By Rick Rothacker  Print Article

RISMEDIA, March 14, 2011—(MCT)—Bank of America Corp. recently announced a mortgage modification program for military customers, including principal forgiveness for some struggling borrowers. The Charlotte bank said the program assists military members who are leaving active duty and having trouble making their mortgage payments.

The announcement comes as big banks are in settlement discussions with banking regulators and state attorneys general over their handling of foreclosures and modifications. The banks may face a requirement that they reduce principal for borrowers, a measure they’re resisting.

At a recent investor conference, Terry Laughlin, the Bank of America executive in charge of distressed loans, said principal reduction was no “panacea” because borrowers without sufficient income still can’t make payments. Chief Executive Brian Moynihan also painted it as a fairness issue, saying “when you start helping certain people and don’t help other people, it’s going to be very hard to explain the difference.”

Wells Fargo & Co. CEO John Stumpf recently stated that principal reduction is “not always the answer.” He expressed concern that such a mandate could encourage customers who are current on their loans to stop paying. Of Wells customers whose mortgages are “underwater,” there are more making their payments than not, he said. “It would make no sense to create an environment where people could be incented not to pay their debts where they could pay,” Stumpf said.

Stumpf said principal reduction isn’t priced into the $40 a month Wells makes servicing the average home loan for investors. He also said it would have a “huge impact” on Freddie Mac and Fannie Mae, the government-controlled mortgage giants that own half of the loans serviced by the San Francisco-based bank.

Principal reduction is a tool in the bank’s tool box, he said, but only for specific situations involving loans owned by the bank. So far, Wells has reduced customers’ balances by nearly $4 billion. Principal reduction has been an option for customers with Pick-A-Payment adjustable rate mortgages inherited in the bank’s purchase of Charlotte’s Wachovia Corp.

To make payments affordable, Bank of America’s new program will first reduce the amount owed on a borrower’s mortgage to as low as 100% of the home’s current market value. After that, the bank can also reduce the interest rate on the loan, as needed.

Starting April 1, Bank of America said, it also will offer a 4% interest rate on mortgages for active duty military members while they are under the protection of the Servicemembers Civil Relief Act, lower than the 6% that is required.

The bank said the modification program and the lower interest rates will initially be offered to customers with loans owned and serviced by the bank. It said it’s in discussions with investors in other mortgages that it services.

“Military men and women face extraordinary circumstances, and they make unique sacrifices for all of us,” said Laughlin in a statement. “For these reasons, we want this combination of tools to address their needs and help them when they need it most.”

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That means that if you're in a 28% tax bracket, Uncle Sam effectively subsidizes about a third of your borrowing costs or more, making your home more affordable or allowing you to buy a larger home than you could have otherwise. Also, big chunks of your closing costs are tax deductible, and hundreds of thousands of dollars of any profit (or capital gains) that you realize when you sell your home are exempt from income taxes.

At tax time, it's critical to know what you're entitled to, so you can claim it. So, here are five essential need-to-knows about home-related income tax tips to help you get the most tax-reducing bang out of your home-owning buck – and to avoid hefty home ownership-related tax traps.

1. You Have to Itemize Your Return to Claim Your Deductions

During the recent debate on Capitol Hill about whether the mortgage interest deduction should be eliminated (it won't be, not anytime soon), it came out that nearly 40% of homeowners lose out on their major tax advantages every year when they fail to itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting just to take the standard deduction – and if your mortgage, property taxes and income are low enough, the standard deduction might outweigh your homeowners' deductions. But you'll never know if you're losing out on the tax advantages of itemizing unless you try; before you grab a pen and start filling in that 1040-EZ grab those forms from your mortgage company and answer the questions on tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill – or the highest tax refund – for you.

2. Plan Ahead and Be Strategic When Taking a Home Office Deduction

According to the Small Business Administration, the average home office deduction is $3,686 – multiply that by your tax bracket – 15%, 20%, 30% or whatever it is, and that's what you'll save on your taxes by writing off your home office. Know, though, that the space you designate as your home office cannot be exempted from capital gains tax when you sell your home later. The $250,000 (single)/ $500,000 (married filing jointly) income tax exemption for capital gains is only good on your personal residence, after all – not including any space in your home you've claimed as your tax-advantaged office. If you foresee selling your home for much more than you bought it in the future, near or far, discuss this with your tax preparer to see if the few hundred bucks you save is worth the capital gains complication later.

3. Tax Relief for Loan Modifications, Short Sales and Foreclosures Is Only Around Through 2012

While the long-term housing outlook is beginning to look up, 2011 is projected to be the peak year for foreclosures during this market cycle. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance that is wiped out by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.

Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI incurred through a loan mod, short sale or foreclosure on most primary residences through 2012. But right now, banks are taking many months, or even years, to work out mortgages in all of these ways; the average foreclosure in New York state right now occurs only after 22 months of missed mortgage payments. If you foresee any of these outcomes in your future, don't put things off. Do what you can to get to closure on your distressed home and loan, ASAP, while you won't have income taxes to add as the insult on top of your significant housing injury.

4. Project the Income Tax Consequences of a Refinance or Property Tax Appeal

Homeowners everywhere are working on applying for a lower property tax bill on the basis of the last few years' decline in their home's value. Those who have equity have flocked en masse to refinance their 7% home loans into the 4% to 5% rates of the last few months. These strategies offer some of the heftiest household savings out there for the corresponding investment in time and money they take. But here's a caveat for savvy homeowners who slash these costs: remember that property taxes and mortgage interest, the very costs you're minimizing, are also the basis for the major tax benefits of being a homeowner. So plan ahead for your income tax deductions to go down along with your taxes and interest.

5. Don't Forget Those Closing Costs If you bought or refinanced your home in 2010, you may be so focused on your mortgage interest and property tax deductions that you forget all about your closing costs. Any origination fees or discount points that were paid to your mortgage lender at closing are tax deductible on your 2010 return, get this – even if the seller paid your closing costs. If you can't figure out exactly what you paid, look for your HUD-1 settlement statement, that legal sized paper full of line item credits and debits that you should have received from your escrow provider or title attorney at, or just after, closing. Can't find it? Drop your real estate agent or mortgage broker an email; they can usually get a copy to you quickly.

Our Top Realtors will be more than happy to answer any questions you may have.  Call 1-800-741-2483.