John Beckett's Real Estate Blog

The basic tax rule on debt discharge is simple: If a lender cancels your debt, that’s taxable income to you, and you and the Internal Revenue Service will get a 1099-C form, and you will have to pay tax on that forgiveness. But Congress gave homeowners a big gift with the Mortgage Forgiveness Debt Relief Act of 2007. It excludes as much as $2 million in debt relief from income taxes through 2012. It applies, however, only to debt on primary residences. If you had a mortgage canceled on your vacation beach condo, you could get stuck. And you’ll still have to pay tax on relief from auto loans, credit cards and similar debts.There are two other exceptions that can affect homeowners: First, if your mortgage — even the mortgage on your beach condo — is discharged in a bankruptcy, none of the debt cancellation is taxable. There’s a trickier issue if you can prove you are insolvent when you get a debt forgiven. Let’s say you have $120,000 in liabilities and $100,000 in assets. You’re insolvent to the extent of $20,000. So, up to $20,000 in debt-discharge income would escape taxes. Any excess would be taxable as ordinary income. Here’s how it’ll hurt: Let’s say you have a $90,000 mortgage and $30,000 in credit card debt, and the credit card companies forgive all of that $30,000. But that’s $10,000 more than you’re allowed, and you’ll have to pay tax on that amount.

Loss of property-tax and interest deductions

There’s no escaping these potential problems. So if you think you may be losing your home, you need to adjust your tax planning. If you lose your house, you also lose future itemized deductions for interest and real-estate taxes. You can deduct the interest on as much as $1 million in principal borrowed to acquire a home, plus the interest on an additional $100,000 in home equity borrowing. There’s no limit on the deduction for real-estate taxes. If you’re paying $12,000 a year in interest plus an additional $8,000 in property taxes, that’s $20,000 in deductions you’ve just lost. In you’re in the 25% bracket, that’s an additional $5,000 you will have to pay in tax. If you couldn’t even pay your mortgage, getting $5,000 more for the IRS is going to be difficult.

The hit from homebuyer credits

The Housing and Economic Recovery Act of 2008 gave first-time homebuyers a refundable credit of 10% of the purchase price, up to $7,500. It was an interest-free loan from the IRS that had to be paid back over 15 years, starting with 2010. The American Recovery and Reinvestment Act of 2009 upped the ante to as much as $8,000 that never has to be repaid — if you stay in the home at least three years. In both cases, you’d qualify as a first-time homebuyer if neither you nor your spouse had had an ownership interest in a principal residence in the previous three years. If you didn’t qualify for the first-time-homebuyer credit, you might qualify for a $6,500 credit. This applies to so-called move-up buyers — those who have owned and lived in their current home for a consecutive five out of the past eight years. The credit does have income limits: $125,000 for singles, $225,000 for married taxpayers filing jointly.But if your home were foreclosed on within 15 years (for a home bought in 2008) or within three years (for a home bought in 2009 or early 2010), it would cease to be your principal residence. The credits would have to be repaid. Remember the extra $5,000 that your taxes went up when you lost your deductions in the earlier example? If you lost your $8,000 homebuyer credit, too, you’d have to find an additional $13,000 for Uncle Sam on top of your normal taxes.  If you qualify as a first-time homebuyer and didn’t buy a house in 2009, start shopping. If you can sign a contract by April 30, 2010, and close by June 30, you can still get the 2009 credit. But please make sure you can make the payments.

State and local tax problems

Lastly, don’t neglect the effect of the foreclosure on state and local taxes. For example, property owners in New Jersey can deduct as much as $10,000 in real-estate taxes from their state tax returns. If you lose your home, you lose that deduction as well.

Read at: http://articles.moneycentral.msn.com/Taxes/TaxShelters/losing-a-home-a-tax-bite-may-be-next.aspx?GT1=33009

Most people retire in the same town where they spent their final working years, but some seek out a new locale with ski slopes or perhaps ocean views. Of course, budget is a big concern. Many people move close by and move to a smaller home or condo where they have less upkeep. They still want to stay close to their children and stay involved in the business world by consulting and remaining close to their clients. Here are some tips for finding a place that fits your budget and interests.

Cost of living. Moving to a place with lower housing, food and entertainment costs is an obvious way to stretch your nest egg. A lower cost of living is the major factor behind retirement mobility. I don’t know anyone moving from Kansas to Hawaii. Twenty-two percent of Americans age 51 or older who moved between 1992 and 2004 did so to save money, according to a recent analysis by the Center for Retirement Research at Boston College.

Low-tax locales. Tax rates vary considerably by location. Seven states don’t levy an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee tax only dividend and interest income. And five states have no sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. Be sure to evaluate property taxes and state and local tax exemptions for seniors.

Health care facilities. Your health care needs are bound to increase as you age. Make sure your prospective retirement spot has adequate health care and elder-care facilities and a doctor who can treat any condition you may have. You can call and see how difficult it is to get an appointment, if you’re on hold for more than 10 minutes or you leave a message on voice mail and you don’t get a call back, then you know.

Proximity to family. Many retirees would like to become more involved in their grandchildren’s lives. Living near family sometimes has another bonus: help with lawn care or transportation for grocery shopping — services for which you would otherwise have to hire someone. Twenty-eight percent of older Americans who have relocated after age 51 did so primarily to be near children or relatives, Boston College found. People often migrate toward someone because they have become more disabled or have lost their spouse and they need some support that they are not getting in their current location. They will move toward their children or some friends to help them with their daily life.

Recreation and culture. When you’re no longer tied to a job, you have the freedom to live in wine country or within walking distance of a beach. Perhaps your ideal retirement spot has plenty of art galleries, golf courses and hiking trails. College towns often fit the bill and host world-class speakers and entertainers, and they often have an affordable cost of living.

Public transportation. Retirees often reach a point when they can’t or no longer want to drive. Consider the cost and quality of a town’s public transportation system and how to get around without a car. AppalCart, a regional bus service in Boone, N.C., for example, provides free local transportation. Retirees who join the Senior Club in Walnut Creek, Calif., ($7 annual dues) are eligible for a minibus service that offers transportation within the city limits for $1 each way.

Weather. To some, it’s important to not have to shovel snow or defrost a car. But warm climates also come with the downside of larger air-conditioning bills. Think about whether you want four distinct seasons. Some retirees can get the best of both worlds by maintaining or renting a residence in the north and then heading south for the winter.

Read the entire story at: http://realestate.msn.com/article.aspx?cp-documentid=23626185