3.8% Tax on Housing? Answers & Resources

Here are the 10 things you need to know about the 3.8% tax according to the National Association of Realtors(NAR):

1.) When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will NOT be subject to this tax.

2.) The 3.8% tax will NEVER be collected as a transfer tax on real estate of any type, so you’ll NEVER pay this tax at the time that you purchase a home or other investment property.

3.) You’ll NEVER pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income.

4.) If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will NOT pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.

5.) The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).

6.) The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.

7.) In any particular year, if you have NO income from capital gains, rents, interest or dividends, you’ll NEVER pay this tax, even if you have millions of dollars of other types of income.

8.) The formula that determines the amount of 3.8% tax due will ALWAYS protect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would NEVER be imposed on more than $1000.

9.) It’s true that investment income from rents on an investment property could be subject to the 3.8% tax. BUT: The only rental income that would be included in your gross income and therefore possibly subject to the tax is net rental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.

10.) The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.

By: The KCM Crew, KCM Blog


Thinking of a Vacation or Retirement Home? Buy It Now

When the economy was exploding in the early 2000s, many of us began to dream about purchasing that vacation home on the lake or securing a home in a more appropriate location for our retirement years. However, with the booming economy came skyrocketing house prices. Many of the homes we fell in love with quickly became out of reach financially. Perhaps we should take a second look at these same homes today.

With prices dropping by over 30% in some markets and with interest rates at historic lows, this may be the perfect time to do what we and our families have always dreamt of doing – buying that second home. Let’s look at the numbers.

Back in 2006 we may have seen the ‘perfect’ home but the $500,000 price tag was just out of reach. Today, we could probably get that home for $400,000 (if not less). We also would be financing it at the current mortgage rate instead of the rates available six years ago. The table below shows the difference in impact on our family’s finances:

 

Not every family is in the financial position to take advantage of the tremendous opportunities the current real estate market offers. But, if yours is, this may be the time for dreams to come true.

By: The KCM Crew, KCM Blog


Home Prices Up Yearly, Inventory Down Nearly 30%: RE/MAX

Home prices skimmed close to the bottom during July this year but climbed 6.3 percent year-over-year by August, according to RE/MAX.

The real estate company revealed in its latest National Housing Report that median home prices ticked up from last year over the last seven straight months.

Home sales jumped 8.5 percent year-over-year, continuing its ascent from over the last fourteen consecutive months, and 2.5 percent on a monthly basis in August.

“As we move from summer to fall it’s very encouraging that this year’s home selling season began strong and finished even stronger,” Margaret Kelly, CEO of RE/MAX, said in a statement. “Nearly every month in 2012 experienced increased sales and prices over 2011, showing that we’ve definitely passed the bottom and we’re looking forward to 2013 being an even better year.”

According to RE/MAX, home inventory dipped 29.7 percent below levels from August last year – a trend that the company report says “remains a serious challenge to this recovery.”

The median sales prices for homes sold in August averaged $168,685, down by only 0.2 percent from July. Prices crested this summer in June, remaining higher from last year over the last two months.

The median price rose 6.3 percent in August, marking the seventh consecutive month that prices rose annually.

Forty-six of the 53 metro areas covered by the RE/MAX report saw prices tick up from over last year, with 15 observing double-digit increases.

Those latter areas included Phoenix (33.9 percent), Boise (24.1 percent), San Francisco (22.6 percent), Las Vegas (19 percent), Miami (17.8 percent), and Billings (16.6 percent).

For home sold in August, the average days on market fell to 81, reflecting a decline from just one day from the average in July.

By Ryan Schuette, DSNews


The Finances of Renting vs. Buying

Trulia reported this week that homeownership is 45% cheaper than renting in the United States. Jed Kolko, Trulia’s Chief Economist explained:

“Homeownership is cheaper than renting in all of the 100 largest metros, by a wide margin. Despite the recent price rebound, rents continue to rise faster than prices, and mortgage rates are near record lows.

Homeownership makes the most financial sense for people whose strong credit scores let them snag the lowest mortgage rate and who get the biggest benefit from deducting mortgage interest and property taxes from their income taxes.”

This news did not come as a surprise to us as we have reported that today’s rental market definitely favors the landlord. Below is a graph of how rental prices have increased recently and where they are projected to go over the next few years based on a report from Marcus & Millichap.

It cost more to rent than own right now. And you don’t get any of your rent back in the future. History shows us, in the long term, you can build equity in a home. Dr. Ken Johnson earlier this year explained in a post on this blog:

“It appears that homeownership creates extra wealth mainly through its ability to force owners to save rather than through property appreciation. Thus, homeownership appears to be a self-imposed savings plan, which through time leads to greater wealth accumulation as compared to comparable renters. In short, buying a home makes Americans save.”

The Joint Center for Housing Studies at Harvard University released a study last year titled America’s Rental Housing: Meeting Challenges, Building on Opportunities. In the study, they actually quantified the difference in family wealth between renters and homeowners:

“[R]enters have only a fraction of the net wealth of owners. Near the peak of the housing bubble in 2007, the median net wealth of homeowners was $234,600—about 46 times the $5,100 median for renters. Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

What Does This All Mean?

We believe David Shulman, senior economist with the UCLA Ziman Center for Real Estate said it best:

“The American Dream of homeownership may be comatose, but it is not dead, and the wake-up call will come in the form of higher rents.”

 

By: The KCM Crew, KCM Blog

 


July Home Prices See Biggest Yearly Increase Since 2006: CoreLogic

Home prices in July saw the biggest nationwide year-over-year increase since August 2006, CoreLogic reported Tuesday.

According to the company’s July Home Price Index (HPI), home prices-including distressed sales-increased year-over-year by 3.8 percent in July. On a month-over-month basis, prices increased 1.3 percent from June.

July marked the fifth consecutive increase in home prices on both a monthly and yearly basis.

Of the top 100 Core Based Statistical Areas (CBSAs), only 23 showed year-over-year declines, four fewer than June.

Removing distressed sales, home prices increased year-over-year by 4.3 percent compared to July 2011 and 1.7 percent relative to June 2012-the fifth consecutive month-over-month decrease.

CoreLogic also reported that its Pending HPI forecasts more monthly and yearly increases ahead. According to the report, prices (including distressed sales) are expected to rise at least 0.6 percent from July to August, putting August on track for a 4.6 percent year-over-year increase. Excluding distressed sales, CoreLogic anticipates price gains of 1.3 percent month-over-month and 6.0 percent year-over-year.

Mark Fleming, chief economist for CoreLogic, said the positive growth will likely lead to price gains for the full year.

“The housing market continues its positive trajectory with significant price gains in July and our expectation of a further increase in August,” Fleming said. “While the pace of growth is moderating as we transition to the off-season for home buying, we expect a positive gain in price levels for the full year.”

Company president and CEO Anand Nallathambi agreed.

“It’s been six years since the housing market last experienced the gains that we saw in July, with indications the summer will finish up on a strong note,” Nallathambi said. “Although we expect some slowing in price gains over the balance of 2012, we are clearly seeing the light at the end of a very long tunnel.”

By: Tory Barringer, DSNews


Short sales? Foreclosures? Principal reductions? The tax man may soon come a calling

Mark Baer listed his Walsingham Heights home for sale, buyers offered $100,000 less than what he owed on his mortgages.

Baer, 50, believed he could persuade the bank to forgive the difference. But the deal posed a big risk: If not done by the end of the year, it could cost him $30,000 in taxes.

“If I do close before that deadline, I will feel like the luckiest man in the world,” Baer said. “If you owe the government money … they can come take your last pair of sneakers. They could take everything.”

Starting Jan. 1, underwater homeowners could be in for a painful surprise: The Internal Revenue Service will begin counting most forgiven mortgage debt as income that can be taxed.

Foreclosed? You’ll be taxed on what’s left on your mortgage. Win a write-down on your principal? You’ll pay taxes on what was cut. Even short sales, the distressed market’s new norm, will be taxed on what was still owed.

For example, if a bank reduces a mortgage principal by $100,000, that homeowner would owe taxes on that amount because it would be treated as income. A homeowner in a 20 percent tax bracket would owe $20,000.

The tax time bomb could serve as a costly new indignity for homeowners. The fallout would be particularly drastic in the Tampa Bay area, where the foreclosure rate remains high and nearly half of all mortgage holders owe more than their homes are worth.

It could also sludge up the housing market as it teeters toward recovery, real estate agents said. Spooked potential sellers could dodge the taxes by staying put in their homes. Instead of the confidence that comes with a fresh start, they would remain burdened by a financial anvil.

“If (tax relief) is not extended, you’re going to get a bunch of people stuck in short sales … and they’ll never be able to get out,” said Keller Williams agent Steve Capen. “I don’t think it would be good for anybody.”

The change comes with the end of the Mortgage Forgiveness Debt Relief Act, passed by Congress in 2007 at the dawn of the housing bust. It allowed homeowners to write off the “phantom income” of forgiven debt but is set to expire Dec. 31.

The law allows homeowners to write off up to $2 million in mortgage debt this year, as long as it was spent on buying or improving a primary home.

The IRS will provide for some very limited exceptions after the provision’s end, meaning most homeowners would have no chance to scrape past the tax unscathed.

Securing a deficiency waiver will keep bank collectors away, but not the IRS. Even a bankruptcy is not likely to remove the extra tax.

Congress has talked of an extension, but final approval is far from guaranteed in a polarized election year. Extending the provision for two years would cost the government more than $2 billion in tax revenue, Congressional Budget Office records show, at a time when Republicans and Democrats both crow about cutting deficits.

Beth Cromwell, a short sale processer with Hillsborough Title, is telling worried homeowners that she would bet on an extension.

“There’s too many short sales that haven’t even been approved yet,” Cromwell said. “If they don’t (extend), they’re just going to create a wave of people filing for bankruptcy.”

Others, like attorney Charles Gallagher, are more doubtful of an 11th-hour rescue. “I’m not real hopeful D.C. will come up with a fix by the end of the year,” he said.

Lenders must forgive the debt by Dec. 31 for homeowners to make the cut, and short sales and other forgiveness measures can often take longer than 90 days to process.

“If you want to get in by the end of the year, you’d need to list your house today,” and even then it might be too late, Capen said. “I have a feeling December is going to be a mess.”

By: Drew Harwell, Tampa Bay Times


Supply & Demand and Its Impact on Housing

For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market, as it is in the markets for every other saleable item, will be determined by the concept of ‘supply and demand’.

According to dictionary.com, “the relationship between supply and demand determines the price of a commodity. This relationship is thought to be the driving force in a free market.”

In real estate, supply and demand is represented as the current month’s supply of homes for sale (the number of homes for sale divided by the number of homes sold in the previous month).

Most real estate professionals know, or at least have a good idea of, the month’s supply of inventory in their market. But why? Because of its affect on pricing moving forward.

While there is no steadfast rule that will apply to pricing in every category of housing, here is a great guideline by which to go:

– 1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.

– 5-6 months’ supply creates a balanced market. Historically home values appreciate at a rate a little greater than inflation.

– 7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.

When you discuss home values with either a seller or buyer, you should be prepared to show what the supply of, and demand for, homes is in the same category of home they are thinking of selling or buying. You should also be prepared to discuss any projected change in those numbers (such as a potential shadow inventory of distressed homes or a projected increase in demand because of a new plant opening).

By: The KCM Crew, KCM Blog