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On Wednesday, the Internal Revenue Service issued proposed regulations for a new provision allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income. The new qualified business income deduction is available for tax years beginning after December 31, 2017. Taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

According to the National Association of REALTORS® (NAR), the deduction will have a significant, beneficial impact on members. NAR believes this deduction, which is included in the IRS and Treasury Department’s release of proposed regulations, will be available to a wide range of real estate professionals, including those who are self-employed, as well as those operating through partnerships, LLCs, and S corporations. NAR will continue thoroughly reviewing the rule and will be releasing more information when the process is completed.

SEE IRS SUMMARY

SEE IRS RULE

NAR TAX REFORM SUMMARY AND RESOURCES

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The California Association of REALTORS® (C.A.R.) announced on Wednesday that it received a letter from the California Franchise Tax Board (FTB), obtained by Board of Equalization member George Runner, clarifying that California families who have lost their home in a short sale are not subject to state income tax liability on debt forgiveness “phantom income” they never received in a short sale.

Last month, in a letter to California Senator Barbara Boxer, the Internal Revenue Service (IRS) recognized that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. Following the IRS’s clarification, C.A.R. sought a similar ruling by the California FTB. With the FTB’s clarification, underwater home sellers are now assured that they are not subject to state income tax liability, rescuing tens of thousands of distressed home sellers from California tax liability for debt written off by lenders in short sales.

“We are pleased with the recent clarifications issued by the IRS and the California Franchise Tax Board, which protect distressed homeowners from debt relief income tax associated with a short sale in California,” said C.A.R. President Kevin Brown. “We would like to thank Senator Boxer and BOE member Runner for their leadership in obtaining this guidance from the IRS and FTB. Distressed California homeowners can now avoid foreclosure or bankruptcy and can opt for a short sale instead, without incurring federal and state tax liability, even after the Mortgage Forgiveness Debt Relief Act of 2007 expires at the end of this year.”

One of the major successes Congress reached in the “fiscal cliff” negotiations at the end of 2012 was the extension of the Mortgage Forgiveness Debt Relief Act for another year. The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure.

While debt relief had been extended at the federal level, the state exemption expired at the end of 2012. In order to conform state law to the federal law that recently passed extending mortgage debt forgiveness, C.A.R. sponsored Senate Bill 30 (Calderon, D-Montebello) so California homeowners on the brink of foreclosure could get much-needed debt relief. That measure has stalled at the state level.

“Senator Boxer’s request to the IRS to provide guidance on whether mortgage debt forgiveness in a lender-approved short sale would be taxable and the subsequent rulings by the IRS and California FTB help clarify the state income tax status of distressed home sellers in California. Many have been worried about it and have contacted our association seeking clarification. We are glad the issue has been resolved,” said Carolyn Miller, president of the Silicon Valley Association of REALTORS® (SILVAR).

California Association of REALTORS® President Kevin Brown announced this morning the successful outcome of C.A.R.’s work with U.S. Senator Barbara Boxer (D-CA) to protect distressed homeowners from debt relief income tax associated with a short sale in California. As part of this effort, Senator Boxer requested the Internal Revenue Service (IRS) to provide guidance on whether mortgage debt forgiveness in a lender-approved short sale would be taxable income under federal law, given California’s recent non-recourse laws for short sales, which were hard fought victories by C.A.R.

The IRS has clarified in a letter that California’s troubled homeowners who sell their homes in a short sale are not subject to federal income tax liability on “phantom income” they never received. The IRS recognizes that the debt written off in a short sale does not constitute recourse debt under California law, and thus does not create so-called “cancellation of debt” income to the underwater home seller for federal income tax purposes. This clarification rescues tens of thousands of distressed home sellers from personal liability upon expiration of the Mortgage Forgiveness Debt Relief Act of 2007 on December 31, 2013.

C.A.R. is seeking a similar ruling from the California Franchise Tax Board (FTB), which has been awaiting the IRS action. C.A.R. anticipates the FTB will act promptly. Short sales may raise other tax issues and, as always, homeowners should speak with their tax professional regarding the tax consequences of a short sale.

Due to the government shutdown, many federal government offices remain closed, and a number of government programs, including some that impact federal housing and mortgage programs, are suspended or experiencing delays due to the lapse in government funding. REALTORS® say if the government shutdown is prolonged, it could hurt the housing market recovery.

“Since the IRS is closed, lenders cannot verify buyers’ incomes. Government-backed loans, including FHA loans, will be delayed. Delays in processing would ultimately stall home sales,” explained Carolyn Miller, president of the Silicon Valley Association of REALTORS®.

California Association of REALTORS® Vice President and Chief Economist Leslie Appleton-Young said if the shutdown continues there could be dire consequences. “We are operating in a global economy, where everything is interconnected. The greatest concern is if nothing is resolved by October 17 and Congress fails to raise the debt ceiling.”

If Congress fails to raise the debt ceiling, the nation would default on its debt. Mortgage rates would soar, housing affordability would drop, and potential buyers would pull back from the housing market, which is just recovering from the recession.

The Office of Management and Budget requires each agency to have contingency plans in place in the event of a government shutdown. The information below is based on the National Association of REALTORS®’ review of agency contingency plans.

Federal Housing Administration (FHA)
FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities, including paying claims and collecting premiums. Management & Marketing contractors managing the REO portfolio can continue to operate. Expect some delays with FHA processing.

VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program, but expect some delays.

Flood Insurance
The National Flood Insurance Program will not be impacted by a government shutdown, since the program is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.

Rural Housing Programs
Lenders will not receive approvals for U.S. Department of Agriculture programs during the shutdown because field office staff who typically issue conditional commitments, loan note guarantees and modification approvals are on furlough due to the shutdown. If the lender has already received a conditional commitment from the Rural Development office, the lender may proceed to close those loans during the shutdown since the funds were already set aside. A conditional commitment, which is good for 90 days, is given to a lender once a USDA underwriter approves the loan.

Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will the Federal Housing Finance Agency, since they are not reliant on appropriated funds.

Treasury
The Making Home Affordable program, including Home Affordable Modification Program (HAMP) and Home Affordable Foreclosure Alternatives (HAFA) program, will not be affected since the programs are funded through the Emergency Economic Stabilization Act, which is mandatory spending, not discretionary.

Internal Revenue Service
The IRS is closed and has suspended the processing of all forms, including tax return transcripts (Form 4506T), which are required for many kinds of loans, including FHA and VA, so expect delays.

Social Security Administration
The Social Security Administration is closed and has suspended most customer service functions. Verifying Social Security numbers through the SSN Verification Service will also be suspended during the shutdown, a further complication for mortgage processing.

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