Dear Sue,
I bought a new home in a subdivision. My plan was to make some money when I flipped it. I paid top dollar because I bought it at the highest point in the market.
The market started its downward spiral the day I closed escrow.
I have been doing what I can to hold on to it but I can’t afford to keep it any longer. I plan to let it go back in foreclosure. My real estate agent said that I may be taxed on any debt that is written off in a foreclosure.
I heard that Congress passed a debt forgiveness act. Would this apply to me?
— Poor Investor
Dear Investor,
Yes, it is true that Congress passed legislation that became effective Jan. 1, 2008.
Homeowners will not be required to pay taxes on mortgage debt written off or forgiven as part of a bankruptcy, short sale, foreclosure, or renegotiation that involves the homeowner’s principal residence.
Under the Mortgage Forgiveness Debt Relief Act of 2007, up to $2 million of indebtedness is shielded from taxes if the debt is the result of construction, acquisition or major improvement of the principal residence.
The act applies to debt discharges from Jan. 1, 2007 through Dec. 31, 2009.
Since you purchased a home as an investment, you may not be exempt from paying taxes on the debt written off in foreclosure.
I recommend you talk to a reputable tax professional before letting your property go into foreclosure.
Dear Sue,
My kids want to buy a home. They don’t have a lot of cash but they have great credit. I suggested that they talk to a lender and get pre-qualified before they start looking. In light of the current high down payment requirements brought on by the subprime crisis, do you think that FHA may be a viable financing option?
— Caring Dad
Dear Dad,
I think that talking to a lender is a great first step. Your idea to check out Federal Housing Administration (FHA) financing options is also very smart. FHA not only has low down payment requirements, it has temporarily increased the loan limits.
The new FHA loan limits are now available online. Go to https://entp.hud.gov/idapp/html/hicostlook.cfm and enter the county you wish to buy in.
You will find that the single-family loan limit is now $580,000 in Placer County. The two-family home limit is $742,500. The three-family home limit is $897,500 and the four-family home limit is $1,115,400.
Many people don’t think about buying a duplex or fourplex and living in one of the units. FHA financing makes this possible, it’s also a great way to get started.
Knowing the new tax laws and available financing options can be a matter of good Home $$$s and Sense.
Sue Thompson is owner and sales manager of HomeTown Realtors. She can be reached at seesue@seehometown.com, or on the Web at www.homedollarsandsense.com.
