Check your Cook Co. 09 tax exemptions online
If you bought a home in 2009, refinanced your mortgage in 2009 or recorded a deed into your living trust in 2009 please be sure to check to make sure that the county didn’t take away your homeowner’s exemption. This video, Tax Exemptions , explains that the county was yanking the homeowner’s exemptions of homeowners who refinanced. If that is the case, you must apply for a certificate of error to replace the exemption for 2009.
The Cook County Assessor’s website will now tell you if your 2009 exemptions (senior, senior freeze, homeowner’s and long-term occupant) are in place. Just click this link and enter the PIN for your property.
Generally, homeowner’s do not need to re-apply for the homeowner’s exemption every year, unless the property was sold the prior year (or one of the other activities above happened). The senior freeze must be applied for every year.
On the subject of real estate taxes, there is a seminar at 7:30 pm on March 31 at the Village of Palatine Council Chambers on “How to Appeal your Real Estate Taxes Before the Board of Review” that may be worthwhile if you feel (like everyone) that you are over taxed.
Short sales improving
In the last few weeks, short sales seem to be easing up a bit, meaning that some are actually closing.
It seems that lenders are finally understanding that with prices in a free-fall, it’s better to allow a short sale than to let a property go through foreclosure.
The new short sales rules will begin next month. The greatest promise of the new short sale rules is that the lender will order its broker price opinion (BPO) before a contract is obtained by the seller and will actually tell the seller how much it wants to net from the short sale. While this sounds minor, it is huge. In the past, lenders would play a guessing game and would refuse to disclose how much they wanted to net from the short sale.
This WSJ article suggests that clients wait to list short sales until the new rules hit. I would say go ahead and try to list it now. Don’t wait.
Last week I closed a short sale. My client had three prior contracts fall through. Buyers signed contracts, waited 45 days, and then jumped ship quickly. All short sale buyers say that they will be patient, but in reality they are as nervous as alley cats. On the fourth contract, we finally closed. It took 7 months total. The lender did not ask for a note or cash payment from my client. It was a deficiency short sale, meaning the lender could pursue my client after closing for the shortage, but my client was willing to accept that risk.
How do I get a free nursing home?
“How do I protect my assets so that the state doesn’t get everything if I have to go into a nursing home?” This is, by far, the most common question that I answer.
I prepare many living trusts for clients, so this question comes up almost every time I meet with a client. It’s really hard to answer, and every time I hear it, I kind of cringe. The answer will not be what people want to hear. As I explain, clients stare at me with a glazed over look like, does this guy know what he’s talking about?
Here is what people are afraid of: The average cost of a nursing home is $219.00/day and rising. That’s almost $80,000.00 per year. The average nursing home stay is 2.5 years.
No one’s fondest dream is to see their assets depleted by a nursing home. But, in this Tea Party age with constant calls for limited government spending, I am always surprised that so many people think that long-term nursing home care is something that they should not have to pay for, or that they can easily qualify for by a simple legal maneuver. I think a person’s money should be used to make them comfortable in the best environment that is affordable. In reality, medicaid is a safety net program for the truly indigent.
On the other hand, health insurance covers you when you are sick… why should long-term nursing care be any different from having your gall bladder removed or any other illness? I don’t know the answer to these tricky questions.
But here are some of the answers to why it is now hard to qualify for medicaid:
Does my living trust “protect” my assets so that I can get medicaid if I need it?
No, a living trust will not help qualify you for medicaid.
Is there a type of trust that I can use to qualify for medicaid?
Yes, there is an irrevocable, medicaid income-only trust. You cannot be trustee. You can’t change the trust. You can only get the income from your assets. I rarely use these because they are very restrictive.
What assets can I keep and still qualify for medicaid?
You can keep $2000.00 in assets and a prepaid funeral. A house is exempt too, but only temporarily. After 6 months in a nursing home, it is presumed you will not return to the home and then a lien can be placed on the house. (There are other rules for married couples.)
Can I give away my assets and qualify for medicaid?
If you have ESP and know when you will need medicaid and don’t mind parting with all of your assets then, yes, if you gift away all of your funds 5 years or more before you need a nursing home, you will get the free medicaid nursing care. Other than that, it is very hard to protect your assets in such a way that you will qualify for medicaid.
Does medicaid keep my pensions and social security if I qualify?
Medicaid will take all social security income, pensions and other income except for $30.00/per month.
Why is it harder now to gift assets and qualify for medicaid?
This has to do with the so called “penalty period.” When someone applied for medicaid under the old law, your checking accounts and other bank statements were checked for the last 36 months for gifts or transfers to family members or others. This is called the “look back” period. Medicaid did not care about gifts made more than 36 months prior to the medicaid application. So if a gift of $50,000 was made more than 36 months before the medicaid application, the applicant would qualify for medicaid. If they found gifts within the 36 months then there was a “penalty period.” Under the old law, the penalty period started when the gift was made. In Illinois, the penalty amount was about $5000.00 per month, so if you gifted $50,000.00 within the 36 month look back period, you were penalized for 10 months from the date that you made the gift and after that you would qualify for medicaid. Confused yet? If not, you are a savant…It was easy under the old law to made gifts over time and still qualify for medicaid.
Now, the look-back period is 60 months. Worse yet, when a gift is made, the penalty period now starts when the client enters the nursing home. So, if a client gifts $50,000.00, the penalty period of $5000.00 per month will make the client ineligible for medicaid for 10 months from the date they enter the nursing home. This makes gifting away assets an almost unusable strategy. The current laws encourage people to buy long-term care insurance and make it hard for those with substantial assets to gift the assets and still qualify for medicaid.
So how am I supposed to pay for a nursing home if I need it?
There are only three ways to pay for long-term nursing care:
1. Use your own funds to pay for care, or self-insure.
2. Buy long-term care insurance to cover some, or all, of the charges. Some clients buy long term care insurance to cover their expense for 3 to 5 years, which carries lower premiums than a lifetime benefit.
3. Have medicaid pay for your care.
Should I buy long-term care insurance?
If you can self-insure, then you won’t need long-term care insurance.
Anyone with assets of $1 million or more can probably safely self-insure.
Those with assets of $1 million or less, should consider some sort of long-term care insurance.
One less quirk to buying a Fannie Mae foreclosure
Last fall, I whined about how hard it was to buy a foreclosed property from Fannie Mae. It’s still true that Fannie Mae is a tough seller and a pain to buy from. (I have a Fannie Mae purchase now. It’s been weeks, but there is no signed contract. Unfortunately, that’s “normal”… )Now I have one less thing to complain about: Fannie Mae (in its infamous and incomprehensible “Addendum”) now agrees to will dewinterize the property after the contract is signed so that the buyer can inspect the property with all the utilities running. This is not exactly a breakthrough at the Paris Peace Talks or anything, but it sure helps.
Previously, the poor buyer had to have a plumber on hand when the property was dewinterized and, more often than not, leaks sprang from every corner of the house. It was a major misadventure just to get the utilities turned on to do an inspection.
Fannie Mae owns more than 50% of all mortgages and there are many foreclosed Fannie Mae homes on the market. This should make it a little easier for buyers to complete Fannie Mae buys without added aggravation.
Here’s the new clause for your reading pleasure:
Investment property: When to file bankruptcy in a short sale or foreclosure
Short sales and foreclosures of investment properties are tricky.
Timing is everything. Bankruptcy can be used to discharge the tax issues arising from a foreclosure or short sale, but the window of opportunity slams shut once the lender issues a 1099.
In August 2009, I closed a short sale for a client. Like most short sales, it took forever (about 9 months), but unlike most attempted short sales, this actually closed.
My client bought the townhouse as an investment, not as his residence, in 2005 with the intention of “flipping” it. Well, the real estate market plunged, and not only did he not flip the property, but he couldn’t rent it out either. He somehow stayed current on the payments, listed the property for sale as a short sale and found a buyer.
My client had to pay extra cash to the lender for a “no deficiency” short sale payoff. Even with the amount my client paid, the mortgage payoff to the lender was “short” by $60,000.00.
There are lingering problems with any short sale of investment property. The main tax problem is this: Even though the short sale payoff was a no deficiency payoff, meaning the lender could not pursue him for the $60,000.00 after closing, the lender issued a 1099C last week to the client for $60,000.00.
Lenders are required by law to issue 1099s by the first week of February in the year after any debt of $600.00 or more is forgiven or written off. There is no way to avoid the 1099. But there are ways to respond to the issuance of a 1099 after a short sale or foreclosure:
1. First, if the property was your primary residence, Form 982 can be filed with the client’s tax return. Under the Mortgage Debt Relief Act of 2007, this amount is excluded from income if the client used the property as a primary residence. In most cases, a short sale or foreclosure of a primary residence will not require a client to file bankruptcy because the income is excluded already and deficiency judgments are rare.
2. Second, if the property is not your primary residence, you can file Form 982 and claim to be “insolvent.” If you are insolvent, meaning your debts exceed assets, then the 1099 income vanishes. You have to include IRAs and retirement accounts as an asset in calculating insolvency, but IRAs and retirement accounts are exempt in bankruptcy, and the client keeps them. In my client’s case, he did claim to be insolvent, which excluded the $60,000.00 from the 1099 from his income.
3. Third, if the property was not your primary residence and you are not insolvent, the client can file a chapter 7 bankruptcy to discharge the debt. But, the bankruptcy must be filed before the 1099 is issued by the lender. Once the 1099 is issued, the forgiven debt turns into income and income cannot be discharged in a bankruptcy. So my client had a window of opportunity to clear the 1099 debt from August 2009 through January 2010 by filing bankruptcy. Filing bankruptcy at any time during that period would get rid of all personal liability for the mortgage, including the 1099 afterward.
I still believe that it is a good idea to pursue a short sale, whether you are selling a primary residence or an investment property, rather than hopping straight to a foreclosure or bankruptcy. But the tax effect of the short sale or foreclosure of any investment property has to be carefully analyzed before the window of opportunity closes and it is too late to file a bankruptcy case.
The cost of probate
I am a fan of living trusts. Trusts avoid probate. Probate is not the chamber of horrors that it is sometimes made out to be. But, all things being the same, you are better off side-stepping it if possible.
In Illinois, probate is not terribly expensive since we do not have a fee schedule that sets mandatory executor’s and attorney’s fees. Our probate statute allows ”reasonable” attorney’s fees. Generally, a probate case involves a minimum of two court appearances by the attorney. Attorney’s fees in a standard probate range from a low of $1500.00 to a high of $3500.00. In addition to the attorney’s fees there are filing fees and costs. Here are the current costs in Cook County for a testate (with a will) probate:
$314.00 Filing fee to Clerk of Court
$180.00 Claims Notice in Newspaper
$20.00 Copies of letters of office
$514.00 Total Costs
Generally, the total cost of a probate (including costs and attorney’s fees) will be as low as $2000.00 or as high as $4000.00. This would not include any tax advice, adminstration of the assets after the probate is opened or asset transfers. This is just to open and close the estate.
With a living trust, these costs are avoided and the client can go straight to collecting and distributing the assets without the added cost of the probate. Often, the cost of setting up a living trust is just a little more than the cost of the probate filing fees alone, so it makes sense to skip the probate by using a trust.
Cook Co. 09 senior freeze and homeowner exemption forms are here
The forms to apply for the Cook County homeowner’s exemption for real estate taxes and for the senior freeze are now available on the Cook County Assessor’s website.
The senior freeze has to be applied for every year and the applicant has to be 65 or older and have an income of less than $55,000.00.
The homeowner’s exemption does not require an annual application. However, anyone who bought real estate in 2008 should fill out the homeowner’s exemption application (one time only) because the homeowner’s exemption drops off after a sale and must be re-applied for after the closing.
Unwelcome surprise: 1099 after foreclosure and short sale
There is an unpleasant aftershock from a foreclosure or short sale.
A client received the 1099 below last week after the foreclosure of his home. Lenders will issue a 1099 to the borrower after foreclosure and, surprise, the client will owe income tax on the amount in the 1099. The client was quite distressed to get this in the mail.
The 1099 means that he has $189,385.26 more in taxable income for 2009. That is because when a mortgage is foreclosed, it is deemed to be “forgiveness of debt” and it is counted as income to the borrower, due to the fact that the borrower does not have to repay the mortgage.
Fortunately, since this was the client’s primary residence and, while he must report the 1099 on his taxes, he can exclude the 1099 from his income. Form 982 is used to exclude the 1099 from income. This was the client’s primary residence and there is an exclusion for primary residences only (no vacation homes or investment properties get this benefit). Had this not been his primary residences (for any 2 of the last 5 years) he would have owed about $60,000.00 in income taxes, which, of course, was money he did not have.
It is always a good idea for a borrower in financial trouble to try to sell the property at a “short sale” before going through foreclosure. Why? First, in a short sale you can at least pay back some of the mortgage and the amount reported on the 1099 issued after closing by the lender will be less than in a foreclosure. After a foreclosure, the entire amount of the mortgage is 1099’d to the borrower.
As I wrote recently, after a short sale or foreclosure, a lender is required to issue a 1099 for the amount that was not repaid. The lender can also pursue a deficiency judgment against the borrower. In Illinois, most lenders on first mortgages are simply issuing 1099s after foreclosures and short sales. They are not seeking deficiency judgments, although they could do so. Technically, the lender can do both of these: a.) 1099 the borrower and b.) seek a deficiency judgment, but that rarely happens. In practice, most lenders just issue 1099s and don’t pursue deficiency judgments. However, borrowers have to be aware that the issuance of a 1099 does not cut off liability for signing the note.
Second mortgages are another story and many of those are being turned over to collection agencies, rather than the lender seeking a deficiency judgment.
Many clients are not aware of the 1099 issue. So the best route if you are in financial trouble with real estate is:
- File for a loan modification first (although it’s easier to get hit by lightning than to get this approved). The only reason to do this is the new short sale rules that start soon require a loan modification first, before a short sale.
- List the house for sale and try to get the lender to approve short sale.
- Ask the lender in the short sale for a “no deficiency” payoff, especially if the property is an investment property.
- Beware that a 1099 will be issued after a short sale or foreclosure and file form 982 to exclude the 1099 from your income.
- At the worst, if the property was not your primary residence, you will have to file for bankruptcy to get rid of the income from the 1099 after the short sale or foreclosure. However, as this excellent post points out, the bankruptcy has to be filed before the 1099 is issued, not after. A bankruptcy filing after the 1099 is issued will not discharge the 1099 income.
Cook County tax first installment 5% higher
I got my first installment of 2009 tax bill in my mailbox on Saturday. To be honest, I didn’t even open it. The first installment of taxes was always 50% of the last tax bill. There are no big increases in the first installment. It’s kind of dull.
Many are complaining (rightfully) that the installments are too close together. Another thing to complain about is this: The first installment is now larger than in previous years. It’s now 55% of last year’s tax bill.