On January 1, 2013, the Net Investment tax went into effect. Despite numerous articles and columns reminding consumers that this tax does not apply to every real estate sale, rumors continue to keep flying all over the country, claiming that the Health Reform legislation Congress enacted includes a sales tax on all real estate sales. While there is a tax, it does not apply to everyone.
My Executive Summary:
Generally, the tax only applies to you if your annual taxable income after deductions exceeds $200,000, or $250,000 filing jointly, and you have net profits from the sale of real estate that exceeds $500,000.
If you qualify, the tax is due only on the portion of net profit that exceeds $500,000. Or, you may choose to pay an additional 3.8% tax on the portion of your annual income that exceeds $250,000 for couples ($125,000 each if filing separately) or $200,000 for individuals instead. Whichever is the lesser of the two.
If you think this tax may apply to you, read on. And remember to check with a financial specialist to assess the best strategy and your exposure.
The Health Care and Education Reconciliation Act of 2010 was signed into law by President Obama on March 30, 2010. It is a comprehensive and extremely complex piece of legislation. One section (1402) is entitled "Unearned Income Medicare Contribution" and does impose a 3.8 percent tax on any profit on the sale of real estate – residential or investment.
But it is aimed at high-income consumers, who comprise a small majority of American citizens.
Let's look at the true facts of this new law.
First, it is not a sales tax, nor does it impose any transfer or recordation tax. It is often called a "medicare" tax because the moneys received will be allocated to the Medicare Trust Fund, which is part of the Social Security System.
Next, if your income (technically called "adjusted gross income) is less than $200,000, you are home free. The income thresholds are clearly spelled out in the law. If you are married and file a joint tax return with your spouse, the law will apply only if your income is over $250,000. (If you and your spouse opt to file a separate tax return, the threshold is reduced to $125,000. For all other taxpayers, you have to earn more than $200,000 in order to be under the new law.
The up-to-$500,000 exclusion of gain for married couples filing a joint tax return (or up-to-$250,000 for single taxpayers) has not been repealed. Nor has the right to deduct mortgage interest and real estate tax payment been eliminated.
How is the tax calculated? It is a complex formula that could be called "the accountant's protection act". As a taxpayer, you (or your financial advisor) must determine which is less: the gain you have made on the sale of your house or the amount that your income exceeds the appropriate threshold.
Complicated? Yes. Let's look at these examples. Your adjusted gross income is $150,000. You sell your house and made a profit of $400,000. There is no change in the way you determine your gain: you take your purchase price, add any major improvements you have made over the years, and subtract that number from the net sales price. Based on this formula, you and your spouse have owned and lived in the property for at least two out of the five years before it was sold. Accordingly, you are eligible to exclude all of your profit; you are not subject to the new 3.8 tax. Keep the money and enjoy.
Change the example so that your adjusted gross income is $300,000. Since you are eligible to take the profit exclusion of up-to-$500,000, once again you do not have to pay the Medicare tax; your entire gain is excluded, and thus there is no profit to tax.
But let's assume you strike it rich and have made a profit of $600,000. Your income is $300,000. You can only exclude $500,000 under current law, so you will have to pay capital gains tax on the remaining balance. The rate currently is 20 percent, so you will owe Uncle Sam $20,000 ($100,000 x 20%).
But since your income is over the threshold, you now have to pay the 3.8 percent tax. But on what amount?
As indicated earlier, the tax is based on lesser of your profit or the difference between the threshold and your income. Your profit is $100,000. The difference between your income and the threshold is $50,000 ($300,000 - $250,000). In our example, the lower number is $50,000, and you will have to pay an additional $1900 to the IRS (3.8% x $50,000).
According to statistics provided by the National Association of Realtors, the median average sales price for homes in the United States (as of July, 2014) was $213.400. Clearly, none of these homes could make a profit of even $250,000, so if you qualify for the exclusion of gain requirements, you will not be impacted by this new law. Those requirements are: you have to have owned and used the property as your principal residence for two out of the five years before it is sold.
Of course, in homes where a large profit will be made, some home owners may be hit with this tax. But the large profit that you make should offset the nominal tax that has to be paid.
Since the law applies to all forms of real estate, including vacation homes, you should consider consulting with your tax and financial advisors as to your exposure.
The Five Biggest Mortgage Mistakes You Can Make
The Five Biggest Mortgage Mistakes You Can Make
For most buyers, the mortgage is the largest monthly expense they will have. Yet most borrowers will do little to no preparation, negotiation, or shopping to get the best deal. And they end up paying much more for their loans than they need to. You? You're smarter than that, or you wouldn't be reading this article. Here are five of the biggest mistakes that can cost you real money.
1. Believing advertised rates are what you'll pay
Unless you have perfect or near-perfect credit, most advertised rates are out of your league. To get boasting rights on a rate that good, you have to pay part of a point (one percent of the loan amount) a point, or more to get the best rates.
Your lender will go over your credit with a fine-tooth comb to find anything to raise the rate. That includes qualifying you at the beginning of the transaction, and then running your credit again a day or two before you're supposed to close on the home and loan. If there's been any change in your debt-to-income ratio, goodbye low mortgage rate.
2. Not comparing lenders
Just like everyone knows two or three real estate agents or more, everyone knows a loan officer or a mortgage broker. A loan officer works for a bank or savings and loan and can only offer you loan packages that the bank has put together. A mortgage broker prequalifies you just like a loan officer, and shops your deal around to various lenders.
Whether you talk to a loan officer or a mortgage broker, you're going to have to share personal financial information in order to get a realistic rate. Reputable brokers will show you what certain banks and credit unions quoted and you can pick the loan you like best.
If you'd rather do your own shopping, consider talking to a local bank, a national bank, a credit union, and a savings and loan, but remember, unless you give them personal information and permission to run your credit, it's just talk.
3. Not paying attention to terms
Advertised rates even for those with perfect credit aren't what you will actually pay. The true cost of the loan is the APR or annual percentage rate, which includes fees from the lender.
Understanding loan terms is harder than shopping for a new mattress. There are so many ways lenders can inch up the fees. A loan origination fee is also called a processing fee. It pays the loan officer or mortgage broker, so this fee can vary widely. You may pay one lender more for an appraisal than another might charge you.
One lender may charge more for pulling your credit than another. It's all in your good faith estimate, which you don't get until you've applied for the loan.
All terms are negotiable, so don't be afraid to ask what a particular fee is for and can it be reduced or eliminated.
4. Waiting for a better rate
It's great to have bragging rights on a low rate, but you don't want to lose the home of your dreams over a quarter of a point in interest.
There's a big picture here you could be missing. No matter what your interest rate is, you're going to pay thousands of dollars in interest up front before you make any serious gain in equity. If you go all the way to the end of your loan's term, you'll pay so much interest that you could have bought the same home two or three times.
Instead of focusing on the percentage rate, work on how quickly you can build equity. Make one extra payment a year. Pay $25, $100, or $500 extra per month and you'll more than offset the rate you're paying.
Down the road, if rates drop through the floor, you can refinance, but even that's not an ideal solution. You'll pay loan origination fees, title search fees, appraisal fees and so on -- enough to equal the closing costs you paid the first time around.
And don't forget, you'll start the amortization schedule all over again -- with most of your payments going to interest instead of principal.
5. Choosing the wrong type of loan
Many families were hurt post-9/11 when lenders opened the spigots and gave a loan to almost anyone who could sign the paperwork. Suckers bought homes that were too expensive using balloon loans with low teaser rates.
The type of loan you choose should depend on current market conditions and how long you plan to stay in your home, not how much home you want to buy.
Current market conditions favor fixed rates, because rates are rising from all-time lows. Yes, they cost more than hybrid loans or adjustable rate loans, but the base amount is fixed and doesn't change. Only your taxes and hazard insurance will cost you more over the years.
If you get an adjustable rate mortgage, you are at the mercy of market conditions. While there's a cap on how high your interest rate can go, it's still a risk.
If you plan to stay in your home five years or more, get a fixed-rate mortgage. If you plan to sell your home sooner, you're taking a risk. It takes most borrowers five years just to earn back their original closing costs in equity.
Once you've narrowed your choice of lenders, ask them on the same day to give you a quote. If you wait even one day, rates may have changed, so you're no longer comparing apples to apples.
Should You Pay Discount Points?
Should You Pay Discount Points?
When you see mortgage loans advertised online, you may think those rates are for everybody, but they aren't. Known as benchmark mortgage rates, the best rates are for borrowers with perfect credit and who are buying a home well within conforming loan limits with a large down-payment as icing on the cake.
The rates you see may be teaser rates and they aren't going to be available to you when you apply for a loan. That's because banks will charge you "discount" points to give you their best rate. You're not required to pay points, but it's a choice if you want a lower interest rate.
Explains David Reed, author of Mortgages 101, "points", or discount points, are a percentage of the loan amount. If a mortgage is $200,000, then one "point" is $2,000.
Should you pay $2000 up front to save a point over the life of the loan? It's a function of how the rate is offered, says Reed.
For each point paid, your interest rate should be reduced by about 1/4 of a point. If you can get a 5.00 percent loan with no points, then you can likely get the same loan at 4.75 percent by paying one point.
The point "discounts" the interest rate, that's why it's referred to as a discount point. You're paying the cost of the discount points in your closing costs in advance. That's cash you could use in your down-payment, or to buy furniture or to upgrade your home.
Reed says he isn't a fan of paying discount points, because the math never seems to work.
On a 30-year mortgage loan at $300,000 and 5.00 percent interest, the monthly payment works out to $1,610 without any points.
Paying one point ($3,000) would reduce your rate to 4.75 percent, making your discounted payment $1,564 per month.
That's a reduction of $46.00 per month. Now weigh that against the cost of $3,000. To get that, divide $46 into $3000. The result is 65. What that means is it will take you 65 payments to break even, nearly 5 1/2 years.
What about paying two points? The math is still the same. On that same $300,000 loan at 4.50% and two points the monthly payment is $1,520, or lower by $90.00 per month when compared to the 5.00 percent rate.
Divide that $90.00 into the two points of $6,000 and the result is (drum roll, please) 67. It would take 67 months to break even.
In general, it will take about five years to break even for every discount point paid. If you don't plan on staying in your home for at least five years or more, you won't come out ahead.
"I say take the $3,000 and pay down the principal," says Reed. "Pass on the points."
It's always a good idea to borrow less.
Written by Blanche Evans
Moving Up? Do it Now.
Moving Up? Consider doing it now.
A recent study revealed that the number of existing home owners planning to buy a home this year is about to increase dramatically. Some are moving up, some are downsizing and others are making a lateral move. Another study shows that over 75% of these buyers will, in fact, be in that first category: a move-up buyer. We want to address this group of buyers in today’s blog post.
There is no way for us to predict the future but we can look at what happened over the last year. Let’s look at buyers that considered moving up last year but decided to wait instead.
Assume they had a home worth $300,000 and were looking at a home for $400,000 (putting 10% down they would get a mortgage of $360,000). By waiting, their house appreciated by 13.8% over the last year (national average based on the Case Shiller Pricing Index). Their home would now be worth $341,400. But, the $400,000 home would now be worth $455,200 (requiring a mortgage of $409,680).
Here is a table showing what additional monthly cost would be incurred by waiting:
Prices are projected to appreciate by over 4% and interest rates are also expected to rise by as much as another full percentage point. If your family plans to move-up to a nicer or bigger home this year, it may make sense to move now rather than later.
Remove Road Blocks To Sell Your Home
Preparing your home for sale can really pay off. Here are some helpful tips...
Remove Road Blocks To Sell Your Home
Many forget or don't know how to remove road blocks that can stall the sales process or kill it completely. If you're getting ready to list your home for sale, pay close attention. What you do before you list it can help or hurt the process.
Remove or limit the areas where your home is lacking. Study your neighborhood and the homes that are for sale. If your home is consistently coming up short in comparison, maybe it's not landscaped enough or it hasn't had any upgrades in 20 years, and it's overdue for some renovations or, at the very least, repairs to clean it up.
Get your home "show-ready" so that it isn't lacking or appearing deficient compared to other homes in your neighborhood. Placing a home on the market that isn't ready (needs repairs) can cause the home to receive very little foot traffic and it can end up being on the market for a long time.
If, for instance, you have vinyl flooring that's peeling, consider replacing it with a flooring that matches the style of your home and is comparable to the neighborhood so that it is consistent with the quality of floors in other homes in the area.
Remove YOU from the home. Yes, it's tricky to remove your personality from the home, especially when you're still living it. But it's very necessary. This doesn't just mean taking down personal photos and putting away private items like medicines. This means that if you've turned a room into a particular "you" room - your style, your personality, and your unique use of the room - consider re-doing the room to make it more neutral, versatile, and appealing to buyers.
For instance, if one of the bedrooms in a two-bedroom house was converted into a meditation room, it's wise, when listing the home for sale, to show it with both rooms as bedrooms rather than one bedroom and one room that is uniquely decorated for a specific use other than sleeping. Buyers can sometimes imagine how else they'd use a room but if it looks like too much work to make changes, they'll keep hunting for a house that is better suited to their needs.
If you've converted the garage into a den, office, or kids play area to fit your particular lifestyle, consider making it a garage again. Find a way to show your home with the garage as clean, useful, and as an extended-living space but also with the option to park cars in it. Not everyone wants to park on the street just to have a few extra hundred square feet of living space. An appraiser can actually knock thousands of dollars off your appraisal if the garage can't be used to park cards in because it's considered a loss of covered parking.
Remove strong odors from your home. Of course, I'm talking about foul smelling odors but sometimes too much of a good thing can also be a turn off. Gather up pet toys, pet beds, pet food, and make sure the house is pristine. If you're using fragrances in your home from sprays, candles, potpourri or even real flowers, make sure that the odor isn't overwhelming. Subtle is good... overbearing can make people think you're trying to cover up something bad in the home.
Ultimately, the goal is to make the home have mass appeal with as few road blocks as possible to sell it. Think like a buyer and see your home the way you'll be looking at your own next home purchase. Then maybe you'll understand the importance of making some changes before you list your home for sale.
Written by Phoebe Chongchua
Inventory is low. How to Buy In A Seller's Market
How to Buy In A Seller's Market
Prices are rising and it's likely there are fewer homes for sale where you want to live. As a buyer, what can you do to put the odds in your favor?
First, get preapproved by a lender. That means sharing your financial information, going online and playing with a mortgage calculator. Give the lender the documentation they need, such as salary stubs, revolving credit obligations, and bank statements.
You'll know for certain how much you can afford, how much you need to put down to qualify and what your interest rate will be.
Make your must-have and wish list realistic, beginning with price. Be prepared for compromises - a bigger home vs a longer commute, or a smaller home in a preferred school district.
Shop for homes with your real estate professional. They know the market. The agent can tap into a vast network of contacts to get the right home for you - especially homes coming onto the market before others get the chance to view them.
In a seller's market, homes sell quickly, so the homes you find online or by driving the neighborhood may already be under contract or sold before you even get the chance to see them.
Homes in the best condition will sell for top dollar. Consider homes in need of cosmetic updates or repairs.
The average home purchased in 2013 was about 20 years old, up from 11 years old at the height of the housing boom. You may be able to buy at a discount, make the updates you want, and bring your home to neighborhood standards - a quick route to building equity.
When you visit open houses or new builder homes on your own, make sure to tell the listing agent or builder's representative that you are represented by your realtor. If you decide to make an offer, your agent can be instrumental in helping you negotiate and protecting your interests.
Don't get caught up in the buying frenzy. If you need to make a full price offer or get in a bidding war, stay within your budget.
Don't let yourself become house-poor; your house payment including principal, interest, taxes and insurance should be no more than about 28% of your gross monthly income. That's the conforming loan standard and it's a good guideline for homebuyers to help them buy safely within their means.
Plan to stay in your new home at least five years.
To buy and sell a home at break-even or with a profit, means you must be able to pay back typical closing costs, approximately 14 percent of the buy side and sell side transactions combined.
Pets in the Mix: From Petrifying to Purrfect
Pets in the Mix
A beautiful cat or friendly dog might be just the thing for you and your family. As members of the household, pets have a place in your home and your heart. But what about pets and all that go with them when you are buying or selling a home? In the case of a large investment such as buying or selling a property, addressing the topic of pets during this transaction is worthy of some sniffing out. True animal lovers often have homes that are especially welcoming to animals and people alike. Homes that are set back from roads or traffic, or are close to dog parks or walking trails might have special appeal. Horse-properties are often fenced, have pasture land or barns, and storage for feed. Whether or not you have pets, if you are selling a property with these facets, you might have a winning angle for the right buyer. While real estate agents can promote these features, they want to do so without having to overcome pet odor and damage issues. Unfortunately, there are also homes where pets "rule the roost" and the home is less appealing to people. When proper care is not taken, or the number of animals in the home outpaces the owner's ability to adequately care for them, smells and other issues can become serious problems in the selling process. Evaluating a home with regard to pets unlocks features and flaws in a home. The ability to open windows or gain access through a back door to a fenced yard or to a pet enclosure is not only useful for pets and people, but can be important in examining temperature, traffic, and utility of a potential home. Odors may indicate issues with airflow, potentially giving clues about heating and/or cooling. When allergens are present in the air, air conditioning can help take them out of circulation, making a home with central air conditioning very desirable. In short, most homes will be primarily evaluated for people, so do the work beforehand to make your home people-friendly and as pet-neutral as possible. Most importantly, the homeowner should minimize the obvious signs of pets: food bowls and toys, scent, fur, feces, scratch-marks, carpet stains, and/or damage from digging or chewing. While it hardly seems fair, significant value may be lost if the home is perceived to be occupied or potentially damaged by animals - pets or wild ones. Not only is it important to rectify any issues that might be in the home presently, but during the duration of the showing and sale of a property; all pet matters must be kept in check. As a general rule, keep in mind that while people often love pets, they don't always love yours. Barking dogs, cats that shed excessively, and animals that could cause harm are deterrents to the welcoming feel most people desire when they come to see a property. Additionally, "pet furniture" can detract from a home, or make it memorable in ways that are not conducive to a sale. Instead, remove that well-worn chair or cat tree that presents an "in-your-face" distraction from more positive aspects of the home itself. Consider "doggy daycare" or boarding your pet elsewhere if there is concern that the presence of a pet could detract from the viewing experience. Always alert the showing agent of the presence of a pet. Ensure that there are arrangements in place for animals that require special attention, and keep up on pet chores that enhance the home's appeal. While it might be unrealistic to get every hair, work to minimize attention to it by vacuuming often and removing potentially offensive items like well-worn pet beds and blankets during showings. Have your pet bathed and groomed frequently during this time period to reduce pet odors and ensure that all shots, ID tags, and licenses are up-to-date in the event of an accidental release. Similarly, if you are seeking a property that is especially free of allergens, or inversely, especially good for a certain pet - real estate agents know what to look for. Be sure to check out laundry rooms, basements and garages as these are common places where pets may spend lots of time, and could provide useful clues regarding the successes and failures of a pet's presence in a home. There are key chores that must be accomplished by the homeowner prior to selling it, if a pet has been present: Check for outside damage to landscape, porches, decks and lawn. Ensure that holes are filled, scratched or chewed wood are fixed, fences are in good repair and painted when appropriate, and that plants don't show evidence of pets. If a pet scratches to come in, repair any marks on the front and back door or screens. Nothing can fix a bad first impression. Moving indoors, check for scratches, chewing, and paint damage that come from pets walking, rubbing, or otherwise using the home. Paint, clean or repairs items as needed. Removal of furniture that reveals the presence of animals should be considered. Stained carpets should be professionally cleaned or removed, as pet "accidents" can be absorbed into carpet pad and odors remain. Again, check doors, molding or areas where grime, hair, scratching or chewing appears. Consider this "detailing" your home as you would a car. Clean air ducts and filters in the home's HVAC system to ensure that odors are not being circulated throughout the home and that it is working properly, free of pet hair. Pet odors are the biggest offense, and must be removed; this might require the replacing of flooring or sheetrock in some cases. Professionally cleaning concrete floors in garages or basements that have housed pets is a great idea to remove odors. In cases where rodents have damaged insulation in crawl spaces, replacement may be necessary. When pets are in the mix and a home is for sale, it is essential to consider a pet's happiness, safety, and effect that they might have on people viewing the home. Creative solutions can be difficult to come by. Few people have the luxury of obtaining a new home prior to selling their residence and removing pets entirely from the home that is for sale. If a pet absolutely cannot be removed from the home, consider crate-training, which might also aid in the relocation process in the future, or limiting a pet to a confined space. No question about it - selling or buying a home with pets in mind adds a dimension to the process. Paying attention to these details can seem overwhelming, but the value of a home depends on it. Purrfectly so