Why Real Estate May Be A Big Winner In The Tax Cuts And Jobs Act

On the surface it may look like the Tax Cuts and Jobs Act is bad for real estate. The reduction in the deductibility of mortgage interest and the combined $10,000 cap on state and local tax (SALT) deductions for income, sales and property, along with the elimination of moving expense deductions would make a compelling argument. But after digging through the fine print, the outcome is that real estate may actually be the big winner.

The mortgage deduction has been reduced to $750,000 dollars for new homeowners, but the deductibility of current mortgage debt up to $1 million is still protected. The only change was that technically under the old law one could also deduct $100,000 of home-equity debt. This is no longer allowed unless an equity loan is used to substantially improve the residence.

However, let’s keep in mind that these mortgage provisions are due to sunset on Dec. 31, 2025. So, don’t run out and pay down your mortgage because you won’t be able to get the deductions back. These limits are short-lived.

Let’s delve a little deeper. How did real estate come out alright?

  • The deduction for mortgage interest on second homes survived although it initially appeared to be on the chopping block.
  • The ability to rent a primary or secondary home for up to 14 days a year and not pay taxes on the income survived.
  • A new deduction for pass-through entities benefits real estate, particularly real estate investment trusts. This will enable real estate partnerships and LLCs to get a new 20% deduction.
  • Real estate agents–unlike doctors, lawyers, financial planners and professional athletes–are not considered a service industry profession and therefore are exempt from the limit in their pass-through deductions if their income is higher than $207,500 or $415,000 for a couple.
  • Real estate professionals who work more than 750 hours a year can still deduct their real estate losses from ordinary income and lower income investors can still deduct passive income, such as real estate rentals.
  • The bill doubles the Section 179 deduction for qualifying expenses, allowing business to annually deduct up to $1 million on certain types of property expenses.
  • Land and property depreciation has been retained and the alternative depreciation system period for residential property has been shortened. This is a huge win for the industry because one of the key features to investing in real estate is depreciation because under U.S. accounting rules real estate loses value, even though it tends to rise in market value.
  • Changes in the carried interest deduction–one must now hold assets for three years instead of only one–will benefit real estate funds substantially more than other types of managed funds.
  • And finally, the lucrative 1031 tax free exchange rules that were on the initial chopping block were retained. Section 1031 allows real estate investors to defer capital gains taxes if they are using the money to purchase another property.

These are just a few of the benefits that real estate has received and only scratches the surface of the plethora of real estate strategies that continue to survive. Not only should commercial real estate benefit, but residential real estate still maintains its luster.

In the end, real estate may be the big winner but so is capitalism. After all, real estate is one of the foundations of an ownership society. As my favorite economist Hernando De Soto said in his book, The Mystery of Capital, “Real estate is why capitalism triumphs in the west and fails everywhere else.”

Source: Forbes.com  ~ BY: John E. Girouard

Get Your Home Summer Ready Now Before It Gets Scorching

Advice for spring home buyers can be found in this recently released survey from realtor.com® , a leading online real estate destination. Research highlights the reality of today’s home buying markets around the country. Advice and insights into one of the most competitive home buying markets in years can help buyers and let sellers know what to expect. Chief Economist at realtor.com Danielle Hale tells the story behind the numbers.

This year there is even less inventory than last year. According to our February 2018 data inventory is down 8.5% from last February. Days on Market (DOM) fell to 85 nationally from 90 last year.

The big news that impacts buyers according to Hale, inventory has declined for 42 consecutive months. What’s most interesting and what the research showed is buyers are getting the message that it is a tougher market this Spring. Either they have heard, or they have experienced it personally as they made offers and did not get the property, Hale adds.

Listen to Hale’s advice for buyers. You have to know exactly what your comfort zone is and the maximum price you can pay. It’s very important to be thinking about what you can afford as mortgage rates go higher especially if they move up quickly.

Take a look at the research from Toluna who in early March surveyed more than 1,000 active buyers. Clearly buyers are out there armed with as much market knowledge as possible. Many are more determined than before to strike a deal.

Here’s key research from the survey. The message is buyers are serious this Spring with 40 percent of buyers planning to put more than 20 percent down in hopes of getting ahead of the competition. Almost half (40%) of today’s buyers have been actively looking for a home for more than seven months. Many remain hopeful with 60 percent thinking they will close on a home within the next six months. Strategies to nab that dream home include checking listing websites daily, while 40 percent of buyers plan to put more than 20 percent cash down. More than a third are setting price alerts on properties. More than 25 percent will offer above asking price with  31 percent planning to put a larger earnest money deposit down.  Only 6 percent indicated they are not planning to use any tactics to cope with competition.

Boston’s David Bates, a long-time Broker Associate at William Ravis Real Estate sums it up.

“We have had a lot of strong markets, but this probably is the strongest I have seen. In my office, folks are talking about the significant competition for modestly priced properties outside the city, say around $500,000 or less. Someone had a 28-offer situation in Chelmsford, another had a 17-offer situation in Everett. I myself had a nine offer and six offer situations in Beverly. These are not the most sought-after communities in Greater Boston. Perhaps there are a number of things motivating buyers, but high on the list is the lack of affordability in and close to the city.”

If you plan on house hunting this Spring, good luck. If you plan to sell this Spring, chances are your home will sell quickly and possibly for above asking price if it’s priced right, in excellent condition and has location, location, location going for it.

Source: forbes.com ~ By: Ellen Paris, Contributor

A Glimpse at Life Without the 30-Year Fixed-Rate Mortgage

As Congress contemplates a permanent fix to its decade-long “temporary” mortgage patch, the lore of the 30-year fixed-rate mortgage is permeating Capitol Hill.

Mortgage giants Fannie Mae and Freddie Mac (known as Government Sponsored Enterprises, or GSEs) don’t issue mortgages directly. Instead, they buy certain mortgages originated by other lenders and bundle them into mortgage-backed securities that are then sold to investors. Critically, these securities are guaranteed against default by Fannie and Freddie, protecting investors and making the securities more attractive. That guarantee enables long-term mortgage products like fixed, 30-year loans to be made widely available at lower rates.

But Fannie and Freddie have been under conservatorship of the federal government since 2008, which means those guarantees are largely backed by U.S. taxpayers, not private capital. Because Fannie and Freddie play such an outsized role in mortgage finance in this country, one of the longstanding legacies of the recession is that taxpayers today back a large majority of the nation’s mortgage market. Fears around the degree to which taxpayers would be on the hook if the market soured have kept Fannie and Freddie in Congress’ crosshairs.

Hoping to reduce taxpayers’ risk, policymakers are considering changing the guarantee, which may lead to a shift toward adjustable-rate products, higher fixed interest rates and/or shorter-duration loans. Those opposed to curtailing the government’s guarantee argue that without it, today’s 30-year fixed-rate mortgage could change drastically – to borrowers’ detriment.

What exactly would lending – and, critically, borrowers’ monthly costs – look like without the venerable 30-year, fixed-rate mortgage that has become the bedrock of housing finance? The Bureau of Labor Statistics estimates roughly seven in 10 mortgages held in 2014 were 30-year fixed-rate.

The figures below provide a glimpse at mortgage alternatives, and illustrate how sensitive house payments are to changes in interest rates and loan duration (use our comparison tool to see the differences across metro areas).

30-Year Fixed-Rate Mortgage, at Current Rates

  • The most common mortgage product today is the 30-year fixed rate mortgage. Last month, to buy the typical U.S. home with a 30-year fixed rate mortgage, the monthly payments would be $777, or 15 percent of the metro’s median income.

Adjustable-Rate Mortgage, at Current Rates

  • If the terms of 30-year fixed-rate mortgages become less favorable after GSE reform, more buyers could choose adjustable-rate mortgages (ARMs). While ARMs often provide a better deal for the first few years of the loan, rates and payments eventually increase unless a borrower refinances. Last month, to buy the typical U.S. home with an adjustable rate mortgage, the first year’s monthly payment would be $736 or 15 percent of the metro’s median income. But those payments would rise when the adjustment takes place.

Non-Conforming Jumbo Loan, at Current Rates

  • Another possibility as a result of GSE reform is that interest rates could climb in response to the elimination of a government guarantee. We don’t know how much they might climb, but they could resemble rates on current loans that don’t have a government guarantee: non-conforming, jumbo loans (a relatively small market currently skewed toward the wealthy). So the exact terms of today’s jumbo loans may not scale to the larger housing market. Last month, to buy the typical U.S. home with a 30-year, fixed rate, non-conforming jumbo mortgage, the monthly payments would be $797 or 16 percent of the nation’s median income.

30-Year Fixed-Rate Mortgage, at 7 Percent Rate

  • Interest rates overall are at historic lows, but reforms to Fannie and Freddie in tandem with other trends in the economy could raise mortgages rates across the board. If they reach 7 percent, a rate common 20 years ago, monthly payments could rise substantially. Last month, to buy the typical U.S. home with a 30-year fixed rate mortgage common in the late ‘90s, the monthly payments would be $1,098 or 22 percent of today’s metro median income.

15-Year Fixed-Rate Mortgage, at Current Rates

  • Even if rates remain similar to today, more buyers may shift toward shorter-term loans as a result of GSE reform and/or other economic shifts. While today’s 15-year, fixed-rate mortgages usually provide lower interest rates, the shorter time frame makes each payment larger. Last month, to buy the typical U.S. home with a 15-year fixed ratemortgage, the monthly payments would be $1,166 or 23 percent of the metro’s median income.

15-year Fixed-Rate, Non-conforming Jumbo Mortgage, at Current Rates

  • Finally, it’s possible that rates rise and buyers move toward shorter-term loans. In that case, new loans could resemble 15-year, fixed-rate, non-conforming jumbo loans. Last month, to buy the typical U.S. home with a 15-year fixed rate non-conforming mortgage, the monthly payments would be $1,210 or 24 percent of the metro’s median income.

We don’t know what exact effects, if any, GSE reform might have on the 30-year mortgage. It’s possible any resulting dominant mortgage product would be wildly or only mildly different from what we have today. The figures in the comparison tool above provide a glimpse at mortgage alternatives and illustrate how sensitive house payments are to changes in interest rates and loan duration.

If monthly payments soar and stay elevated, at some point we’d expect home prices to fall in response to this decreased purchasing power. However, while some households may be able to absorb the extra borrowing cost, in the nearer term first time homebuyers or buyers on the margin could feel a real pinch as homeownership becomes less affordable.

Source: forbes.com ~ By: Svenja Gudell 

Housing in 2018: Where Are Home Values Headed?

Analysts are expecting even higher home prices in 2018 than originally projected, according to new research.

Zillow’s 2017 Q4 Home Price Expectations Survey reveals experts are anticipating a 4.1 percent hike in the new year, up from the 3 percent they forecasted a year ago. Over 100 experts, including economists, participated in the survey.

Their reasoning? Home-building has not panned out as planned—yet.

“The American labor market is stronger than it’s been in decades, and Americans, particularly young Americans, are increasingly feeling confident enough to buy homes,” says Aaron Terrazas, senior economist at Zillow. “Home-building has not kept pace with this surge in demand and remains well below historical norms. We don’t expect that these demand-supply imbalances will fundamentally shift in 2018. Demand will continue to grow and, though supply should increase somewhat, we still won’t build enough new homes to meet this demand, contributing to higher prices.”

Less than 20 percent of experts forecast home-building to pick up next year, the survey shows. Approximately 313,000 new homes were on the market in October, representing 4.9 months supply, according to the U.S. Census Bureau. Entry-level homes, especially, are scarce—down 20.4 percent year-over-year over the summer, reports Trulia.

Additionally, experts foresee increasing mortgage rates, with the 30-year, fixed rate ranging anywhere from 4.28 to 4.70 percent. Currently, the 30-year averages 3.90 percent, according to Freddie Mac.

“Higher mortgage rates will eat into buyers’ budgets, putting even more price pressure on the most affordable homes for sale,” Terrazas says. “Unless there is a fundamental shift in the number and type of homes for sale, this is the new normal of the American housing market.”

One factor in the health of the housing market is the homeownership rate; experts predict it, too, will rise, though slightly, to 64 percent. The homeownership rate has improved twice thus far this year, up to 63.9 percent in third quarter, according to the Census.

Beyond 2018, analysts are divided.

“Our most optimistic group of experts projects average annual home value appreciation of almost 5 percent annually through the five-year period ending in 2022, while the most pessimistic group expects an average annual rate of just 1.4 percent,” says Terry Loebs, founder of Pulsenomics, which conducted the survey in conjunction with Zillow. “I don’t foresee a stronger consensus emerging until we have greater clarity concerning tax reform and the pace of entry-level home building.”

For more information, please visit www.zillow.com.

Source: rismedia.com ~ By: Suzanne De Vita

 

What Is Your Property Really Worth?

Question. Over the years, I have been involved in questions dealing with the value of certain property. This has involved such diverse issues as appealing the County’s assessment for tax purposes, obtaining a refinance mortgage to avoid private mortgage insurance, and recently challenging an IRS valuation of property we just inherited.

Is there a way to determine what our property is really worth. We have often obtained different appraisals on the same property, and would like to determine our true net worth. How do the appraisal prices work?

Answer. The most commonly used method to determine the value of one’s property is to obtain an independent appraisal from an experienced appraiser. However, appraising market value of real estate is an art — and not a science. And at best, it is an inexact art. My own experience with appraisals and appraisers has led me to question the validity of a number of appraisals.

It should be understood that an appraisal is an estimate and an opinion of value. The appraisal will not determine or establish the value of your property, but it can only estimate what that value is. The Supreme Court of the United States has defined fair market value as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

All too often, however, the appraiser does not understand — or even know — the neighborhood, and brings to bear his or her subconscious prejudices while considering the value of your house. This is even worse now since lenders often have to rely on appraisers who are not even in the locality of the property.

There are three methods used by appraisers. First, the cost approach. Under this method, the cost of reproducing the building is added to the value of the land, and a discount is applied for depreciation and deterioration that the buildings might have suffered.

A second approach is known as the capitalization of income. Since this is generally used in considering income-producing property, and is complicated and controversial, this column will not enter into a discussion of this approach.

The third formula is known as the market comparison. Here, the appraiser must consider the value of comparable properties, and once again, this is a highly subjective task. For example, your next door neighbor’s house recently sold for $410,000. Your house looks identical to your neighbor’s from the outside.

But inside your house there are major differences. You have a finished basement; your neighbor does not. You have wall-to-wall carpets; your neighbor does not. You have recently installed a very modern kitchen; your neighbor’s kitchen is from the l940’s.

Needless to say, unless the appraiser actually visits and inspects both houses, the comparable method may adversely affect you.

Nevertheless, this market comparison method is widely utilized by appraisers in determining property values for mortgage lenders.

This does not mean to imply that you must take the appraisal without question. Here are some tips in dealing with your appraiser:

1. Insist on obtaining a written report from the appraiser. Obtain the appraiser’s name and address, and inquire as to the methods used to determine the value of your property.

2. If the appraisal was obtained by a mortgage lender, appeal that appraisal through that lender. Advise the lender you are dissatisfied with the value placed on the property, and that you will insist on a second appraisal being done, by an appraiser of your selection.

3. Although it may be considerably more expensive for you, it may be worth your effort to hire your own appraiser. While they have to give you an objective, independent market value determination, you certainly have the right to obtain your own evaluation as to the worth of your property.

Several years ago, the United States Tax Court was called upon to determine — for estate tax purposes — the value of certain property located in New York city. The Court concluded that a 19 percent discount from market value should be applied to the property because the decedent owned a small percentage of the property and could not — by himself — exercise full control over the property. Furthermore, the Court discounted another 26 percent because of market conditions in New York in the late l980s. (Barudin v. Commissioner, T.C. Memo. 1996-395). Thus, each property is different, and you — and your appraiser — should be completely familiar with all of the factors to be considered when determining the market value of your property.

Incidentally, there is a legal provision contained in the Equal Credit Opportunity Act of 1991 that should utilized by every mortgage borrower in this country. In Section 701(e) of the Act, Congress made it clear that every creditor “shall promptly furnish an applicant, upon written request by the applicant made within a reasonable period of time of the application, a copy of the appraisal report used in connection with the applicant’s application for a loan that is or would have been secured by a lien on residential property.” The law does permit the creditor to require the applicant to reimburse it for the cost of the appraisal.

It is strongly recommended that everyone request and obtain a copy of the appraisal report from the mortgage lender.

There are, of course, on-line websites that attempt to project — or perhaps predict is a better word — the value of your house. While all these are helpful, I would not rely solely on what you see on the internet.

Source: realtytimes.com  ~ By: Benny Kass

5 Questions To Ask Your Estate Planner After The New Tax Law

An estate plan is like a car or a house: It needs regular maintenance to function as intended. Yet unlike your car or home, external events can create the need for adjustments. Among such events is legislation like the tax bill Congress passed in late December.

So this is an important time to schedule a meeting with your estate planner and be certain your plan is up-to-date. Even if your estate plan won’t be affected by the new tax law, it’s smart to confer with your estate planner periodically to be certain your current wishes are reflected in your estate planning documents.

During this checkup, you may find that your plan no longer meets all of your needs because of changes in your life and the lives of your heirs. Or you may find that your plan didn’t cover your needs from the get-go. In my experience, many clients leave their estate planner’s office with a thick folder of documents and fail to read them carefully or discuss them in detail with their planner before signing.

When you meet with a professional for a thorough evaluation and possible updating, you might ask some key question to assure your plan documents fully support your interests and those of your heirs, including these five:

1. Will the new federal law affect my estate tax picture?

Estate tax is the tax that estates pay governments upon death; when it applies, there’s less left for your heirs. The federal government exempts a certain amount of an estate’s value from this tax and Congress just doubled that amount, known as the exemption. The new law eliminated tax on estates for many wealthy families.

There will no longer be any federal tax on estates valued between $5.6 million and $11.2 million. Previously, the limit was $5.6 million. By exempting estates between $5.6 million and $11.2 million ($22.4 million for married couples), Congress gave substantial relief to all but the wealthiest families, since only about 5,000 estates per year are estimated to be above the new limit. So unless you’re rich (but not ultra-rich), the doubling of the exemption shouldn’t  affect your estate plan.

2. What does the new tax law mean by the exemption limit for married couples?

This can be confusing, since couples general die one spouse at a time. The exemption limit for couples refers to portability — the ability of a spouse to avoid estate tax on amounts inherited from the other spouse that were within the exemption limits. The new law preserves portability, which was introduced in a revision of tax rules by Congress in 2012.

To assure that exemption limits from the estate of a deceased spouse are portable, estate planning documents of the surviving spouse must correctly invoke portability, using the right language. Otherwise, the estates of these spouses might be forced to create something known as a bypass trust — a costly, time-consuming route that can have the effect of reducing the amounts that heirs ultimately receive.

3. Will the new federal law affect my state estate tax?

There are 15 states that still have some form of estate tax: Minnesota, Iowa, Nebraska, Washington, Oregon, Kentucky, Tennessee, Pennsylvania, New Jersey, Massachusetts, Rhode Island, Connecticut, Delaware, Maryland and the District of Columbia.

Some of these states yoke their exemption limits to the federal limits, so the federal increase will automatically trigger the same increase in those states. But some of these states have no such linkage, so their exemption limits will remain the same, assuming their legislatures don’t act to change them. (Some states have limits under $1 million.)

Detailed, state-by-state information on estate tax can be found on the Tax Foundation website.

4. Are my estate documents customized to fulfill my wishes and avoid unintended consequences?

Outcomes directly contrary to your intentions can result when documents aren’t specific enough because boilerplate, off-the-shelf documents were used without being customized to your situation. It’s not uncommon for this to happen with financial powers of attorney (POA), which direct how your finances are to be managed if you’re incapacitated and unable to make decisions.

Without specific provisions to assure your wishes are carried out, vague or overly general POAs — which don’t include specific provisions of wishes, limits and prohibitions — might allow the agent managing these finances (often, the person’s spouse) to:

Legally make gifts to whomever they wish and change beneficiaries on financial accounts — 401(k)s, IRAs, life insurance policies and annuities  In some cases, agent spouses have made gifts to themselves or their grown children from their first marriages or have designated these grown children as account beneficiaries without express permission.

Discontinue existing financial support for an aging parent or a disabled child

Manage the incapacitated individual’s assets in ways that person never would, such as taking risks that jeopardize the inheritance of heirs listed in the incapacitated person’s will

To prevent such negative outcomes, ask your estate planner to assure that your POA is specific enough.

5. How soon should I come in for another review of my estate plan?

Many experts advise doing a review every three years, and/or after major life changes, including: your divorce or the divorce of a grown child; the birth of a grandchild; your receipt of a significant inheritance; the sale of your business; your retirement; newly developed disabilities or chronic illnesses or a death in your family.

An estate plan should change with changing circumstances. By attending to this, you can show your loved ones that you cared about outcomes affecting them after you’re gone.

Source: forbes.com ~ By David Robinson, Next Avenue Contributor

Comprehensive NAR Report on the Tax Cut Bill and Homeowners

Source: NAR

The National Association of REALTORS® (NAR) worked throughout the tax reform process to preserve the existing tax benefits of homeownership and real estate investment, as well to ensure as many real estate professionals as possible would benefit from proposed tax cuts. Many of the changes reflected in the final bill were the result of the engagement of NAR and its members, not only in the last three months, but over several years.

Introduction

While NAR remains concerned that the overall structure of the final bill diminishes the tax benefits of homeownership and will cause adverse impacts in some markets, the advocacy of NAR members, as well as consumers, helped NAR to gain some important improvements throughout the legislative process. The final legislation will benefit many homeowners, homebuyers, real estate investors, and NAR members as a result.

The final bill includes some big successes. NAR efforts helped save the exclusion for capital gains on the sale of a home and preserved the like-kind exchange for real property. Many agents and brokers who earn income as independent contractors or from pass-through businesses will see a significant deduction on that business income.

As a result of the changes made throughout the legislative process, NAR is now projecting slower growth in home prices of 1-3% in 2018 as low inventories continue to spur price gains. However, some local markets, particularly in high cost, higher tax areas, will likely see price declines as a result of the legislation’s new restrictions on mortgage interest and state and local taxes.

The following is a summary of provisions of interest to NAR and its members. NAR will be providing ongoing updates and guidance to members in the coming weeks, as well as working with Congress and the Administration to address additional concerns through future legislation and rulemaking. Lawmakers have already signaled a desire to fine tune elements of The Tax Cuts and Jobs Act as well as address additional tax provisions not included in this legislation in 2018, and REALTORS® will need to continue to be engaged in the process.

The examples provided are for illustrative purposes and based on a preliminary reading of the final legislation as of December 20, 2017. Individuals should consult a tax professional about their own personal situation.

All individual provisions are generally effective after December 31, 2017 for the 2018 tax filing year and expire on December 31, 2025 unless otherwise noted. The provisions do not affect tax filings for 2017 unless noted.

Major Provisions Affecting Current and Prospective Homeowners

Tax Rate Reductions

  • The new law provides generally lower tax rates for all individual tax filers. While this does not mean that every American will pay lower taxes under these changes, many will. The total size of the tax cut from the rate reductions equals more than $1.2 trillion over ten years.
  • The tax rate schedule retains seven brackets with slightly lower marginal rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year) Single Filer

Current Law Tax Cuts and Jobs Act
10% $0-$9,525 10% $0 – $9,525
15% $9,525 – $38,700 12% $9,525 – $38,700
25% $38,700 – $93,700 22% $38,700 – $82,500
28% $93,700 – $195,450 24% $82,500 – $157,500
33% $195,450 – $424,950 32% $157,500 – $200,000
35% $424,950 – $426,700 35% $200,000 – $500,000
39.6% $426,700+ 37% $500,000

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act (2018 Tax Year) Married Filing Jointly

Current Law Tax Cuts and Jobs Act
10% $0 – $19,050 10% $0 – $19,050
15% $19,050 – $77,400 12% $19,050 – $77,400
25% $77,400 – $156,150 22% $77,400 – $165,000
28% $156,150 – $237,950 24% $165,000 – $315,000
33% $237,950 – $424,950 32% $315,000 – $400,000
35% $424,950 – $480,050 35% $400,000 – $600,000
39.6% $480,050+ 37% $600,000+

Exclusion of Gain on Sale of a Principal Residence

  • The final bill retains current law. A significant victory in the final bill that NAR achieved.
  • The Senate-passed bill would have changed the amount of time a homeowner must live in their home to qualify for the capital gains exclusion from 2 out of the past 5 years to 5 out of the past 8 years. The House bill would have made this same change as well as phased out the exclusion for taxpayers with incomes above $250,000 single/$500,000 married.

Mortgage Interest Deduction

  • The final bill reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.
  • Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.
  • The final bill repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.
  • Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.
  • The House-passed bill would have capped the mortgage interest limit at $500,000 and eliminated the deduction for second homes.

Deduction for State and Local Taxes

  • The final bill allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.
  • The final bill also specifically precludes the deduction of 2018 state and local income taxes prepaid in 2017.
  • When House and Senate bills were first introduced, the deduction for state and local taxes would have been completely eliminated. The House and Senate passed bills would have allowed property taxes to be deducted up to $10,000. The final bill, while less beneficial than current law, represents a significant improvement over the original proposals.

Standard Deduction

  • The final bill provides a standard deduction of $12,000 for single individuals and $24,000 for joint returns. The new standard deduction is indexed for inflation.
  • By doubling the standard deduction, Congress has greatly reduced the value of the mortgage interest and property tax deductions as tax incentives for homeownership.Congressional estimates indicate that only 5-8% of filers will now be eligible to claim these deductions by itemizing, meaning there will be no tax differential between renting and owning for more than 90% of taxpayers.

Repeal of Personal Exemptions

  • Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.
  • This change alone greatly mitigates (and in some cases entirely eliminates) the positive aspects of the higher standard deduction.

To illustrate how the above-listed changes can affect the tax incentives of owning a home for a first-time buyer and a middle-income family of five, please see these examples:

Mortgage Credit Certificates (MCCs)

  • The final bill retains current law.
  • The House-passed legislation would have repealed MCCs.

Deduction for Medical Expenses

  • The final bill retains the deduction for medical expenses (including decreasing the 10% floor to 7.5% floor for 2018).
  • The House bill would have eliminated the deduction for medical expenses.

Child Credit

  • The final bill increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit was increased significantly from ($55,000 single/$110,000 married) under current law to $500,000 for all filers in the final bill.

Student Loan Interest Deduction

  • The final bill retains current law, allowing deductibility of student loan debt up to $2,500, subject to income phase-outs.
  • The House bill would have eliminated the deduction for interest on student loans.

Deduction for Casualty Losses

  • The final bill provides a deduction only if a loss is attributable to a presidentially-declared disaster.
  • The House bill would have eliminated the deduction for casualty losses with limited exceptions.

Moving Expenses

  • The final bill repeals moving expense deduction and exclusion, except for members of the Armed Forces.
  • The House-introduced bill would have eliminated the moving expense deduction for all filers, including military.
  • (Taxpayers) or $315,000 (for couples filing jointly), then the personal service restriction will not apply.
  • Above this level of income, the benefit of the 20% deduction is phased out over an income range of $50,000 for singles and an income range of $100,000 for couples[2].
  • For those with non-personal service income above these thresholds, the bill provides a second exception that may still allow a full or limited 20% deduction. This second exception (the wage and capital limit exception)places a limit on the deduction of the greater of:
    • 50% of the W-2 wages paid by the business, or
    • The total of 25% of the W-2 wages paid by the business plus 2.5% of the cost basis of the tangible depreciable property of the business at the end of the year.

Examples of How The New Law Will Affect the Tax Incentives of Owning a Home

Example 1 – First-Time Homebuyer. To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local taxes might affect a first-time homebuyer, consider the example of Barbara Buyer. Barbara, an accountant making $58,000 per year, is single and currently rents an apartment. She also pays state income tax of $2,900 and makes charitable contributions of $2,088, but the total of these is lower than the standard deduction, so she claims the standard.

Barbara’s tax liability for 2018 under the prior law is as follows:

Salary income $58,000
Standard deduction ($ 6,500)
Personal exemption ($ 4,150)
Taxable income $47,350
Tax $ 7,491

Under the new law, Barbara would get a tax cut, computed as follows:

Salary income $58,000
Standard deduction ($12,000)
Personal exemption ($ – 0 -)
Taxable income $46,000
Tax $ 6,060

Tax Difference Under New Law. Even though Barbara would not get the benefit of the personal exemption under the new law, her higher standard deduction would more than make up for the loss. In addition, the lower tax rates of the new law would help deliver the total tax cut of $1,431 ($7,491 – $6,060) as compared with the prior law.

However, let’s take a look at what happens to Barbara if she were to purchase the condo that she likes costing $205,000. She takes out a 30-year fixed rate mortgage at 4% interest, putting down 3.5%. Assuming she buys early in 2018, her first-year mortgage interest would total $7,856 and she would pay real property taxes of $2,050.

As a first-time homeowner, her tax liability under the prior law would be computed as follows:

Salary income $58,000
Mortgage interest $ 7,856
Real property tax (1%) $ 2,050
State income tax (5%) $ 2,900
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($14,894)
Personal exemption ($ 4,150)
Taxable income $38,956
Tax $ 5,393

Note. Under the prior law, Barbara would lower her tax liability for 2018 by $2,098 ($7,491 – $5,393) by purchasing the condo. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers her monthly mortgage payment by $175 per month.

Now, let’s take a look at what her tax situation would be under the new law as a first-time homebuyer:

Salary income $58,000
Mortgage interest $ 7,856
Real property tax (1%) $ 2,050
State income tax (5%) $ 2,900
Charitable contributions (3.6% of income) $ 2,088
Total itemized deductions ($14,894)
Personal exemption ($ – 0 -)
Taxable income $43,106
Tax $ 5,423

Tax Difference Under New Law. Even though Barbara would still be able to claim all of her itemized deductions under the new law, she would lose the benefit of her personal exemption. This would mean that her taxes would actually go up under the new law by $30 ($5,393 – $5,423). But far worse, look at the tax differential between renting and owning a home. This difference, which was $2,098 under the prior law, has now shrunk to just $637 ($6,060 – $5,423), or $53 per month. In other words, under the prior law, Barbara was given a strong incentive to move into the ranks of those who own their home. The new law still offers her an incentive, but it is a shadow of what it was, and is unlikely to be very compelling.

Example 2 – Middle-Income Family of Five:

To illustrate how the changes to the standard deduction, repeal of personal exemptions, mortgage interest and state and local tax deductions, and increase in the child credit might affect middle-income family of five, consider the example of Steve and Melinda. Steve is a store manager making $55,000 per year, while Melinda is a school principal, earning $65,000. They have three children, ages 17, 14, and 9. Steve and Melinda recently relocated from another city, and while they are getting to know their new community, they are leasing a home. But they would like to purchase as soon as they identify which area is the best fit for their family. As renters, they pay state income tax on their salaries, totaling $6,000, and also make some charitable contributions equaling $3,120. Since these itemized deductions do not reach the level of the standard deduction, they do not itemize, but they expect to do so when they purchase their home.

Here is a look at Steve and Melinda’s tax liability for 2018, computed under the prior law:

Salary income $120,000
Standard deduction ($ 13,000)
Personal exemptions (5 x $4,150) ($ 20,750)
Taxable income $ 86,250
Tax before credits $ 12,870
Child tax credits (2 x $1,000 less $500 phase-out) ($  1,500)
Net Tax $ 11,370

Under the new law, Steve and Melinda, as renters, would get a tax cut, computed as follows:

Salary income $120,000
Standard deduction ($ 24,000)
Personal exemption ($ – 0 -)
Taxable income $ 96,000
Tax before credits $ 12,999
Child tax credits (2 x $2,000) ($   4,000)
Net Tax $ 8,999

Tax Difference Under New Law As Renters. Steve and Melinda lose the big benefit of the personal and dependency exemptions for the two adults and three children. And the increase in the standard deduction is not enough to make up for this loss. However, the big increase in the child credit for the two younger children and the lower tax rate are enough to deliver them a tax cut of $2,371 ($11,370 – $8,999) as compared with the prior law.

Let’s now consider how Steve and Melinda’s tax situation changes if they were homeowners, rather than renters. Assume they find an ideal home in a nice neighborhood that costs $425,000, and after offering a 10% down payment, Steve and Melinda take out a 30-year fixed mortgage at a 4% rate. Let’s say that their real property tax for the year totals $4,250, which is just 1% of the home’s value.

Here is how their 2018 tax liability would be computed as homeowners, under the prior law:

Salary income $120,000
Mortgage interest $ 15,189
Real property tax (1%) $  4,250
State income tax (5%) $  6,000
Charitable contributions (2.6% of income) $  3,120
Total itemized deductions ($ 28,559)
Personal exemptions (5 x $4,150) ($ 20,750)
Taxable income $ 70,691
Tax before credits $  9,651
Child tax credits (2 x $1,000 less $500 phase-out) ($  1,500)
Net Tax $  8,151

Note. Under the prior law, Steve and Melinda would lower their tax liability for 2018 by $3,219 ($11,370 – $8,151) by purchasing their home instead of renting. This is the financial effect of the prior law’s tax benefits of buying a home. This amount effectively lowers their monthly mortgage payment by over $268 per month.

Now, let’s take a look at what her tax situation would be under the new law as a home-owning family instead of renters:

Salary income $120,000
Mortgage interest $ 15,189
Real property tax (1%) $   4,250
State income tax (5%) (limited by $10,000 cap) $   5,750
Charitable contributions (2.6% of income) $   3,120
Total itemized deductions ($ 28,309)
Personal exemptions ($ – 0 -)
Taxable income $ 91,691
Tax before credits $ 12,051
Child tax credits (2 x $2,000) ($  4,000)
Net Tax $  8,051

Tax Difference Under New Law As Homeowners. For Steve and Melinda, most of their itemized deductions from the prior law are preserved by the new law. They are limited slightly ($250) by the $10,000 limit on the deduction of state and local taxes. However, they lose big by the repeal of the personal and dependency exemptions, which equal $20,750 for this family. Even so, Steve and Melinda receive a small tax cut of $100 ($8,151 – $8,050) under the new law, thanks to the much larger child credit and lower tax rate. But as renters, they received a tax cut of almost $2,400. Thus, buying a home becomes a net tax change of almost $2,300.

What happened? What happened is that the new law is taking away most of the tax benefits of owning a home. Under the prior law, this benefit was $3,219 for Steve and Melinda. But under the new law, they enjoy only a benefit of $948 ($8,999 – $8,051). This gives them a benefit of just $79 per month, which is obviously a far weaker incentive to own.

[1] Meaning one does not have to itemize deductions in order to claim it.

[2] This means that for single individuals, the benefit of the deduction would be fully phased out for taxable income levels above $207,500 and for married couples filing joint returns, the benefit of the deduction would be fully phased out for taxable income levels above $415,000.

[3] With the exception of some restrictions on the deductibility of entertainment expenses, the normal business expenses of real estate professionals were not changed by the bill.

[4] The new law provides single individuals with a $12,000 standard deduction.

[5] The prior law provided a tax credit of $1,000 for each child.

[6] The new law increases the standard deduction for married taxpayers filing a joint return to $24,000. Since this is higher than Andy and Emma’s itemized deductions, they will claim the higher standard deduction.

[7] The new law doubles the child tax credit to $2,000 per child.

[8] At this income level, Bobbie and Emil’s personal exemptions would be phased out.

[9] At this income level, Bobbie and Emil’s itemized deductions are reduced by 3% of the excess of their AGI ($445,000) over the 2018 phaseout threshold of $320,000, or by $3,750. $28,000 – $3,750 = $24,250.

[10] The new law repeals the itemized deduction phaseout (so-called “Pease” provision).

[11] These are made up of mortgage interest, state and local taxes, and charitable contributions.

[12] At this income level, David and Valerie’s personal exemptions would be phased out.

[13] At this income level, David and Valerie’s itemized deductions are reduced by 3% of the excess of their AGI ($450,000) over the 2018 phaseout threshold of $320,000, or by $3,900. $35,000 – $3,900 = $31,100.

[14] The new law repeals the itemized deduction phaseout (so-called “Pease” provision).

For more information AND the entire article:  nar.realtor

9 Updates Your Home Needs Every 10 Years

Approaching your 10th home-iversary? Congrats! It’s probably time for a little maintenance.

No matter how much you love and care for your home, things are bound to wear out and need fixing — especially when you hit the 10-year mark.

To keep your house in tiptop condition, consider making these updates every 10 years or so.

Get new carpet
The average medium-grade carpet has a life expectancy of approximately 10 years. Of course, that depends on several factors, including the number of people and pets.

Signs that you need to replace your carpet: rips, tears or stains, and odors that remain even after a good cleaning. And even without any of those, you carpet might just look old and worn out. An update wouldn’t hurt.

Replace hot water tank
A water heater may not show many symptoms before it leaks or fails, so it’s important to know its age. If the manufacture date isn’t shown, then it may be embedded in the serial number on the tank.

A good rule of thumb: Any tank that’s been around for 10 years or more is a candidate for replacement.

Update ceiling fans
A midrange ceiling fan should last about 10 years, if it’s running frequently. A common sign that it might be time for a new one: the lightbulbs seem to burn out more quickly than usual.

And since a ceiling fan is about style as well as function, you may just want a more modern model.

Buy a new dishwasher
Like your water heater, consider replacing your dishwasher if it’s 10 years old. You’ll likely get a more energy-efficient model that’ll pay for itself over time.

Signs that you should replace your dishwasher sooner rather than later are an unresponsive control board, poorly cleaned dishes and cracks in the tub.

Replace garbage disposal
You’ll know you need a new garbage disposal when it doesn’t work as well as it used to. This is because the blades dull over time.

The average garbage disposal should last about 10-12 years with regular use, so if yours is around that age, consider replacing it.

Replace washer and dryer
The average lifespan of both appliances is about eight years. So, if your set is 10+ years old and running without any issues, consider yourself fortunate! That said, think about replacing them before you have any real problems or leaks.

Repaint inside and outside
There’s no hard and fast rule about when to repaint your home. It depends on where you live, humidity and many other factors.

People often repaint certain areas, such as a heavily used living room, every three to five years. But if some areas of the home haven’t been repainted in 10 years or more, now’s definitely the time to do it.

Re-caulk showers, bathtubs and sinks
Few jobs offer as much bang for your buck as re-caulking. Whether you just haven’t gotten around to it yet or you’re moving into a 10-year-old home, go ahead and re-caulk the tub, shower and sinks. You can easily do this yourself, and it makes everything look so much brighter.

Re-glaze windows
Re-glazing old windows is easier and more cost-effective than replacing them. And generally speaking, re-glazing should be done about every 10 years or so.

But check your windows every year before the cold weather arrives to make sure you don’t have any leaks or cracks.

Source: zillow.com ~ By: SEE JANE DRILL

Do You Really Need to Rake? 8 Steps for Autumn Yard Cleanup

Your fall chore list might be lighter than you think. Check out these 8 steps for autumn yard cleanup.

Bad news: It’s time to get your act together and clean up your garden before winter makes the task more difficult. But the good news is, fall garden chores don’t have to be a pain. You might find you enjoy picking up branches or raking leaves in the brisk autumn air.

Whether you love or hate fall chores, here is a checklist of tasks and ways to make them easier.

Make a compost bin

Composting sounds like a lot of hard work, but it’s actually a perfect solution for lazy gardeners. Have a bunch of weeds, grass clippings and branches to get rid of? Don’t bother bagging it up and hauling it to the curb — just throw it in a pile and mix it up every month or so. Then surround the pile with landscape timbers or chicken wire to keep everything from blowing all over the place.

While you can make composting as complicated as you want, it doesn’t have to be.

Rake leaves — or don’t

That’s right, raking the leaves isn’t always necessary. But before you proudly share this news with your significant other to try getting out of your chores, here’s the full story.

shutterstock_232950250

Leaves in the front lawn are not desirable, especially when they blow into neighboring lawns. Leaves in the garden, on the other hand, are totally desirable, and act as free mulch to protect roots and conserve moisture.

Another caveat: The soil around rose bushes and other plants that are sensitive to diseases like powdery mildew should be kept clean to prevent infection.

Collect fallen debris

We’ve all had a so-called ‘trash tree’ at some point. You know, the Bradford pear that drops branches at the drop of a hat — or the Osage orange that bombs unsuspecting passersby with rock-hard fruits.

If you’re one of the unfortunate souls with a messy tree, now is the time to collect all that debris for the year. Collect sticks and twigs, too, but once you’ve gathered them, leave them in the garden to serve as perches and homes for wildlife.

Mow the lawn

Cut the grass one last time, and mow it short to prevent diseases from spreading. Collect the grass clippings and add them to your compost pile.

Now is also a good time to complete your edging and string-trimming chores.

When you’re done mowing, winterize your mower and other outdoor power tools by draining the gasoline so it doesn’t become stale and gunk up your equipment for next year.shutterstock_203668357

Prune damaged branches

Fall is about using the anvil pruners rather than the hedge trimmers. Prune out any branches that are diseased, damaged or dead so they won’t succumb to winds or the weight of snow and ice.

If any arm-width branches meet those criteria, use a saw. If any large limbs or trees look as if they’ll break when loaded with ice, call a tree surgeon.

Look at it this way: If there’s anything that you think might fall to the ground on its own accord over the winter, remove it now.

Pull weeds

The last thing you want is a bunch of weeds spreading their seeds and taking over your garden in spring. Pull weeds on a pleasant day when it’s above freezing and the soil is a little moist so the weeds will come up more easily.

Since weeds have a tendency to shed their progeny all over the place, throw them on the compost pile or put them in trash bags.

Collect dead leaves

When cleaning and picking up indoors, you’d ideally leave things spotless. This is not the case in the garden, however, since seedpods, flowerheads and fruits add winter interest and provide food and shelter for wildlife.

Still, any dead leaves or other less-useful debris can be collected and composted.

Mulch beds

Mulching isn’t necessarily a cleanup task, but it is necessary nonetheless because it protects the plants’ roots over the winter and conserves moisture.

All of those raked leaves you saved will make an excellent mulch for your flowerbeds, or you can purchase the bagged stuff. Use a 1-  to 2-inch-deep layer of mulch, and resist the temptation to use landscaping fabric. Doing so might prevent weeds, but it will also prevent the soil around your plants from accessing rainfall or beneficial organisms.

Source: zillow.com ~ By: STEVE ASBELL

Reduce Your Homeownership Expenses With These Tips

Homes cost money.

Not just the mortgage and the taxes, or even the down payment, but all the myriad things—from the heating to the gutters—that sap your savings.

Aside from careful money management, how can you reduce your daily home expenses?

Think big

Your biggest regular expense is likely your mortgage. You may be able to shrink it, with and without the bank’s help.

  • Refinance to take advantage of low interest rates
  • Cut the time left on your mortgage. Consider taking on a 15-year option. You’ll save on interest over the long term.
  • Pay half of your monthly mortgage every two weeks. Doing so will also help you save on interest.
  • Reduce your private mortgage insurance. If you made only a small down payment, you may be able to drop some (or all) of the insurance after you pay down your mortgage to about 80%  of the principal, according to the Consumer Financial Protection Bureau.

Save on utilities

Your parents might have nagged you to turn off the lights when you weren’t using them. Now that you’re paying the bills, you get it. You don’t have to replace every appliance in your home to cut the bill, though—a few simple steps can help.

  • Keep the thermostat level, and make sure it works properly. If your house feels cold but you’ve jacked up the thermostat, you’ll want to figure out why quickly.
  • Set the thermostat no higher than 68 degrees in winter and no lower than 78 in summer.
  • Consider high-tech solutions. Some thermostats can be programmed to lower during times when no one is home. Set your lights on timers.
  • Close blinds in summer, and weatherproof windows in winter.
  • Monitor your fridge—keep your freezer full and clean the appliance’s coils regularly.
  • Run loads back-to-back in your clothes dryer so that the dryer will remain warm from the previous cycle.

Save on water

  • Bathroom: Fix any leaking toilets or faucets and install flow-restricting showerheads.
  • Kitchen: Run full loads in your dishwasher and let the dishes air-dry.
  • Laundry: Wash full loads as they use less water than multiple small loads.

Elsewhere, lower the temperature of your water heater to 120 degrees. While most are factory-set to 140 degrees, you could lower the setting on yours and save up to 5% on your electricity bill.

Learn to DIY

Many large hardware stores, including chains such as Home Depot and Lowe’s, offer free home improvement courses such as repairing drywall or updating a dimmer switch—projects that would typically cost $50 an hour if done by a pro.

Some other projects you could learn to do yourself:

  • Curtains: They’re simple to sew if their design involves straight lines.
  • Cabinets: If you aren’t looking to replace your cabinets but want a simple update, try refinishing or repainting them yourself.
  • Gutters: If your gutters are easy to reach, it takes only a small amount of time to clear them of debris. Do this regularly, and you could spare yourself a significant headache down the road.

When times become flush for you, you could hire professionals to tackle these chores. But if your priority is keeping costs down, investing a little time now can pay off in the long run.

Source: Realtor.com ~ By: Anne Miller