An Exchange Means More to Reinvest

Section 1031 exchange for rental and investment real estate is a tool that allows investors to move the gain from one property to another without immediate income tax consequences.

An instant benefit is to postpone the tax due which gives the investor a larger amount of proceeds to invest. In the example shown, the investor has 21% more proceeds to invest and grow over time than if he had paid the taxes due instead of exchanging.

A legitimate long-term goal might be to make qualified exchanges from one property to another until the investor dies. The heirs would then receive a stepped-up basis on the property based on the market value at the time of the decedent’s death and possibly avoiding taxes altogether.

There are specific requirements to be met in order for the exchange to qualify. For more information on exchanges, see IRS publication 544. In addition to enlisting the services of a real estate professional familiar with investment property, seek the help of Qualified Intermediary to facilitate the intricacies of the exchange. Your real estate agent can help you locate one.

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Is the Window Closing?

iStock_000011016597Small 250.jpgWith interest rates lower than they’ve been in over 40 years, it may be difficult to think of a “window of opportunity” closing. However, it isn’t difficult to understand that it may very probably cost more to live in a home in the near future due to rising interest rates and prices.

Zillow recently reported results from a nationwide study that home values are expected to appreciate by 4.5% through the end of the year. Coupled with Freddie Mac’s projection that rates are going up, the cost of housing for buyers by the end of the year will be higher than it is now.

While uncertainty of the future can stagnate some people, the fear of loss can be much more devastating when a person realizes that the amount they pay to live and enjoy a home could have been considerably lower had they acted when prices and mortgage rates were lower.

The following example considers a $250,000 purchase today with a FHA mortgage compared to what it might be at the end of the year with a higher price and interest rate as discussed earlier. The net effect is that it will cost $191.87 more each month to live in the very same home based on the cost of waiting to buy.

To see what the cost might be for your price range, use this Cost of Waiting to Buy spreadsheet.

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6 STAGING PITGALLS SELLERS

SHOULD AVOID

 

In many cases, staging will determine how easily a home will sell, but luckily, it’s one of the few factors that your clients have control over. With a little guidance from their great agent (read: you!) any smart homeowner can get their home picture perfect and buyer ready.

Of course, we’re not talking about major renovations here—just deep-cleaning, uncluttering, and maybe a fresh coat of paint. As agents know, the point of staging is to remove anything that will distract a buyer from all the great things the home has to offer. But for some sellers, it’s easy to go overboard if they’re not careful. Here are a few of the biggest pitfalls we’ve seen when sellers over-stage a home and how agents can help them avoid these missteps.

1. Don’t be dull

Are you selling a hotel room? No? Then a home shouldn’t look like a hotel! The purpose of staging is not to make the home boring and bland. The goal of staging is to get the potential buyer to feel that the home looks nice all the time, so it should feel like real—but incredibly neat!—people live there. As agents, we typically prefer boring over cluttered and crazy, but remember, a few spots of color photograph well and will stand out in listing photos. Simple touches add subtle interest, like a red throw pillow or a turquoise fruit bowl—just don’t go too wild.

2. Selling with smell

When you’re listing a home where sellers are living, sometimes it can be tough to keep a listing in tip-top shape for spur of the moment showings. Of course, no one wants a home to smell like last night’s beef stroganoff when a potential buyer arrives. But many sellers overcompensate with potpourri and air fresheners. Beware of overwhelming a serious buyer with seriously strong scents. A home should smell fresh and clean, but not heavily perfumed. A seller’s best bet is to invest in a deep clean to remove lingering smells and avoid cooking anything too potent during the list time.

3. The sound of music

Ditch the tunes. Mood music backfires more often than not. Sellers won’t be able to guess the buyer’s musical tastes, and it can make some buyers feel like they’re being manipulated.

4. The elephant graveyard

Sometimes it’s necessary for the homeowners to move out before the house sells. But too many sellers take their best furniture and possessions with them to their new home, leaving only the most run-down furniture behind. In a sparsely furnished house, it’s even more important that the pieces left behind are tasteful and add to the ambiance of the home. The old sectional sofa sitting forlornly in an empty living room will just make the house feel abandoned. The house should be well furnished or completely empty. Not somewhere in between.

5. Wasting money on the wrong renovations

Many sellers undertake huge projects right before they sell. Perhaps the bathroom is outdated, and they’ve always wanted to fix it up. But it’s hard for sellers to guess which renovations will provide the greatest return on the investment. Small touches like new cabinet hardware or new light fixtures might go a long way toward making the home feel up to date, without doing a major renovation costing tens of thousands of dollars. Sellers should depend on their savvy agent to help figure out how much updating is needed so the home will sell easily in the current market.

6. Remove clutter, don’t just move it around

Agents say this to virtually every client: When it comes to selling a home, less is more. An uncluttered home makes listing photos more attractive, which translates to more showings, and it makes the house feel open and airy. But it rarely works to try to hide the clutter. A serious buyer will want to look under the hood, kick the tires a little. That means they’ll explore the basement, open up your closets, and even look under your sink. So it’s important to that agents stress the importance of getting rid of or storing extra belongings. It might seem like a lot of work, but it will make it easier to move out once the seller gets the offer they’ve been waiting for.

 

Looking for the Largest Deduction

Standard Itemized.pngIRS allows taxpayers the option to take the standard deduction or the itemized deduction. The astute taxpayer will compare to see which one will result in the greatest deduction and the election can be made each year.

The 2013 standard deduction for a married couple filing jointly is $12,200 and $6,100 for a single taxpayer. It doesn’t require any proof of actual expense and has no requirement for home ownership.

Items that can be included on Schedule A for itemized deductions include:

  • Certain taxes paid for state and local income tax, general sales tax, real estate property taxes, personal property taxes or other taxes paid
  • Qualified home mortgage interest, investment interest or possibly, mortgage insurance premiums
  • Charitable contributions
  • Casualty or theft losses
  • Medical and dental expenses that exceed 7.5% of adjusted gross income if born before 1/2/49 or 10% if born after 1/2/49
  • Job expenses and other miscellaneous deductions that exceed 2% of adjusted gross income

A non-homeowner taxpayer who has been taking the standard deduction needs to consider that it isn’t just the ability to deduct the mortgage interest and property taxes.

While the standard deduction might be the obvious choice for a non-homeowner, the combination of the mortgage interest and the property taxes plus other allowable deductions not recognized previously such as charitable contributions, now makes taking the itemized deductions significantly more advantageous.

What’s the Point?

Prepaid interest, sometimes called “points”, is generally tax deductible when a person pays them in connection with buying, building or improving their principal residence. When points are paid on a refinance, they are not a current deduction but have to be taken prorata over the life of the mortgage.DEDUCTIBILITY.png

For instance, if $3,000 in points were paid on refinancing a 30 year mortgage, a deduction of $100 per year is allowed. When the loan is paid off or replaced by refinancing again or the home is sold and the mortgage paid off from the proceeds, the balance of any un-deducted points may be taken in that tax year.

Your tax professional needs to be made aware of any of these situations so that he or she can accurately reflect the deductions in your return. Currently, the most common situation is homeowners may be refinancing their home for the second, third or even, fourth time. If there are points that have not been completely deducted, they need to be treated in the year of refinancing.

For more information, see points in IRS Publication 936; there is a section on Refinancing in this publication. For advice considering your specific situation, contact your tax professional.

How’s Your IQ on the QM?

Qualifying Guidelines.pngThe Qualified Mortgage Rule came into effect on January 14, 2014 as one of the results to the Dodd Frank Reform Act to protect consumers from predatory lending practices. This will affect the underwriting standards that the majority of lenders will use to qualify borrowers.

The ability to repay rule states that financial information must be supplied by the borrower and verified by the lender. The borrower must have sufficient assets or income to pay back the loan which limits the maximum debt-to-income ratio of 43%. In an effort to present a more accurate picture of the costs to the borrower, teaser rates can no longer hide a mortgage’s true cost.

A maximum of 3% in upfront points and fees can be paid on behalf of the borrower. There can be no negative amortization, interest-only or balloon payments and the loan term limit cannot exceed 30 years.

While there are more requirements, most deal with good underwriting practices that are followed by reputable lenders such as considering and verifying things that affect the ability to repay the mortgage like income, assets, employment status, simultaneous loans, debt, alimony, child support and credit history.

5 Tips to Prepare Your Home for Sale

Article From BuyAndSell.HouseLogic.com

By: G. M. Filisko

Working to get your home ship-shape for showings will increase its value and shorten your sales time.Many buyers today want move-in-ready homes and will quickly eliminate an otherwise great home by focusing on a few visible flaws. Unless your home shines, you may endure showing after showing and open house after open house-and end up with a lower sales price. Before the first prospect walks through your door, consider some smart options for casting your home in its best light.

 1. Have a home inspection

Be proactive by arranging for a pre-sale home inspection. For $250 to $400, an inspector will warn you about troubles that could make potential buyers balk. Make repairs before putting your home on the market. In some states, you may have to disclose what the inspection turns up.

2. Get replacement estimates

If your home inspection uncovers necessary repairs you can’t fund, get estimates for the work. The figures will help buyers determine if they can afford the home and the repairs. Also hunt down warranties, guarantees, and user manuals for your furnace, washer and dryer, dishwasher, and any other items you expect to remain with the house.

3. Make minor repairs

Not every repair costs a bundle. Fix as many small problems-sticky doors, torn screens, cracked caulking, dripping faucets-as you can. These may seem trivial, but they’ll give buyers the impression your house isn’t well maintained.

4. Clear the clutter

Clear your kitchen counters of just about everything. Clean your closets by packing up little-used items like out-of-season clothes and old toys. Install closet organizers to maximize space. Put at least one-third of your furniture in storage, especially large pieces, such as entertainment centers and big televisions. Pack up family photos, knickknacks, and wall hangings to depersonalize your home. Store the items you’ve packed offsite or in boxes neatly arranged in your garage or basement.

5. Do a thorough cleaning

A clean house makes a strong first impression that your home has been well cared for. If you can afford it, consider hiring a cleaning service.  If not, wash windows and leave them open to air out your rooms. Clean carpeting and drapes to eliminate cooking odors, smoke, and pet smells. Wash light fixtures and baseboards, mop and wax floors, and give your stove and refrigerator a thorough once-over.  Pay attention to details, too. Wash fingerprints from light switch plates, clean inside the cabinets, and polish doorknobs. Don’t forget to clean your garage, too.

G.M. Filisko is an attorney and award-winning writer who has found happiness in a Chicago brownstone with the best curb appeal on the block. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.