Business-RealEstate-Law » Taxes

Avoiding Taxes on Forgiven Home Mortgage Debt

sandiegolawfirm — Mon, 30 Jan 2012 17:37:55 +0000

If you are holding an unaffordable mortgage that substantially exceeds your home’s present value, you have several options: a federal HARP or PRA loan modification to reduce your mortgage to your home’s fair market value; a short sale of your home; a deed-in-lieu-of-foreclosure with agreement to void the remaining mortgage; or even a strategic default and foreclosure. The disadvantage to these options is that mortgage debt that is “forgiven” or “eliminated” is generally considered taxable income. However, legal strategies can allow you to avoid paying tax on this fictional “income.”

When forgiven mortgage debt is not taxable

You can escape Federal and California income tax on forgiven mortgage debt in each of these situations:

1. Your Total Debts Are Calculated to Exceed Your Total Assets

To the degree your total debts exceeded the fair market value of your total assets immediately before your mortgage was reduced or eliminated, you are legally “insolvent” and the cancelled mortgage debt is not taxable income. Many California residents can meet this legal definition because they have home equity loans, auto loans, rental property mortgages, and other liabilities that exceed the total fair market value of all their assets. An experienced real estate attorney can easily help you with the expert appraisals and accounting needed to establish legal insolvency for tax purposes.

2. Your Mortgage Was Eliminated or Reduced in a Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows judges to reduce or eliminate home equity loans and second and third mortgages. This “forgiven” debt, no matter how large, is not counted as taxable income. Chapter 13 can also eliminate or reduce many other types of debt. Again, an experienced attorney can determine if you qualify for Chapter 13, and can help you decide whether this would be a good choice for your situation.

3. The Mortgage Debt Relief Act of 2007 Applies

In 2007, Congress passed the Mortgage Debt Relief Act; it was extended in 2011 and now lasts through 2012. Under that law, mortgage debt that is forgiven on a “qualified principal residence” is not taxable income if it is under set dollar limits and was forgiven as part of a mortgage restructuring, foreclosure or a short sale. California has a similar law, but the dollar limits are different.

Under this federal law, debt forgiven between 2007- 2012 can be excluded from taxable income if it is less than $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and $1,000,000 for taxpayers who file as married filing separately. Under California law, these limits are $500,000 and $250,000 respectively for 2009-2012, and $250,000 and $125,000 for 2007-2008. In California, registered domestic partners are treated the same as married taxpayers filing jointly or separately. There is no federal limit on the amount of income that can be considered “qualified principal residence debt”; for California tax, the limit is $800,000 for the first group of taxpayers, and $400,000 for the second.

Only “Qualified” Debt Forgiveness Can Escape Income Tax

To be considered “qualified principal residence indebtedness” that can be forgiven without income tax owing, the mortgage debt must meet these requirements:

1. It must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt used for this purpose is also OK.

2. It cannot have been a “cash out” refinance where loan proceeds were used for other purposes, such as paying off credit cards, school tuition, or buying another piece of property.

3. It cannot have been debt on a second home, rental property, or business property. For this and other non-real estate debts, you will need to come within the insolvency or bankruptcy exceptions.

Call San Diego Law Firm for Help with Mortgage Debt Strategies

Over 2,000,000 California residents are currently stuck with “underwater mortgages,” as California has suffered some of the largest decreases in property values in the nation. If you are in this situation, our experienced San Diego real estate lawyers can help you identify the best strategy for handling your mortgage while avoiding additional income tax on forgiven mortgage debt. We provide skilled legal help with insolvency calculations and Chapter 13 bankruptcy, and can assist you with a deed in lieu of foreclosure and other real estate strategies that require legal documentation. Please call San Diego Law Firm at (619) 794-0243 to schedule a consultation. We look forward to helping you.

President Obama Proposes Small Business Tax Incentives for Hiring: The Legal Issues You Can’t Ignore if Your San Diego Business Hires New Employees

sandiegolawfirm — Tue, 09 Feb 2010 18:19:23 +0000

In his first State of the Union address, President Obama proposed a temporary tax credit that can fuel job growth through small business hiring, and this may prove to be a great incentive for local San Diego businesses that have been thinking about bringing on another employee. The Wall Street Journal’s Elizabeth Williamson reports on more of the details of the President’s plan, as revealed a few days after delivering the State of the Union address. As things stand now, the Small Business Jobs and Wages Tax Cut, one of the White House’s main small business proposals, will provide businesses a $5,000 tax credit for each net new employees hired in 2010, and start-up businesses can receive half the tax credit, all subject to a cap of $500,000 as a way to make sure that most of this tax credit is used by small businesses. Potential benefits are also included for employers who increase hours or wages for existing employees, in which case the business will be reimbursed for the Social Security payroll taxes on wages increased above the rate of inflation, although currently this won’t apply to wages increased above $106,800. The same will apply to newly hired employees paid a higher wage. On its website, the White House’s fact sheet for this proposal explains that businesses will be able to receive the tax credit on a quarterly basis, adding to the incentive for employers to increase hiring and raise wages. The fact sheet also gives examples of how the tax credit will work, while also warning that the plan includes measures to prevent abuse. This is only a proposal, and Congress will have to pass the tax credit for it to go into effect. As a result, it remains to be seen what the rules and specifics of the new tax incentive will be if passed, and how it can help your San Diego business create new jobs.

If you do need to hire new employees, don’t lose sight of the legal issues that go along with hiring. A few examples here include possible discrimination when advertising for new positions, questions you can’t ask when interviewing potential employees, and the terms of employment. Federal anti-discrimination laws and additional protections under California law make discrimination illegal when based on categories that include disability, marital status, sex, age, national origin, race, sexual orientation, religion, medical condition, and so on. Exceptions are very limited (e.g. a women-only hiring policy for women’s locker room workers) and have to be evaluated on a case by case basis. Discrimination can occur in all aspects of employment, even well before hiring someone when your business advertises a job, chooses its recruitment methods, or interviews candidates for an open position. When it comes to interviews, you have to be careful not to ask questions about the applicant’s age, what his or her childcare arrangements are, about plans to have kids, or anything else that relates to a status that’s protected from discrimination if the question isn’t required to determine the applicant’s ability to do the job and isn’t legally acceptable. Discrimination laws are complex, and you need to speak with an attorney who can explain the details of how these federal and California laws apply to your business practices.

Aside from discrimination issues, when hiring a new employee you have to be clear about several terms of the employment relationship to help prevent disputes (and potentially lawsuits) later on with that employee. Misunderstandings can often be prevented with non disclosure agreements (also called NDAs or confidentiality agreements), and employee handbooks or manuals that make clear whether the employment is at-will and set out company policies without creating unintended terms of employment. These are just a few general examples, but keep in mind that many other issues can come up when dealing with prospective hires and current employees. We’ll prepare important agreements you may need and advise you on the legal aspects of running a business, including compliance with California’s harassment laws, wage and hour laws, and employee termination rules so you can avoid many common disputes that carry serious consequences. Contact San Diego Law Firm to learn more about the best employment and hiring practices and how you can minimize the risk of getting sued. Our experienced business lawyers can be reached at (619) 794-0243.

Prospective First Time California Home Buyers in a Rush to Beat the Clock

sandiegolawfirm — Tue, 29 Sep 2009 18:20:02 +0000

Many Californians who will be first time home buyers have their eyes on December 1, 2009, the deadline to purchase a home and get the tax credit created by the Housing and Economic Recovery Act of 2008. “First time” covers more than you would think, since it’s defined to include taxpayers who haven’t owned another principal residence during the last three years before the current purchase date. You won’t be able to qualify for the tax credit if you’re buying a rental property, since the home must be used as your main personal residence. If you buy the home in 2009 (and close by November 30), then you can use the credit to either reduce your tax bill or increase your refund by 10% of the purchase price-up to $8,000 for both single taxpayers and married couples who file returns jointly. If you’re married but file separately, then the government reduces the credit by half. For higher income earners, the credit is reduced or eliminated.

If you already bought your first home in 2008, and after April 8, then you may also be eligible for a tax credit up to $7,500, but the rules change because you’ll be required to repay the credit over 15 years on your future tax returns. While the deal’s not as sweet, you can still benefit because the credit acts like an interest-free loan from the government. Note that even if you purchase your home in 2009, the repayment requirement will kick in if you stop using the home as your principal residence within 36 months of the purchase date. Those interested can visit the IRS website to see how it works and for more details on whether the home you’re buying (or the home you built) will qualify for the credit.

Once you find a home you want to buy, you’ll need to work out the contract details, get inspections done, get your mortgage approved, and have everything else done to prepare for closing. This will usually take up to two months. Senior Financial Analyst Greg McBride suggests in the Wall Street Journal that you get pre-approved for a loan to speed up the purchase once you do find the home you want to buy.

Even with the impending deadline, remember that this is a huge purchase, so don’t skip over important considerations, such as your mortgage options. Compare plans according to your finances and requirements in order to get the best deal. It’s also crucial that you fully understand the terms of the sale. Home buyers and sellers can greatly benefit from our extensive real estate knowledge as we work to protect your interests. We’ll examine whether there’s a title or easement issue, negotiate the terms of the agreement, prepare required documents, and deal with any problems that arise during inspections or at closing. Contact San Diego Law Firm’s real estate lawyers at (619) 794-0243 for help in closing your deal and safeguarding your investment.