Money and Taxes

Are taxes on second homes deductible?
Interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
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What is seller financing?
Seller financing is when a seller helps to finance a real estate transaction by taking back a second note or even financing the entire purchase if the seller owns the home free and clear. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.

Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.

The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller.

If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. For more information, contact the Internal Revenue Service for a copy of its Publication 537, "Installment Sales." Order by calling (800) TAX-FORM.
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How are the rates set for seller financing?
The interest rate on an owner-carried loan is negotiable. Ask your agent to check with a lender or mortgage broker to determine the current rate on institutional first (or second) loans.

Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money were invested elsewhere.
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What are the benefits of seller financing?
Seller financing offers tax breaks for sellers and alternative financing for buyers who can't qualify for conventional loans.

If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?

You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.
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Can a home seller sell a home for less than its mortgage?
Yes, in some case you can sell your home for less than what you still owe on the mortgage. But it is complicated and depends on the lender. This situation is known as a "short sale." Sometimes a lender will be willing to split the difference between the sale price and loan amount, which still must be paid.

A short sale may be more complicated if the loan has been sold to the secondary market because then the lender will have to get permission from Fannie Mae or Freddie Mac, the two major secondary-market players.

If the loan was a low-down-payment mortgage with private mortgage insurance, then the lender also must involve the mortgage insurance company that insured the low-down loan.
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When does foreclosure begin?
Lenders will initiate foreclosure proceedings when homeowners become delinquent in their mortgage obligations, usually after three payments are missed. The lender will then notify the buyer in writing that he or she is in default. The lender can request a trustee's sale or a judicial foreclosure, in which the property is sold at public auction.

A borrower can cure the default by paying the overdue amount and the pending payment after the notice of default is recorded, usually no later than a few days before the property's sale.

Some sales allow the successful bidder to take possession immediately. If the former owner refuses to vacate the premises, the court can issue an unlawful detainer that allows the sheriff to come out and evict them.

Borrowers should do everything they can to avoid foreclosure, which is one of the most damaging events that can occur in an individual's credit history.
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Are seller-paid points deductible?
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. This deduction previously was reserved only for points actually paid by the buyer.
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Can I deduct the loss I suffered when I sold my home?
The Internal Revenue Service currently does not allow deductions for losses on the sale of your own home. In fact there's no way to use a loss to your advantage on your income tax return.
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Where do I get information on IRS publications?
The Internal Revenue Service publishes a number of real estate publications. They are listed by number:

  • 521 "Moving Expenses"
  • 523 "Selling Your Home"
  • 527 "Residential Rental Property"
  • 534 "Depreciation"
  • 541 "Tax Information on Partnerships"
  • 551 "Basis of Assets"
  • 555 "Federal Tax Information on Community Property"
  • 561 "Determining the Value of Donated Property"
  • 590 "Individual Retirement Arrangements"
  • 908 "Bankruptcy and Other Debt Cancellation"
  • 936 "Home Mortgage Interest Deduction"
Order by calling 1-800-TAX-FORM. To call the Internal Revenue Service about general questions, call (800) TAX-1040.
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