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CORRECTION AND PACE LOANS

This is two articles in one. First is a correction for a recent article I wrote about Homeowner’s Associations. In my article I incorrectly stated that when you see the HOA board go into “executive session” where no minutes are kept they may be contemplating litigation. I was politely corrected by a local board member that they go into executive session in order to discuss discipline against homeowners for violating rules, and they don’t want the names in the public minutes but they DON’T discuss potential litigation there.

 

Secondly, I wanted to let you know about some issues with PACE/HERO loans. These are relatively new loans where you can get some energy-efficient home improvements done like improved HVAC, solar, etc. You may be getting solicitations in the mail or by phone about them and the salesperson may tell you how this is an easy way to get home improvements done with almost no qualifying needed (you do have to have equity) and stretch the payments out over many years. What’s different about these loans is they are repaid through your tax bill. This means that when you sell the home, it stays on the home for the next buyer to deal with. This creates a couple of issues. The buyer may not WANT to pay for this and therefore may not want to buy your home or ask you to pay the loan off. In addition, their lender may not even agree to loan on the property because the PACE/HERO loan is part of your tax bill, which makes it the primary lien on your property. Some people are having issues even refinancing their regular mortgages because of these liens. So be sure to check into it fully before you sign up for one of these loans.

TAXABLE GAIN?

There is a big benefit to homeowners in our current tax code where you can sell a principal residence and avoid paying taxes on up to $250,000 of gain if you are single, and up to $500,000 in gain if you are married, as long as you’ve lived there at least two out of the last five years. But what happens if you have to move prior to the two-year period? The good news is your home is probably worth a lot more than what you paid. The bad news is you may be subject to capital gains taxes!

 

Whether you owe the taxes or not will depend on your reason for selling. If you are moving just to get a bigger/smaller/newer/better home, you’ll probably owe taxes. However, if you are selling because of a change in employment, divorce, or another IRS “safe-haven,” you might qualify to avoid some or all of any capital gains taxes owed.

 

If you don’t meet one of these safe-havens, don’t despair. Talk with your tax expert and find out how much it will be. The tax hit may be less than you think. If you bought a home for $400K and it’s now worth $500K, it looks like $100K in gain. However, you can deduct some closing costs on the purchase and the sale transactions, along with hard improvements. Some of my clients opt to make the move and just pay the tax because the benefits of moving outweigh the taxes owed. But many other times they find that if they just delay selling their home a few months (in order to meet the two-year period) it saves them thousands of dollars.

 

My point is to only make your decision to sell or not sell once you have all the facts. I’m not a tax expert, so check with your tax professional.

SOLAR NEWS

Two items came to my attention recently in regards to solar power for your home that I thought you should be aware of.

The first is that the federal tax credit that was set to expire at the end of 2016 was just extended for five more years. I’ve heard VERY little mention of this in the news so I’m guessing this will be news to most of you. I’m still hearing some ads for solar that tell you to “hurry up” before the federal tax credit expires, but I’m sure they’ll update their ads soon. (FYI: The California tax credit is long gone.)

Here is a quote from a website called The Simple Dollar, “The extension means a 30% federal tax credit offered by the EPA and Department of Energy to encourage Americans to use solar power for the next five years. If you install Energy Star-approved solar power systems, the credit allows you to claim 30% of the cost as a tax credit for the year you installed it. That amount is taken directly off your tax payment, rather than as a deduction from your taxable income.”

The other item is that you can now buy solar power through PG&E. You can choose to have either 50 or 100% of your power come from solar. The catch is that you aren’t saving money with this program, but the argument is that it’s better for the environment. There are no panels required, nothing to buy, no long-term leases to sign, etc. So this may be a good option for people or businesses who are renting, or their building doesn’t allow for a good solar system installation due to the size or direction of the roof, but you still want to go solar for environmental reasons. You can find out more at pge.com/solarchoice.

END OF THE YEAR TAX TIPS

The end of the year is fast approaching. Now is the time to plan ahead and do what you can to try and reduce your income tax bill.  Here are two ideas for you to consider:

 

  1. If possible, pay your property tax bill in December. If your property taxes are not impounded, that means you write the checks yourself. If this is your situation, and you can afford it, consider paying the second installment, normally due in February, before the end of this year. This could increase your deductions for the 2015 tax year.

 

  1. Pay your January mortgage payment(s) in December for the same reason as above. This can generate an extra month’s worth of interest deduction on your taxes.

 

You’ll want to check with your tax professional first to see if it is more beneficial to increase your deductions this year versus next. If, for example, you believe you will be in a lower tax bracket next year because of a reduction in income, you may want more tax breaks this year. However, if your income is expected to be higher next year, you may want to move as much of your deductions into next year as you can. If this seems backwards, consider that the higher your marginal tax rate, the more beneficial each dollar of deduction is.

 

This is an important consideration, because by pulling some of your 2016 deductions into 2015, you will be effectively reducing your 2016 deductions by that amount. If you do this again in 2016, you will be roughly breaking even, assuming you will be in the same tax bracket. However, due to the time value of money, I think you’d rather have the tax break THIS year versus next year.

NEW TWIST ON STUDENT HOUSING

For those of you faced with children heading off to college soon, here is an idea you’ll want to consider. Instead of paying rent for 4 (or more) years, consider buying a small home. Your child (children?) can live in the home, and also be in charge of renting out the rest of the bedrooms.

 

There are several advantages to this strategy. The rent you collect on the other bedrooms may cover part or all of the mortgage payment and other costs. This could mean your child’s housing costs would be less than a straight rental for them. Hopefully, the property will appreciate in value over time. However, even if the value never changes, you will still benefit from having the mortgage paid down each month which is kind of like a forced saving plan. There can be some nice tax benefits, too. For example, you may be able to deduct several trips per year to go check on your rental. How convenient for you since your child lives there! [I’m assuming that you’ll WANT to see your kids again…]  If you have other children and they attend the same college, that gives you even more time to accumulate the financial benefits of this plan.

 

The second advantage to this plan is that if you put your children in charge of the rental, it will provide an invaluable “real world” education to them about responsibility, fiscal management, budgeting, paying bills, etc.

 

You don’t even need to wait to employ this strategy. If you are certain about where your kids are headed, buy the home now and have a property manager rent it out for you. And once they graduate, you can even consider keeping it as a rental property if you wish if it makes sense to keep it.

PROP TAX UPDATE

Just this past week the National Association of Realtors announced that resale home sales are way up, as are prices. And there was much rejoicing! Well, the buyers weren’t rejoicing, but homeowners were rejoicing! Especially the ones that need to sell their homes. The rest of the homeowners were happy that prices have risen, as well, but not all of them.

 

Some homeowners are seeing a BIG jump in their property tax bill now that prices have increased. These are the homeowners whose property taxes were LOWERED over the past few years when values were down. If you bought a home over the last 4-5 years and you’ve never had your taxes lowered, than you should be protected by Prop 13 that limits increases to no more than 2% per year.

 

But there were a lot of us that took advantage of something called Prop 8 to appeal our property tax assessment when values dropped way below what we had paid for the home. (Yes, it’s called Prop 8. No, it has nothing to do with same-sex marriage!) The catch with a Prop 8 appeal is that it’s only temporary. The Assessor can raise your assessed value again as prices increase. They can do it gradually, or all the way back up to what your assessed value would have been (including the 2% max Prop 13 increases each year).

 

If you are under Prop 8, you are probably receiving a letter this week or next just to notify you if you are still under Prop 8 or not. Read it very carefully because it can be a little confusing. If you are still getting the reduction, the letter will list that reduced value AND it will give you the number that you SHOULD be under if not for the Prop 8 appeal.

CAN WE MOVE NOW?

I’ve had some people tell me they’d like to move, but they think they have to wait for their two year anniversary before they can sell to avoid paying capital gains tax on the sale of their principal residence.

 

The good news (if you choose to call it this), is that your actual gain is probably less than you think. Most people just take their sales price and subtract what they paid and assume they will be taxed on all of that gain. As I mentioned in my last article, you get to subtract your buying and selling expenses, as well as improvements you’ve made to the home (don’t forget upgrades if you bought a new home). This can reduce your taxable gain in a hurry!

 

For example, let’s say you bought a home for $450,000 a year ago, and it is now worth $500,000. At first glance you might think you would be taxed on the appreciation of $50,000 if you were to sell prior to your two-year anniversary. In fact, after working through your allowable subtractions, your taxable gain might only be $15,000 or so. So you may still owe capital gains taxes on that amount, but it could be quite a bit less than what you were expecting.

 

In addition, if the reason for your move is an “unforeseen” circumstance as defined by the IRS and it’s one that they make allowances for, you can reduce your capital gains tax even further or avoid it altogether! You will qualify for a reduction if you are moving due to a change in employment, health, divorce, etc. There is even an exclusion in the event that you are blessed with twins or triplets which forces you to buy a larger home.

CAPTIAL GAINS QUESTIONS ARE BACK

Now that prices have recovered, people are asking me about capital gains taxes again. There are a lot of myths out there on this topic.

 

The most common myth is that you have to buy another home of equal or greater value in order to avoid paying capital gains taxes. The second is that you must be at least 55 in order to avoid capital gains tax. The third myth is that your capital gains tax will be figured on your equity (sales price minus mortgage balance). None of these are true. Some of them WERE true prior to May 7, 1997, before the tax law changed.

 

Under current tax law, most of the time you can sell your primary residence and avoid capital gains taxes on up to $250,000 of gain if you are single, and $500,000 if you are married. If you have lived in your home for at least two out of the past five years, this will qualify as your primary residence. It doesn’t matter if you are buying another home or not, it doesn’t matter how old you are, and it doesn’t matter if you are currently living in the home.

 

“Gain” is defined as your profit on the transaction, not your equity. Gain is sales price minus selling expenses minus purchase price minus buying expenses minus improvements.  Your buying and selling expenses are your closings costs, inspections, commissions, etc. Improvements are anything that you’ve done to upgrade the home. This does not include what you’ve done to maintain it, only capital improvements. So putting in a pool is an improvement, painting the exterior is usually not (unless you painted it in order to sell it, then it could be argued that it was a “selling expense”).

 

THIS IS GENERAL INFO. SEE A TAX EXPERT FOR SPECIFICS TO YOUR SITUATION.

NEW SHORT SALE RULES

Short sales have gone from being the bulk of our market to being somewhat rare. However, there are still some homeowners out there that may be considering a short sale. Not all short sales are the same. Each lender will have their own guidelines and rules. If your lender participates in the government HAFA program, there are some new rules that are very interesting.

 

When HAFA first started they would pay $6,000 to the 2nd lender. Then they upped it to $8,500. Under their new rules they will pay up to $12,000 to a 2nd lender. This should help many short sales that are “stuck” because the 2nd lender wants more than the first lender would give them.

 

The next issue is in regards to the homeowner getting money at close of escrow as an incentive and/or for relocation expenses. At first almost no lenders would allow short sale homeowners to receive any funds at closing. But then some homeowners figured out that they may be better off to just sit in the home and live rent-free for months and months and maybe even have the lender pay them “cash for keys” after foreclosure. HAFA came out with a $3,000 relocation incentive to the homeowner for a while to solve this problem. Under their new rules they’ve increased that to where the occupant (whether the homeowner or tenant) could be eligible for up to $10,000 in relocation expenses. I just got a short sale approved where the homeowner is getting $10,000 for relocation and $5,000 as a further incentive to do the short sale. (Please note that I’m not advocating whether this is a “good” or “bad” use of our tax dollars or whether this is the “right” thing to do for some borrowers. Just passing on the info so you are aware.)

End of the year tax tips

The end of the year is fast approaching. Now is the time to plan ahead and do what you can to try and reduce your income tax bill.  Here are two ideas for you to consider.

 

  1. If possible, pay your property tax bill in December. If your property taxes are not impounded, that means you write the checks yourself. If this is your situation, and you can afford it, consider paying the second installment, normally due in February, before the end of this year. This could increase your deductions for the 2014 tax year.

 

  1. Pay your January mortgage payment(s) in December for the same reason as above. This can generate an extra month’s worth of interest deduction on your taxes.

 

You’ll want to check with your tax professional first to see if it is more beneficial to increase your deductions this year versus next. If, for example, you believe you will be in a lower tax bracket next year because of a reduction in income, you may want more tax breaks this year. If this seems backwards, consider that the higher your marginal tax rate, the more beneficial each dollar of deduction is.

 

This is an important consideration, because by pulling some of your 2015 deductions into 2014, you will be effectively reducing your 2015 deductions by that amount. If you do this again in 2015, you will be roughly breaking even, assuming you will be in the same tax bracket. However, due to the time value of money, I think you’d rather have the tax break THIS year versus next year.

 

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