NEW TAX LEGISLATION WILL IMPACT HOMEOWNER DEDUCTIONS
The “Tax Cuts and Jobs Act” passed at the end of 2017 nearly doubles the standard deduction, so far fewer Americans are expected to itemize this year. For those who do, however, it could mean less homeowner deductions are available than in the past.
Previously, homeowners could deduct interest paid on the first $1 million of mortgage debt, but that threshold has been lowered to $750,000 for new mortgages. (Existing mortgages will not be impacted.)
Additionally, taxpayers will no longer be able to fully deduct state and local property taxes plus income or sales taxes. The new legislation restricts this deduction to $10,000. It also eliminates the deduction for moving expenses (except for members of the Armed Forces) and interest on home equity loans unless the proceeds are used to substantially improve the residence.10
It’s yet to be seen how the tax bill will impact the real estate market overall. While some economists predict a price reduction in certain markets, Republican lawmakers project the bill will increase take-home pay and stimulate the economy overall. According to Realtor.com Senior Economist Joseph Kirchner, “Some house hunters—particularly wealthy buyers—will see an increase in after-tax income, making an already tough housing market even more competitive. This increased demand could drive prices up even higher than they are already.”11
What does it mean for you? If you’re an existing homeowner, be sure to consult a tax professional if you’re concerned about the impact the new tax bill could have on you.
And if you’re planning to buy or sell this year, we can help you determine how the tax bill could affect demand in your current or target neighborhood and price range.
INTEREST RATES WILL RISE
No one knows exactly what will happen with mortgage rates this year, but the Mortgage Bankers Association anticipates the Federal Reserve will raise rates three times in 2018, with Freddie Mac’s 30-year fixed rate mortgage reaching 4.8 percent by the end of Q4, up from around 4 percent at the end of 2017.12
Kiplinger.com Economist David Payne also predicts interests rates will rise this year, with short-term rates outpacing long-term rates as the Fed aims to curb inflation in a tightening job market. He predicts the bank prime rate that home equity loans are based on will increase from 4.25 percent to 5 percent by the end of 2018. 13
What does it mean for you? If you’re in the market to buy, act now. Rising interest rates will decrease your purchasing power, so act quickly before interest rates go up. Give me a call today at (661) 979-9000 to get your home search started, or email me at [email protected].
And if you’re a current homeowner who is considering refinancing or a home equity loan, don’t wait. I can help you estimate your property’s fair market value so you’ll be prepared before contacting a lender.
You can’t avoid paying taxes, and we all need to pay our fair share. However, paying your fair share shouldn’t place an unjust burden on you. As a homeowner, your tax burden is doubled because you pay both income and property taxes. To decrease that burden and boost your tax savings, take advantage of these homeowner tax deductions. As a result, you can use your tax savings to go on a vacation, increase your child’s college fund, build upon your retirement fund, or complete another home improvement project.
Home Improvement Tax Deduction
You spend so much of your time at home, and you try to make it as comfortable a place to live as possible. If your home needs some upgrades, consider improvements that will help foot the bill for themselves.
You can get an energy-efficient tax credit of up to $500 for installing storm doors and energy-efficient insulation and air-conditioning and heating systems. Switching out your old windows for energy-efficient ones could earn you $200. This credit expires this year on December 31st. So, this year will be your last chance to take advantage of getting tax credit for making your home more energy efficient.
Also, installing equipment that uses renewable sources of energy makes you eligible for the Renewable Energy Efficiency Property Credit. The credit covers 30 percent of the cost of equipment and installation. This credit also expires this year on December 31st.
Mortgage Interest and Refinancing
If your mortgage payment makes you cringe each month, you’ll be glad to know you can deduct taxes on the following:
* Interest towards mortgage
* Mortgage payments for additional property
* Rental properties
* Refinancing and home equity lines of credit (HELOC) up to $100,000 of debt.
If you own multiple properties, the mortgage interest on additional property is deductible as well. The cool thing is that it doesn’t have to be a house. It can be a boat or RV; as long as it has cooking, sleeping, and bathroom facilities, it counts as additional property.
Regarding using your second home as a rental, you need to vacation at least 14 days at the property or spend more than 10 percent of the number of days you rent it out.
Furthermore, you can claim points on your mortgage the year you paid them if the following happened:
* The loan was to purchase or build your main home
* Payment of points is an established business practice in your area and the points were within the usual range
Now, this is the big one. Property taxes you pay each year are tax deductible. The amount of property taxes you paid for the year shows up on your lender’s annual statement. You must deduct them as an itemized expense on your Schedule A tax form.
First-time homebuyers, look at your settlement sheet to see additional tax payment data. You may deduct the portion of property taxes you paid during the first year of your homeownership.
Protesting Your Assessment to Lower Your Property Taxes
Although you must pay property taxes, you can make sure that you pay a reasonable amount based on the true value of your home and land. Many homes get overvalued because assessors err in valuing a home and homeowners don’t pay attention to these mistakes. Consequently, homeowners unwittingly pay more than they should in property taxes.
However, if you’ve owned your home for more than a year, you can potentially lower your property tax burden by showing that your home has been overvalued, meaning that your tax assessment claims your property is worth more than it is.
Even if the number on the tax assessment seems close, you should still consider protesting your property tax. Typical savings from a successful tax protest is over 15%!
According to SmartAsset, the national median property tax paid is roughly $2,839.00. That’s about 1.192 percent of a home valued at $238,200.00.
If you’re able to reduce your assessed value by 15 percent to $202,470.00 and consequently save 15 percent on your tax bill, your new tax bill will be about 2,413.00. That’s a savings of $426.00!
To get started protesting your property tax, read your assessment letter. Your assessment letter will list data about your property and the assessed value of your house and land. Make sure your assessment letter has the correct information about your property.
Understanding that assessors can make mistakes assessing your home value will help you with your appeal. There are three key mistakes assessor make when assessing property. These mistakes include:
- Outdated Historic Sales Data: Sometimes assessors will use sales data from previous years. Because the real estate market is fluid, this data changes quickly, as a result; this data can over value your home.
- Mass Appraisal Methods: Also, when assessors use mass appraisal methods, they do not take into account all the market adjustments that occurred over time. Consequently, there sales data can’t always produce useful comparable properties to set future sales.
- Living Area: Assessors notoriously make mistakes about the living area of your house. This is especially true if you live in a 1.5 or 2 story home. Check any previous appraisals to ensure correct measurements and description of our home. Does the assessment letter show the right number of bathrooms and bedrooms? Does it report the correct size of your lot? .5 acres differs greatly than 5.0 acres.
After reading your assessment letter, consult a Realtor. We can find three to five approximate values of comparable properties similar to yours, and these comps can then be used to support your claim that your home is overvalued. This is especially useful if the assessor used poor historical sales data.
You’ll have 30 days to file an appeal of your assessment, so you’ll want to get the comps as soon as your assessment arrives. You can speak with an assessor on the phone or request a formal review.
You’ll then need to fill out a form and follow specific instructions regarding your supporting evidence. Typically, it’s not necessary for you to appear at the review. The review can take one to three months to complete, and you’ll receive a decision in writing.
The majority of assessment appeals are successful. However, if at first you don’t succeed, appeal. You’ll need to pay a small filing fee for an independent appeals board to hear your second appeal. This process could take up to a year to complete, so you’ll need to decide whether it’s truly worth it.
As a homeowner, you have plenty of options available to decrease your tax burden. The benefit is that you can use your tax savings for major life events such as weddings, vacations, and home improvements.
To find out more about your tax saving options as a homeowner, check out tax information for homeowners. You can also contact me directly and I’ll gladly lead you in the right direction towards saving you money on your taxes.
With the end of the year nearing, it’s time to get all your tax options in order. With a second home, you have tax items to consider that you wouldn’t normally have with a first home.
Second home tax deductions:
1. Mortgage interest. You can deduct the interest if you itemize deductions. Your deduction might be limited if either of these is true:
a) Your mortgage is more than the fair market value (FMV) of your home.
b) The mortgages on your main home and your second home are more than:
i) $500,000 if filing single
ii) $1 million if married filing jointly
2. Real Estate taxes. Interest on a home equity loan or line of credit. This applies unless either of these is true:
a) The mortgage is more than the Fair Market Value of the home. This is without mortgages and including grandfathered debt.
b) The home-equity debt on your main home and second home is more than:
i) $50,000 if filing single
ii) $100,000 if married filing jointly
3. Renting your second home
a) You don’t have to report rental income if both of these apply:
i) You use the home as a residence.
ii) You rent it for fewer than 15 days during the year.
iii) It’s considered a residence if you or a family member uses the home for personal use for more than the greater of these:
(a) 14 days
(b) 10% of the number of days you rent the home at fair rental value
You can’t deduct expenses you can attribute to the rental. However, you can deduct interest and taxes if you itemize your deductions.
If you use the home as a residence and rent it for 15 days or more, report the rental income. You can deduct your interest and taxes as described above. You can deduct other rental expenses, including depreciation. However, you can only deduct up to the amount of the income minus the deductions for interest and taxes. Carry over any rental expenses not deductible under this rule to the next year. Then, they’ll again be subject to this limit.
If you don’t use the home as a residence, the above rules don’t apply. Report your income and expenses the same as you do for other rental property. Source: H&R Block
Stay tuned for more tax rules next week.
Contact Sonja Bush for help buying selling or renting your second home. She can be reached by phone at (661) 979-9000 or by email at [email protected]
The State of California Appropriations Committee is meeting this Friday. On the agenda a SB 30 which was originally introduced in December 2012 and finally received its first hearing last week. If not approved this Friday, the bill would stall up until January 2014.
Why is SB 30 important? Under the current state law, when a lender forgives mortgage debt in a short sale, the seller must pay state income tax on the amount of forgiven debit (there is currently no federal income tax). If passed, this bill will assist to eliminate the state income tax on short sale transactions. According to the California Association of Realtors (CAR) and many others, passing this bill is the right thing to do. Distressed homeowners are faced with a no-win situation — either pay taxes on money they don’t get or let the home go into foreclosure. They generally have two choices — foreclosure or short sale. If they fear state income tax liability on a short sale, they are likely to choose foreclosure. Foreclosures are bad for everyone….the community, the homeowner and damage property values more than short sales.
Not all delinquent homeowners face foreclosure because they purchased above their means. Many homeowners have financial hardships that have placed them in a difficult situation. If this bill is not passed, these borrowers will face credit challenges and additional financial challenges as a result of having to pay taxes on money they will never see again.
What can you do to help?
Encourage State Assembly member Mike Gatto (Chair of the Appropriations Committee) to pass this bill by visiting his Facebook page: www.facebook.com/mikegatto and sending him a message asking him to support SB 30 and distressed homeowners
Call Assembly Member Mike Gatto at: 1-800-969-3420 — enter PIN number 3043 (call Monday – Friday 9 AM – 5 PM)
If you wish, you can bypass the first part of the message by entering the PIN, followed by the # sign, at any time. You may also bypass the 2nd part of the message by hitting the “1” key to be directly connected to the legislator’s office. Ask him to support distressed homeowners and support SB 30. As the Chair of the Appropriations Committee, he is responsible for the committee’s failure to act on behalf of distressed homeowners.
To read the full bill click here
Transient Occupancy Tax (TOT) is a 13% tax that is paid by the guest to the operator of the transient facility at the time the rent is paid. The Town of Mammoth Lakes is responsible for the collection of transient occupancy taxes and has a team dedicated to providing effective TOT enforcement and revenue collection services. It is basically a pass-through tax paid by the guest and passed on to the Town.
TOT makes up approximately 60% of the Mammoth Lakes General Fund. The monies fund services such as snow removal, recreational programming and road maintenance.
There has been a lot of press in the last year about the TOT. Keep in mind the full-time resident population of Mammoth Lakes is around 8,200 and we have 30,000 – 60,000 visitors over peak periods. A few simple calculations and it is easy to see why TOT is so important. The major challenge over the years has been enforcement. TOT existed and although the property management companies complied, many of the VRBO (vacation rental by owner) did not. Quite frankly most people knew it was illegal to not remit the TOT to the town but there were no consequences for not complying.
To make matters confusing, there are some areas of town where transient rentals are not allowed. Most of these are single-family homes in residential neighborhoods. Again, with no consequences for not complying with the zoning requirements there is illegal activity.
In 2012, city officials along with Town Council, implemented a few things to help the situation. The team was formed to educate, enforce and collect TOT. Informational articles and advertisements were placed in the local papers, letters were mailed to homeowners, a hotline for questions and reporting illegal activity put in place, and informational meetings were held in the community. In addition, a new local disclosure was implemented for use by real estate agents to inform property buyers of the TOT and the zoning of the property they are purchasing. A website was launched (https://gis.mono.ca.gov/tot) where after entering the property address, the zoning information detailing whether transient rentals are allowed is displayed.
Additional information (including the full ordinance) can be viewed at http://www.ci.mammoth-lakes.ca.us/index.aspx?NID=201.
Vesting, or how to hold title to real estate, is important for estate planning and tax reasons. Each state in the U.S. has its own vesting rules. When you purchasing real estate, you should consult with an accountant or tax attorney before the sale closes and the deed is recorded. Disclaimer: I am NOT a CPA, tax professional or attorney but as a real estate broker/agent in California can provide an overview of some of the options.
Title to real estate in California may be held by individuals, either insole Ownership or in Co-Ownership. Co-Ownership of real property occurs when title is held by two or more persons. There are several variations as to how title may be held in each type of ownership. The following brief summary highlights eight of the more common examples of Sole Ownership and Co-Ownership.
1. A Single Woman/Man: A woman or man who is not legally married. Example: Jane Doe, a single woman.
2. An Unmarried Woman/Man: A woman or man, who having been married is legally divorced. Example: Jane Doe, an unmarried woman.
3. A Married woman/Man, As Her/His sole and Separate Property: When a marred man or woman wishes to acquire title in her or his name alone, the spouse must consent, by quitclaim deed or otherwise, to transfer thereby relinquishing all right, title and interest in the property. Example: Jane Doe, a married woman, as his sole and separate property.
4. Community Property: the California Civil code defines community property acquired by husband and wife, or by either. Real property conveyed to a married woman or man is presumed to be community property unless otherwise stated. Under community property, both spouse have the right to dispose of one half of the community property. If a spouse does not exercise her/his right to dispose of one-half to someone other than her/his spouse, then one half will go to the surviving spouse. If a spouse exercises her/his right to dispose one half, that half is subject to administration in the estate. Example: John Doe & Jane Doe, husband and wife. Example: Jane Doe, a married woman.
5. Joint Tenancy: a joint tenancy estate is defined in the Civil Code as follows “A joint interest is one owned by tow or more persons in equal shares, by a title created by a single will or transfer, when expressly declared in the will or transfer to be a joint tenancy.” A major characteristic of joint tenancy property is the right of survivorship. When a joint tenant dies, title to the property immediately vests in the surviving joint tenant(s). As a consequence, join tenancy property is not subject to deposition by will. Example: John Doe and Jane Doe, husband and wife as joint tenants.
6. Tenancy In Common: Under tenancy in common, the co-owners own undivided interests, but unlike joint tenancy, these interests need not be equal in quantity or duration, and may arise at different times. There is no right of survivorship; each tenant owns an interest which, on his or her death, vests in his or her heirs. Example: John does, a single man, as to an undivided 1/3 interest, and Henry Adams, a single man as a n undivided 2/3rd interest, as tenants in common.
7. Trust: Title to real property in California may be held in a title holding trust. The trust holds legal ad equitable title to the real estate. the trustee holds title for the trustor/beneficiary who retains all the management rights and responsibilities.
8. Community Property with Right of Survivorship: Community Property of a husband and wife, when expressly declared in the transfer document to be community property with the right of survivorship. and which may be accepted in writing on the face of the document by a statement signed or initialed by the grantees, shall upon the death of one of the spouses, pass to the survivor, without administration, subject to the same procedures as property held in joint tenancy.
I strongly recommend you seek professional counsel from a CPA, attorney or tax professional to determine the legal and tax consequences of how title is vested.
The Internal Revenue Service’s Mortgage Debt Forgiveness Act of 2007 has been extended through the end of 2013. What does this mean?
You probably recall the Mortgage Debt Relief Act of 2007 allows certain taxpayers to exclude income connected with the discharge of debt on a primary residence. This includes debt that has been reduced through the restructuring of a mortgage as well as mortgage debt forgiven in connection with foreclosure, short sale, or deed-in-lieu of foreclosure.
The recent extension comes as part of the vote that passed so we do not go over the “fiscal cliff.” This vote should motivate potential short sale sellers to list and sell their homes in 2013.
According to the IRS (Tax Tip 2011-44), here are 10 facts that the IRS wants people to know about Mortgage Debt Forgiveness. (Information courtesy of the IRS. Please check with your tax advisor/CPA regarding your specific situation.)
- Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
- The limit is $1 million for a married person filing a separate return.
- You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
- To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
- Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
- Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
- If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
- Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
- If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
- Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
The follow-up question is does the tax forgiveness apply to state taxes as well? The California Association of Realtor® recently issued the following statement about California taxes in a short sale:
“The state Senate today passed C.A.R.’s tax relief bill without a single “no” vote. SB 30, which provides tax relief to those who are selling a home in a short sale, will now be considered in the state Assembly.
In late May, the Senate Appropriations Committee linked SB 30 to SB 391, a C.A.R.-opposed bill that creates a recording tax. This link, in the form of an amendment, says that SB 30 cannot take effect unless SB 391 does as well. While we are troubled by this transparent political maneuver meant to force C.A.R. to support the recording tax, C.A.R. will continue to work toward the passage of SB 30 in the Assembly, the defeat of the recording tax, and the delinking of the two bills.”
Again, check with your tax advisor/CPA for details regarding your specific situation.
Source: Short Sale Expeditor and IRS
For previous articles, visit www.sonjabush.com