1) Consider your Lifestyle

For some people, buying their home makes the most sense, and for others, renting is best. To determine which is right for you, you first need to determine whether you can afford to buy. Then you need to consider other factors, including the time you’ll stay in your new home, the home’s prospects for appreciation and taxes. Just answer the following questions and we’ll advise you on what seems best for you.

Visit this site to help you determine your lifestyle: http://www.bankrate.com/calculators/mortgages/rent-or-buy-home.aspx

2) Consider what makes sense Financially

Whether renting is better than buying depends on many factors, particularly how fast prices and rents rise and how long you stay in your home. Compare the costs of buying and renting a home in the calculator below. Go to this site to help you determine if the numbers work for you:

BUY vs RENT Calculator Tool

Click the advanced settings button to change inputs such as your rate of return on investments, condo/common fees and your tax bracket.

Below is a very CONSERVATIVE SAMPLE that I ran.  It’s a $400,000 house (3bed 2bath) that would normally rent for about $1,800 a month if not more.  And as you can see, it is more expensive to rent than to own starting on the 7th year!!!

And if you play around with the numbers a bit more, you will find that renting will become more expensive sooner than 7 years as the purchase price of the house decreases from $400,000 example that we used.  I can even show you some properties where it’s actually cheaper to own NOW than to continue to rent.

If you have any questions on how to use this awesome tool, please call or email me.  I’d be happy to go over some numbers with you.

buy vs rent

buy vs rent - buy settings

rent vs buy - rent settings - long beach homes for sale

rent vs own - other settings - long beach homes for sale

own vs rent - year by year analysis

Historical Treasury Rates

Historical Rates - Long Beach Homes For Sale

This visualization displays long term rate data

View Text Version of Historical Treasury Rates

On July 15, 2011, the California legislature enacted a new law expanding the protection for a homeowner against personal liability after a short sale.  In a short sale, a homeowner sells a property for less than the outstanding loan balance owed.  The difference between what’s owed on the mortgage loan and what the lender receives as a payoff is called a deficiency.  The following charts are easy-to-use reference guides for REALTORS® and their clients to determine the general applicability of anti-deficiency protections for short sales and foreclosure.  These charts do not cover all aspects of any individual case or situation.

For a printer-friendly version of Short Sale Deficiencies Fact Sheet Click Here  (PDF file–Adobe Acrobat Reader Required**)

** Acrobat Reader is free downloadable software that will enable members to read any PDF files.

*Note: Certain exceptions may apply, including fraud, bad faith waste, and for foreclosures, a wiped-out junior lienholder when a senior lienholder forecloses.  Also, no deficiency judgment shall be rendered if a lender forecloses by non-judicial foreclosure (or a trustee’s sale) (CCP § 580d) or if a loan is seller financed (CCP § 580b).  Although most lenders in California foreclose by non-judicial foreclosure, the decision to pursue judicial or non-judicial foreclosure is made by the lender, not borrower.  For more information, C.A.R offers our members other legal articles, including Short Sale Deficiencies, available at http://qa.car.org.

This chart is just one of the many legal publications and services offered by C.A.R. to its members.  For a complete listing of C.A.R.’s legal products and services, please visit www.car.org.

Readers who require specific advice should consult an attorney.  C.A.R. members requiring legal assistance may contact C.A.R.’s Member Legal Hotline at (213) 739 8282, Monday through Friday, 9:00 a.m. to 6:00 p.m. and Saturday, from 10 a.m. to 2 p.m.  C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739 8350 to receive expedited service.  Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/.  Written correspondence should be addressed to:

CALIFORNIA ASSOCIATION OF REALTORS® Member Legal Services 525 South Virgil Avenue Los Angeles, California 90020

The information contained herein is believed accurate as of September 14, 2011. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.  Written by Stella H. Ling, Esq.

Copyright© 2011, CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.

TABLE OF CONTENTS

In a short sale, a homeowner sells property at a loss, but can nevertheless be held personally liable for the difference between the loan balance and sales price.  To protect short sale sellers from this harsh result, the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) sponsored new anti-deficiency legislation that came into effect on July 15, 2011.  This legal article discusses California’s protection against short sale deficiencies, including the legal and practical issues that may arise for REALTORS® and their clients under the new law.

I. GENERAL OVERVIEW

Q 1. What, in a nutshell, is the new law on short sale deficiencies?

A The new law generally prohibits a mortgage lender from collecting a deficiency or obtaining a deficiency judgment for a short sale involving a loan secured by a one-to-four residential unit property.  The new law also generally prohibits a lender from requiring the borrower to pay any additional compensation, aside from the proceeds of the sale, in exchange for a short sale approval.  This law applies to first trust deeds, second trust deeds, and other junior trust deeds.

For definitions of the terms short sale, deficiency, and deficiency judgment, see Questions 3 to 5.  For applicability of the new law to specific transactions, see Questions 14 to 23.  For requirements and guidelines under the anti-deficiency protection for short sales, see Questions 24 to 40.

Q 2. When did this law come into effect?

A This law came into effect on July 15, 2011 when it was filed as an urgency statute with the California Secretary of State.

Q 3. What is a short sale?

A A short sale is the sale of real property where the seller’s mortgage lender agrees to accept a loan payoff for less than what is owed as an outstanding balance.  In a short sale, a seller is “upside down,” which means the amount owed to the mortgage lender is more than the market value of the property.  If the seller cannot or does not want to pay that difference out-of-pocket, the seller can request that the lender accepts a loan payoff for less than what is owed in exchange for releasing the lender’s security interest on the property.  Each lender has its own guidelines and procedures for considering short sale requests.

Q 4. What is a deficiency?

A When more is owed on a mortgage loan than the sales price, the deficiency is the difference between the outstanding loan balance and the loan payoff received by the lender.  A deficiency may arise in connection with a short sale or foreclosure.

Q 5. What is a deficiency judgment?

A A deficiency judgment is a judicial court ruling that a borrower is personally liable for the difference between the outstanding loan balance and the proceeds received by the lender through a short sale or foreclosure.  To obtain a deficiency judgment in California, a lender must file a lawsuit against the borrower and go through the judicial court process.  If the lender obtains a deficiency judgment and the borrower does not pay the amount owed, the lender can enforce the judgment by, among other things, garnishing the borrower’s wages, attaching the borrower’s bank accounts, and placing a judgment lien on the borrower’s real property.  A deficiency judgment may also have a negative impact on a borrower’s credit rating.

Q 6. What is the legal authority for this law?

A This law is set forth as section 580e of the California Code of Civil Procedure (CCP).  Before it became law, the legislation was referred to as Senate Bill 458 (Corbett) or SB 458 of the 2011-2012 legislative session. The full text of the law is available at www.leginfo.ca.gov.

Q 7. What is the purpose of the new law?

A According to the California legislature, the purpose of the new law as an urgency statute is to mitigate the impact of the ongoing foreclosure crisis and to encourage the approval of short sales as an alternative to foreclosure.  (See Section 2 of Senate Bill 458.)

Q 8. Wasn’t there already a law on short sale deficiencies?

A Yes.  Before SB 458 became law generally protecting sellers from short sale deficiencies on all deeds of trust for one-to-four residential unit properties, preexisting California law generally protected sellers from short sale deficiencies on first trust deeds only for one-to-four residential unit properties.  That preexisting law, which was Senate Bill 931 (Ducheny) of the 2009-2010 legislative session, was in effect for a short period of time starting from January 1, 2011 to July 15, 2011.  Now, SB 458 protects sellers not just from short sale deficiencies for first trust deeds, but also for junior mortgage loans, such as second trust deeds and third trust deeds.

Q 9. Will this law discourage lenders from doing short sales?

A Not necessarily.  Prohibiting a lender from pursuing a deficiency may, at least in theory, discourage certain lenders from approving a short sale, especially if the loan is a recourse loan or the amount of the deficiency is very large.  Yet, even without the new law, a lender may not have approved those types of short sales anyway.  Furthermore, a lender considering a short sale request looks at many different factors other than a borrower’s personal liability.  Also, the previous law prohibiting short sale deficiencies for first trust deeds that was in effect from January 1, 2011 to July 15, 2011 (see Question 8) did not seem to have a chilling effect on the short sale practice.

On the flip side, the new law brings much needed clarity to short sale transactions for sellers.  The new law should encourage sellers, who may have otherwise been on the fence, to do short sales now that they have an assurance that, if the new law applies to their situation, they will not be held personally liable for any short sale deficiency.

Q 10. How could a borrower be personally liable for a short sale deficiency if the lender approved that short sale?

A A lender’s short sale approval is generally a voluntary agreement to release its security interest, or its lien secured by real property, despite a loan payoff of less than the balance owed.  The short sale approval enables the homeowner to sell the property free of the short sale lender’s security interest.  The short sale approval may or may not address whether the lender will hold the borrower personally liable for the short sale deficiency.  Absent any laws protecting homeowners from short sale deficiencies, some of the ways a lender could handle a deficiency include, without limitation, requiring the borrower to partially or fully repay the deficiency, requiring the borrower to sign a promissory note for full or partial repayment of the deficiency, reserving the lender’s right to pursue the borrower for the deficiency, fully releasing the borrower from personal liability for the deficiency, or saying nothing about the deficiency.

Q 11. Isn’t California a non-recourse state?

A No. California is not a non-recourse state.  California law protects borrowers from personal liability after a short sale or foreclosure in certain, but not all, circumstances.

Q 12. How does the anti-deficiency protection for short sales compare with the anti-deficiency protection for foreclosures?

A The answer depends on the type of loan and the type of foreclosure.  The anti-deficiency protection for short sales generally applies to all deeds of trusts for one-to-four residential unit properties, regardless of whether the property is purchase money or owner occupied.

In contrast, the anti-deficiency protections after foreclosure are generally as follows:

• No deficiency judgment after foreclosure of a purchase money, owner occupied loan for a property with one-to-four residential units (CCP § 580b);
• No deficiency judgment after a non-judicial foreclosure (or trustee’s sale) (CCP § 580d); and
• No deficiency judgment after foreclosure for seller financing (CCP § 580b).

Although most lenders in California foreclose by non-judicial foreclosure, a homeowner has no control over the lender’s election to pursue a non-judicial foreclosure (no personal liability) or a judicial foreclosure (possible personal liability).  Also, even if a first trust deed lender forecloses by non-judicial foreclosure (so no personal liability for the first trust deed), a junior lienholder whose security interest is wiped out in that process may be able to pursue a deficiency judgment against the borrower.

Q 13. Will a short sale with no deficiency balance have less of a negative impact on a borrower’s credit rating as compared to a short sale with a deficiency balance or a foreclosure?

A Yes, according to FICO’s Banking Analytics Blog.  New FICO research demonstrates that a short sale with no deficiency balance has less of an impact on a consumer’s credit score compared to a short sale with a deficiency balance or foreclosure.  For a simulated consumer profile with a 680 initial FICO score, a short sale with no deficiency balance caused the FICO score to drop to 610 to 630, whereas a short sale with a deficiency balance or a foreclosure reduced the FICO score to 575 to 595.  For a simulated consumer profile with a 780 initial FICO score, a short sale with no deficiency balance caused the FICO score to decrease to 655 to 675, whereas a short sale with a deficiency balance or a foreclosure reduced the FICO score to 620 to 640.  See Joanne Gaskin’s “Research Looks at How Mortgage Delinquencies Affect Scores” dated May 24, 2011 at http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html.

II. APPLICABILITY OF ANTI-DEFICIENCY PROTECTIONS

Q 14. Under what particular circumstances does California law protect a borrower from personal liability for a short sale deficiency?

A To fall within the protection against personal liability for a short sale deficiency, a borrower must satisfy all of the following requirements, and not fall within any of the exceptions in Question 19:

• Mortgage loan is solely secured by a deed of trust or mortgage (see Question 22 for cross-collateralized loans);
• Mortgage loan is for a dwelling of not more than four units;
• Borrower sells the property for less than the outstanding loan balance;
• Lender provides written consent for the short sale;
• Title voluntarily transfers to a buyer by grant deed or other document of conveyance recorded in the county where the property is located; and
• Proceeds of the sale have been tendered to the lender or lender’s agent in accordance with the parties’ agreement.

CCP § 580e(a)(1).

Q 15. Does the anti-deficiency protection for short sales only apply to properties with one-to-four residential units?

A Yes.  The anti-deficiency protection under CCP § 580e applies only to properties with one-to-four residential units.  It does not specifically apply to properties with five or more residential units, commercial properties, or vacant land.  However, even if section 580e does not apply, a borrower may be able to raise other legal arguments challenging a deficiency judgment after a short sale.  See Miller and Starr, California Real Estate 3d (2003) § 10:255 (stating that “the antideficiency legislation applies to preclude a money judgment against the trustor even when there has not been a foreclosure sale under either a senior lien or the lien securing the purchase-money note”) (citations omitted).

Q 16. Does the anti-deficiency protection for short sales only apply to purchase money loans?

A No.  The anti-deficiency protection for short sales applies to purchase money loans, refinance loans, and home equity credit lines secured by one-to-four residential unit properties.  For such refinances, the anti-deficiency protection for short sales applies to all types of refinance loans, regardless of whether the borrower refinanced to obtain a lower interest rate only or took cash out to make home improvements, to pay off credit cards, or for any other purpose.

Q 17. Does the anti-deficiency protection for short sales only apply to owner occupied properties?

A No.  The anti-deficiency protection is for short sales involving owner occupied or non-owner occupied properties.  Non-owner occupied properties include rental properties, vacant homes, second homes, or vacation homes.  Of course, a lender may elect not to approve a short sale for a non-owner occupied property, but if the lender agrees to the short sale and the other requirements are met (see Question 14), the borrower will not be personally liable for any short sale deficiency.

Q 18. Does the anti-deficiency protection for short sales apply to any type of lien?

A No.  The anti-deficiency protection for short sales only applies to notes secured by deeds of trust or mortgages for one-to-four residential unit properties.  It does not apply to other types of security interests in real property, such as, but not limited to, judgment liens, homeowners’ associations (HOA) liens, tax liens, child support liens, mechanics’ liens, attachment liens, or execution liens.

Q 19. What are the exceptions to the anti-deficiency protection for short sales?

A Exceptions to the anti-deficiency protections for short sales are as follows:

• Fraud (see Question 20);
• Waste to the real property (see Question 21);
• Cross-collateralized loans (see Question 22);
• Borrower is a corporation, limited liability company, or limited partnership (CCP § 580e(d)(1));
• Borrower is a political subdivision of the state (e.g. a state government entity) (CCP § 580e(d)(1));
• Deed of trust, mortgage, or other lien securing the payment of a bond or other evidence of indebtedness authorized by the Commissioner of Corporations (CCP § 580e(d)(2)); and
• Deed of trust, mortgage, or other lien made by a public utility subject to the Public Utilities Act (CCP § 580e(d)(2)).

Q 20. What is the exception for fraud?

A If a borrower commits fraud with respect to the sale of the real property securing a deed of trust, the lender can seek monetary damages and use existing rights and remedies against the borrower or any third party (CCP § 580e(c)).  For example, if a borrower makes a misrepresentation in his or her request for a short sale, the lender may sue the borrower for monetary damages that the lender suffered as a result, regardless of the anti-deficiency protection for short sales.

Q 21. What is the exception for waste?

A Waste to real property is generally a physical impairment to the value of the property by an act or an omission of an act.  If a borrower commits waste with respect to the real property securing a deed of trust, the lender can seek monetary damages and use existing rights and remedies against the borrower or any third party, regardless of the anti-deficiency protection for short sales (CCP § 580e(c)).

Q 22. What is the exception for cross-collateralized loans?

A A cross-collateralized loan is a single loan that is secured by more than one property.  If a loan that otherwise satisfies the requirements for anti-deficiency protection for short sales (see Question 14) is also cross-collateralized, the rights, remedies, and obligations of the parties will be treated and determined as if the property sold in a short sale had been sold through a non-judicial foreclosure (or trustee’s sale) for a price equal to the sale proceeds received by the lender (CCP § 580e(a)(2)).

Q 23. What must occur after the anti-deficiency law was enacted on July 15, 2011 for the new law to apply to a short sale transaction?

A A short sale transaction should be consummated or close escrow after this law came into effect on July 15, 2011 for the seller to be protected under the new law.  See CCP § 580e(a)(1) (prohibiting a deficiency or deficiency judgment in any case in which the borrower “sells the dwelling”).  Other time frames during the short sale transaction, such as when the seller entered into a purchase agreement or when the lender approved the short sale, do not appear to be relevant for determining whether the new law applies.

For short sales that closed escrow before July 15, 2011, the new version of CCP § 580e is not explicitly retroactive.  However, the previous version of CCP § 580e (see Question 8) may apply, and the seller may be able to raise other legal arguments challenging a deficiency judgment after a short sale.  See, for example, Miller and Starr, California Real Estate 3d (2003) § 10:255 (stating that “the antideficiency legislation applies to preclude a money judgment against the trustor even when there has not been a foreclosure sale under either a senior lien or the lien securing the purchase-money note”) (citations omitted).

III. ANTI-DEFICIENCY GUIDELINES FOR SHORT SALES

Q 24. What are the specific protections provided by the short sale deficiency law?

A The short sale deficiency law specifically protects a borrower in a short sale involving a one-to-four residential unit property from all of the following:

• Owing a deficiency;
• Having a lender collect a deficiency;
• Having a lender request a deficiency judgment;
• Having a court render a deficiency judgment;
• Being required to pay any additional compensation, aside from the proceeds of the sale, to obtain short sale approval (see Questions 30 to 39); and
• Any purported waiver of the borrower’s rights as above (see Question 29).

For definitions of deficiency and deficiency judgment, see Questions 4 and 5.

Q 25. Does the new law require a lender to approve a short sale?

A No.  The new law does not require any lender to approve a short sale or to accept a loan payoff for less than the balance owed.  Instead, for applicable transactions (see Question 14), the law prohibits a lender that has approved a short sale and has been tendered the proceeds of the sale from pursuing a deficiency or deficiency judgment, and further prohibits a lender from requiring a borrower to pay any additional compensation, other than the proceeds of the sale, in exchange for a short sale approval.

Q 26. If the first trust deed lender approves a short sale, does this law require the second trust deed lender to also approve the short sale?

A No.  This law does not require any lender to approve a short sale.  Instead, for applicable transactions, the law prohibits a lender – whether that lender is the holder of a first trust deed, second trust deed, or third trust deed – that has approved a short sale and has been tendered the proceeds of the sale from pursuing a deficiency or deficiency judgment.  It also prohibits a lender from requiring a borrower to pay any additional compensation, other than the proceeds of the sale, in exchange for a short sale approval.

Q 27. Is a short sale lender required to provide the borrower with a written release from personal liability?

A No.  Although not required, a seller is well-advised to get a written release from personal liability signed by the short sale lender if possible.

Q 28. What short sale transactions are lenders less likely to approve given the new law?

A If a lender cannot hold a borrower personally liable for a short sale deficiency, the lender is, at least in theory, less likely to approve a short sale for a recourse loan because the lender could obtain a deficiency judgment against the borrower through judicial foreclosure.  Also, given the new law, a lender is theoretically less likely to approve a short sale with a large amount of deficiency if the lender must release the borrower from repaying that deficiency.  For example, a lender is more likely to release a borrower from personal liability for a $20,000 deficiency, rather than a $200,000 deficiency.  Finally, a lender is less likely, at least in theory, to approve a short sale if the borrower has income or assets that could be used to pay a deficiency.

However, as a practice tip, these factors are easy for a listing agent and seller to determine and consider upfront, before deciding to list a property for a short sale.  If the odds are stacked up too high against the likelihood that a short sale will close escrow successfully, a listing agent and seller may be better off opting for alternatives.  Even a buyer’s agent and buyer can make certain upfront determinations of the likelihood of closing escrow successfully, by searching title records and conducting other investigations before writing an offer to purchase a short sale property.

Q 29. Can a lender require the homeowner to waive his or her rights under the anti-deficiency protection for short sales?

A No.  Any purported waiver of the anti-deficiency protection for short sales is void and against public policy (CCP § 580e(e)).  If a lender attempts to require your client as a seller to waive his or her rights, see Question 39 for guidelines on how to handle that situation.

Q 30. Can a lender require a borrower to pay something out-of-pocket to obtain a short sale approval?

A No.  The law prohibits a lender from requiring the borrower to pay any additional compensation to obtain a short sale approval, other than the proceeds from the sale (CCP § 580e(b)).  The law, however, does not prohibit a lender from rejecting a short sale request altogether.

Q 31. Instead of the lender requiring a borrower to pay a monetary contribution, can a lender condition a short sale approval on a higher sales price than what was submitted?

A Probably so.  Because a lender can reject a short sale altogether, this law is unlikely to prohibit a lender from approving a short sale for a sales price higher than what was submitted, as long as the lender seeks no additional monetary compensation from the borrower.  However, under paragraph 1F of C.A.R.’s Short Sale Addendum (SSA) to the California Residential Purchase Agreement (RPA), the seller and buyer are not obligated to agree to a sales price higher than what they originally agreed to and submitted to the short sale lender.

Q 32. Instead of the lender requiring a borrower to pay a monetary contribution, can a third party, such as the private mortgage insurer, require the borrower to pay a monetary contribution?

A Not likely in connection with a short sale.  The law prohibits a lender, not a third party, from requesting funds from the borrower.  So a private mortgage insurer (PMI company) or other third party could ask a borrower for money (no strings attached).  However, a third party requesting the borrower to pay a monetary contribution for the purposes of obtaining a short sale approval may face what is perhaps an insurmountable logistical challenge.  If a third party requests a monetary contribution directly from the borrower, the typical borrower would not pay or agree to pay unless he or she obtains a written short sale approval from the lender.  After all, it is the lender, not private mortgage insurer, who must agree to the short sale approval and issue the short sale approval letter.  Yet, for a lender to condition a short sale approval upon the borrower’s monetary contribution to a third party may violate the law, because it prohibits the lender from requiring the borrower to pay any additional compensation, regardless of whether such payment is to be made to the lender or someone else (see CCP § 580e(b)).  Moreover, a court of law is unlikely to allow a lender to circumvent the law by having a related party to the lender, such as a private mortgage insurer, to be the one to require a borrower to pay a monetary contribution in exchange for a short sale approval.  See also, Bank of America v. Graves (1996) 51 Cal.App.4th 607, 611 fn. 3 (stating that “The antideficiency statutes are to be construed liberally to effectuate the legislative purposes underlying them”).

Ultimately, it will be up to a lender to decide whether to risk violating the law by requiring a borrower to pay a third party in exchange for short sale approval.  If that happens to your client as a seller, see Question 38 for general guidelines for handling that type of situation.

Q 33. Instead of the lender requiring the borrower to pay a monetary contribution, can a lender require a monetary contribution from someone other than the borrower?

A Yes.  The law prohibits a lender from requiring the borrower to pay any additional compensation to obtain a short sale approval, other than the proceeds of the sale (CCP § 580e(b)).  The law does not specifically prohibit a lender from requiring compensation from someone other than the seller, such as the buyer, agent, relative, and the like.

Although the short sale lender can require compensation from someone other than the seller, that other person is generally not obligated to agree to the lender’s proposed terms.  Under paragraph 1F of C.A.R.’s Short Sale Addendum (SSA) to the California Residential Purchase Agreement (RPA), a buyer is not obligated to agree to a short sale lender’s request for a monetary contribution from the buyer.  Under the C.A.R. Residential Listing Agreement (RLA), a listing broker is also not obligated to agree to a short sale lender’s request for a monetary contribution from the broker.

Q 34. Instead of the lender requiring the borrower to pay a monetary contribution, can a lender require the borrower to pay closing costs?

A Not likely.  The law prohibits a short sale lender from requiring a borrower “to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale” (CCP § 580e(b)).

An argument has been made that interpreting the word “proceeds” to mean “gross proceeds” rather than “net proceeds” would allow a lender to require the seller to pay “gross proceeds” of the sale to the lender, which would mean the seller would be required to pay closing costs to escrow.  That argument seems unconvincing on many levels.  First, the law explicitly prohibits the lender from requiring the borrower to pay “any additional compensation,” regardless of whether that payment goes to the lender or towards closing costs (see CCP § 580e(b)).  Second, among other arguments, nothing in the statutory language warrants a “gross proceeds” interpretation, which the California legislature would have more accurately described as “sales price.”  Instead, the phrase “proceeds of the sale” most likely means what a lender typically receives in a short sale transaction and what reconveyance law requires, which is the amount stated in the lender’s short-pay demand statement (Cal. Civil Code § 2943(a)(7)), and not “gross proceeds” or “net proceeds.”

Ultimately, it will be up to a lender to decide whether to risk violating the law by requiring a borrower to pay closing costs.  If that happens to your client as a seller, see Question 38 for general guidelines for handling that type of situation.

Q 35. Instead of the lender requiring the borrower to pay a monetary contribution, can a seller voluntarily offer to pay a monetary contribution?

A Yes.  The law does not prohibit a seller from volunteering to pay a monetary contribution to help ensure that a lender will approve a short sale.  For the difference between the lender requiring a monetary contribution and the seller volunteering a monetary contribution, see Question 36.

Q 36. What is the difference between a lender requiring a monetary contribution from a borrower, which is prohibited, and a borrower volunteering a monetary contribution, which is permissible?

A The difference between a lender requiring a monetary contribution, which is prohibited, and a borrower volunteering to pay a monetary contribution, which is permissible, depends on the facts and circumstances of each particular transaction, including the chain of events and negotiations between the short sale lender and borrower.  However, whether a monetary contribution violates the anti-deficiency law for short sales is, generally speaking, a concern for the short sale lender, not seller (see Question 37).

A seller who wants a lender to accept the seller’s voluntary offer of a monetary contribution is strongly encouraged to make a written offer upfront with the initial submission of the short sale request to the lender to help minimize any concern the lender may have that such contribution violates the law.  In making that offer, the seller is also encouraged to clearly indicate in writing the seller’s intent to voluntarily offer a monetary contribution and provide the reason the seller is offering the monetary contribution.  The seller may also acknowledge in writing that the lender has not directly or indirectly required any monetary contribution as a condition for approving the short sale.

Q 37. Can a seller be held liable for violating the anti-deficiency law for short sales?

A Not likely, as long as the seller does not commit any fraud or waste.  This new law is consumer protection legislation generally aimed at regulating the conduct of short sale lenders, not sellers.  As long as a seller does not commit fraud or waste (see Questions 20 to 21), it is the lender, not the seller, who should generally be concerned about violating the short sale deficiency law.

Q 38. I am the listing agent representing a seller in a short sale transaction.  To get the short sale approved, the lender requires that the seller makes a $5,000 monetary contribution.  I tried to get the lender to remove that requirement given the new law, but the lender refuses.  What should I do?

A Requiring the seller to make a $5,000 monetary contribution under these circumstances is a violation of the anti-deficiency law for short sales (see Question 30).  Nevertheless, in this situation, you should, in writing, advise the seller what has happened and request that the seller decides what to do under these circumstances.  Also encourage the seller in writing to seek the advice of his or her own attorney, accountant, and other professional as the seller deems appropriate.  If you are not an attorney, you should not give the seller any legal advice and you should not make any legal determinations on the seller’s behalf.  As a member benefit for REALTORS®, you may give a copy of this legal article to your client to help your client decide what to do.

Each seller is different and can make a different decision based upon the seller’s own legal determinations, legal resources, financial situation, housing accommodations, adversity towards taking risks, market forecasts, value system, emotional considerations, and many other factors.  A seller’s options include, among other things, attempting to further negotiate the terms of the short sale with the lender, reporting the matter to the lender’s short sale escalation team or similar authority if any, reporting the matter to governmental authorities, seeking assistance from a HUD-certified housing counseling agency, hiring an attorney to represent the seller, suing to enjoin the lender from requiring a monetary contribution, canceling the short sale, paying the $5,000 contribution willingly, or paying the $5,000 contribution but suing the lender after close of escrow for its return.

If a seller elects to pay a monetary contribution and sue the lender for its return after close of escrow, a claim up to $7,500 may be brought in small claims court (to be increased to $10,000 starting January 1, 2012), depending on the parties’ agreement if any for alternative dispute resolution.  The seller’s claim against the lender would be for a violation of the anti-deficiency protection under section 580e of the California Code of Civil Procedure.  Of course, the seller may win or lose a court action depending on various factors including, without limitation, whether the claim is properly filed and served, whether other court procedures are properly followed, whether the seller appears in court for the court hearing, how well the seller argues his or her case, and whether the seller satisfies the burden of proving his or her case.  If a seller obtains a favorable judgment but the lender fails to pay, the seller must pursue certain legal procedures to successfully enforce that judgment to get the money back.

More information about suing in small claims court and enforcing judgments is available from the California Courts’ Small Claims guide at http://www.courtinfo.ca.gov/selfhelp/smallclaims/ and the California Department of Consumer Affairs’ Small Claims Court Guide at http://www.dca.ca.gov/publications/small_claims/index.shtml.

Q 39. I am the listing agent representing a seller in a short sale transaction.  The lender requires the borrower to sign a short sale addendum that states the borrower may be held personally liable for the short sale deficiency.  I tried to get the lender to remove that provision given the new law, but the lender refuses.  What should I do?

A For a lender to require a seller to agree that that he or she could be personally liable for a short sale deficiency violates the law (see Questions 24 and 29).  However, given this situation, you should, in writing, advise the seller to decide what to do and encourage the seller to seek the advice of his or her own attorney or other professional as the seller deems appropriate.  If you are not an attorney, you should not give the seller any legal advice and you should not make any legal determinations on the seller’s behalf.  As a member benefit for REALTORS®, you may give a copy of this legal article to your client to help your client decide what to do.

Each seller is different and can make a different decision based upon the seller’s own legal determinations, legal resources, financial situation, housing accommodations, adversity towards taking risks, market forecasts, value system, emotional considerations, and many other factors.  A seller’s options include, among other things, attempting to further negotiate with the lender for the removal of that provision, reporting the matter to the lender’s short sale escalation team or similar authority if any, reporting the matter to governmental authorities, seeking assistance from a HUD-certified housing counseling agency, hiring an attorney to represent the seller, suing to enjoin the lender from requiring that provision, canceling the short sale, or signing the lender’s short sale addendum.

For transactions falling under CCP § 580e, a provision in a short sale addendum holding a borrower personally liable for a short sale deficiency should be unenforceable.  However, that doesn’t mean a seller can sign a provision agreeing to personal liability with total abandon.  If the seller signs such a provision, the lender or a third party collection agency may, after close of escrow, attempt to collect such deficiency in violation of the short sale deficiency law, as well as federal and state fair debt collection practices laws.

The lender or third party may also attempt to file a lawsuit against the seller for the short sale deficiency in violation of the law (see Question 24).  If so, the seller and seller’s attorney have the responsibility of, among other things, claiming the provision is unenforceable as an affirmative defense in an answer to the lender’s complaint or by demurrer (and pursuing a malicious prosecution claim if appropriate).  If the seller does not properly object to the lender’s claim, the lender may obtain a default judgment against the seller.  See Spector v. National Pictures Corp. (1962) 201 Cal.App.2d 217, 225-26 (holding that an anti-deficiency protection under CCP § 726 is waived if a debtor’s fails to raise it as an affirmative defense in an answer or by demurrer).

Q 40. What if, instead of requiring the seller to agree that the seller may be personally liable for the short sale deficiency as in Question 39, the lender requires a borrower to sign a promissory note for full or partial repayment of the deficiency?

A Same answer as in Question 39.  For a short sale lender to require a seller to sign a promissory note and owe the short sale deficiency violates the law (CCP § 580e(a)(1)).  The promissory note could be construed as a purported waiver of the borrower’s rights which is void and against public policy (CCP § 580e(e)).

Q 41. Where can I find additional information?

AThis legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.’s legal products and services, please visit car.org.
Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.’s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/. Written correspondence should be addressed to:
CALIFORNIA ASSOCIATION OF REALTORS® Member Legal Services 525 South Virgil Avenue Los Angeles, CA 90020

The information contained herein is believed accurate as of September 19, 2011. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.  Written by Stella H. Ling, Esq.

Copyright© 2011 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). Permission is granted to C.A.R. members only to reprint and use this material for non-commercial purposes provided credit is given to the C.A.R. Legal Department. Other reproduction or use is strictly prohibited without the express written permission of the C.A.R. Legal Department. All rights reserved.

By VICKIE ELMER

What You Can and Cannot Deduct

To deduct expenses of owning a home, you must file Form 1040 and itemize your deductions on Schedule A (Form 1040). If you itemize, you cannot take the standard deduction.

This section explains what expenses you can deduct as a homeowner. It also points out expenses that you cannot deduct. There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment.

Your house payment.   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. These are discussed in more detail later.  Some nondeductible expenses that may be included in your house payment include:

• Fire or homeowner’s insurance premiums, and
• The amount applied to reduce the principal of the mortgage.

Minister’s or military housing allowance.   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. You do not have to reduce your deductions by your nontaxable allowance.

Nondeductible payments.   You cannot deduct any of the following items.

• Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance.
• Wages you pay for domestic help.
• Depreciation.
• The cost of utilities, such as gas, electricity, or water.
• Most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information.
• Forfeited deposits, down payments, or earnest money.

Hardest Hit Fund and Emergency Homeowners’ Loan Programs

You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions.

1. You received assistance under:
   1. A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or
   2. An Emergency Homeowners’ Loan Program administered by the Department of Housing and Urban Development (HUD) or a state.
2. You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home.

If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums), and box 5 (real property taxes). However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home.

Real Estate Taxes

Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction. The tax must be for the welfare of the general public and not be a payment for a special privilege granted or service rendered to you.

Deductible Real Estate Taxes

You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, see Special Rules for Cooperatives, later.

Where to deduct real estate taxes.  Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6.

Real estate taxes paid at settlement or closing.   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible if you itemize your deductions.

Division of real estate taxes.  For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.  You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.

Example.

You bought your home on September 1. The property tax year (the period to which the tax relates) in your area is the calendar year. The tax for the year was $730 and was due and paid by the seller on August 15.

You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). You figure your deduction for real estate taxes on your home as follows.

1.	Enter the total real estate taxes for the real property tax year	$730
2.	Enter the number of days in the property tax year that you owned the property	122
3.	Divide line 2 by 365	.3342
4.	Multiply line 1 by line 3. This is your deduction. Enter it on Schedule A (Form 1040), line 6	$244

You can deduct $244 on your return for the year if you itemize your deductions. You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller.

Delinquent taxes.   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. You treat them as part of the cost of your home. See Real estate taxes, later, under Basis.

Escrow accounts.   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.

Refund or rebate of real estate taxes.   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income.

Items You Cannot Deduct as Real Estate Taxes

The following items are not deductible as real estate taxes.

Charges for services.   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. You cannot deduct the charge as a real estate tax if it is:

• A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
• A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or
• A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).

You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill.

Assessments for local benefits.   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.  You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.

If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it.

An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find how much of it, if any, you can deduct.

Transfer taxes (or stamp taxes).   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.

Homeowners association assessments.   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them.

Special Rules for Cooperatives

If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. You can deduct your share of the corporation’s deductible real estate taxes if the cooperative housing corporation meets the following conditions:

1. The corporation has only one class of stock outstanding,
2. Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation,
3. No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and
4. At least one of the following:
   1. At least 80% of the corporation’s gross income for the tax year was paid by the tenant-stockholders. For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership.
   2. At least 80% of the total square footage of the corporation’s property must be available for use by the tenant-stockholders during the entire tax year.
   3. At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year.

Tenant-stockholders.   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. The tenant-stockholder does not have to live in any of the cooperative’s dwelling units. The units that the tenant-stockholder has the right to occupy can be rented to others.

Deductible taxes.   You figure your share of real estate taxes in the following way.

1. Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation.
2. Multiply the corporation’s deductible real estate taxes by the number you figured in (1). This is your share of the real estate taxes.

Generally, the corporation will tell you your share of its real estate tax. This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit.

Refund of real estate taxes.   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received.

Sales Taxes

Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. For information on figuring your deduction, see the Instructions for Schedule A (Form 1040).

If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home.

Home Mortgage Interest

This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement.

Most home buyers take out a mortgage (loan) to buy their home. They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder.

Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). However, your deduction may be limited if:

• Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or
• You took out a mortgage for reasons other than to buy, build, or improve your home.

If either of these situations applies to you, you will need to get Publication 936. You also may need Publication 936 if you later refinance your mortgage or buy a second home.

Refund of home mortgage interest.   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. For more information, see Recoveries in Publication 525. The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. See Mortgage Interest Statement, later.

Deductible Mortgage Interest

To be deductible, the interest you pay must be on a loan secured by your main home or a second home. The loan can be a first or second mortgage, a home improvement loan, or a home equity loan.

Prepaid interest.   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. An exception applies to points, which are discussed later.

Late payment charge on mortgage payment.   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.

Mortgage prepayment penalty.   If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.

Ground rent.   In some states (such as Maryland), you may buy your home subject to a ground rent. A ground rent is an obligation you assume to pay a fixed amount per year on the property. Under this arrangement, you are leasing (rather than buying) the land on which your home is located.

Redeemable ground rents.   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. The ground rent is a redeemable ground rent only if all of the following are true.

• Your lease, including renewal periods, is for more than 15 years.
• You can freely assign the lease.
• You have a present or future right (under state or local law) to end the lease and buy the lessor’s entire interest in the land by paying a specified amount.
• The lessor’s interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled.

Payments made to end the lease and buy the lessor’s entire interest in the land are not redeemable ground rents. You cannot deduct them.

Nonredeemable ground rents.  Payments on a nonredeemable ground rent are not mortgage interest. You can deduct them as rent only if they are a business expense or if they are for rental property.

Cooperative apartment.   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives. In addition, you can treat as home mortgage interest your share of the corporation’s deductible mortgage interest. Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936.

Refund of cooperative’s mortgage interest.   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year.  If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct.

Please click here for the text description of the image.

Figure A. Are my points fully deductible this year?

Mortgage Interest Paid at Settlement

One item that normally appears on a settlement or closing statement is home mortgage interest.

You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). This amount should be included in the mortgage interest statement provided by your lender. See the discussion under Mortgage Interest Statement, later. Also, if you pay interest in advance, see Prepaid interest, earlier, and Points, next.

Points

The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points.

A borrower is treated as paying any points that a home seller pays for the borrower’s mortgage. See Points paid by the seller, later.

General rule.   You cannot deduct the full amount of points in the year paid. They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage.

Exception.   You can deduct the full amount of points in the year paid if you meet all the following tests.

1. Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
2. Paying points is an established business practice in the area where the loan was made.
3. The points paid were not more than the points generally charged in that area.
4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
7. You use your loan to buy or build your main home.
8. The points were computed as a percentage of the principal amount of the mortgage.
9. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller’s.

Note.

If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions.

Home improvement loan.   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier.

Refinanced loan.   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.

Points not fully deductible in year paid.    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct.

Figure A.   You can use Figure A as a quick guide to see whether your points are fully deductible in the year paid.

Amounts charged for services.   Amounts charged by the lender for specific services connected to the loan are not interest. Examples of these charges are:

• Appraisal fees,
• Notary fees, and
• Preparation costs for the mortgage note or deed of trust.

You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis, later.

Points paid by the seller.   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.

Treatment by seller.   The seller cannot deduct these fees as interest; but, they are a selling expense that reduces the seller’s amount realized. See Publication 523 for more information.

Treatment by buyer.   The buyer treats seller-paid points as if he or she had paid them. If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. If any of those tests are not met, the buyer must deduct the points over the life of the loan.  The buyer must also reduce the basis of the home by the amount of the seller-paid points. For more information about the basis of your home, see Basis, later.

Funds provided are less than points.   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. In addition, you can deduct any points paid by the seller.

Example 1.

When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). You meet all the tests for deducting points in the year paid (see Exception, earlier), except the only funds you provided were a $750 down payment. Of the $1,000 you were charged for points, you can deduct $750 in the year paid. You spread the remaining $250 over the life of the mortgage.

Example 2.

The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). You spread the remaining $250 over the life of the mortgage. You must reduce the basis of your home by the $1,000 paid by the seller.

Excess points.   If you meet all the tests under Exception, earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.

Mortgage ending early.   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Example.

Dan paid $3,000 in points in 2004 that he had to spread out over the 15-year life of the mortgage. He had deducted $1,400 of these points through 2010.

Dan prepaid his mortgage in full in 2011. He can deduct the remaining $1,600 of points in 2011.

Exception.   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Instead, deduct them over the term of the new loan.

Form 1098.   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. See Mortgage Interest Statement, later.

Where To Deduct Home Mortgage Interest

Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. See Table 1 for a summary of where to deduct home mortgage interest and real estate taxes.

If you paid home mortgage interest to the person from whom you bought your home, show that person’s name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. The seller must give you this number and you must give the seller your SSN. Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Failure to meet either of these requirements may result in a $50 penalty for each failure.

Mortgage Interest Statement

If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder’s trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. The statement will show the total interest paid on your mortgage during the year. If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. See Points, earlier.

The interest you paid at settlement should be included on the statement. If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Write “See attached” to the right of line 10.

A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. If a statement comes from a cooperative housing corporation, it generally will show your share of interest.

Your mortgage interest statement for 2011 should be provided or sent to you by January 31, 2012. If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. A copy of this form will be sent to the IRS also.

Example.

You bought a new home on May 3. You paid no points on the purchase. During the year, you made mortgage payments which included $4,480 deductible interest on your new home. The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). You can deduct the $5,100 if you itemize your deductions.

Refund of overpaid interest.   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Generally, you must include the refund in income in the year you receive it. See Refund of home mortgage interest, earlier, under Home Mortgage Interest.

More than one borrower.   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Show how much of the interest each of you paid, and give the name and address of the person who received the form. Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line.

Mortgage Insurance Premiums

You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2011 for qualified mortgage insurance in connection with home acquisition debt on your qualified home.

Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction.

Qualified Mortgage Insurance

Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006).

Prepaid mortgage insurance premiums.  If you paid premiums that are allocable to periods after 2011, you must allocate them over the shorter of:

• The stated term of the mortgage, or
• 84 months, beginning with the month the insurance was obtained.

The premiums are treated as paid in the year to which they were allocated. If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. See Publication 936 for details.

Exception for certain mortgage insurance.   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.

Home Acquisition Debt

Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. It also must be secured by that home.

If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt.

Home acquisition debt limit.   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately).

Discharges of qualified principal residence indebtedness.   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2013. You must reduce the basis of your principal residence (but not below zero) by the amount you exclude.

Principal residence.   Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

Qualified principal residence indebtedness.   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements.  Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness.

Amount you can exclude.   You can only exclude debt discharged after 2006 and before 2013. The most you can exclude is $2 million ($1 million if married filing separately). You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition.

Ordering rule.   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness.

Qualified Home

This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

Main home.   You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home and other special situations.   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Homein Publication 936.

Limit on Deduction

If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums.

Form 1098.   The amount of mortgage insurance premiums you paid during 2011, should be reported in box 4. See Form 1098, Mortgage Interest Statementin Publication 936.

You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Contact your state or local housing finance agency for information about the availability of MCCs in your area.

Figuring the Credit

Figure your credit on Form 8396.

Mortgage not more than certified indebtedness.   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year.

Mortgage more than certified indebtedness.   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction.

Certified indebtedness amount on your MCC

Original amount of your mortgage

The fraction will not change as long as you are entitled to take the mortgage interest credit.

Example.

Emily bought a home this year. Her mortgage loan is $125,000. The certified indebtedness amount on her MCC is $100,000. She paid $7,500 interest this year. Emily figures the interest to enter on Form 8396, line 1, as follows:

	$125,000	=	80%	(.80)
	$100,000
	$7,500	x	.80	=	$6,000

Emily enters $6,000 on Form 8396, line 1. In each later year, she will figure her credit using only 80% of the interest she pays for that year.

Limits

Two limits may apply to your credit.

• A limit based on the credit rate, and
• A limit based on your tax.

Limit based on credit rate.   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.

Limit based on tax.   Your credit (after applying the limit based on the credit rate) generally cannot be more than the following.

• Form 1040 filers: Your regular tax liability
  on Form 1040, line 44, plus any alternative minimum tax on Form 1040, line 45, minus certain other credits.
• Form 1040NR filers: Your regular tax liability on Form 1040NR, line 42, plus any alternative minimum tax on Form 1040NR, line 43, minus certain other credits.

Use Form 8396 to figure this limit.

Dividing the Credit

If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person.

Example.

John and his brother, George, were issued an MCC. They used it to get a mortgage on their main home. John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. John paid $5,400 mortgage interest this year and George paid $3,600.

The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. The loan amount (mortgage) on their home is $120,000. The credit is limited to $2,000 because the credit rate is more than 20%.

John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. His credit is limited to $1,200 ($2,000 × 60%).

George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. His credit is limited to $800 ($2,000 × 40%).

Carryforward

If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.

Example.

You receive a mortgage credit certificate from State X. This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. You claim no other credits. Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). You can carry forward this amount to the next 3 years or until used, whichever comes first.

Credit rate more than 20%.   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit).

Example.

In the earlier example under Dividing the Credit, John and George used the entire $2,000 credit. The excess

	John	$1,350 − $1,200	=	$150
	George	$900 − $800	=	$100

$150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George.

Refinancing

If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. The amount of credit you can claim on the new loan may change. Table 2 summarizes how to figure your credit if you refinance your original mortgage loan.

An issuer may reissue an MCC after you refinance your mortgage. If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC.

Year of refinancing.   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1.  If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. It must show a separate calculation for the part of the year when the new MCC was in effect. Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line.

New MCC cannot increase your credit.  The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC.  In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. In that case, you will need to know the amount of the credit you could have claimed using the old MCC.

There are two methods for figuring the credit you could have claimed. Under one method, you figure the actual credit that would have been allowed. This means you use the credit rate on the old MCC and the interest you would have paid on the old loan.

If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC.

You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC.

As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage.

Basis

Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent.

While you own your home, you may add certain items to your basis. You may subtract certain other items from your basis. These items are called adjustments to basis and are explained later under Adjusted Basis.

It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. You also must keep records of the events that affect basis or adjusted basis. See Keeping Records, later.

Figuring Your Basis

How you figure your basis depends on how you acquire your home. If you buy or build your home, your cost is your basis. If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. If you inherit your home from a decedent, different rules apply depending on the date of the decedent’s death. Each of these topics is discussed later.

Property transferred from a spouse.  If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse’s (or former spouse’s) adjusted basis just before the transfer. Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses.

Cost as Basis

The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed.

The cost of your home includes most settlement or closing costs you paid when you bought the home. If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. See Settlement or closing costs later.

If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home.

Purchase.   The basis of a home you bought is the amount you paid for it. This usually includes your down payment and any debt you assumed. The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. This amount includes any purchase commissions or other costs of acquiring the shares.

Construction.   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. This includes the cost of labor and materials, the amount you paid the contractor, any architect’s fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. If you built all or part of your home yourself, your basis is the total amount it cost you to build it. You cannot include in basis the value of your own labor or any other labor for which you did not pay.

Real estate taxes.   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. See the earlier discussion of Real estate taxes paid at settlement or closing, under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid.  If you pay any part of the seller’s share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. You cannot deduct them as taxes paid.

If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Do not include those taxes in your basis. If you did not reimburse the seller, you must reduce your basis by the amount of those taxes.

Table 3. Adjusted Basis

This table lists examples of some items that generally will increase or decrease your basis in your home. It is not intended to be all-inclusive.

Increases to Basis	Decreases to Basis
Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits, under What You Can and Cannot Deduct) Amounts spent to restore damaged property	Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income

Example 1.

You bought your home on September 1. The property tax year in your area is the calendar year, and the tax is due on August 15. The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. You can deduct your $426 share of real estate taxes on your return for the year you purchased your home.

Example 2.

You bought your home on May 3, 2011. The property tax year in your area is the calendar year. The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Under state law, the taxes become a lien on May 31. You agreed to pay all taxes due after the date of sale. The taxes due in 2011 for 2010 were $1,375. The taxes due in 2012 for 2011 will be $1,425.

You cannot deduct any of the taxes paid in 2011 because they relate to the 2010 property tax year and you did not own the home until 2011. Instead, you add the $1,375 to the cost (basis) of your home.

You owned the home in 2011 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2012 return of $949 [(243 ÷ 365) × $1,425] paid in 2012 for 2011. You add the remaining $476 ($1,425 − $949) of taxes paid in 2012 to the cost (basis) of your home.

Keeping Records

Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. In addition, you should keep track of any decreases to the basis such as those listed in Table 3.

How to keep records.   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS.

How long to keep records.   You must keep your records for as long as they are important for meeting any provision of the federal tax law.  Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. (A period of limitations is the period of time after which no legal action can be brought.) For assessment of tax you owe, this is generally 3 years from the date you filed the return. For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Returns filed before the due date are treated as filed on the due date.

You may need to keep records relating to the basis of property (discussed earlier) longer than for the period of limitations. Keep those records as long as they are important in figuring the basis of the original or replacement property. Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you.

Table 4. Record of Home Improvements

Keep this for your records. Also, keep receipts or other proof of improvements.

Remove from this record any improvements that are no longer part of your main home. For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting.
(a) Type of Improvement	(b) Date	(c) Amount		(a) Type of Improvement	(b) Date	(c) Amount
Additions:				Heating & Air Conditioning:
Bedroom				Heating system
Bathroom				Central air conditioning
Deck				Furnace
Garage				Duct work
Porch				Central humidifier
Patio				Filtration system
Storage shed				Other
Fireplace				Electrical:
Other
Lawn & Grounds:				Lighting fixtures
				Wiring upgrades
Landscaping				Other
Driveway				Plumbing:
Walkway
Fences				Water heater
Retaining wall				Soft water system
Sprinkler system				Filtration system
Swimming pool				Other
Exterior lighting				Insulation:
Other
Communications:				Attic
				Walls
Satellite dish				Floors
Intercom				Pipes and duct work
Security system				Other
Other
Miscellaneous:				Interior  Improvements:
Storm windows and doors				Built-in appliances
Roof				Kitchen modernization
Central vacuum				Bathroom modernization
Other				Flooring
				Wall-to-wall carpeting
				Other

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Free help with your return.   Free help in preparing your return is available nationwide from IRS-certified volunteers. The Volunteer Income Tax Assistance (VITA) program is designed to help low-moderate income taxpayers and the Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. To find the nearest VITA or TCE site, visit IRS.gov or call 1-800-906-9887 or 1-800-829-1040.  As part of the TCE program, AARP offers the Tax-Aide counseling program. To find the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit AARP’s website at www.aarp.org/money/taxaide.

For more information on these programs, go to IRS.gov and enter keyword “VITA” in the upper right-hand corner.

Internet. You can access the IRS website at IRS.gov 24 hours a day, 7 days a week to:

• Check the status of your 2011 refund. Go to IRS.gov and click on Where’s My Refund. Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund.
• E-file your return. Find out about commercial tax preparation and e-file services available free to eligible taxpayers.
• Download forms, including talking tax forms, instructions, and publications.
• Order IRS products online.
• Research your tax questions online.
• Search publications online by topic or keyword.
• Use the online Internal Revenue Code, regulations, or other official guidance.
• View Internal Revenue Bulletins (IRBs) published in the last few years.
• Figure your withholding allowances using the withholding calculator online at www.irs.gov/individuals.
• Determine if Form 6251 must be filed by using our Alternative Minimum Tax (AMT) Assistant available online at www.irs.gov/individuals.
• Sign up to receive local and national tax news by email.
• Get information on starting and operating a small business.

Phone. Many services are available by phone.

• Ordering forms, instructions, and publications. Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions. You should receive your order within 10 days.
• Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
• Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.
• TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
• TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.
• Refund information. You can check the status of your refund on the new IRS phone app. Download the free IRS2Go app by visiting the iTunes app store or the Android Marketplace. IRS2Go is a new way to provide you with information and tools. To check the status of your refund by phone, call 1-800-829-4477 (automated refund information 24 hours a day, 7 days a week). Wait at least 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after mailing a paper return. If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). Have your 2011 tax return available so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back.
• Other refund information. To check the status of a prior-year refund or amended return refund, call 1-800-829-1040.

Evaluating the quality of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen in on or record random telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Walk-in. Many products and services are available on a walk-in basis.

• Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
• Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary—just walk in. If you prefer, you can call your local Center and leave a message requesting an appointment to resolve a tax account issue. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience. If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested. All other issues will be handled without an appointment. To find the number of your local office, go to  www.irs.gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service.

Mail. You can send your order for forms, instructions, and publications to the address below. You should receive a response within 10 days after your request is received.

Internal Revenue Service 1201 N. Mitsubishi Motorway Bloomington, IL 61705-6613

Taxpayer Advocate Service.   The Taxpayer Advocate Service (TAS) is your voice at the IRS. Our job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. We offer free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. Remember, the worst thing you can do is nothing at all.  TAS can help if you can’t resolve your problem with the IRS and:

• Your problem is causing financial difficulties for you, your family, or your business.
• You face (or your business is facing) an immediate threat of adverse action.
• You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised.

If you qualify for our help, we’ll do everything we can to get your problem resolved. You will be assigned to one advocate who will be with you at every turn. We have offices in every state, the District of Columbia, and Puerto Rico. Although TAS is independent within the IRS, our advocates know how to work with the IRS to get your problems resolved. And our services are always free.

As a taxpayer, you have rights that the IRS must abide by in its dealings with you. Our tax toolkit at www.TaxpayerAdvocate.irs.govcan help you understand these rights.

If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www.irs.gov/advocate. You can also call our toll-free number at 1-877-777-4778.

TAS also handles large-scale or systemic problems that affect many taxpayers. If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System at www.irs.gov/advocate.

Low Income Taxpayer Clinics (LITCs).   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. For more information and to find a clinic near you, see the LITC page on www.irs.gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. This publication is also available by calling 1-800-829-3676 or at your local IRS office.

Free tax services.   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Learn about free tax information from the IRS, including publications, services, and education and assistance programs. The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. The majority of the information and services listed in this publication are available to you free of charge. If there is a fee associated with a resource or service, it is listed in the publication.  Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities.

DVD for tax products. You can order Publication 1796, IRS Tax Products DVD, and obtain:

• Current-year forms, instructions, and publications.
• Prior-year forms, instructions, and publications.
• Tax Map: an electronic research tool and finding aid.
• Tax law frequently asked questions.
• Tax Topics from the IRS telephone response system.
• Internal Revenue Code—Title 26 of the U.S. Code.
• Links to other Internet based Tax Research Materials.
• Fill-in, print, and save features for most tax forms.
• Internal Revenue Bulletins.
• Toll-free and email technical support.
• Two releases during the year. – The first release will ship the beginning of January 2012. – The final release will ship the beginning of March 2012.

Purchase the DVD from National Technical Information Service (NTIS) at www.irs.gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee).

Since the beginning of the house-price crash in 2007, analyst after analyst has predicted that “the bottom” in house prices is just around the corner – only to be wrong every time.

But now, finally, it looks as though house prices may actually be nearing a bottom.

Why?

Because, after falling nearly 35% from their 2007 peak, nationwide house prices are finally approaching “normal” levels on two key valuation measures: The “price-to-rent ratio,” which measures house prices relative to what the houses might rent for, and the “price-to-income ratio,” which measures house prices relative to average incomes.

Using the first ratio, economists at Goldman Sachs have concluded that national house prices will decline another 2.5% in 2012 and then bottom over the course of the following year.

(To see a recent chart of the national price-to-rent and other ratios, please click here.)

House prices differ markedly depending on where you live, of course, and Goldman’s analysts have considerably different predictions for different markets. Prices in New York, Portland and Atlanta, Goldman predicts, will still see significant declines. While prices in Detroit, Miami and Cleveland should rise.

Importantly, after a price bubble similar to the one the U.S. just experienced, prices often don’t stop at “average” levels on the way down. On the contrary, they often plunge straight through “fair value” and spend years below average levels. And that certainly could happen to house prices this time around.

But Goldman’s economists believe house prices will level out in a year or two. And unlike other analysts who have made similar predictions in prior years, Goldman’s economists actually have data on their side: The price-to-rent ratio really has fallen to normal levels.

Of course, even if house prices do bottom in 2013, that doesn’t mean that they’ll quickly shoot up again – or that housing will once again be the “great investment” that everyone thought it was back in the boom years.

One of the reasons house prices are expected to bottom soon is that houses are currently more affordable than they have been in the past. But housing “affordability” is judged, in large part, on mortgage rates, and mortgage rates are currently near an all-time low. If and when the economy begins to recover in earnest, mortgage rates will likely rise, and, as they do, houses will become less affordable.

So it is likely that, even after they bottom, U.S. house prices will face headwinds for a long time.

New Homes in Long Beach - 1051-06_Aubry_PL-3_Front-480x292

Aubry at Alamitos Ridge in Long Beach (near CSULB, by Redondo Ave & Stearns St, desirable Long Beach area)

Community Overview:

Phase 7B Homesites Now Available!

• New Homes located in Long Beach
• Gated community
• Approx. 2,073 to 2,452 Sq. Ft.
• 3 to 4 bedrooms
• 2.5 to 3.5 bathrooms
• Lofts, great rooms, and family rooms (varies by residence)
• Interior laundry rooms
• Centrally located near Pacific Coast Highway, 405, and 710 freeways
• Close proximity to the Long Beach Airport, Aquarium of the Pacific and Shoreline Village

Note: First time home buyer loan programs available including FHA loans.

4 ways to avoid refinance rejection

What you should know about lender ‘overlays,’ debt ratios

By Jack Guttentag
Inman News™

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“My  application to refinance my $200,000 loan was recently turned down … do I  have any recourse?”

If by recourse you mean a third party of some standing who will direct  the lender to make the loan, or attempt to persuade them to do it, the answer  is “no.”

No third party is going to reunderwrite the loan to see if the lender  made a mistake. Such mistakes are very rare because lenders make money only on  loans they close; they lose money on loans they reject.

Reapplying with  another lender

It is possible but unlikely that another lender would approve your loan.  Virtually all $200,000 loans are either sold to Fannie Mae or Freddie Mac, and  therefore subject to the underwriting rules of those agencies; or insured by  FHA and subject to its underwriting rules.

Some lenders place  “overlays” on top of these rules, which are more restrictive than  those of the agencies. It is possible that your loan met agency requirements  but was tripped up by a more restrictive overlay, which would mean that another  lender might approve it.

Before applying elsewhere, however, I would discuss your rejection with  the loan officer who gave you the bad news to see where your application fell  short, and whether it might have met agency requirements.

On the assumption that you did not meet agency requirements, your only  option is to change the transaction in a way that will bring it into  compliance. The changes required depend on the reason or reasons you were  rejected.

Credit score too  low

In general, it takes considerable time to raise a credit score  significantly, but there are some exceptions. One is where the score is  depressed by a reporting mistake, which is not uncommon. As soon as the mistake  is corrected, your score will jump. (See “How  Do You Correct Mistakes In Your Credit Report?“)

Another possible way to juice your credit score is to pay down high  balances on your credit cards. A high ratio of balance to maximum balance,  called the “utilization ratio,” is considered a sign of weakness and  potential trouble, reducing your score. Paying down balances to less than 50  percent of the maximums should raise your score.

Finally, you can detach yourself from the “wrong vendors.”  Because finance companies lend to relatively poor risks, the credit score of  any borrower owing money to a finance company is lower than it would be if the  creditor were a bank.

By the same logic, borrowers who have credit cards of  department stores are penalized, relative to what their score would be if they  had cards issued by banks. If you can’t pay them off, place department-store  cards at the top of your balance-reduction list.

Equity too low

The borrower’s equity in his property is its appraised value less the  loan balance. Equity can be increased by obtaining a higher appraisal or by  paying down the balance.

You don’t get a higher appraisal because you need one to refinance your mortgage;  you get one because the appraiser made one or more mistakes that reduced value  erroneously. You may well know the local market better than the appraiser,  especially if he is located a good distance away; you will find his address on  the appraisal report.

To make use of your information, however, you must start the process  again with another lender. Under current rules, if your existing lender orders  a new appraisal, he is obliged to use the lower of the two values.

You can also increase your equity in the house by paying down your loan  balance, a process called “cash-in refinance.” If you have money in  the bank earning 1 to 2 percent, a cash-in refinance that allowed a rate-reduction  refinance that would not otherwise be possible would earn a very high return.  Of course, you must have the cash to invest.

Debt-to-income  ratio too high

In general, underwriting guidelines set maximum ratios of total debt  payments to borrower income of 41-43 percent. Debt payments include the  mortgage payment, property taxes, homeowners insurance, mortgage insurance (if  any), and all other debt payments that extend beyond the next six months and  are not deferred for a year or longer.

This includes home equity credit lines  (HELOCs) and other revolving credits, credit card debt that you don’t pay off  at month-end, auto loans, student loans and alimony and child support  payments.

If your ratio is too high to qualify, there may be ways to reduce your  debt payments. The cash-in refinance referred to above not only increases your  equity in the house but it also reduces your monthly mortgage payment. Borrowers  who don’t have excess cash but do have a 401(k) retirement account can borrow  against it and use the proceeds to pay down other debt. Loans from a 401(k) are  not included in the debt ratio.

The bottom line is that a loan rejection is not necessarily final, but  it is up to the borrower to do what is necessary to convert the transaction  from one that does not meet underwriting requirements into one that does.

The writer is  professor of finance emeritus at the Wharton  School of the University of Pennsylvania.  Comments and questions can be left at www.mtgprofessor.com.

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