Bush suspends debt-forgiveness tax

NEW -> Contingent Buyer Assistance Program
<p>NSR,</p>

<p>No disagreement here.</p>

<p>All other issues will pale in comparison to this one though.</p>

<p> </p>
 
The more important question is what cap rate are people willing to accept on houses. If nirvinerealtor is correct that people are buying in plaza at 3% caps all cash there is some froth still in the investment home market. If that moved closer to 5-7% caps then you could see some significant principal risk for these people. If you're borrowing money at 7.75% to invest in an asset that is yielding 3% that is not likely to be a sensible investment unless you expect pretty strong rent growth/capital appreciation.
 
<em>"Debt forgiveness tax is already waived if the taxpayer is insolvent. The taxpayer does not have to declare bankruptcy, just show the IRS that they are insolvent."</em>





I didn't think about that. It makes Bush's proposal even more of a window dressing than I first realized.


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<p><em>"The problem is withdrawal of the Alt-A jumbo loan market.</em></p>

<p><em>Every mortgage veteran here will confirm that this is a heavily-used product type here.</em></p>

<em>...


</em>

<p><em>This is the single most important factor that will affect pricing here."</em>


</p>

I totally agree with this assessment. This mortgage product is everywhere here because the higher incomes of Irvine residents made subprime unnecessary. It will suffer the same fate as subprime because the Alt-A part is generally because they are lying about their income. Full documentation requirements will be the death of the Alt-A jumbo market, and with it the death of the Irvine real estate market.





When you think about it, now that everyone is defaulting, and we are seeing the borrowers lied about their income, what possible incentive would an investor have for purchasing this mortgage? There is zero confidence in this product from an investor's viewpoint because the income they were relying on to make the payment was a fabrication. The only way to bring confidence back to the system is to provide full documentation. This will stop people from lying on their mortgage loan applications and force them to qualify on their real income. This will cause an immediate and significant drop in the amounts borrowed and thereby in the prices people pay for homes.





This is not going to change any time soon. It isn't like the market will suddenly stabilize then resume double digit appreciation. People are going to have to start paying for a house out of their real income. This will drop prices back to their fundamental valuations in line with incomes and rents.
 
<p>It is actually not window dressing.</p>

<p>The IRS takes precedent over every other debt. </p>

<p>You get a worksheet with all of your finances listed out. I think in OC they only recognize up to $1800 per month for housing.</p>

<p>Then you add your car payments etc. Then they take the rest. They will put a tax lein on your credit report.</p>

<p>They have 10 years to collect before it goes past the statute of limitations. They can let your debt sit there for 5 years collecting interest and penalties.</p>

<p>So if you owe them 60k today it isn't just written off because of inslovency they will want the money if debt foregiveness tax is still there.</p>
 
trrenter - Are you sure about this? Most of what you write is applicable to overdue and assessed taxes, but it has been my understanding that the tax liability incurred as a result of debt forgiveness is treated differently in regards to insolvency. I am fairly sure that it is just written off. Honestly, I have never had a client go through this procedure, but the more I think about it, I think the taxpayer does not even have to give evidence of insolvency. I think they can just claim insolvency in the year the tax is incurred and they would only have to give evidence if the return is reviewed. I remember hearing that a claim of insolvency does flag a return for review, but I have never actually heard that from an IRS employee.<p>


Theoretically the IRS has ten years to collect once the tax has been assessed, but practically speaking, when using IRS procedures, there is no real limitation for collection of tax once it has been assessed. Every time the taxpayer signs an affadavit admitting to tax owed, the ten years starts again.
 
IIRC I read that as long as you can "prove" that you are insolvent it is wiped out. I could be wrong because I pay someone to do my taxes. Maybe later I will look into it.
 
<p>I am not completely sure because the code is some what ambiguous. It isn't the state of your affairs after the discharge either. It is the state prior to the discharge.</p>

<p>Just because you lose your home does not make you insolvent. If you have a job and cars and assets you may not be.</p>

<p>Of course dealing with the IRS is always tricky because usually they are judge an jury in the case. If your Tax liability on the sale is 15k and you make 150k the IRS may not agree that you are insolvent.</p>

<p>Because you do have the ability to pay. At least that is what I was told by an accountant. Who knows he may be wrong.</p>

<p>In any case it will make it one step easier for people to walk away.</p>

<p>If you aren't walking away for foreclosure the IRS may not agree you are insolvent. Then the debt foregiven would certainly need to be claimed.</p>

<p>I have dealt with the IRS and they are not an easy group to deal with.</p>
 
If the taxpayer's income is 150k, it is unlikely a claim of insolvency would hold up under review. But, I get paid to deal with the IRS and I find most IRS reviewers, agents, and attorneys easy to deal with, unless they are new. It is my clients who do not know tax code who can be a bit of a challenge at times.
 
My understanding of the test is that you have to be insolvent both before and after the debt forgiveness. The solvency test includes exempt assets (retirement assets) so it is more likely that you will reduce rather than eliminate your tax liability through insolvency. Bankruptcy does wipe out this tax liability but there is a sequence for doing so and it is very hard to declare bankruptcy if you had high income in 2006.


"IF taxpayer can prove the "insolvency exception," measured both before and after the discharge, it is possible to avoid the adverse constructive receipt of income result. But the taxpayer has the burden of proof, and unless he is prepared to meet the `before and after' tests of legal insolvency, it is a difficult case. Taxpayer must prove that no enhancement to his economic circumstances has taken place via the discharge, and that can be very difficult, if any assets remain which might be executed upon, or even if he is employed and the lender has waived rights to a deficiency judgment as part of the short sale, if the projected earnings of taxpayer indicate that the non-exempt part of his take-home pay would make payment of the deficiency judgment a bankworthy resource to the judgment creditor. If it is a bankworthy asset for the disappointed lender, the taxpayer has avoided future garnishment, and evaded a judgment that could be collected over time, so even if insolvent, he does have an income stream and has in a sense protected it. The Service will argue at audit that his estate has been enhanced, thus the insolvency exception is inapplicable. Thus it becomes hard for this taxpayer to make out this exception."





Source:http://dianecohn.blogs.com/reno/2007/06/my-first-short-.html
 
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