Taking A Tax Loss On Your Principal Residence

Taking A Tax Loss On Your Principal Residence

Taking A Tax Loss On Your Principal Residence

Question. When my wife died several years ago, I sold the large house we were living in and bought a smaller house.. That purchase was at the top of the local real estate market. I have just purchased a retirement home and would like to sell my current property. However, after real estate commissions and sales expenses, I am facing a sizable loss — and my accountant tells me this loss is not tax deductible. Can you suggest any solutions so that I do not lose my long-term investment?

Answer. Your accountant is correct. Current tax law permits a tax loss deduction for investment property but not for a principal residence. Although it appears that some day in the foreseeable future Congress will provide similar tax relief for the American Homeowner, at present no such laws are on the books. In fact, the current Congress appears intent on reducing homeowner rights and benefits.

You do, however, have a few options.

First, to the extent you can make projections, try to analyze the future marketability of your house. Will the house come back up in value, or will it continue to deteriorate? If you keep the house for a longer period of time, will you have to make a number of costly repairs and thus be throwing good money after bad? In other words, does it make sense to “take your loss and run?”

Second, if you decide it makes sense not to sell now, rent the house out for a year or two. Abandon the house as your principal residence; pay taxes where your retirement home is located, get a new driver’s license and new voter registration card at a different address. Let your friends and relatives know that you no longer call that property your “home.”

A year or two from now, depending on your financial and personal needs, you can then sell the property. Since it will then be investment real estate, you may be able to deduct some of your tax loss on your income tax return (although you should confirm the amount with your accountant).

If you do not need the money — or the tax loss — and if the rental income from the house is worthwhile, you can continue to rent out the house.

Third, once you have converted the property to that of an investment (rather than your principal residence), you might want to consider swapping the house under the “like-kind” (Starker) exchange. Such an exchange would permit you to obtain alternative real estate, without currently having to pay tax on any profit. Obviously, however, if you have no gain, there is no need to consider a Starker exchange. The rules for such an exchange are complex, and have been discussed in earlier columns.

Finally, if you have children, why not consider keeping the real estate until your death. Under current tax law, (which may change in the current Congress) your children will inherit the property at what is known as the “stepped-up” basis. Oversimplified, this means that the children’s tax basis is the value of the property at the date of your death — and not your tax basis. Your tax advisors should be asked to analyze all of these various options.

Your question also raised a very important issue facing many older homeowners– and one that is often overlooked or forgotten. Many homeowners purchased their first home many years ago at low prices. Over the years — especially in the l970s and l980s — real estate appreciated rapidly. Many homeowners moved from one house to another, and took advantage of the roll-over. Now, when they want to sell their last house — or purchase down in price as you are considering — the tax issues become very important.

Let us look at the following example. Assume that in 1970, you and your wife purchased your first house for $30,000. Over the years, you added $20,000 in improvements, and thus the basis for tax purposes (purchase price plus improvements) for you and your wife was $25,000 each. In 1987, you sold the house for $200,000, thus generating what you probably believed was a paper profit of $150,000.

However, since your wife died before you sold the first house, your basis is increased by virtue of the “stepped up” basis. At the time of your wife’s death, the property was worth $200,000. Under the tax laws, you inherited your wife’s basis as of the date of her death; in our example, her basis was $100,000. Thus, for tax purposes, the basis of your first house when you sold it was $125,000 ($25,000 plus $100,000).

Your house was sold for $200,000, and thus your profit was $75,000. But since you purchased your current house within two years from the time the first house was sold, you qualified for the roll-over, and this profit was used to reduce the basis of the Alexandria house. Accordingly, although you paid $300,000 for the new property, in reality its basis is $225,000.

If you sell the house now for $220,000, even after paying real estate commissions and other expenses, your paper loss will not be as great as you think.

However, this is tax talk; you are looking at an actual loss of $80,000, since you purchased the house at $300,000 and now can only sell it for $220,000. There are a lot of people who purchased real estate at the peak of the market, — and despite significant increases in value — many homeowners are still unfortunately under water.

And the rollover has long been replaced by the up-to-$250,000/$500,000 exclusion of gain.

 

 

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Home Negotiation tips to close the deal

Home Negotiation tips to close the deal

  There is no simple formula for home negotiations.  There is no if C happens then you should go to counter F.  It’s not that simple.  Some of it comes with past experience.  Some if it comes with being able to read the opposite party and to read between the lines.  This home negotiation tip is for both buyers and sellers.  Negotiating the sales price or repairs on a home is so different than many other types of sales negotiation. That is what confuses people. Here in Detroit we have many Tier 1, Tier 2 and 3 negotiators that deal with Ford, GM, and Chrysler. These negotiators are hard nosed and good at what they do, and they wonder why the tactics they use everyday do not work with home sales.  In most cases you cannot be a hard nosed negotiator and expect the other party to succumb to your demands or to close the deal.

There are a few reasons why hard nosed negotiations do not work and why some negotiators end up frustrated and not at the closing table.  After all the ultimate goal is to get to the closing table.

1.) There are emotions involved. Sellers have an emotional attachment to the house because they have remodeled the home, or raised their children there, or think the house is the greatest in the world even though it needs major updating. Seller’s sometimes have the rose colored glasses on. Buyers are usually less emotional about the house, but they too get emotional sometimes when the negotiations get tough. In car sales, equipment sales, and many other types of sales and sales jobs there is no emotions. It’s about product and price. Not so with all home sales.

2.) In equipment sales or negotiating with the big auto companies both sides want to make the deal work and work hard to come to an agreement.  They are negotiating to meet in the middle because there are a limited amount of companies to deal with.  There is may be prior relationships between the companies.  In house sales that is not always the case.  Seller’s usually DO NOT HAVE TO SELL THE HOUSE, nor DO BUYERS HAVE TO BUY.   The buyers can move onto the next home, and the sellers can keep turning down offers as long as they want. In equipment sales there are usually only a few companies to choose from. Not in real estate there are always more homes coming to the market. They may not be as nice, or as updated, but there will be more homes coming to the market if you are willing to wait.  They can put up the house for sale next year, or wait until spring to buy.

It is the same with sellers. I just heard yesterday about a seller that has turned down 5 offers. After 5 offers you should get an idea of what a buyer is willing to pay for your home. Yet there are some unreasonable sellers that will still want more after multiple offers on their house. The seller just rejected my clients offer that was higher than the previous 4 offers.  Sellers and buyers do not have to close the deal. And it is common for buyers or a seller to quit negotiating and walk away from the deal. Sometimes they just don’t care or are unreasonable in their demands and wants. It is common for one party to base their price in reality and the other party in the transaction living in dream land.

So when negotiating on a sales price you want to be the one grounded in reality. You want your agent to look at the recent solds in the neighborhood. That way the agent or you can look at the recent sold prices of comparable homes and be able to give a range of what the home is worth. That is so important whether you are the seller or buyer. Know what the current market value of the home is your priority.

Having the knowledge of the range of what the home is worth gives you a basis of what to offer (if you are the buyer ) or what to accept (if you are the seller). If you are unreasonable in what you want then do not be surprised when the other party stops negotiating or walks away. It is the same way for you. If the other party is unreasonable in their demands then it is smart for you to walk away.   The other party has an incentive to close on the home, but they cannot be forced to accept what you think or what you want. Even if you are right on, they may be the unreasonable one. There is nothing you can do about it. Many buyers do not have to buy the one house or the seller does not have to sell.  That is the difference in home sales in most cases…. they do not have to.  If you are a hard nosed negotiator you may learn the hard way and lose the house.  So the key is how bad do you want to buy or sell?

I hope this negotiating tip of understanding the mind set of the opposite party, and what has to be done in the home sales process will help make your home sales negotiation more fruitful. It will save you aggravation if you understand this up front. It does not matter if it is waterfront home for sale in Oakland County or any home in Mesquite, NV. …..realize that many times hard nosed negotiations fail in the real estate business.

The goal should always be to find a win win for both parties.

 

 

Tax Free Exchange

Tax Free Exchange: A Valuable Alternative To A Home Sale

Tax Free Exchange: A Valuable Alternative To A Home Sale

Congress is currently talking tax reform. Two very important real estate benefits are on the so-called “chopping block”, either to be completely eliminated or significantly curtailed.

It is doubtful that the home owner exclusion of up to $500,000 (or $250,000 if you file a single tax return) of profit will be impacted; there are too many homeowner voters who will forcefully object. But investors do not have the same strong lobbyist who can make the case for preserving the “like kind” exchange. So if you have an investment property, now might be the time to consider doing an exchange.

Residential homeowners have a number of tax benefits, the most important of which is the exclusion of up to $500,000 (or $250,000 if you file a single tax return) profit made on the sale of your principal residence. But real estate investors — large and small — still have to pay capital gains tax when they sell their investments. And since most investors depreciated their properties over a number of years, the capital gains tax can be quite large.

There is a way of deferring payment of this tax, and it is known as a Like-Kind Exchange under Section 1031 of the Internal Revenue Code. In my opinion, these exchange provisions are still an important tool for any real estate investor.

The exchange process is not a “tax free” device, although people refer to it as a “tax-free exchange.” It is also called a “Starker exchange” or a “deferred exchange.” It will not relieve you from the ultimate obligation to pay the capital gains tax. It will, however, allow you to defer paying that tax until you sell your last investment property — or you die.

The rules are complex, but here is a general overview of the process.

Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:

First, the property transferred (called by the IRS the “relinquished property”) and the exchange property (“replacement property”) must be “property held for productive use in trade, in business or for investment.” Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house.

Second, there must be an exchange; the IRS wants to ensure that a transaction called an exchange is not really a sale and a subsequent purchase.

Third, the replacement property must be of “like kind.” The courts have given a very broad definition to this concept. As a general rule, all real estate is considered “like kind” with all other real estate. Thus, a condominium unit can be swapped for an office building, a single family home for raw land, or a farm for commercial or industrial property.

Once you meet these tests, it is important that you determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, it must be noted that the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using the like-kind exchange will make up for the lower cost basis on your new property. And discuss also whether you might be better off selling the property, biting the bullet and paying the tax, but not have to be a landlord again.

The traditional, classic exchange (A and B swap properties) rarely works. Not everyone is able to find replacement property before they sell their own property. In a case involving a man named Mr. Starker, the court held that the exchange does not have to be simultaneous.

Congress did not like this open-ended interpretation, and in 1984, two major limitations were imposed on the Starker (non-simultaneous) exchange.

First, the replacement property must be identified before the 45th day after the day on which the original (relinquished) property is transferred.

Second, the replacement property must be purchased no later than 180 days after the taxpayer transfers his original property, or the due date (with any extension) of the taxpayer’s return of the tax imposed for the year in which the transfer is made. These are very important time limitations, which should be noted on your calendar when you first enter into a 1031 exchange.

In 1989, Congress added two additional technical restrictions. First, property in the United States cannot be exchanged for property outside the United States.

Second, if property received in a like-kind exchange between related persons is disposed of within two years after the date of the last transfer, the original exchange will not qualify for non-recognition of gain.

In May of 1991, the Internal Revenue Service adopted final regulations which clarified many of the issues.

This column cannot analyze all of these regulations. The following, however, will highlight some of the major issues:

1. Identification of the replacement property within 45 days. According to the IRS, the taxpayer may identify more than one property as replacement property. However, the maximum number of replacement properties that the taxpayer may identify is either three properties of any fair market value, or any larger number as long as their aggregate fair market value does not exceed 200% of the aggregate fair market value of all of the relinquished properties.

Furthermore, the replacement property or properties must be unambiguously described in a written document. According to the IRS, real property must be described by a legal description, street address or distinguishable name (e.g., The Camelot Apartment Building).”

2. Who is the neutral party? Conceptually, the relinquished property is sold, and the sales proceeds are held in escrow by a neutral party, until the replacement property is obtained. Generally, an intermediary or escrow agent is involved in the transaction. In order to make absolutely sure the taxpayer does not have control or access to these funds during this interim period, the IRS requires that this agent cannot be the taxpayer or a related party. The holder of the escrow account can be an attorney or a broker engaged primarily to facilitate the exchange.

3. Interest on the exchange proceeds. One of the underlying concepts of a successful 1031 exchange is the absolute requirement that not one penny of the sales proceeds be available to the seller of the relinquished property under any circumstances unless the transactions do not take place.

Generally, the sales proceeds are placed in escrow with a neutral third party. Since these proceeds may not be used for the purchase of the replacement property for up to 180 days, the amount of interest earned can be significant — or at least it used to be until banks starting paying pennies on our savings accounts.

Surprisingly, the Internal Revenue Service permitted the taxpayer to earn interest — referred to as “growth factor” — on these escrowed funds. Any such interest to the taxpayer has to be reported as earned income. Once the replacement property is obtained by the exchanger, the interest can either be used for the purchase of that property, or paid directly to the exchanger.

The rules are quite complex, and you must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction.

 

 

 

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Showing Your House

Showing Your House

From Chris Williams

Your house should always be available for show, even though it may occasionally be inconvenient for you. Let your listing agent put a lock box in a convenient place to make it easy for other agents to show your home to homebuyers. Otherwise, agents will have to schedule appointments, which is an inconvenience.  Most will just skip your home to show the house of someone else who is more cooperative.

Most agents will call and give you at least a couple of hours notice before showing your property. If you refuse to let them show it at that time, they will just skip your house. Even if they come back another time, it will probably be with different buyers and you may have just lost a chance to sell your home.

Try Not to be Home

Homebuyers will feel like intruders if you are home when they visit, and they might not be as receptive toward viewing your home. Visit the local coffee house, yogurt shop, or take the kids to the local park. If you absolutely cannot leave, try to remain in an out of they way area of the house and do not move from room to room. Do not volunteer any information, but answer any questions the agent may ask.

Lighting

When you know someone is coming by to tour your home, turn on all the indoor and outdoor lights – even during the day. At night, a lit house gives a “homey” impression when viewed from the street. During the daytime, turning on the lights prevents harsh shadows from sunlight and it brightens up any dim areas. Your house looks more homey and cheerful with the lights on.

Fragrances

Do not use scented sprays to prepare for visitors. It is too obvious and many people find the smells of those sprays offensive, not to mention that some may be allergic. If you want to have a pleasant aroma in your house, have a potpourri pot or something natural. Or turn on a stove burner (or the oven) for a moment and put a drop of vanilla extract on it. It will smell like you have been cooking.

Pet Control

If you have pets, make sure your listing agent puts a notice with your listing in the multiple listing service. The last thing you want is to have your pet running out the front door and getting lost. If you know someone is coming, it would be best to try to take the pets with you while the homebuyers tour your home. If you cannot do that, It is best to keep dogs in a penned area in the back yard. Try to keep indoor cats in a specific room when you expect visitors, and put a sign on the door. Most of the time, an indoor cat will hide when buyers come to view your property, but they may panic and try to escape.

The Kitchen Trash

Especially if your kitchen trash can does not have a lid, make sure you empty it every time someone comes to look at your home – even if your trash can is kept under the kitchen sink. Remember that you want to send a positive image about every aspect of your home. Kitchen trash does not send a positive message. You may go through more plastic bags than usual, but it will be worth it.

Keep the House Tidy

Not everyone makes his or her bed every day, but when selling a home it is recommended that you develop the habit. Pick up papers, do not leave empty glasses in the family room, keep everything freshly dusted and vacuumed. Try your best to have it look like a model home – a home with furniture but nobody really lives there.

 

Go to my web site for other selling tips.

Increase Your Home’s Value

Three Simple Ways to Increase Your Home’s Value

Three Simple Ways to Increase Your Home's Value

We all want to make sure that our home not only holds its value, but increases it as well. That way if needs were to change or a move were in order, the home could be sold for a profit, making the move that much easier. Here are a few very simple, quick, ways to make sure that this happens.

Get Handy

Homeowners often get into a lull with maintaining and fixing broken or worn items in their houses. One thing leads to another, which eventually leads to repairs costing thousands of dollars. Instead of waiting, take action the moment you realize something is wearing out and fix it or call a handyman — it will save you money in the future and help maintain the value of your home.

Cleanliness

There is an obvious correlation between the value of homes that are kept up with (at least) a weekly cleaning and those that don’t. Not only will your home look nice and be clean for company, it will stay in good condition longer and avoid having bugs and rodents inside the garage, home, and attic. Homes that have actively used a pest control service can be sold for more than those that didn’t. Make it easier on yourself by committing to a good cleaning on a weekly basis, scheduled in at the same time each week so that a habit will be formed.

Think Outside the Box

The inside of your home may be the top priority for you, but don’t forget to do basic maintenance on your lawn and surrounding areas. Remember, this is the first thing that potential buyers and renters see when they pull up. In fact, the looks matter so much that a recent study said that simply raking, aerating, mowing, and maintaining a basic lawn yields over a 300% ROI when it comes to selling!

Best place to retire; wwwmesquite-realestate.com

To Avoid Contract Disputes, Itemize Items That Convey

To Avoid Contract Disputes, Itemize Items That Convey

To Avoid Contract Disputes, Itemize Items That Convey

Question. We have signed a contract to buy a house. When we first saw it, before signing the agreement, there were two refrigerators. One was in the kitchen and one was in the basement. The real estate agent told us that both refrigerators would stay with the property. Settlement is scheduled for next week, and we have now been told that the basement refrigerator has been removed. Our mortgage lender, however, insists on our signing a statement that the refrigerator remains as part of the house, and as part of the lender’s security.

I do not understand when a refrigerator is a fixture and when it is not.

Answer: Your question has stumped a lot of people, including several law professors to whom this question was posed.

There is no easy answer as to what is a fixture. An item, standing by itself, may not be a fixture, but when made part of the property, it can change its characteristics. For example, a kitchen sink in a plumber’s shop window is personal property. Once it has been installed in your house, however, it becomes a fixture and is part of the real estate.

Generally speaking, and in the absence of a contractual agreement to the contrary, fixtures remain with the house. Personal items can be removed by the seller.

As you can see, it certainly makes a difference if an item is characterized “personal property” or “fixtures.” For example, can a seller take a removable wet bar from the basement, even though the plumbing is hooked up? Does a window air conditioning unit convey with the property?

There are no easy answers to any of these questions. The courts have applied a number of tests, including:

  • The manner in which the article is attached to the real estate. If the article can be removed without substantial injury to the building, it is generally held to be personal property.
  • The character of the article and its adaptation to the real estate. If, for example, an article was fitted or constructed specially for a particular location or use in a house, one can argue the article becomes a permanent part of the building, and thus a fixture.For example, the courts have held these items to be fixtures: pews in a church, screens and storm windows specially fitted to a house and electronic computing equipment installed on a floor specially constructed for it.
  • The intention of the parties. What would the average person consider the article to be? Gas stoves, for example, are intended to remain in a house permanently, and thus are fixtures. The so-called “Murphy beds” fastened to the wall on pivots are considered fixtures. But roll-away beds that are not fastened to the wall are not fixtures (except in Wisconsin).Going through this fascinating history of fixtures, one important caveat comes to mind.When in doubt, spell it out in the contract. Furthermore, if the seller or the real estate agent verbally advise you that a particular item will convey, again spell it out in the real estate contract. If you want the refrigerator to convey with the property, put it in the contract to avoid any confrontation in the future.

    Too many homebuyers are often disappointed because they relied on what the agent or the seller said — or what they thought the agent said — and just did not reduce those representations to writing into the sales contract.

    In your case, I would argue that the second refrigerator stays with the property. This is based not necessarily on the fact that it is a fixture, but on the promises made by the seller’s agent — and on which you relied.

    Custom in the area is also important. I understand that in the Western part of the country, refrigerators do not necessarily convey; however, they do in the Eastern states. But don’t rely on custom. If you are the seller and want to take a particular item with you, spell it out in writing in the sales contract. And if you are the buyer and want a particular item to stay in the house, spell it out in writing in the sales contract.

 

 

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Appraisals Can Be Challenged

Appraisals Can Be Challenged

Appraisals Can Be Challenged

Question: We are refinancing our home to replace an adjustable rate mortgage with a good fixed rate loan. Unfortunately, the appraisal came in low and when I received the copy from the mortgage company I noticed many errors, some of which are significant.

For example, the appraisal statet my home is stone and frame instead of stone and brick. It also omits a finished bedroom in the basement and a porch. The appraiser is reluctant to make the adjustment and the loan officer just does not seem to care. They claim they are very busy, and have to rely on the appraiser.

Discussing the potential adjustments with an independent appraiser leaves me to conclude that if the errors are corrected, it would add at least an additional $10,000.00 to the appraisal, and thus about $8,000.00 more in a loan to me.

Should I have my home reappraised? Should I contact the corporate officer of the mortgage company? Should I consider any legal action?

Answer: I cannot recommend you consider legal action. Not every wrong that occurs should be taken to court. Usually the courts want a Plaintiff to demonstrate that he or she has exhausted all other remedies before filing suit.

To prove the measure of your damages — if any — in court, you would need to obtain another appraisal, so you can demonstrate the error of the original appraiser.

I am a believer in going to the top, when necessary. You write that the mortgage company’s loan officer does not seem to care about the apparent error. I suspect that the loan officer’s boss — the president of the mortgage company — would care.

People in business usually are concerned about staying in business, and reputation and word of mouth are a very important aspect of business growth.

Even in today’s market, where mortgage lenders are very busy doing refinancings, I would try to meet with the president of the mortgage company or at least someone in a supervisory position above the loan officer, and discuss your concerns.

The lender may put pressure on the appraiser to reappraise your house. I have heard of numerous instances where appraisers have made mistakes but have been honest enough to go back to the house with a view towards correcting the original appraisal.

You should note that the appraisal business is not scientific. At best, it is a sophisticated art. While appraisers certainly use such bench marks as comparable sales in the area, square footage, replacement value and other similar concepts, the bottom line in my opinion is that appraising a house is a very subjective exercise.

The best test of market value still is what a ready, willing and able buyer will pay a ready, willing and able seller. The price sets the market value. All of the other factors are significant, but not necessarily critical to a determination of price.

You should also understand that the appraisal industry has been under significant pressure — and has taken a number of steps — to correct many of the errors which they made during the 1980’s 90s. Indeed, most appraisers are now taking a very conservative approach, just to be on the safe side. And under new rules, the appraiser must not be selected by the lender; this creates potential problems since I have personally seen appraisers from a different part of the country where the property was located. Clearly, an appraiser must have a working knowledge of the area

If your mortgage lender is reluctant to reassess the situation and to put pressure on the appraiser to go back to the house, then you currently have a problem. While I normally would have suggested you try another lender, unfortunately in the last month, interest rates have gone up some what, and if you apply for a new loan today, it probably would be at a higher rate than the original lenders commitment.

Thus, in your particular case, I would go to the mat with this appraiser and with this lender. Clearly, if there are errors in the appraisal, those errors should be corrected — at no additional cost to you.

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