Real Estate Information Archive

When to Sell the Temporary Rental

Some homeowners, who were not able to sell during the Hawaii Real Estate recession, chose to rent their homes instead.  In some cases, they didn't need to sell their home at the depressed prices and opted to rent it until the market recovered.

It's a valid strategy but there are time restrictions that could have serious tax implications for some homeowners.

The section 121 exclusion for gain in a principal residence requires that the home is owned and used as a main home for at least two years during the five year period ending on the date of the sale.  This allows a homeowner to rent their home for up to three years and still have some part of the exclusion available.

The sale of a home with a $200,000 gain that qualifies as a principal residence would result in no tax being paid by the owner.  Comparably, a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and tax brackets of the investor.

The housing market has dramatically improved in the last year.  If you have a gain in a home that has been your principal residence and it has been rented less than three years, you might want to consider selling it while you qualify for the exclusion.

If you are considering a sale on your principal residence that has been rented, consult with your tax professional for advice on your specific situation.  For additional information, see IRS Publication 523.

Boomerang Buyers

It's estimated that 10% of the homes sold in 2013 will be to buyers who lost a home in the past five years.  Approximately 500,000 buyers who may have thought they wouldn't own a home anytime in the near future will be homeowners again.

It's estimated that several million of these previous homeowners will purchase again in the next eight years.  This kind of activity will contribute significantly to the housing recovery.

Some people thought that the housing crisis would cause a shift in values placed on owning a home but the boomerang buyers definitely don't support that theory.  Having a home of your own, where you can raise your family, share with your friends and feel safe and secure is still part of the American Dream.

The rising rents, increasing prices and low, low mortgage rates are also influencing buyers into the market.  In many cases, it is cheaper to own that to rent.

All new buyers, including those who have experienced foreclosures or bankruptcies, must have good credit history and the ability to repay the loan.  It just may not take as long to reestablish the credit as some would-be buyers might have thought.

Read more about Bidding Wars This Spring, Spring's Wild Card and Boomerang Buyers.

Maintaining Comfort

Some people refer to the heating and air conditioning systems as the "comfort systems."  If you've ever had to be without one in the dead of winter or the heat of summer, lack of comfort may be an understatement.  Simple maintenance with a HVAC checklist is something that every homeowner can perform.

Periodically

• Change your filter every 90 days; every 30 days if you have shedding pets.
• Maintain at least two feet of clearance around outdoor air conditioning units and heat pumps.
• Don't allow leaves, grass clippings, lint or other things to block circulation of coils.
• Inspect insulation on refrigerant lines leading into house monthly and replace if missing or damaged.

Annual, in spring

•  Confirm that outdoor air conditioning units and heat pumps are on level pads.
• Pour bleach in the air conditioner's condensation drain to clear mold and algae which can cause a clog.
• Avoid closing more than 20% of a home's registers to keep from overworking the system.
• Replace the battery in the home's carbon monoxide detector.

Even with the attention that perfoming this list will provide, it is recommended that you have your units serviced annually by a licensed contractor.  Furnaces can be inspected for carbon monoxide leaks and preventative maintenance may help avoid costly repairs.  Click Here if you'd like a recommendation.

Your Deduction...Your Choice

Taxpayers are allowed to decide each year whether to take the standard deduction or to itemize their deduction when filing their personal income tax returns.  Roughly, 75% of households with more than $75,000 income and most homeowners itemize their deductions.

The 2012 standard deduction, available to all taxpayers, regardless of whether they own a home, is $11,900 for married filing jointly and $5,950 for single taxpayers.

Let's look at an example of a homeowner couple with a $150,000 mortgage at 3.5%.  The standard deduction would give them $2,650 more than the total of their interest paid and property taxes of approximately $9,250.  If they were in the 28% tax bracket, the actual tax savings would be $742.00.

When mortgage rates were considerably higher, many people expected the interest and property taxes to easily exceed the standard deduction but with today's low rates, a comparison is certainly justified.

There are other things that could come into consideration like charitable contributions, medical expenses and casualty losses.  Tax professionals will compare available alternatives to find the one that will benefit the taxpayer most.

For more information, see www.IRS.gov and consult a tax advisor.

What's the Point?

Pre-paid 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 pro-rata over the life of the mortgage.

For instance, if $3,000 in points were paid on refinancing a 30 year mortgage, 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 can accurately reflect the deduction in your return. Currently, the most common situation is where 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.

Who Do You Call?

While the Internet is a great resource to locate information about food, travel and a number of other things, it isn't necessarily the best place to find a local service provider.

Sure, you can run the search, get quick results and may even see some fairly impressive websites. The problem is that sometimes, those sites are run by companies that sell the leads to providers who may not be as experienced as you're expecting.

Instead of taking a chance on a total stranger, a personal recommendation could yield you more satisfactory results. Most real estate transactions require some work to be done to the house either in preparation prior to the sale or to meet requirements from the buyer or inspector after the sale is made.

Looking for a service provider on the Internet is easy. Contact me for a recommendation is easier still and you can trust that they'll be reputable and reasonable. I want to be your personal source of real estate information.

Refinancing Too Soon?

Some people believe they shouldn't refinance more often than once every two years. The determining factors are if you'll lower your payments and plan to stay in the home long enough to recapture the cost of refinancing. If so, you should consider refinancing.

Interest rates have actually come down significantly in the past 12 months and even more in the past 24 months. According to the Freddie Mac Primary Mortgage Market Survey®, rates on a 30 year fixed rate mortgage are down to 3.6% in August, 2012 compared to 4.27% one year earlier.

Refinancing in the example below would save the homeowner $67.04 per month and they would recapture the cost of refinancing in 3 years and 9 months based on approximately $3,000 of closing costs.

Click Here to make your own projection on a Refinance Analysis calculator.

FHA MIP Release

FHA loans require mortgage insurance premium to cover a possible loss to the lender if the property has to be foreclosed and sold. The premium is substantial and eliminating the MIP would reduce the payment considerably.

The MIP must remain in effect for five years but after that, when the balance is 78% of the original purchase price, FHA will release the requirement and your monthly payment will go down. Since amortization is affected by interest rates, the normal time to reach this 78% point could be from 9 to 12 years at today's interest rates.

In the example below, the MIP would be released in 9 years 6 months with normal payments. An extra $100 a month would allow the borrower to reach the release point in 7 years 1 month. To reach the release point in the minimum five years, the borrower would have to make an extra $268.04 per month principal contribution.

Releasing the MIP in this example would save the borrower $177.67 per month. The borrower would also save interest, build equity and shorten the term of their mortgage. Once the MIP is released, the borrower could continue the same payment schedule to further accelerate the debt reduction.

To make some projections on your mortgage, click here.

Home Safety & Security Tips

A quick once-over of the items on this list may improve the safety and security of your home and could protect your family and friends. It is important to periodically pay attention to these things because things change over time.

Security

• Does each exterior door have a deadbolt?
• Does the lock on each window work?
• Have you added pins or clips to your windows for additional security?
• Do you have dowels or broom sticks in the track of windows and sliding glass doors?
• Do you have security company labels or signs displayed prominently?
• Do you have an alarm system? Is the system monitored?
• Do you have a dog that barks when strangers approach the home?
• Are emergency numbers posted near the telephones?

Fire

• Do you have smoke detectors near all sleeping areas?
• Do you check the batteries monthly and change them annually?
• Do you have two carbon monoxide detectors?
• Do you have an escape ladder for upper floors?
• Do you have fire extinguishers near exits and in the kitchen?
• Do you have an emergency escape plan and is the family familiar with it?
• Are any outlets or switches warm to the touch?
• Are kitchen ventilation systems working properly?
• Is the dryer ventilated to the outside and is the exhaust free of lint?
• Is the furnace cleaned and serviced yearly?
• Is the space around the hot water heater clear of combustible materials?

Falls

• Are all electrical and phone cords out of the flow of traffic?
• Are rugs and runners slip resistant?
• Is your step-stool sturdy and in good condition?
• Are stairs clear of objects that could cause a fall?
• Are all entrance ways, exits, halls and walks well lighted?
• Do bath tubs and showers have non-skid strips or suction mats in them?

Other

• Do you keep drugs and medicines out of reach and sight of small children?
• Are interior doors designed so small children cannot lock themselves in rooms?
• Are pool and play areas fenced to keep small children in and uninvited guests out?
• Are firearms kept out of reach and sight of children?
• Is a well-stocked first aid kit available for emergencies?
• Is there one member of your family trained in first aid, CPR and the Heimlich maneuver?