Relocation assistance is taxable

April 15, 2011

Last year, I had to do a short sale on my home. My lender gave me $3,000 in relocation assistance.

I’m now doing my taxes and I would like to know whether relocation assistance payments are taxable to the homeowner. This payment was made in connection with a mutual agreement between the mortgage company and myself, stipulating that I will vacate the home in good condition.

Bill Nemeth, an enrolled agent who is president of the Georgia Association of Enrolled Agents, said he has seen more of these payments come through his office, and unfortunately the payments are taxable.

“I have heard this program called by various names, but the catchy one is Cash for Keys,” Nemeth said. “The income is taxable. It goes on Line 21, Other Income, on Form 1040.”

I know that’s not what you wanted to hear. The bank will send you a 1099 for the payment as well as a 1099 for the difference between what the property sold for and the amount you still owe on the mortgage. Although there won’t be any tax implications for you on that second amount (provided the property was your primary residence), you will have to pay tax on the $3,000, which the IRS says is income.

In January, I lost my job and was out of work for about two months. I am working again and making a bit more money than I was before. My wife and I want to buy a house in the next year.

Will my not having been at the same job for two years, or the fact that this is my third place of employment in six years, affect our qualifying for a mortgage? The position I’m in now is much more stable than before, as I am no longer a government contractor. My credit score, the last time I checked, was in the 750 range.

The fact that you have a W-2 is probably all you need to buy a house in terms of proving that you are employed. The two-year rule is generally for self-employed people, those in cash businesses or those who own their own businesses. Lenders do want to see that your employment is stable, however, but if you move from one job to another and the replacement job pays more, that’s usually something that a lender views as a positive. Lenders assume that if you’re employed, you’ll continue being employed.

Lenders are looking for homeowners to put down much more cash and have even better credit than they used to require to get the best mortgage terms and the lowest interest rate available.

Be sure you have enough cash saved up and then go out and find a nice house that you’ll want to stay in for the next five to 10 years. Property prices continue to fall nationwide, so there are some great deals around.

This would be a good time to find a mortgage lender to review your finances and the documentation you’ll need to buy a home. Since you are not ready to buy a home, don’t go through the full application process, but take your credit score and credit history, if you have one, and show that to the lender or broker.

I have had two different trial payments with my lender, and I have paid as expected. But when it comes to making it permanent, there is always some silly reason why they can’t. Who can I write to for help?

Very few people are getting permanent loan modifications.

Over the past few months, it has become clear that fewer people are applying for loan modifications. Some economists claim that this is because the economy is improving, and people have found jobs that are helping pay the mortgage.

As the economy moves further into a weak recovery, that’s probably true. It’s also likely that word has gotten around about how few homeowners have received permanent loan modifications and how frustrating the process is, so many have stopped trying to get one.

The biggest problem is that lenders were not required to help homeowners during the worst downturn since the great depression. The program was entirely voluntary.

Worse, loan servicers and investors’ financial interests were not necessarily aligned. Throw in some really mediocre (if not poor) customer service from the big banks with thousands of lost documents (which surely would fill a landfill if they ever turn up), and you begin to get an idea of why silly (and sometimes strange) reasons derail legitimate loan-modification applications.

The simple, if unwelcome, truth is that not every homeowner is entitled to a loan modification. Some might argue that no one is entitled to a loan modification and the loan modification is totally at the discretion of the lender. However, if you feel you have been unfairly denied, you can file a complaint with the Office of the Comptroller of the Currency, which regulates the big banks, at helpwithmybank.gov.

We have been living in our home since 2004. The property is in my wife’s relative’s name because we could not qualify because of our low credit score. We have been making the payments and purchased the property when it was new.

Recently, my wife’s relative passed away. Since we are unable to qualify for a new loan because of our low credit scores, and a new loan would place payments beyond what we could afford, we stopped making payments on the loan.

My wife’s relative died without a will. We aren’t sure what to do at this point, or what we could expect the bank to do. What course of action should we take?

Since the title to the home is in your wife’s relative’s name, you effectively don’t own title to the home. While you may have been paying the mortgage, taxes and insurance payments for the property, you might be viewed more as an occupant helping with the expenses of the home rather than having any real ownership interest in it.

It might be unfortunate that you stopped making payments to the lender. The lender will allow the property to proceed through normal channels on the way to foreclosure. And then the property will be sold to pay back what is owed on the loan.

Depending on the bank and its loan department decision-making process, if you were to get title to the home, the bank could waive its right to foreclose and call the loan due if you were to bring the loan current and continue to make payments.

But before you can consider making any more payments to the lender, you have to find out who is scheduled to inherit the home. Did you and your wife’s relative ever document the relationship with the property? Was anything ever discussed regarding what might happen if the relative died? If so, it’s time to dig out that paperwork, because you’ll need it.

Your wife may be one of the beneficiaries, but if there are others, you might have to come to come to terms with them and see whether they will allow you to obtain title to the property.

If the other heirs are willing to cooperate, and you are able to obtain title, you can then approach the bank and see whether it is willing to reinstate the loan. If the bank reinstates the loan, it would stop any foreclosure proceedings against the home and would accept payment from you in the future.

Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink’s Web sites, thinkglink.com and expertrealestatetips.net.

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