Short Sales - What you need to know about mortgage debt forgiveness.
With the value of properties dropping over the last couple of years many people have been forced to sell their homes for less than they owe on the property. When this happens, the bank can require that the people who owe the mortgage still owe the outstanding balance or it can forgive the outstanding amount, called mortgage debt forgiveness. While having the bank forgive the outstanding mortgage balance sounds great, there are other considerations that you need to think about first.
Generally, any debt that has been forgiven is considered taxable income by the IRS. However, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 which forgives taxes on the amount of mortgage forgiveness if a few conditions are met. First, the property sold on which mortgage forgiveness was given must have been the taxpayers primary residence. Second, if the debt forgiven was for a refinance, the income from the debt forgiveness can only be forgiven if the refinance was used to improve or repair the primary residence. Thus, if you refinanced and used the money to pay off credit cards or other debt, the debt forgiven would still be taxable as income for IRS purposes.
Financial Fortunes
Understanding finances and how to keep track of your finances can make or break your business. Keeping track of your finances is especially important for small cash based businesses. It is very easy to forget or lose track of what you make, the taxes you need to pay on your sales, and what was sold if you don’t develop a system to keep track of everything. This can land you in hot water not only with the IRS and your state, it will also make it hard when you need investors or try to get a loan from a bank.
Many small businesses don’t realize the importance of keeping good records. They want to try and hide some of their income in order to keep taxes down. However, while this might save them a few dollars in the short term, this gamble could really hurt in the long run. If the IRS finds out that you are not properly reporting all your income, including any cash tips or sales from other items that are not the main part of your business, they will not only collect the back taxes for that income, they will also impose fines and charge interest on the back taxes owed.
There are plenty of good accounting systems available that will help you keep track of your inventory, sales, invoices, expenses and income. I frequently use Quickbooks. Ask your accountant or other business owners for what they recommend.
Key to Starting a Successful Business
Starting a business requires more than just a great idea. If all you have is an idea, the business won’t get very far. You need management skills and a vision for the business. However, the vision must be more than just a few thoughts and ideas you keep in you head, it needs to be written down in a business plan.
Business plans are essential for successful and long-lived business. While you may last for a couple of years without a plan, you will be more successful if you have the plan. Creating a business plan requires you to focus on where the business is now, where you see the business in a few years, and how you will get there. Banks won’t loan money to a business without a solid business plan and financial statements.
To start working on your business plan today, check out your local Small Business Administration (SBA) office, SCORE, or check with your local community college or an attorney.
Should I consider a short sale?
Today nearly 1/3 of all homeowners owe more on their homes then the homes are worth. If the homeowner can continue to make the mortgage payment and isn’t planning on moving anytime soon, that is not a problem. However, if the homeowner needs to sell the home being underwater on the house can be a huge problem.
In certain areas of the country, the real estate market is flooded with short sales and foreclosures. Home sales are picking up but buyers are still able to name the prices they are willing to pay for the properties. Increasingly, banks are holding the homeowners responsible for the balance left between a home’s selling price and the selling owner’s outstanding mortgage. Banks have taken a hit and now the stimulus money the got from the government keeps their top executives from earning the big bucks they want from salary and stock options so the banks are doing their best to repay the government and avoid needing any additional stimulus because the CEO wants his millions. That may sound a bit harsh, but the reality is, banks are not as willing to negotiate a short sale down and write off the balance now as they were a year ago.
Before starting a short sale, talk to your banker to see if you qualify for a loan modification or some other program that will let you stay in your home
Real Estate Market Changes
The real estate market has slowly been changing over the summer months. In Florida things were going quite cheap this summer. Orlando had condos asking $19,000. Prices now are starting to creep back up. Maybe its the $8,000 housing credit or maybe it is the economy and housing market starting to recover. Either way, prices are going back up even though there are plenty of bank owned properties still on the market.
While prices are going up, there are still some good deals available. However, when looking to purchase a bank owned property, be prepared to spend some money in repairs. From what I have seen, these properties are $50,000 to $80,000 off the market value. Be prepared to spend anywhere from $10,000 to $40,000 in repairs though.
Before purchasing a bank owned property, get a home inspection so you know exactly what you are getting yourself into, especially if you are a first time homeowner. Homeowners tend to find a house they love and get so excited about the house that they don’t see the flaws in the property or they don’t know what they should be looking for.
Federal Housing Credit
Housing market prices are still low, rates are still very low and sales are increasing. Is now the right time for you to buy your new home?
Many people are trying to purchase a property before the $8,000 housing credit expires in November. Currently, if a property is not purchased by the end of November, you will not be able to get the $8,000 credit. However, before claiming the tax credit, make sure that you have qualified for it and verify the amount that you can claim. Even though you purchased a house, you may not qualify for the entire $8,000 credit as it is based on the amount of the house.
Beware of Fraud
Since houses are worth less today than they were purchased for, i.e. the homeowner is underwater on his mortgage, some families have tried to put their homes on the market as a short sale and then have a family member purchase the house at the lower price and then sell the property back to the original homeowner at that lower price. While the homeowner would still get to live in his house, this is considered fraud and lenders are cracking down on this. California, Florida, and New York have been identified as the top three states in the country where these fraudulent transactions happen. If you are caught doing this, you could go to jail. I understand that people don’t want to leave their homes but it isn’t worth committing fraud and going to jail.
Multi-family Investments - Great options for this economy
Yes it is difficult to get a mortgage right now. Banks are loaning money but they want more downpayments and they are taking more precautions to protect their investments. As such, I would recommend that couples looking to purchase a home consider a multi-family.
Multi-families are great because it allows the couple to purchase a home, thus saving them from paying those pesky association fees you get with condos and many townhouses. In addition, the couple becomes the landlord rather than paying someone else.
If a couple purchases a 3-family home, they can rent out two of the levels and will likely make enough money doing that to cover most if not all of the mortgage for the entire property. In addition, if the couple can get people to sign a lease to move into a level of the home prior to closing on the property, that might influence the bank because it will show that you are getting additional income. As banks are very concerned about debt to income ratios right now this can really help you get the mortgage you need at an interest rate you can be happy with.
Piercing the Corporate Veil
With so many people starting their own businesses now, it is essential that they get proper advice in setting up the companies to ensure that they don’t end up with issues later on in the life of the company.
Many people like to form corporations because of the limited liability for shareholders. Limited liability means that the shareholders are liable, meaning they can lose, only the amount of their investment. Thus, if the corporation owes $200,000 but only has $100,000 in assets, you as the sole shareholder will not be personally liable for the extra $100,000 owed to the creditors. That means that the creditors can only get the money that is actually in the corporation.
Small nonpublic corporations need to be careful when setting up the corporation to ensure that creditors can’t come back and pierce the corporate veil. This means that the creditor claims that the corporation is just a veil to protect the shareholder and would allow the corporation to be put aside and the creditor could then go after the shareholder to get payment for money owed.
To prevent a creditor piercing the corporate veil, corporations need to do the following:
1. Observe corporate formalities - hold shareholder meetings
2. Do not co-mingle corporate funds with the shareholders private funds - get a separate bank account for the corporation
3. Control of shareholders over the corporation - better to have more than 1 shareholder and vote for important decisions
4. Shareholder can’t borrow corporate funds without a contract to repay - don’t move funds between corporate and shareholder accounts without paperwork to show a business reason for moving the money
Behind on your mortgage?
Many people today are falling behind on their mortgages. Thanks to legislation the Obama administration passed this year there is hope.
First you need to assess why you are falling behind on your mortgage. Did you or your spouse lose your job, did you have some unexpected medical expenses, were you or your spouse injured and unable to work? Any of these excuses is very sympathetic and bankers will be interested in working with you to find a way for you to keep the house and make payments more manageable. However, you have to tell the banker what is going on before they can help you.
Bankers are most willing to work with clients who have a previous good record of paying their mortgage on time. This helps to show that you are responsible with your credit and really do want to live up to your agreements but due to circumstances beyond your control, at the moment, you just can’t make the payments.
Don’t think of the bank as the enemy. They want you to keep paying for the house. If they had to foreclose, it would cost them an average of $50,000 per house to foreclose. In addition, many houses that are currently in trouble were purchased within the last three to eight years and the values have fallen since then so the bank would not be able to get as much for it as they are owed on the loan. Thus, the banks have just as much incentive as you to work out a plan to ensure that you can continue to make payments, either at a lower interest rate or for an extended period of time, as you have for wanting to keep your home.
If you are behind on your mortgage give your banker a call, you might be surprised.