRA account so you can use that money to cover your costs. You also can make annual contributions within federal guidelines.
Currently, you can contribute $3,000 annually to a traditional or Roth IRA ($3,500 if you’re age 50 or older) and as much as 15 percent of your annual compensation, up to $40,000, if you’re a self-employed individual with a SEP-IRA. If your account doesn’t have funds to cover property expenses, you will have to withdraw the property from your IRA and pay taxes on the value of the property, as well as possible penalties for early withdrawal.

It’s also possible to sell properties while they are held by your IRA, so long as the purchaser is not a family member. Once a deal closes, your IRA account now holds the cash proceeds—ready for you to make your next investment. An alternative is to sell an IRA-held property with seller financing so that all payments made by the buyers are paid to the IRA.

Distributing Your Property
You can withdraw real estate from your IRA and use it as a residence or second home when you reach retirement age (age 59½ or older for a penalty-free withdrawal). At that time, you can elect either to have the IRA sell the property or take an in-kind distribution of the property. Under that arrangement, your IRA custodian assigns the title to the property to you. You will then have to pay income taxes on the current value of the property if it’s been held in a traditional IRA. If the property was held in a Roth IRA, you won’t owe taxes at distribution. This makes a Roth IRA extremely attractive if you anticipate that your real estate investments will appreciate over time.

Whether your retirement strategy is to hold properties or buy and sell for gain, real estate investing through your IRA can yield extraordinary returns toward your future retirement.

IRA Options
While any form of IRA allows for real estate investment, there are other pluses and minuses to consider when choosing the account type that’s best for you:

• A traditional IRA lets you deduct annual contributions (currently set at $3,000, or $3,500 if you’re age 50 or older) from your income. However, once you begin withdrawing money, those funds will be taxed as regular income.
• A Roth IRA gives you no deduction on your current contributions (again $3,000), but does allow you to withdraw funds tax-free. If you expect to buy a real estate investment in an IRA and hold it for a long period, this is probably your best option, particularly if the property increases in value over that period.
• A SEP-IRA is designed for self-employed individuals and small companies. You can contribute up to 25 percent of your compensation, or $40,000, whichever is less. However, keep in mind that if you have employees, you must make contributions for them as well. This option is a great alternative for real estate practitioners who can make the higher contributions because they can build up funds more rapidly to purchase properties. Withdrawals from a SEP-IRA are treated like those of a traditional IRA for tax purposes.
  

Written by Kelli Click, VP of Sale & Marketing, Sterling Trust Co.