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Friday, September 18, 2015

Post-Foreclosure Deficiency Judgments in NC

Because of his extensive work in the area of foreclosures and post-foreclosure lawsuits, Attorney Jason McGrath is frequently asked about whether a foreclosing party/creditor (such as the lender, loan note holder, etc.) will be able to collect money from the borrowers after foreclosure occurs. In this video, which is specifically geared toward such circumstances in North Carolina, Mr. McGrath explains how a recent court decision may impact post-foreclosure deficiency judgment lawsuits in North Carolina.

https://youtu.be/xL-vJ3n7BYw


Tuesday, September 8, 2015

Private Mortgage Insurance (PMI) – What is the Borrower Really Paying for?

As contract attorneys who provide a variety of real estate and mortgage related services, including real estate closings and handling real estate disputes, we know that many (most?) borrowers really don’t understand private mortgage insurance. Known as PMI, private mortgage insurance is to benefit the lender, not the borrower – even though the borrower is paying for it.

We’ve advised borrowers about this in various contexts, including when a mortgage insurance company sues the borrower to recover monies the insurance company paid out pursuant to the policy. For more about mortgage insurance companies suing borrowers, including in post-foreclosure situations, click here.

new home, mortgage, insurance
PMI is typically required if the circumstances include a private mortgage loan in which less than 20% of the sales price / appraised value is put down up front. From the lender standpoint, PMI is a very good thing – the borrower has to pay for an insurance policy which names the lender as the beneficiary, with the lender (or whomever ends up owning the loan) potentially being able to make a claim on the policy if the borrower defaults on the loan, and that default results in the lender not being paid back in full.

In most situations, the premium payments the borrower has to make for private mortgage insurance are rolled into the borrower’s monthly “mortgage payment”. The details regarding the original PMI agreement, including the payment amount, are known in advance of the real estate closing. Borrowers / buyers should be asking questions about PMI before closing as compared to after (although better to ask afterwards and know than to not ask at all).

It’s also extremely important to know when you might be able to cancel your PMI – and the related payments, thus decreasing your monthly payment by hundreds of dollars. This sentence will link to our blog on canceling PMI once that is published in the near future; you should subscribe to our blog (see the upper right side of this page to do so) if you’d like to receive that update.

We encourage all of our real estate Charlotte clients to be or become informed ones, and we assist in that process. After all, knowledge is power.

Wednesday, September 2, 2015

Mediation

mediation works
Whether mediation is court ordered, required by some prior contract/agreement, or occurs as a result of parties to a lawsuit agreeing to mediate, mediation is often an excellent opportunity to resolve a lawsuit. In his 19 years as trial lawyer, Jason McGrath has mediated many cases and in this video he explains how mediation works.

https://youtu.be/TiNYEiqgB4Y


If you are facing a lawsuit in North Carolina please fill out our confidential client intake form for legal assistance.


Tuesday, September 1, 2015

Being Sued by a Mortgage Insurance Company for an Insurance Policy youPaid for?

As attorneys who provide a variety of real estate and mortgage related services, including foreclosures and post-foreclosure disputes, we know that many (most?) borrowers really don’t understand private mortgage insurance. Known as PMI, private mortgage insurance is to benefit the lender, not the borrower – even though the borrower is paying for it.

What makes it worse from the borrower’s perspective is that, in addition to being foreclosed on, a borrower can end up being sued by the mortgage insurance company in relation to the very same policy the borrower paid for. The highly technical terms we use to describe this include:

The Gut Punch, Geting Hit Below the Belt, The Double Whammy

We’ve advised and defended borrowers in these cases. The most common fact scenario is this one:

  • a foreclosure takes place (or sometimes even a short sale or a deed-in-lieu of foreclosure);

  • the loan is not paid off in full;

  • the creditor (lender / loan note holder) makes a claim against the private mortgage insurance policy;

  • the mortgage insurance company pays the creditor to reimburse it for its losses on the loan;

  • the mortgage insurance company sues the borrower / former homeowner, under the theory of “We only had to pay out on this policy because you didn’t pay the loan off in full, so you owe us”; and
  • the borrower is shocked, comes to us for help.

We’ve seen cases in which the mortgage insurance company may not actually have paid out the money it was seeking to recover, in which the mortgage insurance company was unable to even produce the insurance policy at issue, and in which the borrower has been assured by the persons involved in the deal (before our involvement) that the borrower was going to be “free and clear” after a foreclosure, short sale, or deed-in-lieu. However, we’ve also seen cases in which the borrower did appear to legally owe the monies being sought by the insurance company.

These cases usually – in our experience and based on our assistance – go away without the borrower having to pay what the mortgage insurance company is seeking. However, each case and each client is different, and no guarantees or predictions can be made. The bottom line is that anyone wanting to reach a settlement with the lender / note holder before the property is disposed of and anyone who has been notified of a claim against them related to PMI should be educated and informed and perhaps seek professional assistance. 
McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

Tuesday, August 25, 2015

Negotiating with a Bank: Why do I have to Provide My Financials?

The attorneys in my Law Firm represent clients against banks and other creditors on a regular basis. Whether it’s in a civil lawsuit, a foreclosure case, a situation which has not yet reached the litigation stage, or a post-judgment matter, negotiations just about always take place. In most all of these cases, we have a conversation with our client like the one below when the time comes to discuss the settlement offer I’m going to make on behalf of the client.

ME: In order to consider a settlement offer, the bank is requiring you to fill out this financial worksheet return it and to provide records such as your most recent 2 months of bank statements – complete, every single page, even the very last page of the bank statement which essentially says nothing.

CLIENT: Well, I don’t want to do that.

ME: I don’t blame you, I wouldn’t want to do it either.

CLIENT: So I don’t have to do it?

ME: Well, you don’t have to do anything – at least not unless there’s a court order or similar that says you have to do it. There’s no court order here which says you have to provide your financials.

CLIENT: Well that’s good.

ME: I agree.

CLIENT: Why does the bank want this stuff?

ME: Mostly so it can make an informed decision as to whether it makes sense to settle – and at what amount – versus pursuing you through the legal system for the full amount. Also, these creditors want to know if you can pay but don’t want to, or truly cannot pay, at least not right now. Of course, they can come after you for years, sometimes even decades. Also, if no settlement is reached, they want a head start on knowing what there might be for them to collect and where it is.

CLIENT: So if I provide my financials, they might use that information against me.

ME: This is true. I hope it doesn’t come to that, and we’re going to work hard to avoid that.

CLIENT: So what happens if I don’t provide my financials?

ME: If you don’t provide them, the bank is not going to consider any settlement offer and/or will assume that you have plenty of money and can pay the entire amount claimed.

CLIENT: Yes but how can the bank make me provide the financials?

ME: Again, at this stage they can’t “make” you – it’s up to you, you can decide what to provide and what not to provide. This is a voluntary negotiation, and each side can more or less choose to do – or not do – what it wants. That means you can decide not to provide your financials, but the bank can then decide not to negotiate with you.

CLIENT: I need to settle this case.

ME: Unfortunately, then, you probably need to provide your financials.

CLIENT: <sigh> Ok.

ME: Don’t worry, we’ll take a look at everything first, analyze how it may impact the settlement negotiations, and bring you up to speed on that before anything gets sent out – for now it’s confidential and privileged between you and us until and unless you direct us to share it with the bank or anyone else.

Also, we’ll make sure that what we are send to the other side is done so as part of confidential, privileged, and non-admissible settlement negotiations. That will make it harder for the bank to use it against you later, or limit the ways the bank can use it, if a settlement can’t be reached.

CLIENT: This kind of sucks, but I guess I feel a little bit better about it than I did a few minutes ago.

ME: I wish you weren’t in this situation, but we’ll do what we can do. We can never guarantee how a case will go or what the end result will be – nobody can, and we’re not allowed to do that anyhow – but it’s pretty rare that we can’t get something worked out on behalf of a client.

CLIENT: Ok, I’ll get this financial data back to you later this week.

ME: Great, thanks. We’ll look it over and get back to you with further advice within a few days of you providing that to us. Hang in there.
McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

Monday, August 24, 2015

Summary Judgment

Motions for summary judgment can result in a case being immediately won or lost, and thus are incredibly important. Attorney Jason McGrath explains motions for summary judgment and summary judgments themselves based on his 19 years of experience as a trial attorney.

https://youtu.be/3sqK5FJes7o



If you are facing a lawsuit in North Carolina please fill out our confidential client intake form for legal assistance.

Wednesday, August 19, 2015

Tax Rates on Ordinary Income for Businesses

When you decide to start a business venture, there are a myriad of things to consider. We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal. There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business. This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity. The most prominent federal tax considerations in choosing a business entity include:










This article discusses the tax rates for businesses and business owners.

Ordinary Income Tax Rates

For most C corporations that have significant taxable income, the corporate income tax rate is essentially a flat rate of 34-35%. Corporations with smaller amounts of income enjoy lower rates (15-25%) on their first $75,000 of taxable income. As you can see below, a very small number of small businesses will receive the lower tax rates of 15 and 25%.


Additionally, certain personal service corporations (i.e., lawyers, accountants, architects, and the like) are not entitled to graduated tax rates but receive a flat rate of 35%. Individuals pay tax at the graduated rates of 15%, 28%, 31%, 36%, and 39.6%.

With a presidential election fast approaching and presidential hopefuls throwing their hat in the ring, you can expect some campaign talk of tax reform. On the corporate side, Marco Rubio has talked about tax reform that would lower the tax rate for corporations and passthroughs to 25% (although many of the credits and deductions would be eliminated) and allow businesses to expense the cost of their investments 100% in the year of acquisition. On individual tax reform, Rubio proposes reducing the number of individual tax brackets from 7 to 2 (15% and 35%), eliminate the standard deduction and replace it with a refundable personal credit, and create a $2,500 child tax credit.

The relationships among these tax rates can greatly influence the choice of entity. At one time the maximum individual tax rate on ordinary income peaked at 70% and the top corporate tax rate was 46%, making forming a C corporation an attractive option to avoid the higher individual tax rates. The difference in rates prompted most business owners to organize their entities as a corporation rather than a pass-through entity because corporate income was taxed at much lower rates. During these high individual tax rate times, shareholders that wished to withdraw earnings created tax efficient strategies to avoid the double tax (e.g., owner-employees of a C corporation would distribute profits in the form of salary or fringe benefits, which are tax-deductible by the corporation and the fringe benefits are excludable from income of the employee in most situations). Shareholders also loaned money or leased property to C corporations and withdrew earnings from the corporation in the form of rent or interest payments that were tax deductible as well. The IRS began to crack down on these strategies and attacked payments of salary or interest as unreasonable compensation or disguised dividends. Congress fought back by enacting penalties to patrol against excessive accumulations or avoidance of the individual progressive tax rates. It wasn't hard for a corporation with good tax planning to justify the payment of reasonable compensation and accumulation of earnings on the basis of reasonable business judgment and thereby avoid constructive dividends and the corporate penalty tax.

Now, individuals and corporations are subject to the same top tax rate and dividends and long-term capital gains are both taxed at relatively low rates, the C corporation earnings accumulation strategy is much less compelling. The parity in the individual and corporate tax rates, in conjunction with the prospect of two levels of tax when a C corporation is sold, provides a greater incentive to use a pass-through entity instead of a C corporation, particularly if the business intends to distribute its earnings currently, does not have owners who work for the firm, or holds assets that are likely to appreciate in value over a relatively short time frame. It would not be beneficial to organize a venture that invests in passive assets such as real estate or financial assets to operate as a C corporation because the costs of doing so would be prohibitive in light of the double tax. In some cases, however, C corporations still offer tax savings, especially for businesses able to pay out most of their earnings as compensation to their high-income owners.

For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."

McGrath and Spielberger, PLLC assists clients with all sorts of tax issues, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact us about your tax matter.


 McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

Tuesday, August 18, 2015

Mortgage Loans: Recourse versus Non-Recourse and Foreclosure Related Deficiency Judgments

Deficiency Judgments
As attorneys who handle real estate loan closings, mortgage loan disputes, mortgage loan loss mitigation matters, and foreclosure cases, we are frequently asked questions about recourse versus non-recourse loans, foreclosure-related deficiency balances and related legal judgments, and similar issues. The intent of this short article is to provide some information on these topics from our perspective, keeping in mind that our primary jurisdictions of practice are North Carolina and South Carolina (we also practice in FL, GA, OH, and TN).

Recourse mortgage loans versus non-recourse mortgage loans

Although the terms “recourse mortgage loan” and “non-recourse mortgage loan” are not commonly used in North Carolina, they are common nationwide and are often misused and misunderstood. A recourse loan is one which allows the lender (or whomever later acquires the loan) to foreclose upon violation of the loan terms (assuming that a valid deed of trust or similar is in place) and also allows the creditor the additional recourse of pursuing monetary damages from the borrower and any guarantors, etc. if the foreclosure sale proceeds are not enough to cover what is owed to the creditor.

In contrast, a non-recourse mortgage loan is one in which the creditor does not have the right to pursue the borrower and any other potentially obligated parties for monetary damages. Rather the creditor is limited to foreclosing on the property that serves as collateral for the loan (again assuming that a valid deed of trust or similar is in place).

Regardless of which side you are on, lender or borrower, it is absolutely crucial that you know exactly which type of loan is being contemplated or has been entered into. Recourse loans are more common in residential lending as compared to commercial lending, but not so much that any assumptions should ever be made.

Deficiencies and deficiency judgments

A “deficiency” in the mortgage loan context is related to the concept of recourse versus non-recourse mortgage loans. If the net proceeds from a foreclosure sale are not enough to make the creditor whole, and if the loan was a recourse loan, the creditor would typically be entitled to – or entitled to further seek – monetary damages from the borrower, any guarantors, etc.

The amount that the creditor believes it is legally entitled to still recover is typically called the deficiency. The creditor – whether by a separate, post-foreclosure civil lawsuit (the typical process in North Carolina) or by way of the foreclosure litigation itself (South Carolina) – can seek a judgment which states that it is entitled to that amount. This is typically referred to as a “deficiency judgment”.

We regularly assist clients in matters involving, or potentially involving, deficiencies and deficiency judgments. It’s fundamentally important to understand when the creditor may be able to seek the same, and whether doing so is going to make economic sense; sometimes spending $20,000.00 to possibly recover $50,000.00 simply isn’t worth if it some compromise can be reached. Both creditors and debtors may have good reasons to resolve such issues via settlement, but litigation always looms if not.

McGrath & Spielberger, PLLC provides legal services in Florida, Georgia, North Carolina, Ohio, South Carolina, and Tennessee, as well as in some Federal courts. The Firm offers full scale representation, as well as limited scope services, as appropriate for the situation. Please be advised that the content on this website is not legal advice, but rather informational, and no attorney-client relationship is formed without the express agreement of this law firm. Thank you.

Friday, August 14, 2015

Responding to a Lawsuit Complaint

Based on his 19 years as a trial lawyer, Attorney Jason McGrath provides some fundamental and important information with regard to responding to a lawsuit after a defendant has been served with a summons and complaint by a plaintiff. His comments are more specific to North Carolina lawsuits, but have a general application nationwide.



https://www.youtube.com/watch?v=qBzkQaQysDQ

If you are in need of legal assistance with a Lawsuit in North Carolina, South Carolina, Tennessee, Georgia or Florida please fill out our confidential client intake form.

Tuesday, August 4, 2015

Employment Tax Considerations in Starting a Business

Employment Tax Considerations in Starting a Business



When you decide to start a business venture, there are a myriad of things to consider.  We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are both non-tax and tax factors as well as state and local statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

I previously wrote an article regarding the non-tax factors that should be considered when starting a business.  This article is one of a series of articles that focuses on the tax implications of certain business activities and things you should consider when choosing your business entity.  The most prominent federal tax considerations in choosing a business entity include:



This article focuses on the employment tax considerations in starting a business.

rain taxesWhen a principal owner of a business is also a service provider, employment taxes can be an influential factor in choosing the legal form for a business.  Employment taxes are imposed in addition to income taxes on employee wages and on net earnings from self-employment.  For instance, half of the employment tax on wages is paid by the employee through withholding and the other half is paid by the employer, which may deduct the tax as a business expense.  A self-employed individual, such as a sole proprietor or a general partner who derives income from a trade or business conducted by a partnership in which he is a partner, must pay a 15.3% rate (12.4% for social security and 2.9% for Medicare) on self-employment income up to a wage base $117,000 in 2014.  Self-employed taxpayers may take an above-the-line deduction for one-half of self-employment tax paid and an additional 2.9% Medicare tax on all income from self-employment.  In 2013, the Medicare tax rate increased to 3.8% for taxpayers with self-employment income above certain thresholds ($250,000 for a joint return, $125,000 for a married filing separate return, and in any other case $200,000).

S corporations are often used by service providers to avoid the uncapped Medicare portion of self-employment taxes.  For example, Architect, a single taxpayer, has $300,000 of net earnings from self employment and no other earned income.  If he is a sole proprietor, his self-employment tax will be $46,800 ($11,400 in Medicare Tax and $37,200 in Social Security Tax) on the entire $300,000.  That does not include amounts that he will pay for federal income tax.  If the Architect incorporates his business using an S corporation which nets the same $300,000 in income and pays Architect a salary of $300,000, he could potentially save $24,300 in self-employment taxes.  When the company pays him a salary the company pays half of the medicare and social security taxes and takes a deduction for those taxes paid.  If the company pays a portion of the income as a dividend or distribution to Architect instead of as a salary you have to be careful.  In cases where little or no compensation is paid and the S corporation distributes a large dividend to its sole owner, the IRS will likely reclassify all or part of the dividend as wages for employment tax purposes.

Employment taxes may also influence the choice between a limited partnership and an LLC.  Limited partners generally are not subject to self-employment tax on their distributive share of partnership income (apart from salary-like guaranteed payments).  The law regarding the treatment of LLC members was uncertain for some time and created an opportunity for tax avoidance by LLC members who were active in the business.  Regulations were recently passed by Congress in February of 2015 that were originally proposed in 1997 that prevents partners and LLC members who provide more than 500 hours of service for their firms in a taxable year from taking advantage of the limited partner exclusion from self-employment tax.

The employment tax regime is not applied uniformly to service providers who are partners, members of LLCs and LLPs, and S corporation shareholders, and in some respects the law is not crystal clear.  This inconsistency and uncertainty has fueled the growth of one-person S corporations.

Medicare Tax on Unearned Income

Beginning in 2013, a Medicare contribution tax of 3.8% was imposed on the less of (1) net investment income, or (2) modified adjusted gross income (adjusted gross income over a threshold amount of $250,000 for a joint return or surviving spouse, $125,000 for a married individual filing separately, or $200,000 for all other taxpayers).  The tax is effectively an additional income tax, raising marginal rates for high-income taxpayers who have unearned income.  Net investment income is broadly defined to include interest income, dividends, annuities, royalties, rents (other than from an active trade or business), capital gains, less allocable deductions, as well as passive income (within the meaning of the passive loss rules of §469) from trade or business activities and income from the type of active securities and commodities trading often conducted by hedge funds.

Attorney Angel Oliver / McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact Ms. Oliver about your tax matter.

Thursday, June 25, 2015

Comparison of Subchapter K v. Subchapter S

business taxes, subchapter K versus subchapter S taxes, IRS
Both Subchapter K and S of the Internal Revenue Code (IRC) are pass-through tax structures in which the members of the entity are taxed for the entity's income, gains, losses, and expenses on their individual tax returns. That is where the similarities end. There are several differences discussed below that make Subchapter K seem more taxpayer friendly than Subchapter S. Much of the popularity of the LLC is attributable to the fact that LLCs offer limited liability to all investors combined with the more flexible partnership tax regime. In some situations, however, the goals of the business owners may be better achieved with an S corporation.

Subchapter S places very strict restrictions on the ownership and capital structure for S corporations.  S corporations are limited to 100 shareholders (although members of a "family," broadly defined, are counted as one shareholder), and they may not have more than one class of stock.  Additionally, all shareholders much be individual U.S. citizens or residents and other corporations or partnerships cannot be shareholders of the company.  Anyone can be a member or partner of an entity taxed under Subchapter K.

Partnerships and LLCs taxed under Subchapter K may make special allocations of income and deduction items, while shareholders of an S corporation must include corporate income and loss on a pro rata share basis.  Thus, partners/members may agree to share certain income or deductions disproportionately, and the agreement will be respected for tax purposes if it reflects their economic business deal.  Additionally, in most cases, partnerships and LLCs taxed under Subchapter K, can distribute appreciated property in kind without immediate recognition of taxable gain.

In a business with only a few owners, an S corporation may be the entity of choice because the flexibility of Subchapter K is not needed.  S corporations are often used by owners that prefer to conduct their business as a state law corporation instead of a partnership or limited liability company because they are more comfortable with the corporate governance structure.  S corporations are also often used by service providers to minimize their exposure to employment taxes.  S corporations are not viable options in many situations - a business with foreign investors would not be able to make the S corporation election because foreign investors are not permissible S corporation shareholders.  Additionally, many institutional investors (e.g., tax-exempt pension funds and charitable organizations) are discouraged by the tax system from investing in any type of active business that is operated as a pass-through entity.  Venture capital funds, which provide a large source of capital for start-up companies, appear to be more comfortable using the familiar C corporation capitalized with several classes of stock, a structure not available in an S corporation.

business entities
For a complete analysis of the tax implications of C Corporations, Partnerships, and S Corporations click here for the Joint Committee on Taxation's publication entitled "Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations."

McGrath and Spielberger, PLLC assists clients with all sorts of tax matters, both federal and state (including but not limited to North Carolina and South Carolina). Click here to contact an attorney about your tax matter.

Tuesday, June 16, 2015

What Factors Should You Consider When Starting a Business?

When you decide to start a business venture, there are a myriad of things to consider.  You have possibly already chosen the purpose of your venture and what it is you are going to make, do, or sell.  You have probably also played around with what to name your business.  Now what?  Where do you go from here?

We regularly assist small business owners, especially start-up businesses, walking them through the steps that need to be taken in order to make the business official and legal.  There are many ways a business can be organized and there are non-tax factors, tax factors, and state statutory requirements that need to be taken into consideration when embarking on this exciting journey of starting a business.

This article focuses on a few of the non-tax factors that need to be considered.  A follow-up article will discuss the tax factors of organizing your business.  Much of the information in this article relates to the laws in a majority of jurisdictions along with examples of specific instances where North Carolina law is different from the majority of jurisdictions.  The statutory requirements of starting a business are state specific, therefore it is important to seek the assistance of a professional who knows the law in your jurisdiction.  There are also state and local licensing as well as registration requirements that will need to be met depending on the jurisdiction your business will be located in.


In the tables below the entities are listed from the broadest/most flexible to the most restrictive.

Limit Liability for Business Entities

Limited liability is probably the most sought after attribute of business owners forming a new business venture.  New business owners wish to protect their personal assets from the claims of business creditors.  This can usually be achieved by organizing the venture under a state law that limits the owners' liability to the amount of capital the owner has invested in the entity.  Be very careful when capitalizing the business and applying for loans.  Some lenders may require that the owner(s) of the business provide a personal guarantee for the business obligations, thereby making the owner liable to those creditors of the business and defeating the purpose of the limitation of liability.

Business Entity Management and Control Comparison Chart
Business Entity Capital Structure
Transferability of Business Interests chart
Duration of the Business Entity chart

The business lawyers McGrath & Spielberger, PLLC assists clients with all sorts of tax, business, and estate planning matters in North Carolina.  Click here to contact us about your tax, business, or estate planning matter today.

Wednesday, April 8, 2015

Servicemembers' Civil Relief Act and Foreclosures

In this video, Attorney Jason McGrath of McGrath & Spielberger discusses how members of the US Armed Forces may have some specific protections and rights in relation to foreclosures and related court proceedings. Mr. McGrath and McGrath & Spielberger, PLLC handle both foreclosure cases in multiple states, including North Carolina and South Carolina.

https://youtu.be/kkxshCxt_Co

Tuesday, March 24, 2015

Mortgage Loan Debt Forgiveness

Is Canceled Mortgage Loan Debt Income that you are Taxed on?


As an attorney with specific tax law knowledge who also works with borrowers to avoid foreclosure and/or to otherwise resolve mortgage loan problems, I deal with short sales, deeds in lieu of foreclosure, loan modifications, and mortgage loan settlements on a regular basis. Borrowers are usually thrilled to be able to get rid of unwanted mortgage debt either through disposing of the property, as part of a discounted pay off which allows them to keep the property, or in the form of a principal reduction as part of a modification. However, the mortgage loan debt canceled as a result of these types of transactions can have negative future tax consequences for the borrower.

Generally, canceled or reduced mortgage principal is treated as income by the IRS, which means the amount of forgiven/reduced debt would normally be taxable income to the borrower. However, the Federal Government enacted the Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”) to exclude up to $2 million of forgiven debt on a taxpayer’s primary residence from taxable income. This type of forgiven debt is specifically referred to as “Qualified Principal Residence Indebtedness”. The Act has been extended several times, with the most recent extension occurring in January 2015 to retroactively cover 2014, meaning that certain mortgage debt which was canceled or forgiven in 2014 need not be included as income to the borrower

North Carolina and South Carolina have different approaches on these matters as far as state income taxes. In most recent years, North Carolina followed the Federal Government’s lead and enacted legislation to exclude Qualified Principal Residence Indebtedness from a taxpayer’s income for state tax purposes. The North Carolina state exclusion expired in 2013 (just like the Federal exclusion), but unlike the Federal Government, North Carolina has not yet extended the exclusion to cover 2014. Thus, as of the date of this writing, the exclusion currently applies to 2014 for purposes of South Carolina state income taxes but not for North Carolina state income taxes (but changes may be taking place within weeks).

The debate surrounding the debt forgiveness exclusion is a hot topic for North Carolina lawmakers. In February 2015, the North Carolina State Senate passed a bill that requires forgiven debt to be included as income. North Carolina’s initial failure to extend the exclusion and the effect on homeowners was recently discussed by McGrath & Spielberger attorney Jason McGrath when he was interviewed by the Charlotte Observer.

The bill was subsequently rewritten by the NC House of Representatives to exclude forgiven debt from income and then passed by the NC House in early March 2015. As it currently stands, a Conference Committee with members from both the Senate and the House was appointed late last week to hash out whether North Carolina will follow the lead of the IRS and allow certain forgiven mortgage loan debt to be excluded from state taxation from the borrower side for certain debt canceled in 2014. Governor McCrory, of course, can sign or refuse to sign whichever version of the bill is presented to him.

At this point, homeowners with Qualified Principal Residence Indebtedness from 2014 will be able to exclude the forgiven debt amount from Federal income tax but would have to include that amount for North Carolina state income tax purposes. Homeowners facing foreclosure and other difficult mortgage loan situations could be forced into deciding whether to keep the home or pay at least state income tax later as to any canceled mortgage loan debt.

In contrast, South Carolina closely resembles the Federal income tax laws with only a few modifications. South Carolina has simplified its tax scheme by deciding to follow the Federal government’s lead on tax laws with any differences expressly stated in the South Carolina statutes. In fact, § 12-6-40(c) of the South Carolina Code of Laws specifically states, “If Internal Revenue Code sections adopted by this State which expired or portions thereof expired on December 31, 2013, are extended, but otherwise not amended, by congressional enactment during 2014, these sections or portions thereof also are extended for South Carolina income tax purposes in the same manner that they are extended for Federal income tax purposes.” Qualified Principal Residence Indebtedness is not mentioned or excluded in the South Carolina Income Tax Act and thus, one can conclude that the retroactive extension of the Mortgage Forgiveness Debt Relief Act of 2007 by the Federal Government allows a borrower in South Carolina to exclude certain forgiven debt for South Carolina state income tax purposes.

In addition to the Qualified Principal Residence Indebtedness exclusion, borrowers, including those in both North Carolina and South Carolina may be able to exclude some or all of forgiven debt from Federal taxation under the IRS’ insolvency exemption. The insolvency exemption allows a taxpayer to exclude canceled or forgiven debt from income if the taxpayer is insolvent. A borrower is insolvent when the total of all the liabilities exceed the fair market value of all the assets immediately before the cancellation of the debt. However, a borrower can only exclude forgiven debt up to the amount he or she was insolvent. 

Whatever you do, just make sure you are fully aware of the potential consequences of your mortgage loan resolution; there’s nothing worse than a nasty tax surprise hitting you out of the blue. If you need advice regarding a tax situation, a distressed mortgage loan, or something similar, please don’t hesitate to contact us to speak to an attorney Charlotte NC and Mt Pleasant SC.

S-Corp Tax Election for LLC

S-Corp Tax Election: Is it Right for Your LLC?


As an attorney who happens to have an MBA and some specific tax law knowledge, and one who advises businesses on both day to day issues and tax matters, I know that if you’ve chosen (or will choose) an LLC as your business structure, it’s likely due to some combination of the liability protection an LLC offers, the operations and internal organization flexibility it allows, and the tax advantages which can accompany it. One of those tax advantages of an LLC can be the election to be taxed as an “S-corp.”

Keep in mind that, as we’ve previously discussed, one does not really “form an S-corp.” – this a tax classification, not a type of business organization. Once a corporation is formed, the shareholders can unanimously elect to “become” an S-corporation by filing Form 2253 with the IRS. The resulting S-corp. is a corporation that’s status is governed by Subchapter S of the Internal Revenue Code. If no election is made, then the corporation defaults to a “C-corporation” for tax purposes and is governed by Subchapter C of the Internal Revenue Code.

The traditional C-corporation’s net income is subject to a double tax at the entity level and individual level, while partnerships, LLC’s, sole proprietorships and S-corporations enjoy a pass-through status for income earned by the business. However, partnerships and sole proprietorships typically do not provide the limited liability protection desired by most small business owners. Based on these combined factors, the LLC with an S-corp. tax election is often a wise choice for business owners.

The IRS automatically treats any LLC with two or more members as a partnership and any sole member LLC as an entity disregarded as separate from its owner for federal income tax purposes. Either default treatment will provide pass through benefits to the owners of the LLC, while providing the limited liability protection. However, an LLC is allowed to make an election to be treated as an S-corporation for federal income tax purposes.

Why would an LLC want to choose to be taxed as an S-corp. rather than a partnership? There are numerous reasons for an LLC to choose to be taxed as an S-corp., including being able to pay wages and salaries to owners (which are taxed similar to wages paid to non-owner employees) but also allowing owners to be paid distributions / profits and the LLC not being federally taxed on those monies. Most experts state that the election to be taxed as an S-corp. allows the avoidance of “double taxation” as to the distributions / profit distributions. While the greatest tax benefits are typically by being an S-corp. which pays a higher proportion of monies to owners as distributions, owners who do work for the company are supposed to be paid a “reasonable salary” so that at least some payroll taxes are being paid for that individual and his/her work.

In addition to the impact that a parent – subsidiary LLC relationship can have on the possibility of selecting S-corp. tax status (see further down), an S-corp. election does allow less flexibility as far as distributions paid to owners. Typically, distributions paid to an owner must be proportional with that person’s ownership share; in other words, if Sally owns 60% of the LLC and John owns 40%, Sally should be receiving 60% of the distributions (but their salaries need not match up that same way).

If you are an existing LLC which is considering changing its tax classification, please keep in mind that, according to the IRS, an entity usually can only make such a change once every five (5) years. Be aware that some states do not recognize the S-corp. status / election and business income could be subject to double taxation at the state level.

If an LLC elects to be treated as an S-corp. for tax purposes, the LLC must comply with the same rigid ownership requirements applicable to qualifying for S-corporation tax status. This becomes an issue for the parent-subsidiary LLC relationship, as a subsidiary LLC that is wholly owned by the parent LLC cannot make the S-corp. election. One must be careful to avoid committing this error in electing tax treatment for any subsidiary LLC’s.

This is merely a starting point for a discussion of these issues, and the devil is certainly in the details as far as both the law and taxes. If you need advice regarding a tax situation, a distressed mortgage loan, or something similar, please don’t hesitate to request a consultation with a lawyer. The tax consequences of forming a business and electing tax treatment can be complicated and it is always best to contact a tax professional to address your specific situation.

Friday, March 20, 2015

Can the HOA (Homeowners' Association) Foreclose on my Home?

In this video, Attorney Jason McGrath discusses whether the Homeowners' Association can foreclose on your property or not. Mr. McGrath and the McGrath and Spielberger PLLC attorneys handle both "regular" and HOA foreclosure cases in multiple states, including North Carolina and South Carolina.

https://youtu.be/CQMZJjZAYPA

Sunday, March 15, 2015

Jason McGrath Interviewed Regarding Internet Security for Law Firms andtheir Clients

Law firms warned to be vigilant against cybercrime - The Charlotte Business Journal

Jan 30, 2015 - The N.C. State Bar released ethics opinions about cybersecurity, and ... so they can be more efficient," says Jason McGrath,  partner at McGrath & Spielberger . . . . (click link above for full story or read it below)


Law firms warned to be vigilant against cybercrime
LEGAL INC. SUBSCRIBER CONTENT: Jan 30, 2015, 6:00am EST
Bea Quirk, Contributing Writer

At the Mecklenburg County Bar's recent monthly luncheon, the speaker, FBI Agent Colleen Moss, told attendees that although small and midsized law firms don't regard themselves as targets for hackers, they are. As supervisor of the Charlotte Division's Computer Intrusion Cyber Squad, she knows firsthand the firms' vulnerability, no matter the size.

"Anytime there's a large pot of money involved — escrow, a trust — you're going to be a target," Moss told the lawyers. "Criminals look for the fastest and quickest way to make the most money possible. If they find any other data that's usable and sellable on the Internet, that's fair game, too."

Hackers aren't always subtle in their attacks, as seen in a form of malware called ransomware that is gaining popularity. Hackers install a "cryptolock" on a company's files and won't provide access until a ransom is paid, says Clark Walton, an attorney at Alexander Ricks. He has a digital forensics consulting business and previously worked in cybersecurity at the Central Intelligence Agency.

Moss and Walton say regularly updating operating systems, firewalls and antivirus software is the best defense.

Email remains the entry point of choice for hackers. Moss says up to 85% of incidents stem from phishing emails — messages that look legitimate that ask the recipient to click on a link or open an attachment. That allows a hacker to install malware that infects the user's computer — and an entire system.

"These criminals are good at socially engineering emails that look legitimate or are designed to pull at your heart strings," Moss says.

One such effort surfaced last year, when hackers were found to have penetrated pharmaceutical companies and their outside advisers in banking and law. Emails were written in "flawless English" and tailored to recipients, who were duped into revealing information that allowed hackers to profit in stock trades, The New York Times reported.

Moss says information on a firm's website and employee Facebook pages can be used to create credible email. Even though employees of law firms are generally aware of the danger, Moss says they still fall for scams offering financial rewards in exchange for providing access to a checking account.

But law firms have a difficult situation to balance. They are businesses and need to respond to emails. They can't be ignored, even if they appear suspicious. Moss suggests employees contact their IT department, server host or a consultant. She also recommends reporting apparent scams to www.ic3.gov, an information clearinghouse for Internet crime.

If a law firm in North Carolina is hacked, the state's Identity Theft Protection Act mandates that customers and clients be informed. Moss also hopes a firm will contact the FBI, which might be able to curb additional damage. Doing so also helps the agency track criminals and can increase the public's awareness of current scams.

Both the state and national bars are aware of the growing problem. The N.C. State Bar released ethics opinions about cybersecurity, and the American Bar Association published a guide to security.

Moss says cybersecurity is often a matter of risk management. Law firms must consider the costs of security and their tolerance for risk. Small firms must do this kind of analysis as their work and communications are increasingly digitized.

"Smaller firms are moving more to technology so they can be more efficient," says Jason McGrath, partner at McGrath & Spielberger and chair of the Bar committee that organized Moss' presentation. "You have to invest in security once technology becomes your bread and butter. It's just common sense."

Jason McGrath Interviewed by TV Station Regarding BOA Fraud


Former BofA workers claim they received bonuses for foreclosures... - WSOC tv

www.wsoctv.com › News › Local Posted: 3:14 p.m. Monday, June 17, 2013


Jun 17, 2013 - "I've seen all of those things that this lawsuit has mentioned. Yes I have," said Jason McGrath a foreclosure attorney in Charlotte. McGrath helps ...  (click here to see the TV broadcast story and interview excerpts)


By Blair Miller

CHARLOTTE, N.C. —

Former Bank of America employers said they received $500 cash bonuses and gift cards when they sent distressed homeowners into foreclosure.

Eyewitness News took a closer look at the allegations in the latest lawsuit on Monday night.

The lawsuit against Bank of America lays out some strong accusations. It claims the Charlotte-based bank gave cash bonuses and gift cards to employees who pushed homeowners into foreclosure.

It was the heart of the recession, at a time when many homeowners were looking for help, but on Monday night, according to a new federal lawsuit, former employees claim loan collectors who put customers into foreclosure were rewarded with gift cards to Target and Bed, Bath and Beyond.

The suit said those who would put at least 10 customers into foreclosure would get $500 bonuses.

According to Bloomberg, ex-Bank of America employees said mortgage workers falsified records and were told to delay applications for government loan assistance by asking customers to fill out paperwork that had already been received.

"I've seen all of those things that this lawsuit has mentioned. Yes I have," said Jason McGrath a foreclosure attorney in Charlotte. McGrath helps clients save their homes.

He said on Monday night that he works with Bank of America often and he is glad that the public is hearing the claims.

"It's one of those things that it's great for folks like me because we experience this on a day-to-day basis and we are finally glad to see it see the light of day," said McGrath.

On Monday night, in a statement to Eyewitness News about the lawsuit, Bank of America said, "These attorneys are painting a false picture of the bank's practices and the dedication of our employees. While we will address the declarations in more depth when we fire out opposition to the plaintiff's motion next month, suffice it is to say that each of the declarations is rife with factual inaccuracies."

McGrath said in some ways the lawsuit helps his clients.

"Some of my clients say I'm so glad to hear you tell me other people are going through this and it's not just me. They feel much more persecuted. It's weird since they feel better that other people are going through this as well," he said.

Seven former loan employees are pushing to get the lawsuit approved for class-action status.

Jason McGrath Quoted in Story About Pace of Foreclosures

September 12, 2013 By Deon Roberts droberts@charlotteobserver.com  ... Jason McGrath, a Charlotte-based lawyer who defends struggling homeowners ... (click below link for full story, which is also excerpted below)

Charlotte-area Foreclosure Filings Decline 16%


By Showcase Realty On October 14, 2014

By Deon Roberts
droberts@charlotteobserver.com
Posted: Thursday, Sep. 12, 2013

Charlotte-area foreclosure filings dropped 16 percent in August from a year ago, as they also fell across the U.S.

The Charlotte region had 982 filings – which comprise default notices, scheduled auctions and bank repossessions – down from 1,166 a year ago. North Carolina filings fell to 2,361, a decline of 12 percent.

Nationwide, foreclosure activity fell largely as a result of fewer properties starting the foreclosure process, according to real estate data firm RealtyTrac. U.S. foreclosure starts dropped to 55,775, their lowest level since December 2005.

For Charlotte, it was the third month in a row of year-over-year declines.Observers point to at least two trends driving down Charlotte foreclosure filings: Rising home prices are increasing equity in homes that are “underwater,” making the owners less likely to allow their properties to fall into foreclosure. Also, they say, some lenders are opting to sell distressed Charlotte-area homes to investors.

“Some of the institutions don’t really want to be in the foreclosure business, so they unload some of their notes that are in default, or nonperforming notes, they call them,” said Nancy Braun, owner of Charlotte-based Showcase Realty.“They sell them to investors at a fraction of the value,” she said. “The investors then can take on the unpleasantries of possibly foreclosing on the party or renegotiating the note with the borrower or doing a short sale with the borrower.”

In Charlotte, investors such as private equity firms have been snapping up bank-owned properties to convert them into rentals. Braun said investor purchases are a factor in Charlotte’s tight inventory situation.

“That’s part of the reason … there’s a shortage of inventory,” she said.

Charlotte’s drop in foreclosures also coincides with home prices increasing here and elsewhere. On Tuesday, the Charlotte Regional Realtor Association reported the average home price in the region rose to $237,635 in August, the largest year-over-year gain so far in 2013. That’s up 11 percent from $213,846 in August 2012.

Home prices are rising across the U.S. as mortgage rates increase and supplies of homes for sale remain tight in many areas. RealtyTrac says the increase in prices is good news for homeowners who are underwater – those who owe more on their homes than they are worth. Those owners have more equity as prices overall rise.

Foreclosure filings in Charlotte remain below their peak of 2,141 in August 2009.

Even though overall filings fell in the Charlotte region, bank repossessions and default notices increased year over year in August, RealtyTrac said. Repossessions climbed 33 percent to 330 properties, compared with 249 properties a year ago. Default notices increased 1,620 percent, to 172 from 10 a year ago.

‘Desperate homeowners’

While overall foreclosure filings are down, Charlotte homeowners who have already fallen into foreclosure are still battling their lenders.

Jason McGrath, a Charlotte-based lawyer who defends struggling homeowners, said his office, in roughly the past few months, has seen an increase in demand from clients facing foreclosure hearings that are only a week or two away or whose homes are already scheduled for foreclosure sales.

“There are clearly many desperate homeowners out there that are still facing foreclosure and are still struggling to make every effort they can to avoid it,” he said.

Despite the falling number of foreclosure filings, some predict a surge in foreclosures in coming months.

Daren Blomquist, vice president for RealtyTrac, said foreclosures are expected to rise in some U.S. markets as lenders move forward with foreclosure starts that had been delayed.

McGrath expects an increase in Charlotte, too.

“There’s some theory out there that we’re going to see a ramp up in foreclosure filings in 2014,” he said.

Source: http://www.charlotteobserver.com/2013/09/12/4306203/charlotte-area-foreclosure-filings.html

Jason McGrath Reappointed to City of Charlotte's Civil Service Board and Remains Chair

Charlotte Business Journal: Professional Recognition, September 26, 2014, Jason McGrath

Attorney Jason McGrath of McGrath & Spielberger, who serves as the Chair of the City of Charlotte Civil Service Board, was recently reappointed to the Board for another three year term. The Board has certain quasi-judicial authority over Charlotte Mecklenburg Police Department and Charlotte Fire Department.

Jason McGrath Quoted in Story About NASCAR Hall of Fame Loans

City Lab, a division of The AtlanticJan 12, 2015 - Yet, as highlighted by a recent Charlotte Observer editorial, the project's ... Jason McGrath, a Charlotte attorney experienced in real-estate ... (full story linked and pasted below)

Investing in NASCAR: What Could Go Wrong?

SAM STURGIS  JAN 12, 2015
Charlotte's NASCAR Hall of Fame crashed hard. As the city preps for an $18 million debt-forgiveness vote, homeowners wonder where their bailouts are.

A beautiful disaster. (Flickr/Daniel Lobo)

We just rang in 2015, but the city of Charlotte, North Carolina, would love to see the calendar flipped back to 2005.

That was the year NASCAR cemented its position as one of the United States' most popular sports. Fortune magazine drooled over the racing juggernaut a decade ago, proudly declaring NASCAR "the fastest-growing, best-run sports business in America—with the emphasis on businesses."

But the financial viability of NASCAR has crashed in recent years amid plummeting race attendance and growing disinterest in car racing among Americans. And nothing symbolizes the sport's tragic decline more than its Hall of Fame, which broke ground with great expectations in 2007 and officially opened in 2010—and is now hemorrhaging money for the city of Charlotte.

Monday night, Charlotte's city council is expected to pass a loan-forgiveness deal that will eliminate nearly $18 million in debt the city owes on the NASCAR Hall of Fame. Opening the glitzy development cost the city $200 million, but the project was viewed as a crucial job creator for downtown Charlotte, undergoing noticeable revival. Today, to call the NASCAR Hall of Fame a financial disaster would be an understatement.

The NASCAR Hall of Fame, under construction in 2007, features a 278-seat theater, meeting halls, and a cafe. (Flickr/James Willamor)

Early projections had the city-owned Hall of Fame pulling in revenues of up to $1 million annually. Instead, according to Sporting News, the venue has lost over $5 million since opening. Attendance is abysmal. Developers expected at least 400,000 visitors annually, with the potential to attract up to 800,000. Over the past five years, however, only about 170,000 NASCAR fans have visited the venue each year, or 470 per day. One official representing the NASCAR Hall of Fame acknowledges some financial projections have not been met, but insists, "the Hall is doing well." Tom Murray, CEO of the Charlotte Regional Visitors Authority, which overseas large city-owned assets, says the NASCAR Hall of Fame will earn money or break even if the debt deal is agreed upon.


City officials are framing today's debt deal as a "restructuring" rather than a bailout. Yet, as highlighted by a recent Charlotte Observer editorial, the project's downfall can't really be spun:

It doesn’t camouflage that the Hall of Fame couldn't survive on its own. It doesn’t change the fact that the city, when it bid for the hall, miscalculated everything from attendance projections to the arc of NASCAR’s popularity.

The failure of the deal becomes even more clear as cities struggle to pull out of the Great Recession. Charlotte was spared the crippling housing crisis that hit cities like Detroit and Las Vegas. Still, North Carolina's largest metro was hit hard, according to the Brookings Institution. Single-family properties financed with a mortgage lost 23 percent of their value during the recession and, despite a marginal recovery, are still nowhere near pre-recession rates.

(Brookings)

Jason McGrath, a Charlotte attorney experienced in real-estate litigation, says the community's support for the debt-forgiveness deal is "mixed." Given how badly the venue has underdelivered, taxpayers naturally balk at wiping its financial slate clean so easily. However, McGrath says, residents know they are likely to benefit, at least indirectly, if the city's debt toward the project is written off. (McGrath chairs a civil service committee for the city, but spoke to CityLab from the perspective as an independent lawyer).


“Of course, the folks that are facing foreclosure and have not been able to get help are looking at this and likely thinking to themselves, 'Well, here we go again,' where it’s always the big fish that seem to get the big breaks," McGrath says.

Nearly 16,000 foreclosed properties in Charlotte are either for sale or auction, according to RealyTrac, an online housing database. Would the $18 million being written off for the NASCAR Hall of Fame have better served residential properties currently underwater?

Jason McGrath Quoted in Charlotte Observer Story on Mortgage Relief Tax Issues

Feb 16, 2015 - The Charlotte Observer | CharlotteObserver.com ..... Jason McGrath, a Charlotte-based attorney who works with clients dealing with mortgage disputes and foreclosures, said that . . . (full article linked and posted below).

Tax-change renewal could hurt troubled homeowners in North Carolina

By Deon Roberts and Jim Morrill - deroberts@charlotteobserver.com jmorrill@charlotteobserver.com
FEBRUARY 16, 2015 6:00 AM

North Carolina lawmakers are poised to renew a rule requiring homeowners to pay state income taxes on mortgage debt forgiven by lenders – a move that could cost some homeowners thousands of dollars in additional taxes.

For years, North Carolina allowed taxpayers not to count written-off mortgage debt as taxable income after Congress, responding to the mortgage crisis, enacted a similar exclusion on federal income taxes.

In 2013, North Carolina took away the exclusion for the first time since the crisis. And last week the N.C. Senate passed a bill that would not allow the exclusion for tax year 2014. The House is expected to vote on the measure this week.

To illustrate what the bill would mean, if a homeowner received $20,000 in mortgage principal forgiveness, he or she would have to pay $1,160 in additional taxes, based on the state’s individual income tax rate of 5.8 percent. If $40,000 were forgiven, he or she would owe $2,320 in additional taxes.

Analysts say the proposal, which is included in a bill changing the state’s gasoline tax, could affect as many as 4,000 N.C. homeowners caught up in the mortgage crisis.

Republican and Democratic lawmakers are divided on the proposal, which General Assembly staffers estimate will bring in about $14 million in 2014 tax revenue.

Republicans say the move would be consistent with other tax changes that have lowered rates and eliminated many deductions.

But Democrats and some consumer advocates say it would hurt homeowners struggling to recover after falling into foreclosure and defeat the purpose of a lender providing the debt relief in the first place.

“This is not a good policy,” said Al Ripley, director of consumer and housing affairs for the North Carolina Justice Center. “We want to try to create situations where they will be able to afford to stay in their house ... not engage in policies that will take resources away from those families and make it more likely that they will end up in foreclosure or face other economic hardship.”

Taxpayers can still claim the exclusion on 2014 federal income taxes after President Barack Obama signed an extension in December. The exclusion stems from the Mortgage Debt Relief Act of 2007.

As recently as two years ago, North Carolina was one of seven states not allowing taxpayers to exclude canceled mortgage debt from taxable income, according to a study by H&R Block.

The N.C. Department of Revenue said it is still compiling data for tax year 2013 and does not know how much additional tax revenue the state collected on canceled mortgage debt that year.

Lawmakers divided

The proposal to not allow the exclusion prompted a passionate debate in the N.C. Senate on Thursday. Among other tax changes in the bill is the loss of a taxpayers’ deduction of college tuition expenses.

Together, the changes are expected to mean an additional $73 million in state revenue.

Republican Sen. Harry Brown of Onslow County said not having that revenue would hurt working families.

“What you’re talking about is 70-some million of revenue that the state would have to come up with ...” said Brown, co-chair of the Senate Appropriations Committee. “Are you going to take it from teachers? … Or Health and Human Services? Or the court system? That should be part of the argument.”

Senate Finance Committee Chairman Bob Rucho, a Matthews Republican, said lawmakers are seeking the changes to be consistent with other tax changes that have lowered rates and eliminated many deductions.

“We just feel like consistency is important,” Brown said later. “It’s pretty much aligned with our tax reform. We think driving the rates down will serve (the middle class) in the long run.”

But Senate Minority Leader Dan Blue of Raleigh said the bill means that “we kick people while they’re down.

“If they had money they wouldn’t be in foreclosure,” he told colleagues. “What we’re doing is saying you have to come up with money because you managed to get the mortgage company to forgive this loan. You’re wrapping something around their neck probably for the rest of their lives.”

Democratic Sen. Joel Ford of Charlotte said in a $21 billion state budget, Republicans could make up for the revenue elsewhere.

“We just need to prioritize working families rather than corporations and special interests,” he said. “You mean to tell me you folks can’t find ($73 million) for the working families of North Carolina? If you can’t find it you should be ashamed of yourselves.”

Bart Hildreth, executive director for the Washington, D.C.-based National Tax Association, said it’s appropriate for state legislatures to take a second look at tax policies, such as those put in place in response to the mortgage crisis.

“Policy experts typically recommend that states revisit each of those periodically to see if they’re still meeting public policy goals,” he said. “You don’t want it all to be on autopilot.”

N.C. foreclosures still high

The proposal comes at a time when foreclosure activity in North Carolina and Charlotte remains higher than in much of the U.S.

According to a report released Thursday by data firm RealtyTrac, one in every 711 housing units in the Charlotte region had a foreclosure filing in January, the 35th-highest rate in the U.S. among 213 metro areas. North Carolina posted the 14th-highest rate: one filing for every 1,044 housing units.

The proposal also comes as Bank of America is just starting to provide $7 billion in consumer relief nationwide as part of its $17 billion settlement with the U.S. government announced last year. Some of that relief is expected to take the form of principal reductions on mortgage loans.

Bank of America spokesman Dan Frahm said the bank has forgiven more than $164 million in principal on 3,600 home loans in North Carolina since 2008. The average amount forgiven over that period is nearly $45,000, he said.

Jason McGrath, a Charlotte-based attorney who works with clients dealing with mortgage disputes and foreclosures, said that while foreclosure activity is falling nationwide and locally, many homeowners are still fighting to keep their homes.

“My firm is as busy as we have ever been with regard to those kinds of cases,” he said. “The overall numbers may be down, but it’s still very much an ongoing issue.”

He said some homeowners might pass up an offer of mortgage relief that could give them much-needed assistance because of the increase in taxes the homeowners might have to pay later.

“It certainly can be part of a self-defeating process” to forgive mortgage debt only to tax consumers on that aid, “smacking them on the back end.”

 ⬧

http://nchousing.org/housing-matters-newsletter/archives/