GCRC Spring Meeting 2010
WELCOME
Introduction
Katy Meinhardt
GCRC President
Thank You to Our Sponsors!
TAX & LEGAL UPDATE
GCRC Spring Meeting 2010
– Prepared by Peter K. Scott
– Worldwide ERC Tax Counsel
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Topics
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IRS Employment Tax Audits Begin
Homebuyer Credit Issues
Underwater Homeowner Programs
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Additional FAQs on New RESPA Rule
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HUD “HAMP” program
FNMA “Deed for Lease”
Deductibility of Loan Origination Fees
Anti-flipping Timing Rules Suspended
Tax Relief for Defective Drywall?
Legislative Outlook
IRS Audits
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New IRS employment tax audit program
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IRS will perform detailed employment tax audits, beginning
in February of 2010, on some 6,000 businesses
Purpose of audits is to identify employment tax issues
needing attention
 Will cover worker classification, fringe benefits (including
relocation), officers’ compensation, employee expense
reimbursement plans (for example, temporary
assignment issues), and nonfiling issues
Companies will be selected at random
IRS Audits
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Audits are in addition to those ordinarily conducted
IRS will hire significant numbers of additional agents to perform
them
Issues to watch out for:
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Timing of withholding and deposits for relocation benefits. Many
companies continue to incorrectly cut off withholding on these items
before year end
Renewal of attacks on BVO programs, particularly those with
additional risk-reduction techniques that cause short holding periods
Home sale audits continue, but at a much reduced pace, and
IRS seems to have de-emphasized the issue since Rev. Rul.
2005-74. Not clear whether new audit program will cause issue
to re-emerge
Homebuyer Credit
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Credit was extended and expanded effective November 6, 2009
Will now be in effect for sales before May 1, 2010, and until
June 30, 2009 for closings of binding contracts entered before
May 1
Credit remains up to $8,000 for first-time homebuyers
New credit for “long-time” homeowners who have used their
prior residence as their principal residence for five consecutive
years of the eight before the new purchase. Credit is up to
$6,500
Income limits have been raised, from $75,000 to $125,000
(single), $150,000 to $225,000 (married)
Homes eligible for credit cannot exceed $800,000
Homebuyer Credit
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Gross-up issue: what if taxable relocation benefits push
homeowner beyond income limit?
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Less likely with higher income limits
But more likely with long-time homeowners eligible
Law has provisions that may help
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First time homebuyer in 2009 may elect to claim credit on an
amended 2008 return, rather than 2009. If relocation benefits paid
in 2009, claiming credit for 2008 may eliminate gross-up problem
Long-time homeowner who buys in 2010 may elect to claim credit
on either 2009 or 2010 return. (Note this option does not apply to
long-time homeowner buyers between Nov. 6, 2009 and
December 31, 2009)
In either case, the expanded income limitations will apply,
regardless of which year the credit is claimed in
Homebuyer Credit
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Law still requires that credit be repaid if
home disposed of within three years of
purchase
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There is no exception for relocation
If employee who claimed the credit is moved
within three years, company will have to decide
whether to compensate for the required
repayment. An item to consider when deciding
whether to move an employee, or which
employee to move
Homebuyer Credit
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Some employees may qualify who are not first-time
homebuyers
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Long-time homeowners (5 consecutive years as principal
residence out of last 8)
Employees who moved out of their old house over three
years ago and rented in a destination location (for example,
returning expats, or employees on long-term assignments).
Even if they maintained ownership of the old home in the
interim, they qualify because they did not own a principal
residence during the three years preceding their purchase
Homebuyer Credit
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Other issues to consider:
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While the credit is available until June 30, 2010 if a binding
contract to purchase is entered into by April 30, 2010, new
construction requires not only closing, but occupancy by June 30
There are significant new documentation requirements that must
accompany the return claiming the credit (a copy of the HUD-1 or,
for new construction, a copy of the occupancy certificate). Longtime homeowners must attach documents such as Forms 1098,
property tax records, homeowner insurance records, or other
documents to show they were living in the house for five
consecutive years. As a result, taxpayers claiming the credit
cannot file electronically.
IRS is revamping its systems to detect fraud, and incorporate
new rules, and will not begin processing homebuyer credit
returns until mid-February. Refunds may take several
additional weeks.
Homebuyer Credit
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What will happen this Spring?
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Home sales are again down (both new & existing)
Some of that is due to acceleration of sales due to
November scheduled expiration of homebuyer credit
Some due to weather
If sales do not improve, pressure will build on
Congress to renew/extend homebuyer credit
NAR, Homebuilder, Mortgage Lenders are already
working on an extension
Underwater Homeowner Programs
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Numerous programs, both governmental and
private, are in place. Goal is to reduce
foreclosures, usually by modifying mortgages
Pace has been slow, millions of mortgage
resets will occur in 2010 that may provoke
more homeowners to walk away
Two new developments are encouraging
HUD Campaign to Revitalize HAMP
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Campaign to help borrowers in the trial phase of their modified
mortgages convert to permanent modifications under the Home
Affordable Modification Program (HAMP).
Data released in December showed an acceleration in the rate
at which borrowers were approved for permanent modifications;
as of that month, more than 100,000 permanent modifications
had been approved, including 66,000 that borrowers have
accepted and the remainder in completion stage.
HUD Campaign to Revitalize HAMP
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HAMP was designed to allow eligible homeowners to reduce monthly
mortgage payments to a point which is sustainable over the mortgage
term.
Several million homeowners are estimated to be eligible for the
program and more than one million have received modification offers.
Since the program is a government sponsored loan modification, it
requires a considerable amount of paperwork, comparable to that
required in a new mortgage application, as well as proof of changed
circumstances justifying the homeowner’s need. Many of the
outstanding unaccepted offers are the result of the borrower’s failure to
submit the necessary documentation.
The new HUD initiative is designed to coax qualified borrowers to do
so.
HUD Campaign to Revitalize HAMP
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The program is aimed at the borrowers who can
make substantial payments on the revised mortgage,
and does not address the fate of the unemployed, or
those whose house is so far underwater that it
makes financial sense to abandon the property to
foreclosure, or to opt for bankruptcy.
The program can be useful to employed, cash
strapped homeowners.
Fannie Mae Announces “Deed for Lease” Program
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Fannie Mae introduced the “Deed-for-Lease” Program (D4L), a
program designed to minimize displacement, deterioration of
neighborhoods caused by vandalism and theft to vacant homes, and
the effect these have on communities and home price stabilization.
D4L allows qualifying borrowers of properties transferred through
deed-in-lieu of foreclosure (DIL) to remain in their home by executing a
lease of up to 12 months in conjunction with a DIL. Investment
properties that are tenant-occupied may also be considered as long as
the borrower is cooperative in providing information from the tenant to
facilitate the D4L.
Fannie Mae Announces “Deed for Lease” Program
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With the D4L program, loan servicers are expected to follow their
regular process in considering a borrower for a DIL in accordance with
Fannie Mae’s existing rules.
Once the servicer determines a borrower is eligible for a DIL through
its normal course of business, the servicer will notify Fannie Mae that
the borrower may also be eligible for D4L. Fannie Mae will take the
steps necessary to further verify property and borrower eligibility,
determine the rental rate, and, if appropriate, execute the lease
agreement.
To qualify for D4L, the occupant of the property must have the ability
to pay market rent not to exceed 31% of his or her monthly gross
income. The lease agreement will be contingent on successful
completion of the DIL.
Fannie Mae Announces “Deed for Lease”
Program
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One area in which the program might be used in the relocation
industry could be in the case of properties employees are occupying
as renters. Though not a common occurrence, there are cases in
which these workers find the house which they are legitimately renting
is foreclosed upon. While there may be other short-term remedies, the
D4L, which specifically applies to renters, may be an option. The
downside, however, is the personal financial information which Fannie
Mae will apparently require from the renter.
Tenants also have protection under the Federal Protecting Tenants at
Foreclosure Act of 2009, which requires the bank to take the property
in foreclosure subject to an existing lease, or to give 90 days’ notice in
the event that the lease expires within that period, or in the event of an
“at will” lease.
HUD Released Additional FAQs on New RESPA
Rule
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HUD released a total of nineteen additional FAQs concerning
the rule, the Good Faith Estimate, and HUD-1 forms.
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The new FAQs include discussions of the Good Faith Estimate
(GFE), defining the “written list of providers” more specifically,
further discussion of the “changed circumstances” exemption,
"right to cure and tolerance violations," and additional technical
points regarding the form.
One of the new FAQ’s deals with a problem concerning
deductible origination fees
Origination Fees
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Origination fees are deductible as interest, like points, but only
if calculated and stated as a percentage of the loan amount.
Such origination fees were easily identifiable on the old HUD-1,
companies who reimbursed them ordinarily did not gross up
because fee was deductible by transferee
New HUD-1 lumps such origination fees with numerous other
charges to initiate the mortgage. Consequently, amount in Line
801 can no longer be assumed to be deductible
Origination Fees
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FAQ says loan originator may designate any
origination point paid on page 2 of HUD-1 in line
801. “The designation should follow ‘Our Origination
Charge’ either by adding the language ‘Includes
Origination Point’ (_% or _$) or by placing an
asterisk (*) and adding the language at the bottom of
the page.”
Companies will need to work with lenders to identify
what part, if any, of line 801 is a deductible
origination fee, and whether the amount stated on
line 801 consists entirely of amounts company is
willing to reimburse
HUD Released Additional FAQs on New RESPA
Rule
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The bottom line regarding the RESPA rule remains unchanged:
all settlement service providers need to be fully aware of the
complex requirements mandated and which became effective
January 1st.
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The ambiguities, and changes in procedure, such as the
amalgamation of mortgage service costs have been discussed,
and others are likely to be discovered.
HUD and FHA Suspend the Anti-Flipping Timing
Regulations in the General Market
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HUD announced a temporary policy to expand access to FHA
mortgage insurance and allow for the quick resale of foreclosed
properties. With certain exceptions, such as the relocation property
exemption which Worldwide ERC® successfully lobbied for over 10
years ago, FHA currently prohibits insuring a mortgage on a home
owned by the seller for less than 90 days.
The temporary exemption came about because FHA research
discovered that acquiring, rehabilitating and the reselling foreclosure
properties to prospective homeowners often takes less than 90 days
(usually the bank).
HUD and FHA Suspend the Anti-Flipping
Regulations in the General Market
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The policy change will permit buyers to use FHA-insured financing to
purchase HUD-owned properties, bank-owned properties, or properties
resold through private sales. The waiver will take effect on February 1, 2010
and is effective for one year, unless otherwise extended or withdrawn
To protect FHA borrowers against predatory practices of "flipping" where
properties are quickly resold at inflated prices to unsuspecting borrowers,
the waiver is limited to those sales meeting the following general conditions:
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All transactions must be arms-length, with no identity of interest between the buyer and seller
or other parties participating in the sales transaction.
In cases in which the sales price of the property is 20 percent or more above the seller's
acquisition cost, the waiver will only apply if the lender meets specific conditions.
HUD and FHA Suspend the Anti-Flipping
Regulations in the General Market
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This waiver does not affect the relocation property exemption,
which remains in place. It is designed to increase the rate of
sale of foreclosed properties, where a house is purchased at
foreclosure and resold.
It also apparently does not, unfortunately, affect the application
of the “owner of record” requirement in the anti-flipping rules.
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Rules require that the seller be the owner of record
With increased underwriting scrutiny, this rule is now often invoked
by FHA lenders to prevent use of “one deed” in relocation
transactions
It has become common for two deeds to be used in any relocation
transaction in which FHA financing is sought
Mileage Rates
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New optional standard mileage rates for use
of a car in business or moving announced
December 3
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50 cents per mile for business, down from 55
16.5 cents per mile for moving, down from 24
Rate for moving lowest since 2005
Companies that reimburse transferees for
auto use at higher than 16.5 cents per mile
must include the excess in income
Imported Corrosive Drywall
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Letter from some influential members of Congress to IRS Nov.
24 includes data from the Consumer Product Safety
Commission as to damages caused, urges formal ruling by year
end that losses are deductible as casualty losses.
IRS has not ruled, but seems receptive to argument
A bill has been introduced in the House to exclude from income
any remediation payments received from Federal, State or local
governments relating to defective drywall installed after
September 1, 2006. H.R. 4362 (Cao, R-LA). Prospects are
unclear.
Legislative Outlook
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Healthcare reform on life support, various tax items
in House/Senate bills may not occur. These include:
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40% nondeductible excise tax on “high cost” insurance
plans (Senate)
5.4% surtax on income over $500,000 (1 million joint)
(House)
Increase Medicare tax to 2.35% for those earning $200,000
($250,000 joint) (Senate)
Penalties for those without insurance (Both)
Penalties for employers not offering insurance (Both)
Small business tax credits for providing insurance (Both)
Legislative Outlook
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But given the dire budget situation, and
recent passage by Congress of statutory
“paygo” rules, search will intensify for
revenue raisers
One revenue raiser in both House and
Senate health care bills is likely to re-emerge
Legislative Outlook
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Extend information reporting to corporations,
and to payments for property
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Currently, Forms 1099 not required if payment is
to a corporation, or for property other than real
estate
Revenue raiser in health care legislation would
end both exceptions
Likely to be used as a revenue raiser elsewhere
Would take effect in 2012
Information Reporting
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Unless IRS writes regulations carefully, will be very
burdensome.
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All payments by businesses to anyone aggregating $600
during the year will have to be reported, whether or not the
recipient is a corporation, and whether or not the payment is
for services or property (for example, supplies, inventory,
etc)
Will greatly enlarge the number of required information
reports
Worldwide ERC will watch this carefully and look at whether
there are opportunities to narrow the rules for relocation
Questions
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Rules:
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Has to be one I can answer (but not necessarily
on the subjects we covered)
Questioner cannot be on permanent “banned” list
(you know who you are)
No “stump the tax nerd”
Relevance of recent study of audience
attention to tax presentations