One of our team members asked the following question today:

Can you or the team answer a question about 1099 income on a short sale. I thought a home owner who sold via a short sale wasn’t liable for the difference with the Debt Forgiveness Act?

I’ve just received an approval from the bank on my short sale but they say the seller will be issued a 1099 for approx. $150K. She would do better with a foreclosure than have that type of tax burden.

Here is the answer by Deborah Beneke, CPA at Olsen Thielen

Regardless of whether the transaction is covered under the Debt Forgiveness Act or not , she will be issued a 1099. Further if the property goes into foreclosure, a 1099 will also be issued and she could still be liable for debt forgiveness income depending upon her circumstances.

However if she does qualify for the exemption available under the Debt Forgiveness Act, the amount of debt forgiveness income exclusion must be reported on Form 982 on her individual tax return. As a result, even though a 1099 was issued she will not have any tax liability.

Again, she must qualify for exemption. It must have been her principal residence two out of the last five years. AND the debt that is to be excluded must be qualified residence indebtedness. In other words, if she refinanced on the property and used the proceeds for other uses (for example to pay off credit cards), the debt forgiveness income would be taxable up to the amount used for other purposes.

If she can prove insolvency or is in bankruptcy, there would be no debt income either. Again a Form 982 needs to be filed. She should consult her tax professional to analyze her situation and determine if she would be subject to adverse tax implications. Renting out the property should not be a problem if it is short term. She will need to pick up net rental income (if any) and recapture any depreciation if there is a gain on disposal (unlikely).

As much as I want to believe the following stats, I am skeptical.  I think they make some good assumptions and per the stats, sales prices are rising.  I think it is a little early to call the war won and that we are on a recovery.  If you pull your head out of just the housing market and take a look at the rest of the economy, how can you say we are on the recovery road?  With unemployment at 10%+, a 2nd stimulus package looming, congress’s approval rating at historic lows, and inflation just waiting to take off from all the money printing the Fed is doing, I suspect we are going to being the housing market get worse again before it gets better.

From the Minneapolis Area Association of Realtors, December 10, 2009

Extremely heavy buyer activity and shrinking inventory led to strengthening Twin Cities home prices in November.

The November median sales price of $170,000 was a slight increase from October—a rare occurrence in this month that typically marks the beginning of a temporary winter price swoon. This mark is 2.9 percent behind last October, the lowest year-over-year price decline in more than two years.

“This is the surest sign we’ve seen yet that we’re on recovery road,” said Steve Havig, President of the Minneapolis Area Association of REALTORS® (MAAR). “We’ve seen sales growing for almost a year and a half, and prices are starting to reflect that, particularly in the lower price ranges.”

The median sales price of traditional homes (excluding foreclosures and short sales) in November was $190,000, down 15.6 percent from a year ago. Since a heavy share of buyers in November were likely first-timers who typically buy in the more affordable price ranges, prices in the traditional segment have been weighted downward. Foreclosures posted a November figure of $127,500, up 2.0 percent from a year ago, while short sales prices were at $143,500, down 15.6 percent from a year ago.

There were 2,987 signed purchase agreements in November, a big dip from October due to seasonal trends and to the tax credit’s initial expiration date. That’s still up 10.2 percent from a year ago—the 17th consecutive month of year-over-year increases in pending sales. Closed sales posted a whopping 67.0 percent jump from a year ago, again due to the tax credit.

The Months Supply of Inventory has dropped to 5.7 months, the lowest mark since April 2006. Traditional homes have 7.6 months of supply, foreclosures have 1.4 months and short sales have 12.8 months.

“Supply is dropping in the traditional and foreclosure markets,” said MAAR President-Elect, Brad Fisher. “Short sale supply is stagnant because of the headaches involved in purchasing them. The process needs to improve, but industry and government efforts that are coming soon could help.”

All information is according to the Minneapolis Area Association of REALTORS® (MAAR) based on data from the Regional Multiple Listing Service of Minnesota, Inc. MAAR is the leading regional advocate and provider of information services and research on the real estate industry for brokers, real estate professionals and the public. MAAR serves the Twin Cities 13-county metro area and western Wisconsin.

I was meeting with another Realtor on our team on Friday.  He wanted to discuss buying investment properties sometime in the future as a long term retirement plan.  One of the questions that came up was “what type of property would you buy if you had to do it all over again”.  I had actually answered this question a long time ago when a reader asked “What Type of Property Investment is Best for First Time Investors“.  Now 2+ years and 100′s of properties later, I would have to answer:  a nice single family home.  I have really come to appreciate the simplicity of buying, owning, and managing a single tenant in a single property.

Single family rentals have some great pros:

• More desired by the average tenant than a duplex or apartment, consequently it is easier to rent a single family home.
• Higher rent possible.
• Tenant takes care of all lawn care and snow removal (typically).
• Minimal monthly landlord expenses (usually just water/sewer/garbage).
• Single Family Home tenants tend to be less transient.
• Easier to sell this property in the future to either an owner occupant or investor.
• Problem tenants can’t sour other tenants (unlike multi-family).

Now, there are some drawbacks, but I think they are manageable:

• When the property is vacant, no rent is coming in.
• Capital improvements can not be spread out across a larger gross rent.  In other words, a duplex may generate $800 per month in cash flow versus a single family home that generates $400 per month.  Unfortunately, the roof on the single family house may cost just as much as the duplex to replace, resulting in it taking twice as long to recover that cost.

Ultimately, this Realtor friend is making the right decision to buy an investment property.  The type doesn’t matter, just get in the game.

Who mows the grass and shovels the snow at your investment properties? Maybe you do. Eventually you may want to ask one of your tenants to take care of the work. Here are some tips on how to make this a winning situation for you and your tenant:

• Find a tenant that takes pride in where they live. Someone that is often just making their rent payment is a good candidate. They will appreciate the extra money.
• Do NOT reduce their rent. Keep the rent at the standard amount and instead, pay them by check for the work they do. This allows you to stop paying them if they stop doing the work. If you discount the rent and they stop doing the work, you would need to have them sign an updated lease for the non-discounted amount which may be impossible to do (resulting in you getting less rent than expected and needing to find a new caretaker-or do it yourself). The only exception is for single family houses where yard maintenance (grass & snow) are part of the original rent amount.
• I have seen some landlords pay as much as $100 per month for simply mowing the grass and shoveling, both of which take less than 2 hours per month. I normally pay the caretaker $25-30 per month all year. Again, I do not pay anything at single family houses.
• You should provide all tools (shovel & mower), gas, and salt for the tenants. This is only fair considering what you are paying them.
• Never give your caretaker a set of keys to the apartments unless they perform maintenance duties and/or leasing as you can open yourself up to liability if they steal or break something or assault someone. If your caretaker has access to apartment keys, you should make sure you have run full employment-type screening on them (including background checks). Consider having them bonded for additional liability protection.
• You may need to provide your tenant a 1099-MISC form as this caretaker work could be considered income. Check with your accountant.

Finding a caretaker can lower your time requirements at your properties. Done correctly it can be a great situation for you, your tenant, and your building.

A Special Research Report from the Minneapolis Area Association of REALTORS®
Q3-2009

Lender-owned foreclosure inventory available for sale in the Twin Cities has fallen by 60 percent in the last year, falling from an estimated 4,886 at the end of last September to 1,960 this year. Short sales are a different story—basically holding steady over the last twelve months (Figure 1). Lender-owned Minnesota foreclosures now account for only 7.9 percent of the total inventory, while short sales represent 17.4 percent of total inventory.

The simple reason for this growing chasm is that foreclosures are selling roughly three times as frequently as short sales (Figure 2). Short sales are complicated transactions and many consumers have reported considerable delays and uncertainties associated with making an offer on a short sale home. These complications are likely the main cause of the relatively quiet sales activity.

Foreclosures are properties in which the financial institution has repossessed the home from the owner due to nonpayment of mortgage obligations. Short sales are unique arrangements where the financial institution and in default homeowner work together in an attempt to sell the home before it is foreclosed upon.

It’s encouraging to see the number of vacant foreclosures drop as they’re absorbed by new homeowners. But it’s discouraging to see that short sales remain such a substantial drag on the market’s forward momentum, especially when we consider that a portion of these short sales will eventually become lender-owned foreclosures.

If you owned a rental property in Minnesota during 2009, you are required by the State of Minnesota to send each of your tenants a MN Certificate of Rent Paid.  Depending upon the tenant’s income, they may be eligible for a tax deduction for a portion of the rent they paid for 2009. Although you must send your tenant this form, this does not affect any Minnesota taxes you pay or anything else. It is simply for the tenants tax reporting purposes.  You can find the 2009 Minnesota CRP here.

Like most government forms, the instructions are rather confusing and length!  I am not an accountant, government worker, or attorney.  Below are just some suggestions and ideas that I have come up with over the years of filling these out:

• When figuring out the totals, do not include any damage deposits, late fees, or other non-rent payments in the total amount.  Also, only include actual rent paid, not rent billed (or accounts receivable).
• Any rental subsidy amounts (including section 8 and other non-profit agencies) should not be included in the total line on the CRP. Only include rent paid by the tenant(s).  In your accounting system remember to mark each subsidy payment in the memo field to make this easier at the end of the year.
• When calculating the total amount, you must divide the total rent paid by the total number of adults in the unit, regardless of how much rent each paid.  Married renters are considered one person, again regardless of how they paid.  You should then send a form to each adult.  This may cause some frustration among roommates, but just tell them you are simply following the instructions.
• If you have many 2009 Certificate of Rent Paid forms to send, I recommend that you fill in a copy of the form with your business information and make copies of that original CRP to save yourself time. With almost 30 rental units, you can imagine how much time this saves me!
• Alternatively, the Certificate of Rent Paid form comes in a PDF format, so I purchased a copy of Adobe Acrobat and opened the PDF in edit mode.  I then entered my business info once and then simply changed the property and tenant info and printed them out (I am faster at typing than writing!).
• Often you will have tenants that have moved out during the year.  Personally, I just wait for past tenants to call me and request the CRP.
• The landlord must send the tenants the MN Certificate of Rent Paid by 1/31/2009 or face a $100 penalty per CRP not sent by the required date.
• Lastly, make a copy of all of the Minnesota CRPs for yourself.  I will always get a least 2-3 calls in August (when the tenants turn these in for their taxes) from someone looking for a new copy.  It will save you having to recreate the wheel when they lose their copy.

If you have many to do, simply do a couple each night until you have them all finished. Turn the music or TV on and just fill them out!  Good luck!