1. C O A L I T I O N Corner Coalition Corner: Business training tools for HR staff, real estate licensees and other service professionals in the relocation and real estate industries Short Sales: Some Taxing Issues Can Arise by Peter K. Scott, Worldwide ERC ® /Coalition Tax Counsel Washington, DC © 2008, Worldwide ERC ® Coalition

2. C O A L I T I O N Corner Program objectives This program supplements an editorial feature in Worldwide ERC ® s Mobility magazine This segment will: –Examine some of the basic tax implications of selling a home subject to a short sale.

3. C O A L I T I O N Corner Definition of Short Sale A short sale occurs when a seller is unable to realize enough on the sale of a home to cover outstanding mortgage debt.

4. C O A L I T I O N Corner A transferee owes $300,000 on a mortgage (or on the mortgage plus an associated home equity loan or second mortgage) The home can only sell for $250,000 The transferee is short by $50,000, and is in a situation known as negative equity Example of a Short Sale

5. C O A L I T I O N Corner Circumstances Can Vary Scenario A Employee A bought a house for $750,000 two years ago, at the peak of the market, after a transfer from Kansas City to Miami. The employee obtained a 100%, interest-only adjustable rate mortgage for the purchase, because it was the only way the employee could afford a comparable home in Miami. The value of the home is now $650,000, and the mortgage is still $750,000.

6. C O A L I T I O N Corner Scenario B Employee B purchased a home in Miami five years ago for $450,000 with a $400,000 mortgage. As home prices escalated, Employee B engaged in two rounds of refinancing in which the employee took out equity of $200,000 to buy other assets, and also obtained a home equity line of $100,000, which is currently maxed out. Total debt is $690,000. The house is now worth $650,000. Circumstances Can Vary

7. C O A L I T I O N Corner If the employer simply gives an employee money to pay negative equity, the payment is taxable as wages, and withholding and payroll taxes are required. The same result would follow if the employer purchased Employee As home at the $650,000 market price and paid off the $750,000 mortgage. The excess is considered compensation and subject to taxes. Approaches to Negative Equity…

8. C O A L I T I O N Corner Approaches to Negative Equity… If the lender agreed to reduce the amount owed, any amount of debt reduction would generally be taxable to the employee as cancellation of indebtedness income. However, in late 2007 Congress passed legislation that foregiveness of an acquisition mortgage up to $2 million on a principal residence during 2007-2009 is not taxable.

9. C O A L I T I O N Corner Approaches to Negative Equity… The employer could loan the employee money to pay the negative equity, with no tax consequences, so long as the loan is properly structured as a real debt, with a repayment schedule, a market rate of interest, and the usual security and enforcement provisions.* *Note that section 402 of the Sarbanes/Oxley Act would prohibit such loans to covered executives of publicly traded companies.

10. C O A L I T I O N Corner Approaches to Negative Equity… If the company wants to loan the employee money interest-free, the issue becomes more complicated. –Section 7872 of the Code imputes a market rate of interest to interest free loans exceeding $10,000 between employer and employee. Imputed interest has a number of undesirable results. –Although there are special rules that allow certain interest-free employee relocation mortgage and bridge loans, a loan to cover negative equity generally would not meet the requirements.

11. C O A L I T I O N Corner Conclusions Short sales are becoming more prevalent, especially in certain declining regional markets. Companies need to familiarize themselves with the tax issues that can arise, to help make sound decisions in developing and implementing home purchase program policies.

12. C O A L I T I O N Corner More Information Available… This presentation only summarizes some tax issues that can arise in short sales, and there are a number of legal issues to consider as well. A full, detailed discussion of tax issues can be found in the Worldwide ERC ® Coalitions Tax & Legal MasterSource (http://www.erc.org/coalition/tax_legal/index.shtml) article Short Sales, Foreclosures, Negative Equity and Loss on Sale. See also www.irs.gov for additional information on this and other foreclosure and debt cancellation issues.www.irs.gov