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On December 21, 2009,
in Taxes,
by blacklobellolaw
On November 3, 2009,
in Real Estate, Taxes,
by blacklobellolaw
Recently, Senators agreed to extend the first time homebuyers tax credit and offer a reduced credit to some repeat homebuyers. The tax credit provides up to $8,000 to first-time homebuyers and was set to expire at the end of November. Senators agreed to extend the existing tax credit for first-time homebuyers and offer a reduced credit of up to $6,500 to repeat buyers who have owned their current homes for at least five years. We do not yet have the details but will keep you posted.
Tisha Black Chernine, Esq.
A bankruptcy court in Pennsylvania recently ruled on an issue that has been a frequent source of confusion to those working with short sales.
The issue is whether a 1099-C issued by a lender to a borrower automatically relieves the borrower of liability for the debt. In other words, is a creditor prevented from pursuing collection of a debt for which it has issued a 1099-C pursuant to IRS requirements?
A 1099-C is issued to the borrower by the lender for “cancelled” debt. This debt generally is taxable income to the borrower. The exceptions to this have been covered extensively in other articles including that for purchase money debt on a primary residence.
In the case of In re Zilka (407 B.R. 684) the court considered this issue in a situation that did not involve a short sale. Nonetheless, the case is illustrative of what may happen when a court considers the issue in a short sale context. The judge wrote:
[The creditor’s] issuance of the Forms 1099-C did not itself operate to legally discharge the Debtor from further liability on each of the [creditor’s] four claims. That is because Forms 1009-C, as a matter of law, do not themselves operate to legally discharge debtors from liability on those claims that are described in the Forms 1099-C.
The court addressed the issue of a taxpayer who has paid tax on cancelled debt that is the subject of the 1099-C. It found that the issuance of a corrected 1099-C would allow the creditor to pursue the debt in such a situation. This can be distinguished form a short sale of a primary residence where the owner most likely is subject to tax relief.
Robert B. Noggle, Esq.
Recently we were asked if a single-member limited liability company (LLC) has to get a new EIN after it hired an employee. Again we provide the typical lawyer’s answer, which is “it depends.” The Internal Revenue Service (IRS) rules regarding this situation are as follows:
Single Member LLCs with Employees. For wages paid on or after January 1, 2009, single member/single owner LLCs that have not elected to be treated as corporations may be required to change the way they report and pay federal employment taxes, wage payments, and certain federal excise taxes. On August 16, 2007, changes to Treasury Regulation Section 301.7701-2 were issued. The new regulations state that the LLC, not its single owner, will be responsible for filing and paying all employment taxes on wages paid on or after January 1, 2009. These regulations also state that for certain excise taxes, the LLC, not its single owner, will be responsible for liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008.
A single member LLC has been filing and paying employment taxes under the name and EIN of the owner, and no EIN was previously assigned to the LLC, a new EIN will be required for wages paid on or after January 1, 2009. If a single member LLC has been filing and paying excise taxes under the name and EIN of the owner and no EIN was previously assigned to the LLC, a new EIN will be required for certain excise tax liabilities imposed and actions first required or permitted in periods beginning on or after January 1, 2008. The following examples may assist in determining if a new EIN is required:
- If the primary name on the account is John Doe, a new EIN will be required.
- If the primary name on the account is John Doe and the second name line is Doe Plumbing (which was organized as an LLC under state law), a new EIN is required.
- If the primary name on the account is Doe Plumbing LLC, a new EIN will not be required.
You will be required to obtain a new EIN if any of the following statements are true.
- A new LLC with more than one owner (Multi-member LLC) is formed under state law.
- A new LLC with one owner (Single Member LLC) is formed under state law and chooses to be taxed as a corporation or an S corporation.
- A new LLC with one owner (Single Member LLC) is formed under state law, and has an excise tax filing requirement for tax periods beginning on or after January 1, 2008, or an employment tax filing requirement for wages paid on or after January 1, 2009.
You will not be required to obtain a new EIN if any of the following statements are true.
- You report income tax as a branch or division of a corporation or other entity, and the LLC has no employees or excise tax liability.
- An existing partnership converts to an LLC classified as a partnership.
- The LLC name or location changes.
- An LLC that already has an EIN chooses to be taxed as a corporation or as an S corporation.
- A new LLC with one owner (single member LLC) is formed under state law, does not choose to be taxed as a corporation or S corporation, and has no employees or excise tax liability. NOTE: You may request an EIN for banking or state tax purposes, but an EIN is not required for federal tax purposes.
Carlos L. McDade, Esq.
A client recently changed the name of their business and asked whether they must obtain a new Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
First, check whether your type of entity needs a new EIN if it changes its name.
If a new EIN is not necessary, then the business must change its business name with the IRS to register the new name with the pre-existing EIN. The methods for doing so are as follows:
|
Business |
Action Required |
|
Sole Proprietorship |
Write to the IRS at the address where you filed your return, informing the IRS of the name change. Note: The notification must be signed by the business owner or authorized representative. |
|
Corporation |
If you are filing a current year return, mark the appropriate name change box of the Form 1120 type you are using:
If you have already filed your return for the current year, write to the IRS at the address where you filed your return to inform them of the name change. In addition:
|
|
Partnership |
If you are filing a current year Form 1065, mark the appropriate name change box on the form: Page 1, Line G, Box 3.If you have already filed your return for the current year, write to the IRS at the address where you filed your return to inform them of the name change. In addition:
|
Carlos L. McDade, Esq.
The Pending Home Sales Index (PHSI) is an index created by the National Association of Realtors (“NAR”) to measure housing contract activity, which is released the first week of each month. PHSI analyzes the relationship between existing home sale contracts and transaction closings over the last four years. As of September 2009, contract activity for pending home sales had risen for the sixth straight month, a pattern not seen since the Index began in 2001. 
Why are we seeing so many contracts signed in recent months? Certainly, the lower home prices and falling cost of mortgages have played a role. However, real estate pundits are attributing a material part of the increase to the one-time $8,000 tax credit, which is set to expire at the end of November. The NAR estimates that at least 350,000 of the 1.8 million first-time purchased a home solely because of this tax credit. Though Washington is expected to extend this credit, many first-time home buyers are not gambling on the extension. Rather, they have chosen to play it safe and take the credit now, thus scrambling to close home purchases before the November 30, 2009 cut-off date.
The incentive to purchase homes spurred by the tax credit may be partially responsible for the positive news in the real estate residential front. Spending on private home construction jumped 2.3% in July to an annual rate of $245.6 billion — the highest level since April. Public spending on residential homes also rose 3.6% to an annual rate of $8.6 billion — a record number! While commercial construction is still weak, and expected to remain sluggish as it is a 12-month trailing indicator behind residential building and consumption, the focus ought to be on both private and public spending in the residential market.
Hopefully, an extension of the one-time tax credit will continue to drive, even if in small measure, new home buyers to purchase homes. If and when residential construction reaches a critical mass, commercial building will, eventually, increase as well. We can only hope that Washington sees the connection. We will keep you posted.
Tisha Black-Chernine, Esq.
On August 19, 2009,
in Real Estate, Taxes,
by blacklobellolaw
Homeowners whose mortgage debt is partly or entirely forgiven during the calendar years of 2007 through 2012 are able to claim tax relief by filling out the newly-revised Form 982, filing it with the Internal Revenue Service, and submitting it with their year-end federal tax returns. Normally, when a bank gives a homeowner debt forgiveness it results in taxable income. However, the Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude from their taxable income debt forgiven on their principal residence. A homeowner qualifies for this tax exclusion if the balance of their loan is $2 million or less, or $1 million for a married person filing a separate return.
The Tax Form 982 applies to debt reduced through mortgage restructuring, loan modifications, short sales, and foreclosures. Eligible homeowners need only fill out the Form 982 and receive a 1099-C from their lending institution. The debt forgiven by the lending institution must have originated to buy, build or improve the taxpayer’s principal residence and must have been secured by that residence. Debt associated with rental or investment properties, home equity lines of credit, business property, credit cards or car loans do not qualify for the new tax-relief provision.
A homeowner will encounter the Tax Form 982 upon the completion of a mortgage restructuring transaction. This would include but not limited to (1) a successful loan modification with principal reduction, (2) a completed short sale, and (3) a foreclosure sale with remaining deficiency.
If you would like additional information about the Tax Form 982 and its relation to your residential home visit the IRS’ website at www.irs.gov.
James E. Herbe, Esq.
On August 7, 2009,
in Real Estate, Taxes,
by blacklobellolaw
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount as income for tax purposes. You should determine whether you will qualify for an exemption before your contemplated short sale or foreclosure closes. You may become obligated to the IRS instead of your lender!
Consider this, when you initially borrow money you are not required to report the borrowed money as income because you had an obligation to repay the lender. However, if all or a portion of that obligation is subsequently forgiven, the forgiven amount must generally be reported as income because you no longer have an obligation to repay the lender. The lender will then, generally, be required to report the amount of the forgiven debt to the IRS (1099-C) and you, in turn, report the forgiven amount as income and pay the related tax.
However, and fortunately, income associated with the forgiveness of debt may be excluded as taxable income if it falls within an exemption created by the Mortgage Debt Relief Act of 2007. The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see IRS News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
The Act only applies to debt that was forgiven or canceled in the calendar years of 2007 through 2012 and was used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes and the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married or respectively, filing separately. See your tax professional with regard to further detail and reporting requirements.
-Tisha Black-Chernine, Esq.
On August 4, 2009,
in Real Estate, Taxes,
by blacklobellolaw
The Internal Revenue Service announced on July 29, 2009, its first successful prosecution related to fraud involving the first-time homebuyer credit (FTHC). On its website, the IRS warned taxpayers to beware of this type of scheme.
On Thursday, July 23, 2009, tax preparer James Otto Price III, from Jacksonville, Florida, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.
The IRS is investigating dozens of cases of potential instances of fraud involving the credit. How does it find these fraudulent returns? The IRS has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.
“Taxpayers should be wary of anyone who promises to get them a big refund,” said Eileen Mayer, Chief, IRS Criminal Investigation. Mayer publicly announced “We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction.”
Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.
First-Time Homebuyer Credit
The IRS explains the proper use of the First-Time Homebuyer Credit on its website, www.irs.gov. The FTHC was originally passed in 2008, and modified in 2009. The law provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before December 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.
Different rules apply for homes bought in 2008.
-Carlos L. McDade, Esq.
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