Archive for April 7th, 2011

What to do to Avoid Tax Charges on Forgiven Debt?

Being charged to pay taxes even after foreclosure is a clear manifestation of what is said to be adding insult to injury. Losing a home which most likely implies not having enough money would surely make anybody in this situation wonder why they still owe anything to the IRS. However, the simple answer to this is that the IRS considers canceled or forgiven debt as a taxable income

As an illustration, if a $400,000 home is foreclosed and the bank sells it for $300,000, the rest of the loan which amounts to $100,000 is the forgiven debt. However, the tax code says that the forgiven debt which is $100,000 in this case is considered a taxable income.

In 2007, a legislation enacted by the Congress exempts up to $2 million in canceled mortgage debt from being charged with taxes. This comes with the condition that the loan was utilized for purchase or improvement of the primary residence of the taxpayer. According to Thomson Reuters’ tax analyst Robin Christian, this means that individuals whose houses were foreclosed do not have to pay taxes for the forgiven debt.

This legislation however will expire by the end of 2012. The implication of this is that homeowners who are experiencing difficulties and are having payment delays in their mortgages may be surprised by the taxes that they have to pay in 2013. Moreover, people who have other types of cancelled debts may also be in trouble.

Financial institutions tasked to write off debts amounting to at least $600 must submit a Form 1099-C to both the IRS and the borrower. If a 1099-C is received for a forgiven debt after foreclosure, make sure to inform the IRS about its exclusion, says Christian. Do this by filling out Form 982 on Form 1040 and put a check mark on Part I of box 1E. Without this, IRS may consider the forgiven debt as taxable income. Other forgiven debt in the category includes credit card debt, student loans, mortgage debt from a second home, and home equity line of credit that was not utilized for home improvement.

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30 Year Fixed Rate Mortgage Still Under 5%

The rate for 30 year fixed mortgages remained unchanged for the latest week as the rate remained below the 5% mark.

Mortgage giant Freddie Mac announced on Thursday April 7th that the rate of this week remained unchanged however last week the rate rose from 4.86% to 4.87%. The rate hit a 4 decade low in November of last year when it fell to 4.17%.

Meanwhile the rate for the 15 year fixed mortgage rose this week by 0.01% to stand at 4.10%. The 15 year fixed mortgage had also hit a 2 decade low in the November of last year when it fell to 3.57%.

Mortgage rates closely flow the yield on ten year Treasury notes. Low mortgage rates have not helped the home sales market which is struggling to recover from the economic crisis. KB home is the latest homebuilder that has announced a decline in net orders for homes in the last quarter.

The company which is based in Los Angeles California and operates in 12 states across the country released statistics this week which showed a decrease by 28% in houses that were delivered in the last quarter and a decrease of 32% in new home orders.

Lennar Corp last week announced its statistics for the last quarter and they also posted a 12% decline in new orders and a 3% decline in homes delivered.

The sluggish new home sales in the United States are due to the fact that prospective home buyers are hesitant to buy new houses because of stringent credit requirements, fears of getting laid off and not being able to repay mortgages and an expectation that home prices will fall because of large amounts of foreclosures still available in the market.

Mortgage rates are extremely unstable and can vary on a daily basis. Hence to calculate the average rate for the week, rates are measured across United States every day from Monday to Wednesday every week by Freddie Mac.
On a 5 year adjustable rate mortgage the average rate rose from 3.7% to 3.72%. This rate hit its lowest mark since 2005 last month when it dropped to 3.25%.

Meanwhile the average rate for the 1 year adjustable rate mortgage dropped from 3.26% to 3.22%. This rate hit its lowest in almost 3 decades 3 weeks ago when it stood at 3.17%.