A month or so ago I attended the monthly Silicon Valley broker’s meeting of my company. They always have a speaker every month, and last month it was a gentleman from First American Exchange Company. He gave an interesting (if you can believe it!) presentation on Avoiding Capital Gains Tax upon Sale of your Home. Now that home prices have recovered – nearing, hitting or exceeding their all-time peak values in many areas of northern California – many home owners are facing a bit of a tax dilemma. Most home owners are aware that they enjoy a tax exclusion on the gain from the sale of their primary residence: up to $250,000 for single individuals, and up to $500,000 for married couples. It’s one of the best tax loopholes available to middle class Americans. With home values again soaring, a good number of home owners are finding that if they were to sell their house, they’d have a gain which exceeds the exclusion limit, and will potentially be faced with paying significant capital gains taxes. Would it surprise you to know that you can avoid paying tax on more than $500,000 of gain on your home? This can be accomplished if a homeowner converts their residence to a rental. Once the home is converted to a rental, the owners can sell it and use both the Section 121 exclusion of gain and the Section 1031 deferral of gain provisions to exclude some of the gain and defer paying tax on the rest. How it Works Let’s … Read More
Sometimes the reporting on the world of real estate gets so caught up in the rapidly changing landscape that the elements of buying and selling real estate that are most important for the public are not given the attention they deserve. Yesterday a great article in the San Jose Mercury News came out where a series of industry professionals gave wise words to aid home buyers. Since the article is basically a series of quotes, it seems most fitting to just go ahead and list our some of the best ones, one-by-one. While they are pretty self-explanatory, they are very easy to lose sight of once buyers get into the process. Jim Walton, vice president of consumer credit with MetLife Bank in Irving, Texas “There is more to home- ownership than a housing payment. Homeownership requires a commitment to a property and to a community.” “A lender can tell you the maximum mortgage you qualify for, but financial experts recommend that you determine your own upper limit for a housing payment.” “Buyers should take a disciplined approach to saving for a down payment, and then they need to be able to continue to save after they buy, for home maintenance and emergencies.” “A rent-versus-own calculator can be a good resource, but generally these will show you the maximum mortgage you qualify for at the best rates.” “Buyers need to factor in maintenance costs which can run from 1 (percent) to 4 percent of the home value per year.” Marc Schindler, a certified financial planner in Bellaire, … Read More
The Housing Crash guy says: A landlords’ rule of thumb is that a house price should be a maximum of 15 times the annual rent for that place, yet in coastal areas, houses are still selling for 30 times annual rent I think he’s got a good point there – which goes to underscore my belief that prices in Watsonville are actually very reasonable at the moment. … Looking over the ads on Craig’s List, it’s safe to say that a 3 bedroom, 2 bathroom house would rent for about $2,400 a month in Santa Cruz, assuming it was in a not-so-great location. … Let’s look at the payment for a $500,000 house – but let’s assume you’re putting down a reasonable 10% instead of the FHA minimum of 3.5% – so you’d have a $450,000 loan, again at about 5.75% because with only 10% down, you’d still need to pay mortgage insurance. … Let’s say you’re in a tax bracket of 25%, and you can figure you’d save about $640/month in federal and state taxes, bringing your effective monthly after-tax payment to about $2,519 per month, or just about $120 more than renting.
I should have just sat there and watched as my hard-earned dollars evaporated, sucked it up, been a man, and lost all that cash, the price to pay for participating in our capitalist system. … So let me assure you – if you want to buy a house in Santa Cruz, and you have decent credit (at least a 580 FICO Score to qualify for an FHA loan, I believe) and you have the debt-to-income ratios required by the guidelines. … Mind you, the median price these days in the county is $585,000 (as of August), so it’s getting to the point where you can actually buy a habitable structure in a somewhat central location for that kind of bread. … That would leave you with a whopping loan of $482,500 and payments (all-in, including principal, interest, property tax, and insurance) of about $3,500 a month (roughly, approximately – and that’s before your considerable mortgage interest tax deduction ).
Or, rather, he loves it when the seller pays the discount points, although it’s all pretty much the same thing, since it’s your money (the buyer’s money) that he’s using to pay the points (typically, unless it’s a short sale). What both Larry and the trainers said was this: seller paid discount points are tax deductible for the buyer in the year that the property is purchased – that’s right, even though the seller pays them. … So…if your lender is going to charge you an origination fee (which is not tax deductible), ask if instead it can be called a discount point on the closing statement, and so then it, too, will be tax deductible. … Now, I’m not necessarily advocating that you get the seller to pay discount points for you – although it is increasingly common, especially as buyers are finding that interest rates are higher than they heard they might be – typically around 6 to 6.5%.