The recent mortgage crisis has resulted in thousands of homeowners selling their homes for less money than what is actually owed on the home resulting in a “short sale”. The question many ask is, “Is the amount of debt that wasn’t recovered or paid off in the sale taxable to me?”
There is no short, quick answer. Generally speaking forgiven debt is taxable. For instance, if you loan your friend $10,000 and he only pays back $2,000 before you finally quit trying to collect, your friend is liable for the tax on the $8,000 in forgiven debt, payable at his personal income tax rate.
Thanks to President Bush, the Mortgage Debt Relief Act of 2007 provides an avenue of relief for folks who lost a home through the short sale process. I’m not an accountant, so it would not be appropriate for me to discuss the details of the act or whether you’d qualify for relief under its provisions. I can provide a link for you, though and here is the link to the IRS website relating to the act. It’s something to think about before you decide to short sale your home.
When will it become clear to the average American that the real estate market has started to recover? About two years after it has recovered. Why is this? People don’t pay attention to the right indicators.
It’s sad but true that most of us watch the media for reports on market trends. The truth is, once a market trend is reported in the media, it’s an old story. The real data is laying in the streets of your town, waiting for you to quit stepping over it and pick it up and use it.
Take Phoenix, AZ, for instance. One of the top three hardest hit cities, it is now recovering at a steady rate. Iventories are being absorbed, prices are escalating at an alarming rate and foreign investors, mainly Canadian, are setting themselves up for great wealth by buying the discounted homes in the area. American investors remain largely on the sideline, confused and afraid, not willing to invest in their own ability to recover from this downturn.
When the dust settles, hundreds of millions of dollars in personal wealth will be created. I only hope Americans get some of it.
The crisis in Japan has caused me to think how it will be 20, 30 years from now when the Powers That Be have their way and the mighty and prosperous United States is reduced to a lesser status in the world, say, that of France. What will happen when the next tsunami hits a coastal area and creates massive loss of life and puts a country into a social and economic tailspin?
Today, the heavy lifting is most often done by the US. We have the technology, know how and money to help around the world and we do just that. Our efforts are largely suppressed by corrupt governments and we are often hated in spite of our efforts. Now, don’t get me wrong, we’ve not handled things perfectly as a nation, but tell me who can or will replace us when we’re gone?
It’s not only the rest of the world that wants us to step back a bit, it’s the folks at home, too. We’re taxed to death while our government sends billions of dollars in foreign aid to countries who hate us! And we’re tired of sending our most prized resource, our young men and women to die on foreign soil for an unappreciative and hostile population such as exists in Iraq and Afghanistan.
He was angry and I understand. He lost his home in foreclosure. He told me real estate ownership was not in his future. “I don’t want to be responsible for keeping the place up, paying taxes, insurance, upkeep, mortgage payments, utility payments, you can go broke owning a home.!” he said.
He was angry and, believe me, I understand.
I see it every day, week and month. I’m in the real estate business and I talk to folks who have lost or are losing their homes because of the economy, job loss, whatever. It’s sad, discouraging and maddening as hell. I often ask a lender who is foreclosing on an owner what they hope to achieve by putting another American on the street. It falls on deaf ears.
But, back to the young man. “I get it”, I said, “You don’t want to own real estate. Point taken. But please don’t think you aren’t going to PAY for real estate unless you’re planning on living underneath the East Side bridge.” I explained that renters still paid for utilities, insurance, mortgage payments, upkeep, repairs, and taxes, PLUS depreciation and replacement cost of appliances, carpets etc. in their rent payments. They also paid the owner for a reasonable return ON and OF their investment in the property. Cheaper to rent? Rarely. Easier to rent? Sometimes. Smarter to rent? Sometimes.
For instance, if you’re new to a city and don’t know the area well, I’d rent for a while. Or, if you’re not sure about job security and anticipate having to move to find a good job, renting is better. Or, if you simply want to have a little more freedom, travel a bit for extended periods or try out new towns and cities for a few years, renting is a better option. Not all decisions are purely financial.
But remember, most of the wealth accumulated in the past 50 years in this country has been real-estate related. Just because you’ve had a bad experience doesn’t mean you should deprive yourself of some great opportunities. America is one of the places on earth where we can experience a high degree of freedom and home ownership is one of the highest expressions of that freedom.
