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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.

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.

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.

TAX BILL APPEAL

Many homeowners in our area were pleasantly surprised a few years ago when they received a notice from the County Tax Assessor’s office that their tax bill would be going DOWN. This was due to Proposition 8, which allows the County to drop your tax bill when the value of your property goes down.

 

But now I’m getting calls from people saying that their bill is now going back UP. They didn’t realize that Proposition 8 is a TEMPORARY reduction, and that once the values go back up, your tax bill can, too. It can go up a little bit, or it can go all the way back up to the prior value, plus the Proposition 13 increases along the way. (Proposition 13 limits property tax increases to only 2% per year.)

 

So if you benefited from a Proposition 8 reduction in the past, just know that the County is likely going to review that situation annually and they can raise it back up to accurately reflect the market value.

 

If you have received a notice that your tax bill is going up, and you think the assessed value is too high, you have until November 30th of this year to appeal it. You can call 925.335.1901 and ask for an appeal form. Or contact me, I have them in my office. They’ll ask you to provide information on recent sold properties to support your appeal. Again, I can help you with this if you like. Just email me at Brian@SharpHomesOnline.com and give me your address and what the new assessed value is. I’ll email you back if I think it’s worth appealing and I’ll provide the comparable sold information you’ll need at no charge.

HOW TO ESTIMATE PROPERTY TAXES

Last week I promised to show you how to estimate what your tax bill would be if you bought a certain home. You can get a copy of the current bill at the following website – https://taxcolp.co.contra-costa.ca.us/taxpaymentrev2/summary/ Once you pull up a property, click on “view bill.” This will take you to a breakdown of all the fees included in the tax bill. On the upper right will be “Assessment Information” which will show what value your property is assessed for.

On the left side will be “Special Taxes & Assessments.” These are flat fees, which means it doesn’t matter what your assessed value is. These can vary wildly from one neighborhood to the next. On the right will be “Ad Valorem Taxes & Assessments” which are a percentage of your assessed value. The first item will be the 1% Countywide Tax. Then below that will be a variety of school, park and misc. items, all at different percentages of your assessed value. At the bottom of that list will be your total of Ad Valorem Taxes as a percentage and a dollar amount.

If you are considering a property to buy, you should NOT just look at the prior owner’s total due and assume you will pay the same since the assessed value could be dramatically different. To estimate your tax bill if you are buying a property as a residence, take your new purchase price, minus $7,000 for the homestead exemption, then multiply it by the total Ad Valorem rate, and then add in the dollar amount of the Special Taxes and Assessments.

NOTE: This is for educational purposes only and should not be relied up for your future tax bill. Please contact the County Assessor & Tax Collector for more accurate numbers.

HOW TO EASILY CHECK TAX BILL

Last week I discussed the basics of how tax bills are calculated. As part of your due diligence before buying a home, it is a good idea to have a look at the tax bill for that new home so you don’t get any surprises later. I described last week how most lenders and escrow officers use 1.25% to estimate your tax bill, but some homes in East County are taxed at much higher rates.

Thankfully Contra Costa County has their tax bills online so you can check them very easily. Here is the link – https://taxcolp.co.contra-costa.ca.us/taxpaymentrev2/summary/

Once you are there, the best way to search is by the Assessor’s Parcel Number (APN). If you don’t have that, you can search by street address. However, it is a little picky as far as how you enter the street address as it tries to match it EXACTLY to what is on the tax bill. Let’s say the address you want to check is 123 Main Street but it is listed on the tax bill as “123 Main St.” If you enter “123 Main” it won’t pull it up, and “123 Main Street” won’t work, either. In this case, the only way for it to pull up is if you enter “123 Main St.”

Once it does locate the property, the first screen you come to will be a list of the current tax year installments and their status. At the bottom will be the assessed value of the property listed as “gross.” To see the assessments, under “Payment Status,” look for the words in blue, “View Bill.” Click on that and it will pull up the actual tax bill, complete with a breakdown of the Ad Valorem Taxes and Assessments and Special Taxes and Assessments. Next week I’ll tell you how to look at the current tax bill and then estimate very closely what your tax bill would be in the event you buy this property.

PROPERTY TAX BASICS

When I first started in real estate, some of my clients were surprised when their first payment was much higher than what they were quoted by their lender. I would find that their principal and interest were exactly what the lender had quoted them, but their monthly tax impound was much higher. Usually when most people first sit down with a lender, they haven’t picked a home out yet, so the lender HAS to use an estimate since the property taxes aren’t known yet. Many lenders and title companies use 1.25% as a rule of thumb to approximate your tax bill when they quote you a payment on your new home and/or to calculate your impound accounts. However, property taxes can vary greatly from town to town, neighborhood to neighborhood, and even within neighborhoods. I quickly learned how tax bills were calculated to try to provide more accurate estimates to my clients and avoid these nasty surprises.

Your property tax bill is broken into several different sections. First is the Countywide 1% Tax, which is 1% of your Assessed Value (which is usually initially set at the sales price when a property changes hands). Then you add in school bonds, city bonds and others. That is the total of your Ad Valorem Taxes. Then you add in Special Taxes and Assessments, which can be park assessments, Mello-Roos, etc. When you add all these amounts up, that is your total tax bill due for the year. If you divide that by your Assessed Value, you will get your effective tax rate, which is often 1.3%-1.5% around here, but can climb MUCH higher in areas with large special assessments. So if you bought a home with a 1.5% Tax Rate, and your lender had estimated your payment based on 1.25%, it could mean an extra $100-200+ every month. Next week I’ll tell you how to estimate the tax bill on a house your considering buying.

DEDUCT INTEREST WHEN NOT ON TITLE?

I’m seeing more situations where a parent will step in to buy a home for their adult child since the parent has better credit, even though the child will be living in the home and making all the payments. There is typically a question about whether the child can write off the interest on the loan, and the answer is “probably.”

Regulation 1.163-1(b) of the IRS reads: “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”

The IRS has challenged this type of situation before – sometimes they allow the deduction, but other times they don’t. They want to see that the party claiming the deduction has all “the benefits and burdens of ownership…”

Here are the factors in the cases allowed in the past that seemed to sway the IRS towards approval: 1. The child must live in the property. Their driver’s license, voter registration and utility bills should be in their name and should list the property address. 2.
Parent and child should sign a written agreement saying that the child is fully obligated to make mortgage payments, that parent can evict in the event of default, and that parent recognizes that the child has an “equitable interest” in the property. 3. Child should be responsible for all maintenance and upkeep of the property. 4. Parent and child should sign a Quit Claim Deed, conveying the property to the child. This will not be recorded, but shows your intent that the child really “owns” the property.

Please see a tax expert and/or attorney for specifics to your situation.

End Of The Year Tax Tips

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

1. Pay your property tax bill in December (if you can). If your property taxes are not impounded, that means you write the checks yourself. If this is you, and you can afford it, consider paying the 2nd installment (the one due next February) before the end of this year. That could increase your deductions for the 2013 tax year.

2. Pay your January mortgage payment(s) in December. 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, and vice versa. 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 2014 deductions into 2013, you will be effectively reducing your 2014 deductions by that amount. If you do this again in 2014, 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.
Please check with your tax professional for specifics to your situation. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

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