This may not be on your radar but Spiegel Accountancy Corp., a professional accounting firm that serves the mortgage industry and small businesses nationwide, reminds mortgage lenders who are selling MSRs to do an analysis to determine if they can report a portion of the sale as long-term capital gains.
“If a lender has maintained the servicing rights for more than 12 months, which is considered long-term, and has a significant portion of those loans in their sale, then they can take a tax position to report a portion of the tax gain as long-term capital gain as opposed to ordinary income. Oftentimes, this will save the lender up to 20 percent in federal taxes,” stated Jeff Spiegel, Principal at Spiegel Accountancy Corp.
In addition, when selling a portfolio, the lender needs to make sure that it has accurately evaluated its portfolio to take a position to report capital gains. It is recommended to document the following to substantiate the capital gain position and to avoid any penalties should the IRS challenge and disallow:
>>Having “reasonable basis” for capital gain filing position
>>Analyzing and documenting your specific facts and circumstances in determining your tax reporting position
>>Obtaining a third-party valuation of MSR portfolio with a separately stated value of “reasonable compensation” based upon the lender’s specific portfolio, servicing costs, etc.
>>Disclosing the tax position on Form 8275 attached to your tax return.
>>Consider obtaining a tax opinion letter supporting the tax position from a qualified law firm
Spiegel Accountancy Corp. is a professional accounting firm based in the San Francisco Bay Area with a national practice specializing in the mortgage banking and small business sectors. Spiegel’s senior-level CPAs are actively involved and readily accessible to the firm’s clients. Their deep understanding of business for audit and tax purposes makes them uniquely qualified to share best practices, meet mortgage companies’ needs and exceed their expectations.
About The Author
Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at email@example.com.