The Worldwide ERC® Real Estate and Mortgage Forum has prepared a list of frequently asked questions (FAQs) to assist Worldwide ERC® members with the implementation of the TILA-RESPA Integrated Disclosure (TRID) Rule. If you have further questions regarding the FAQs, please contact Worldwide ERC® Real Estate and Mortgage Forum Chair Eric Arnold at firstname.lastname@example.org
Definitions and Acronyms:
CFPB – Consumer Financial Protection Bureau
Consumer – The borrower
Consummation – The date the consumer becomes contractually obligated to the creditor on the loan. Generally, the date they sign the note.
Creditor – The lender
RESPA – Real Estate Settlement Procedures Act of 1974
TILA – Truth in Lending Act of 1968
TRID – TILA/RESPA Integrated Disclosure Rule
Frequently Asked Questions:
What types of transactions are exempt from the requirements of the new TRID Rule? Cash transactions, HELOC, reverse mortgages, loans made by creditors making five or fewer loans per year (but they still have to deal with the Loan Originator (LO) Act), commercial purpose loans, mobile home loans, no-interest second mortgages made for down payment assistance, and energy efficiency or foreclosure avoidance are all exempt. Most every other residential 1-4 family dwelling closed-end mortgage falls within the scope of the TRID Rule.
Is the equity acquisition in a home sale program subject to the TRID Rule? To the extent that the equity acquisition is a cash transaction subject to neither RESPA nor TILA, it will not be subject to the TRID Rule. In that case it will not be necessary to use the new forms and there would be no new timelines directly imposed upon the acquisition.
Do the provisions of the new TRID Rule apply to private lenders? The answer is yes and no. There are two new Rules private investors must understand; first is the TILA-RESPA Integrated Disclosure (TRID) Rule and second is the Loan Originator (LO) Act. The TRID Rule has an exemption for any lender making five or fewer loans per year. As an example, if it is a simple seller take-back or a parent/child transaction the TRID Rule will not apply; however, the LO Act may make this type of loan difficult to make. The LO Act can be found at http://www.consumerfinance.gov/regulations/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z/
The Loan Estimate
Can closing cost worksheets be utilized before the Loan Estimate is sent to the borrower? Yes, closing cost worksheets or other customized documentation may be used before the Loan Estimate is sent, but the TRID Rule requires specific language be included informing the borrower that the document that it is not a Loan Estimate and the costs may increase.
The Closing Disclosure – Content
Where are the buyer's and seller's signature lines on the Closing Disclosure (CD)? The borrower’s CD only provides a signature line for the borrower to confirm receipt of the document and the seller’s CD provides no signature lines. Therefore, the CD provides no means for the parties to acknowledge the accuracy of figures or authorize disbursement as is currently included on the HUD-1 Settlement Statement. However, if the escrow or closing company uses the ALTA Settlement Statement in addition to the CD, signature lines are provided on the ALTA Settlement Statement with authorization language similar to the HUD-1. Additionally, secondary market investors may require the lender to obtain the signatures of the parties on an addendum to the CD.
How will direct bill credits be reflected on the Closing Disclosure? It will depend on whether it is a credit for a specific charge, such as the title policy, or a generalized credit. The former will likely be itemized in the new Paid By Others column on page 2, while the latter would be in subsection L – Paid Already by or on Behalf of Borrower at Closing, on page 3.
How will the loan and owner’s title policies be reflected on the Closing Disclosure when there is a simultaneous issue discount applied? In many states, title companies will provide a discount when both a loan and owner’s title policy is purchased. However, due to concerns that the pricing will be confusing to consumers, the TRID Rule requires the charges be itemized on the Closing Disclosure in a way that often will not be the amounts actually paid for the policies. The loan policy must reflect the full, undiscounted rate (even if that is not what is being charged), and the owner’s policy will be calculated to reflect the remaining amounts paid for the combined policies. Some states are developing required forms to identify the amounts actually charged, and the ALTA Settlement Statement may be provided in other states to document the actual policy costs.
The Closing Disclosure – Preparation and Delivery
What is a Business Day for purposes of delivering the Closing Disclosure? The definition of a “business day” as it applies to the delivery of the CD is all calendar days other than Sundays and the 10 federal holidays.
What determines whether the Closing Disclosure (CD) form was received by the borrower three days in advance of consummation? It will be within the sole discretion of the lender what methods are used to deliver the CD, when it must be sent out and what evidence of receipt is required. Generally, if the CD is not hand-delivered (or delivered in a manner that affirmatively confirms delivery to the consumer), the CD will be deemed to have been received three business days after it is sent to the consumer. This is known as the “Mailbox Rule.” If the Mailbox Rule is applied, the CD typically will need to be sent seven calendar days in advance of closing (three days in transit, three days for review plus one Sunday or federal holiday when applicable). Lenders may apply the Mailbox Rule even if the document is sent electronically.
Is the lender in charge of the seller’s CD? No, the TRID Rule specifically states that the settlement agent is responsible for the seller’s Closing Disclosure. Lenders may, however, require a copy of the seller’s CD from the settlement agent.
Much of the information on the recommended form is what many would consider to be private/personal information. Will this form be shared with the seller and other third parties? You are correct; a number of items on Closing Disclosure (CD) would be considered non-public personal information and recognizing this, the CFPB created a separate two page CD specifically for the seller. In order for a seller or other third party (real estate agent, etc.) to receive a copy of the borrower’s CD, they would need to obtain a signed release from the borrower.
The Closing Disclosure – Revisions
What are the three changes that would cause a re-triggering of the three-day review period? The three instances where a new review period is required are:
If a pre-payment penalty is added,
If the loan product changes, or
If the APR increases beyond the allowable limit (see below).
How much of a change to the APR is allowable without triggering a new three-day review period? 1/8% for fixed rate loan products and 1/4% for adjustable rate loans and those with irregular payment periods. Whether the APR threshold has been triggered is within the sole discretion of the lender, and some lenders have commented they will err on the side of caution and use the 1/8 of a percent change on all loans no matter what loan product is used in the transaction.
What type of changes would affect the APR? In principle, the mortgage APR should include all settlement costs that would not arise in an all-cash transaction. Reg Z §226.4 defines many of the costs associated with the APR. Under §226.4, "It (i.e., APR calculation) includes any charge payable directly or indirectly by the consumer AND imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit."
What about changes or adjustments requested by the real estate agent, buyer and seller for items discovered during the walk-through held the morning of consummation? The final Closing Disclosure (CD) must reflect all terms of the transactions and charges imposed upon the parties. To the extent walk-through discoveries require a change to the borrower’s CD (which it generally will in the case of a repair credit or similar adjustment), they must be approved by the lender. Prompt communication with the lender will be critical to ensure a timely closing, particularly if the lender will be preparing the revised Closing Disclosure (CD). While the lender may authorize the settlement agent to prepare revisions to the CD, (1) it is unclear at this time how common that practice will be, and (2) the final CD would likely still have to be approved by the lender. If the revised CD is prepared in time for closing and the change is not one of the three that triggers a three business day waiting period (see above), there is no requirement under TRID to delay closing. However, there may be instances where this is not feasible, and companies are strongly discouraged from attempting to avoid a delay by handling adjustments outside of closing or otherwise not on the CD.
Can the seller’s side change at closing? The answer to this question is - it depends on why the seller side is changing. There is no seller-side only change that will retrigger the three-day waiting period under the TRID Rule UNLESS the change causes the buyer’s side to change in one of the three areas that trigger the new review period, which is very unlikely. But even if that isn’t the case, certain seller changes may require approval by the buyer’s lender. Minor changes such as a water bill payment, (if it is a payment and not an adjustment) should not cause a consummation problem, but the logistics of getting the CD revised may take some time. The sooner changes are communicated to the lender the better the likelihood that the transaction will proceed as scheduled. To avoid problems at the closing table, there are two strategies. First, request the settlement agent prepare a separate seller’s Closing Disclosure, so that the lender will only have to review revisions that impact the borrower’s Closing Disclosure. Second, many real estate professionals are considering conducting two walk-throughs - one seven days prior to consummation (for most required repairs) and the other one on the day of consummation (to confirm no changes in condition).
What if the buyer agrees to waive the redisclosure? The TRID Rule provides a means for a buyer to waive the three day waiting period in the case of a bona fide personal financial emergency. However, it is in the sole discretion of the lender whether to accept the waiver, and they must determine whether it is an “emergency” or merely an “inconvenience.” The lender would be accepting significant risk of liability and the secondary market would be unlikely to purchase a loan where a waiver was granted, so waivers will be granted in only the rarest of circumstances. The only scenario provided by the TRID Rule would be if the borrower is at imminent risk of losing their home to foreclosure if they are unable to close a refinance in time. The vast majority of scenarios encountered in mobility transactions will likely be considered “inconveniences” rather than emergencies, despite the cost and personal hardship they may pose.
What happens if the buyer MUST be out of his/her/their prior residence before consummation can occur due to a redisclosure trigger? The buyer will need to find alternative housing – including staying in a hotel, with family members or other arrangements. Some sellers may allow early occupancy, however that imposes many risks on the sale and should be considered carefully.
The information provided is for informational purposes only and should not be used or relied upon for any other purpose. This information is not intended nor should it be construed as providing legal advice. Worldwide ERC® does not guarantee nor shall accept any responsibility for, the accuracy, timeliness, correctness, or completeness of the information. Always seek the advice of competent counsel with any questions you may have regarding any legal issue.
If a repayment agreement for relocation expenses covers tax protection payments (gross-up), repayment of gross-up should not be sought if the employee’s repayment occurs in the same year as the relocation benefits were paid. In such cases, the employer will recover its gross-up payments (income tax withholding, FICA, and Medicare) directly from the IRS. If the employee’s repayment of relocation benefits is in a year after the benefits were paid, only repayment of gross-up for income tax withholding should be sought; gross-up for FICA and Medicare will still be recovered directly from the IRS.
The Full Story:
A majority of companies require employees being relocated to enter into repayment agreements. Such repayment agreements (also called payback agreements) generally commit the employee to repay amounts spent by the company in relocating the employee if the employee leaves employment within some specified period after the move. For example, the employee might have to repay 100% of included amounts if the employee departs within one year, 50% within two years, and nothing thereafter.
Payback agreements can differ as to the items of expense that are covered by the agreement, but generally must be reasonably specific as to those items if the company wants to be able to enforce the agreement. Many companies require repayment of almost all costs incurred, including homesale expenses, moving expenses, and numerous other items.
Questions arise concerning gross-up payments. If the company paid $10,000 to gross up the employee for extra income and employment tax resulting from taxable relocation payments, the company might think it appropriate to include that amount as an item requiring repayment under a repayment agreement. But what are the tax consequences of the repayment?
There is no specific authority concerning repayment of gross-up. However, in assessing the extent to which it is appropriate to include its recovery in repayment agreements, understanding how gross up is treated for employment tax purposes is critical because in some cases the employer can recover it from the government, rather than from the employee.
Functionally gross-up is simply additional withholding (and FICA or Medicare if those are included in the gross-up calculation). That is, when the employer grosses up the employee, those amounts are not paid to the employee, but are paid to the IRS as tax deposits, and appear as additional wages and withholding on the Form W-2. Consequently, unless the employee actually receives the benefit of the tax deposits, they should not be repaid by the employee to the employer, but should be recovered by the employer from the IRS rather than the employee under the rules described below.
As a general matter, Rev. Rul. 79-311, 1979-2 C.B. 25, holds that wages repaid in the same year they are received are treated differently than wages repaid in a subsequent year. Taxable relocation payments, including gross-up, are “wages.” (Note that some relocation benefits are not taxable, and therefore not wages. Consequently, their repayment has no employment tax consequence, but questions arise about their treatment by the transferee).
Under Rev. Rul. 79-311, same-year wage repayments are treated as though they were never wages at all, and employment tax returns for the year of the repayment are adjusted accordingly.
Repayments of wages in years following their receipt, however, remain reportable as wages for the year originally paid. Wage withholding is not adjusted, but Social Security (FICA) and Medicare taxes are adjusted through the use of Form 941-X and an amended W-2 (Form W-2c).
Under these rules, for repayments of taxable relocation expenses in the same year as the payment, the employer would include the amounts as wage reductions on a Form 941-X for the quarter the repayment was received, and adjust the employee’s Form W-2 for that year to eliminate both the wages and the amounts withheld, recovering the withheld amounts from IRS either as a refund or a credit. The employer would also use Form 941-X to recover both the employer and employee shares of FICA or Medicare, in most cases simply crediting it to currently due amounts. The amounts recoverable by the employer will include the gross-up amounts previously credited to the employee. The employee will get no benefit from those amounts, and for the employer, it is as if those amounts were never paid at all. If the employer includes them in a repayment agreement, it will get a double benefit; repayment by the employee of amounts that the employer also recovered from the IRS.
For repayments of wages in a year subsequent to the year the wages were paid, however, the situation is somewhat different. Under the rules above, income tax withholding would not be adjusted even though the wages have been repaid. The employee received withholding credit for the income tax gross-up when the employee filed the employee’s tax return for the year in which the wages were paid, and the employer cannot recover that amount by adjusting its own employment taxes. Therefore, it is appropriate to require the employee to repay the amount of the gross-up for income tax withholding.
However, the rules require adjustment using Form 941-X for FICA and Medicare taxes on repaid wages even if the repayment is in a year subsequent to the year the wages were paid. Therefore, the employer will recover the amounts it paid on behalf of the employee for FICA and Medicare taxes directly from the IRS by claiming a credit for both the employee and employer shares of the taxes, issuing a Form W-2c to each affected employee, and sending a Form W-3c to the Social Security Administration. That is, even if wages are repaid in a year subsequent to their receipt, the rules allow the employer to recover amounts it paid to gross up the employee for FICA and Medicare directly from the IRS, and those amounts should not be sought from the employee as part of a repayment agreement.
As can be seen, the correction mechanisms for overpayments of employment taxes do not work at all well with gross-up. Moreover, although beyond the scope of this examination, the rules in the states for treatment of recovered wages are also likely to be forbiddingly complex. As a result, the only item of gross-up for which repayment should be sought is income tax withholding for amounts of taxable relocation expenses repaid in a year subsequent to the year they were included in wages. All other gross-up amounts should be recovered through the employment tax adjustment process. This in turn introduces additional complications into the design and implementation of payback agreements that Worldwide ERC® members will have to deal with.
Posted by Peter K. Scott. Many thanks to Hank Roth of Sirva Worldwide, Inc. for assistance in the development of this post.
The Consumer Financial Protection Bureau (CFPB) has proposed delaying implementation of the TILA-RESPA Integrated Disclosure (TRID) Rule from August 1 to October 3.
On June 17, CFPB Director Richard Cordray issued a statement announcing the Bureau would seek to delay implementation of the new mortgage disclosure requirements and forms until October 1, 2015. Director Cordray indicated the Bureau would have to delay implementation by at least two weeks due to an administrative error and believes a longer two-month postponement would be beneficial to consumers. He further noted the potential delay would be made official through a proposed rule on which the public could comment.
On June 24, the CFPB issued the proposed rule with a potential new effective date of October 3. The CFPB elaborated that the two-week delay was a result of the failure of the Bureau to adhere to the Congressional Review Act (CRA) which requires an agency to send to Congress a report conveying a final rule 60 days before it takes effect. While the TRID final rule was published in the Federal Register on December 31, 2013, the CFPB hadn’t realized until recently that a report had not been sent to Congress and submitted the report on June 16. Thereby requiring the Bureau to delay implementation until at least August 15.
The Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule also as known as the "Know Before You Owe" rule would implement several new requirements on mortgage disclosures. It would also replace the Good Faith Estimate as well as "early" Truth in Lending forms with a "Loan Estimate" form and the HUD-1 and Truth in Lending forms with a single "Closing Disclosure" form. According the proposed rule, the date of when the new mortgage disclosure requirements become effective and the start date of when use of the new forms would be used could potentially be October 3.
The Worldwide ERC® Government Affairs Real Estate and Mortgage Forum is reviewing the proposed amendment and will draft comments on behalf of the organization if appropriate. Comments are due July 7. We will distribute our final comment letter to Worldwide ERC® members. For more information on the proposed delay and to download a copy of the rule, click here.
Posted by Tristan North
By Craig E. Anderson, SCRP, SGMS
Craig Anderson, our guest blogger, is the President of C.E. Anderson & Co. of Rolling Meadows, IL, and a member of the Worldwide ERC® Government Affairs Tax Forum.
Companies today are increasing their international and state business footprints more than ever before and subjecting themselves to compliance issues on multiple fronts. The concerns of complying with foreign tax laws and accounting for time spent and money earned by expatriates and foreign nationals on assignment are now becoming a valid concern here in the U.S. at the state level.
Road Warriors – residents of one state that work in another – may be commonplace but understanding how to appropriately account for, and report on, the earnings attributable to the state in which work was done can be a nightmare. 50 states and almost 50 differing tax regulations regarding income reporting and withholding requirements create a daunting task that most companies and individuals choose to merely ignore. Cash strapped states are looking for additional sources of revenue and frequent business travel is bringing lost revenue opportunities under the scrutiny of state tax auditors.
Other than the nine states without tax on wages (AK, FL, NH, NV, SD, TN, TX, WA, WY) the remaining 41 states have some sort of income recognition statute for income earned whilst working in the state. Some states have reciprocity with neighboring states that deal with withholding requirements. Others have de minimis exclusion provisions based on the number of days worked or a threshold of money earned. The problem is most states differ in how many days of work within the state trigger recognition and withholding requirements, and in some states the two requirements are not even parallel. In Connecticut, for example, an out-of-state employer is required to comply with wage information reporting even if a withholding trigger was not reached. Such practice could cause the employee to be subject to state income tax, AND be under withheld for the tax liability.
Apart from an understanding of the requirements, employers cite difficulties in the following areas:
Tracking employee movement on a daily basis
Collecting and maintaining documentation for proper wage allocation
The inability of payroll systems to correctly match time spent in multiple states
Inconsistent policies and procedures for monitoring a mobile workforce
Without proper understanding of the requirements and lacking documentation of support, employees are at risk by failing to file individual tax returns and pay the appropriate level of state tax. Employers will fail in their responsibility to report state earnings, withhold accordingly, and could find they have wrongly ignored the creation of permanent establishment of business within that state, which opens the door to issues with other state corporate income tax laws and annual reporting requirements.
In an effort to simplify reporting and standardize the myriad of state taxing schemes, members of Congress have introduced the Mobile Workforce State Tax Simplification Act in 2006, 2007, 2009, 2011, 2013, and again in 2015. The earlier versions of the Act eventually died in committee. However, in 2014 the Act finally passed the full House, and was sent to the Senate. Unfortunately, the Senate did not act. The 2015 version, H.R. 2315, introduced by Reps Bishop (R-MI) and Johnson (D-GA), like earlier versions, would impose a 30-day threshold before states could begin taxing workers temporarily in the state. It was the subject of a hearing June 2, 2015, in the House Judiciary Committee. The Committee approved the bill and sent it to the full House for consideration on June 17. It has attracted the support of more than 250 businesses and trade associations.
The same bill has also been introduced in the Senate. S.386, with several co-sponsors.
Multiple proponents of such an Act advocate the simplicity that standardization would bring. The AICPA believes the current Hodge-podge of state laws takes resources away from companies trying to stay in compliance. The American Payroll Association welcomes the relief such an Act would bring to their payroll administrator members. The Council on State Taxation endorses the creation of established minimum thresholds to provide certainty for employees filling out tax forms, and to create greater efficiencies for employers. Their analysis shows 44 of the states would gain at least a small amount of revenue or lose no more than .01 percent from current levels.
In opposition of federal mandates is the Federation of Tax Administrators who have opposed such bills from the outset. Their chief argument is that such Acts intrude upon state sovereignty and tax authority, and too greatly impact state tax revenues, while not having adequate federal justification.
Despite the lack of success in enacting legislation, and despite the hurdles to compliance, current state laws relegate employees and employers to proper reporting and withholding methods. Failure to do so, regardless of the often lax enforcement by many state authorities, could result in audit, penalty and interest assessments, and public relations headaches.
What can be done?
Be aware that this risk exposure is looming and is not going away.
Evaluate and assess those states and employees most likely to be have a materially impact on your exposure.
Determine how states define “working”. Sales and marketing for sure, but what about attending a conference? What about checking messages and working on a lap top in an airline lounge during a long flight delay? Etc.
Identify records and sources that will provide you with the indicators of multi-state activity.
Design compliance policies that indicate the processes used for multi-state tracking and reporting, communicate these policies to your employees, and determine internal audit procedures to monitor the policy effectiveness.
So, educate yourself about the risks that exist, be aware of your potential exposure, develop the best course of action to mitigate a harmful impact, and let your warriors run.
In Notice 2015-33, April 14, 2015, the Internal Revenue Service has provided adjustments to the limits on excludable foreign housing costs for a large number of high-cost foreign locations. Allowable costs for those locations are higher than the generally applicable maximum housing allowance exclusion.
The Full Story:
U.S. workers stationed overseas remain taxable in the U.S. on all income received, whether it comes from the U.S. or a foreign country. However, if certain conditions are satisfied section 911 of the Internal Revenue Code allows those workers an election to exclude from their U.S. income some of their "foreign earned income," and some of their reimbursed expenses for foreign housing.
To qualify for the foreign earned income exclusion (section 911(a)(1)) and the foreign housing exclusion (section 911(a)(2)) the worker must have income received for working in a foreign country, have a tax home in a foreign country, and meet a bona fide residence or physical presence test in that country.
Assuming that those requirements are met, the law also limits the amount of income excludable, and the amount of the excludable housing expense. Those limits are indexed for inflation. For 2015, the amount of foreign earned income that is excludable is $100,800.
Prior to 2006, the housing exclusion was unlimited to the extent it exceeded a base amount. The base amount was 16% of the salary of a federal employee at salary grade GS-14, step 1, or about $12,500 in 2005. So, if housing costs were $40,000 in 2005, then $27,500 would generally have been excludable (the amount by which actual costs exceeded the base amount).
However, the 2006 law amended these provisions to change the calculation of the base amount, and to limit the maximum amount of the exclusion. The new law changed the calculation of the base to 16% of the foreign earned income exclusion amount. For 2015, that is $16,128 ($100,800 x .16). The new law then imposed a maximum on the costs that may be taken into account in computing the exclusion. The maximum is 30% of the earned income exclusion, or $30,240 for 2015 ($100,800 x .30). The result is that in general the maximum housing exclusion for any location is $14,112 for 2015 ($30,240 minus $16,128).
The new law, however, also gave the Treasury Department the authority to provide higher maximum housing cost limits for areas in which it determined housing costs to be high. IRS has regularly exercised that authority in a series of publications, of which Notice 2015-33 is the latest.
The Notice provides a lengthy table of foreign locations, and replaces the $30,240 general limitation with one specific to the locale. Beginning with Luanda, Angola at $84,000, and ending with Ho Chi Minh City in Vietnam at $42,000, the table visits nearly every country in the world, and should always be consulted by Worldwide ERC members calculating the foreign housing exclusion.
A few highlights: Hong Kong remains the highest cost city at $114,300, followed, as usual, by Moscow at $108,000. However, allowances for some traditionally high-cost cities have been reduced. For example, Geneva has declined from $100,800 to $95,200, and Tokyo goes from $96,000 to $83,500. Allowable costs for European capitals such as Paris and London have declined as well, from $86,000 to $73,800 for Paris and from $88,700 to $85,300 for London. Although Worldwide ERC® has not compared the allowance for each location in the Notice to the allowances for 2014, it appears that a significant number have declined, presumably as a result of the recent strong performance of the dollar relative to foreign currencies.
Finally, as it did last year, the IRS provides an option for taxpayers in any locations where housing costs are higher in Notice 2015-33 than they were in Notice 2014-29 applicable to 2014. If the taxpayer resided in one of those locations in 2014, he or she is allowed to use the higher 2015 amount in calculating the 2014 exclusion.
Posted by Peter K. Scott
By Eric Arnold
Eric is a guest blogger and is Counsel at Steward Title Guaranty Company – Stewart Relocation Services as well as Chair of the Worldwide ERC® Government Affairs Real Estate and Mortgage Forum.
The Federal Housing Administration (“FHA”) recently announced the end of its waiver of the FHA Anti-Flipping Rule’s 90-day resale restrictions. This waiver had allowed investors and others to rehabilitate and resell properties to FHA-insured borrowers. Worldwide ERC® has received reports that this has led some lenders to take the position that relocation properties are ineligible for FHA-insured financing if the relocation company has not owned the property for the required 90-day period. Since this overlooks the longstanding exemption for relocation transactions, this blog entry attempts to clarify the exemption, the waiver, and the potential source of this confusion.
The Full Story:
In 2003, The Department of Housing and Urban Development (“HUD”) adopted 24 § CFR 203.37a, commonly known as the FHA Anti-Flipping Regulation (the “Regulation”). HUD was concerned that the artificially inflated values of recently flipped properties would lead to higher default rates by borrowers using the FHA mortgage insurance program and threaten the financial soundness of the program. To limit exposure to these high risk properties, the Regulation introduced two new requirements for a property to be eligible for the FHA insurance program: (1) the property must be sold by the owner of record and (2) the seller must have owned the property for a certain period of time, generally 90 days.
The Regulation provided no exemption to the first requirement and as such, it is common for relocation companies to take title to properties when the outside buyer seeks FHA financing. Worldwide ERC® was successful in obtaining an exemption for relocation transactions from the second requirement. Pursuant to § 203.37a(c)(2) (as adopted in 2003 – currently § 203.37a(c)(5)), “sales of properties purchased by an employer or relocation agency in connection with the relocation of an employee” are exempt from the time restrictions on resales imposed by the Regulation.
In the midst of the real estate downturn, there was a common perception that the Regulation limited real estate investors from cleaning up abandoned or neglected properties and reselling them to families who could occupy and take care of them, in turn reducing neighborhood blight. In 2010, FHA responded by issuing a temporary waiver to the time restrictions, so long as certain underwriting requirements were met. To qualify for the waiver, the sale must be conducted at arm’s length, with no inappropriate collusion or agreements between the parties, and if the sales price increased twenty percent or more between acquisition and subsequent sale to the homebuyer, the lender would require additional documentation, such as receipts for any improvements made and a new inspection to confirm the quality of work performed. Originally set to expire after one year, the waiver was extended another year in 2011 and for two years in 2012, ultimately through December 31, 2014.
On September 30, 2014, HUD’s Office of Inspector General (“OIG”) published a report criticizing FHA’s oversight of the waiver program. The report recommended that FHA either discontinue the waiver or strengthen its controls and clarify requirements of the waiver. On December 10, 2014, FHA responded by issuing FHA INFO #14-73 (the “Notice”) which announced that the agency would not extend the waiver beyond December 31, 2014.
Worldwide ERC® has received reports from members that certain lenders have taken the position that due to the expiration of the waiver, effective January 1, 2015, relocation transactions are again subject to the time restrictions on resales. There are two potential explanations for this position:
There may be confusion between the waiver and the exemptions. The waiver expired December 31, 2014. The exemptions, including for relocation transactions, were not impacted by expiration of the waiver. See FHA INFO #14-73 – “[t]he regulation, including its exemptions, is still in effect.”
FHA INFO #14-70 could be a source of confusion since it provides an incomplete list of exempt transactions. It states that “exempt transactions include” and provides a number of transactions exempted under the Regulation. This list does not include relocation transactions. However, there is no reason to extrapolate from this that the relocation exemption no longer applies:
“[E]xempt transactions include” does not indicate an exhaustive list. In addition to relocation transactions, FHA INFO #14-70 does not include properties acquired through inheritance, which are also exempt under the Regulation.
FHA INFO #14-70 states that “[t]he regulation, including its exemptions, is still in effect” and provides a link to the current version of the Regulation, which includes the exemption for relocation transactions – see § 203.37a(c)(5)
The exemptions for relocation transactions and inherited properties cannot be removed simply through a mortgagee letter and no information has been provided to Worldwide ERC® or the reporting members of any formal rulemaking to amend the Regulation.
The exemption for relocation transactions was one of the two original exemptions in the FHA Anti-Flipping Regulation (there are now eight). The agency clearly understood Worldwide ERC®’s concern that a ninety-day holding requirement would impede relocation transactions which pose no additional risk to the mortgage insurance program. However, our industry’s exemption remains a very small part of the general volume of FHA-insured mortgages, and it is very common to see confusion about its applicability. Hopefully this (somewhat) brief primer will assist in clarifying these issues going forward.
THE PRECEDING DISCUSSION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT LEGAL ADVICE TO ANY PARTY. ANY OPINIONS OR POSITIONS EXPRESSED ARE THOSE OF THE AUTHOR AND NOT OF STEWART TITLE GUARANTY COMPANY OR ANY AFFILIATED ENTITY. YOU ARE STRONGLY ENCOURAGED TO SEEK LEGAL COUNSEL BEFORE TAKING ANY ACTIONS IN RELIANCE UPON THESE MATERIALS.
Sources: Anti-Flipping Regulation - http://www.ecfr.gov/cgi-bin/text-idx?rgn=div8&node=24:220.127.116.11.18.104.22.168
OIG Report - http://www.hudoig.gov/reports-publications/audit-reports/hud-did-not-always-provide-adequate-oversight-of-its-property
FHA INFO #14-73 - http://portal.hud.gov/hudportal/documents/huddoc?id=SFH_FHA_INFO_14-73.pdf
Posted by Eric Arnold
President Obama on December 19, 2014, signed into law a package extending some 40 expired or expiring tax breaks for one year, through the end of 2014. H.R. 5771. As a result, the provisions will be available for use on 2014 returns to be filed in 2015.
Among the provisions extended were three items of importance to mobility.
The first is the exclusion from income for cancelled mortgage debt on a principal residence. The exclusion, in the tax code since 2007, protects homeowners from tax on the forgiveness of up to $2 million in mortgage debt incurred to acquire their home. It expired at the end of 2013. Worldwide ERC® had joined many others in urging Congress to extend the provision again, which is important in allowing employees whose homes are burdened with debt exceeding the value to engage in short sales and accept relocations. For Worldwide ERC®’s letter to Congress urging action, go to http://www.worldwideerc.org/gov-relations/Documents/12-2-2014WERC-WydenMortgageDebtForegiveLetter.pdf
Although the extension was not for as long as Worldwide ERC® advocated, a one-year retroactive extension for all of the expiring provisions was all the Congress could agree to as it sought to wrap up business for the year.
Although the extensions are welcome, Congress will again have to revisit all of these provisions in 2015. It is hoped that some will finally be made permanent, thereby avoiding the annual uncertainty and confusion engendered by their periodic expiration. Worldwide ERC® will continue to work toward preserving these important provisions.
Posted by Peter K. Scott
On December 10, 2014, the IRS released its annual optional standard mileage rates that may be used in computing automobile deductions during 2015. See IR-2104-114, http://www.irs.gov/uac/Newsroom/New-Standard-Mileage-Rates-Now-Available;-Business-Rate-to-Rise-in-2015
, and Notice 2014-79. The new rates, applicable for auto use after December 31, 2014, are 57.5 cents per mile for business use, 23 cents per mile for medical or moving use, and 14 cents per mile for charitable use. The business rate is up 1.5 cents from the 56 cents per mile rate that has been in effect since January 1, 2014, while the rate for medical and moving is down a half cent from 23.5 cents. The charitable rate of 14 cents per mile does not vary from year-to-year because it is fixed by statute.
The rates are based on an annual study of fixed and variable costs of operating an automobile conducted for the IRS by an independent contractor. The rates for business and moving differ because the rate for business use includes fixed costs such as depreciation, which are not allowed as medical or moving deductions. Both rates include variable expenses such as fuel. Taxpayers are also allowed to deduct items such as parking and tolls in addition to the standard mileage rate.
Use of the standard deduction rates is optional; taxpayers are always free to determine their own actual costs of operating a vehicle. However, such costs must be substantiated through detailed records, while the use of the standard rates avoids any need to substantiate the underlying costs incurred, although taxpayers must still maintain records of the miles driven and the purpose of each trip.
Notice 2014-79 also provides amounts by which taxpayers using the standard business mileage rate must reduce the basis in their automobile for depreciation that is included in the standard mileage rate. Those amounts are 22 cents per mile for 2011, 23 cents per mile for 2012 and 2013, 22 cents per mile for 2014, and 24 cents per mile for 2015.
Some companies use mileage rates higher than the standard rates to reimburse business travelers or transferees. In such cases, the excess amounts are treated as taxable wages, and are subject to withholding and payroll taxes. Amounts up to the standard mileage rates are excluded from the income of the employee. An employee cannot deduct moving expenses using the business travel rate. See Adamson v. Commissioner, 32 T.C.M. 484 (1973).
Generally, the rates the IRS announces in November or December remain in effect during the entire following year, regardless of changes in underlying costs. However, in 2011 the IRS changed the rates in mid year due to a dramatic rise in fuel costs, the third time in six years in which it had done so. With the current dramatic drop in fuel costs expected to continue during 2015, it is possible IRS will again opt to modify the allowance during the year, this time by reducing it.
Posted by Peter K. Scott
As Congress works to extend a group of around 50 expired or expiring tax provisions before adjourning for the year, Worldwide ERC® has written to Congressional leaders urging at least a two year extension of the tax provision that excludes some forgiven mortgage debt from income.
In letters dated December 2, 2014, Worldwide ERC® President and CEO Peggy Smith pointed out that the expiration of the provision will negatively impact the mobility of workers and ability of employers to move their workers to where they are needed. Transferees who need to make a short sale to accept a transfer often will not be able to move if the amount of their mortgage that is written off becomes taxable to them.
Worldwide ERC® joins a number of other organizations such as the National Association of Realtors and the Mortgage Bankers Association in pushing for Congress to extend the provision.
The tax provision has been in the Code since 2007, and has been extended periodically, but expired at the end of 2013. Under the provision, forgiven mortgage debt up to $2 million on a principal residence is not taxed.
The provision is one of some 50 tax breaks that periodically expire. Both House and Senate have been working during the remaining Congressional session to either extend most of them, or extend some and make others permanent. Unfortunately, efforts at the latter solution broke down and Congress is currently working on a simple one-year extension through 2014. Worldwide ERC® believes a longer extension should be enacted, but even the currently contemplated one-year extension would be beneficial.
Posted by Peter K. Scott
There are a number of tax and Social Security items that are statutorily required to be adjusted for inflation each year. Both the Internal Revenue Service and the Social Security Administration generally release the adjusted numbers in late October of the preceding year, and both have done so for 2015.
The new Social Security Wage Base of $118,500 for 2015 was the subject of a LawBlog post on October 27, 2014. Shortly thereafter, the Internal Revenue Service released its 2015 inflation adjustments, which are discussed below.
The most commonly utilized inflation-adjusted items are the standard deduction, and the personal exemption. For 2015, personal and dependent exemptions will be worth $4,000, up $50 from 2014. The standard deduction will rise to $12,600 for married couples, up $200, and to $6,300 for singles, up $100. The tax brackets will also be adjusted. For example, the 15% bracket will now end at $74,900 for married couples filing joint returns, and at $37,450 for singles. In addition, the high-income brackets imposed by the 2012 “American Taxpayer Relief Act” will be adjusted. In 2015, the 39.6% tax rate will apply to income exceeding $413,200 for singles and $464,850 for married couples, up from $406,700 and $457,600.
Beginning in 2013, high income individuals also began to lose some of the benefit of itemized deductions at certain income thresholds. For 2015, the income at which the loss begins is $258,250 for singles, and $309,900 for married couples filing joint returns.
The foreign earned income exclusion, which is utilized by many Worldwide ERC® member expats, will rise to $100,800, up from $99,200 in 2014 (and breaking the six-figure mark for the first time).
The Alternative Minimum Tax exemption amounts, which were first indexed for inflation by the 2012 law, and which keep many middle-income employees from owing this additional tax, rise to $53,600 for singles, and $83,400 for married couples, up from $$52,800 and $82,100, respectively.
Unfortunately, the 3.8% Net Investment Income tax that also came into effect in 2013 begins at Adjusted Gross Income levels that Congress did not make subject to inflation adjustments. Consequently, the tax will still begin to apply at Adjusted Gross Income of $200,000 for singles and $250,000 for married couples, and as incomes rise more transferees will be subject to the tax. For a full explanation of the tax, refer to http://www.worldwideerc.org/gov-relations/us-tax-legal-resources/tax-legal-mastersource/Pages/Additional-Medicare-Tax-on-High-Income-Individuals.aspx
, in the Worldwide ERC® Tax & Legal MasterSource. Also beginning in 2013, an additional 0.9% Medicare tax was imposed on “high income” employees making more than $200,000 in wages ($250,000 for married couples), so the employee share of the tax for these taxpayers is 2.35% (the employer share remains at 1.45%). And like the Net Investment Income tax, Congress also did not index these wage thresholds, so employers should be aware that additional employees will also be subject to this additional tax as wages rise but the thresholds don’t.
All of these developments will affect gross-up calculations and other payroll calculations for Worldwide ERC® members, who should begin preparing to adjust their systems.
Posted by Peter K. Scott