legislation

In a country where talk of obesity and rising health care costs seem to flood every news channel on a constant basis, our all knowing, all powerful government, in its infinite wisdom, is punishing the ambitious, hard-working entrepreneur in order to extend Medicare benefits and to cover the cost of the impending national health care program. Actually, only half the cost as they have forecast.

The idea is this. If you as an individual show a gross adjusted income of more than $200,000 ($250,000 for married couples), then the government will require you to pay a 3.8% tax on the capital gains above and beyond those limits.

The National Association of Realtors lobbied heavily against this legislation as it cropped up at the last minute to solve the obvious question: “Who’s going to pay for it?”

Well, if you’re “rich” as the government defines, then YOU are going to pay for it. The more you make, the more you pay, which perpetuates the continual problem of a vast majority of the nation NOT paying taxes.

Robin Hood

I used to equate Robin Hood’s “stealing from the rich, giving to the poor” to the government taxing hard working Americans and giving it to the lazy people. Now, I think of it more like this. Robin Hood steals the money BACK from the government who stole it from the people and gives it BACK to the rightful owners. Go go gadget archer.

3.8% Example

A quasi-confusing document was released by the NAR which offers a few examples of how this new legislation will actually affect the home owner. While some have blown the tax out of proportion, not knowing the actual details of the law, assuming that everyone who owns a home is going to be taxed, that is simply not true. It’s just those of us who make “enough” money doing it.

Example 1: Suppose your adjusted gross income (AGI) for the year hits the $150,000 mark, and you sell some of your stocks and bonds for a net gain of an additional $150,000. That puts your new AGI at $300,000, or $100,000 above the $200,000 limit. $100K * 3.8% = $3,800.00

Your Tax Liability: $3,800.00

Example 2: You and your wife have a combined income of $190,000. You sell some stocks and bonds which net a capital gain of $60,000. In addition to that, you sell your residence which you purchased for $600,000 for $1.2Million for a gain of $600,000. Since you gained over $500,000 on the home, everything over $500,000 is added to your AGI and becomes taxable. So, $190,000 + $60,000 + $100,000 = $350,000. Again, you’re over by $100,000.

Your Tax Liability: $3,800.00

Example 3: This one blew me away. I’ll add this one as it’s written in the NAR brochure with no modifications.

In 2010, Ethan inherited a four-plex investment property from his great aunt. She had used it for many years as an investment rental property in San Francisco. At the time of her death, the adjusted cost basis of the property was $10,000. During her period of ownership, she had taken $240,000 worth of depreciation deductions on it. Its fair market value was $900,000 when she died. Because there was no estate tax for 2010 and because the carryover basis was in effect, Ethan’s basis in the inherited property is also $10,000. The prior depreciation allowances carry over to him, as well. He continues to use the property as an investment rental property.

Ethan later sells the property for $1.2 Million. He is single, and reports Schedule C self-employment income of $180,000.

Ouch. That hurts. That’s additional tax that Ethan is required to pay because of the health care program. What if we assumed that Ethan lived a rather responsible life, since he obviously knows how to make money ($180,000/year before any inheritance). We could assume he’s healthy, eats well, exercises, doesn’t smoke, isn’t an addict of sorts, etc. I think you may be able to figure out where this argument could lead.

When does this legislation go into effect?

January 1st, 2013.

I’m curious to know what you think about this plan, and what the effect of the cause will be. How creative are those of us who make an income that the government deems “too much” going to be?

Leave your comments below.

Arizona Anti-Deficiency Laws Are Changing

The following information was provided by Marc McCain, Attorney at law, regarding the changes that are coming regarding the Arizona Anti-Deficiency legislation.

A deficiency is the amount that you still owe the bank after the bank forecloses. If you are selling your home short of what you owe, or you are about to experience a foreclosure, then this information is important for you. As always, please seek professional legal council when it comes to your particular situation. I can help you sell your house, but I’m not an attorney. We leave that up to the legal experts.

Arizona’s anti-deficiency laws are changing effective September 30, 2009!

The change is designed to limit the type of borrowers that will qualify for anti-deficiency treatment. Set forth below is a general outline of Arizona law regarding when a borrower may be subject to a deficiency action or sued on its note following a foreclosure or short sale. However, borrowers must understand that these are only general rules — every situation must be analyzed carefully based on the specific facts – consult with a professional at all times to determine your rights and obligations in connection with a foreclosure or short sale.

In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. § 33-721
If the foreclosure price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the difference. However, certain states, including Arizona, have what are called anti-deficiency laws that bar a lender from seeking a deficiency in certain situations.
In determining if anti-deficiency rules apply, the first step is to confirm what law applies to the loan, particularly the lender’s remedies under the Promissory Note. The applicable law should NOT be assumed. Read your Promissory Note and other loan documents carefully and understand their terms.
Assuming Arizona law applies to the lender’s rights under the Promissory Note, Arizona’s anti-deficiency laws are found in 2 places – in A.R.S. § 33-729(A) (regarding judicial foreclosures), and A.R.S. § 33-814(G) (regarding trustee’s sales).
In both judicial foreclosures and trustee’s sales, anti-deficiency rules apply only if the property being foreclosed meets the following criteria: (a) 2½ acres or less; and (b) limited to and utilized as a single one-family or single two-family dwelling. However, on July 10, 2009 Governor Brewer signed into law a change to A.R.S. § 33-814(G) which will take effect September 30, 2009. In addition to the above requirements, the trustee’s sale statute will also require that: (a) the trustor has lived in the property for at least 6 consecutive months; and (b) a certificate of occupancy has been issued. Until September 30, 2009, there is NO requirement that the trustor use the property as a residence – residential investment properties satisfy the anti-deficiency criteria. Effective September 30, 2009, investment properties sold at trustee’s sale will NOT qualify for anti-deficiency treatment if the trustor has not lived in the property for at least 6 consecutive months. Commercial properties and loans secured by residential homes being developed for sale but never used as dwellings don’t qualify for anti-deficiency treatment. In addition, a deed of trust that is a lien against more than one property will not be subject to anti-deficiency rules — the deed of trust needs to be a lien against a single trust property.
A.R.S. § 33-729(A) also requires that the loan be a purchase money (“PM”). However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan. A PM loan doesn’t lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
In a judicial foreclosure, only a PM lender on qualifying residential property is prevented from seeking a deficiency; a nonpurchase money (“NPM”) lender is not – it can obtain a deficiency following a foreclosure or sue the borrower on the note.
In a trustee’s sale, both PM and NPM lenders that foreclose on qualifying property are prevented from seeking a deficiency and from suing directly on the note.
Junior liens extinguished by a 1st position foreclosure may be able to sue on the note. The issue is whether the junior loan was a PM or NPM loan – if it was a PM loan on qualifying property, the lender can NOT sue the borrower on the note following the foreclosure; if it was a NPM loan, the lender CAN sue the borrower.
If a lender can not seek a deficiency, then the lender can NOT waive its security and sue directly on its note. This means that a lender under a PM loan on qualifying property will NOT be able to sue the borrower on the note. This rule also applies to short sales. Note there are gray areas regarding cash out refi’s. Other Lender claims are also not barred – e.g. mortgage fraud.
Even if anti-deficiency rules apply, a borrower will be liable to a lender for any diminution in value of the trust property due to voluntary waste. In other words, don’t damage the property, take fixtures, A/C units, etc., or let the Property go to waste.
Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
Last, but not least, consult with qualified tax professionals BEFORE deciding to do a short sale or foreclosure. 1099 income, gains, losses and other tax consequences may result from foreclosures, short sales and loan modifications. Know what tax consequences you will face and plan accordingly.