THE 2013 FISCAL DEAL AND HOW IT AFFECTS THE REAL ESTATE MARKET

So the deal is done...Well half way at least. So how does this affect the real estate market? Well I've been doing my research and this is what I've come up with. On one end of the spectrum you have the wealthy home owners who were considering selling at some point in the near future. Well if they were looking to recoup money on their investment after the fiscal cliff deal was passed they're in for a shock. The capital-gains tax has effectively gone up as of midnight. Therefore sellers in the high-end real-estate market could owe millions more in taxes on their sales. As a result, many wealthy sellers have either been racing to close before 2013 or will now be looking to hold until the next highly charged debate in congress. The speculators are predicting a surge of high end properties to hit the market, effectively pushing down prices even more and running a ripple effect throughout the entire real estate market. One solution to this problem as in one of my recent deals is to offer your buyer, seller financing. That way you avoid paying that capital gains tax for a number of years while you earn interest on the money the owner has lent the buyer. I'm no economist but rich seem to be pretty savvy at hiding money and avoiding taxes so by adding creative financing to the mix of ways to avoid paying taxes doesn't surprise me. ************************************* On the other end of the spectrum you have a large portion of the shrinking middle class who've been hit with a job-loss, income reduction or property value deduction. Don't get me wrong this has not only been a problem for the middle & lower class, there are plenty of wealthy homeowners who've lost substantial value in their homes as well. But for the millions of Americans who have basically lost everything that took generations to build and in the blink of a CDO/Swap deal it's was completely lost due to the evil dealings of some crummy Wall Street guys it's a good thing that the "cliff deal" has continued to offer "us" protection. According to the new "fiscal deal" the sun may be shinning a little brighter for those trampled Americans hanging on by a string. If your home is worth significantly less than when you purchased it, you’ve likely been seeking out some type of modification with your lender (Good luck with that!). Or perhaps things have gotten so bad that you’re facing foreclosure or a short sale. Well according to a recent article and I'm sorry but I can't recall where I found it....Here’s the thing: anytime a mortgage is modified (i.e., reduced), the borrower is required to recognize cancellation of indebtedness (COD) income to the extent of the debt forgiveness. Similarly, if a property is sold at foreclosure or in a short sale and the underlying mortgage is recourse (meaning the borrower has personal responsibility for any excess loan deficiency remaining after the sale), then to the extent the remaining deficiency is forgiven, the borrower will again recognize COD income. In the foreclosure or short sale context, this COD income is NOT treated as gain from the sale of the home, and thus is not eligible for exclusion under Section 121, which allows married taxpayers to exclude up to $500,000 of gain on the sale of a home, provided they have owned and used the home as their principal residence for two of the prior five years. As a result, barring some sort of statutory relief, the COD income must be recognized. Ex: A owns a primary residence with a basis of $500,000 that is subject to a recourse mortgage with a balance of $400,000. After the property declines in value to $300,000, the lender and A agree to enter into a short sale. As a result, A sells the home to an unrelated buyer, B for $300,000. A remits the $300,000 sales price to the lender in settlement of the $400,000 debt, leaving A with a $100,000 remaining deficiency. If the lender forgives the remaining deficiency, A will recognize $100,000 of COD income. When the real estate bubble burst and the resulting run on foreclosures and debt modifications began, Congress recognized that something had to be done, as it seemed patently unfair to tax homeowners on COD income when they couldn’t even afford to service the mortgage on the home. And while exclusions to COD income have always existed under Section 108, prior to 2007 those exclusions were only of use to a homeowner if the homeowner were insolvent or bankrupt. What this means in layman's terms is if you owe a lot of money on a property and have lost considerable value in your home due to the financial crisis. You no longer need to file bankruptcy to avoid paying taxes on the additional income not paid down by the short sale or foreclosure of your home. I believe the $2,000,000 threshold may be broken down differently between those who are single and those who are married but this is a good thing. Not having to pay taxes on $2,000,000 effectively lost dollars makes sense especially if you don't have it! At this point I'm still doing my research and will check back when I have more information. All the best in 2013!