Death and Taxes!

With tax season upon us, we need to think “tax incentives”, “tax credits” and legal “tax write-offs”!!!  These tips are relevent whether you live in Portland, Oregon or elsewhere in the US!  Of course, first and foremost in my mind is the $8,000 First-Time Home Buyer Tax credit (not deduction)!  It was originally set to expire on November 30th, 2009 but this credit of up to 10% of the purchase price or up to $8,000 was extended into 2010 (purchase agreements must be signed by April 30, 2010 and closings must be final by June 30th, 2010)!  The new program was also expanded to include a tax credit of up to $6,500 (or up to 10% of the purchase price…not to exceed $800,000) for qualified buyer of a ”repeat” or “replacement” home under the same deadlines.  To qualify, home purchasers must have owned and occupied a primary residence for five consecutive years during the last eight years.  Most importantly, the new program significantly increased previous income requirements. 

There is also a property-tax deduction for non-itemizers.  You don’t have to be a new homeowner in 2009 to deduct qualifying property taxes, but prior to 2008, you did have to itemize your taxes in order to receive the benefit–not anymore.  Under the new rule, homeowners who don’t itemize can boost their standard-deduction amount by up to $500 if they’re single and up to $1,000 if they’re married and file a joint return to account for property taxes paid during 2009.  You’ll need to include a Schedule L with your 2009 tax return, but it’s definitely worth it if your qualify.

If you paid refinancing points, you get to deduct the points over the life of the loan.  That means you can deduct 1/30th of the points per year if it’s a 30-year mortgage.  It’s not a lot of savings, but everything helps when you’re legally trying to lower your tax bill.

There are multiple energy and home improvement credits.  Homeowners can make energy-conscious purchases that will provide tax benefits when filling out their tax returns for 2009.  The new law provides tax credit for making your principal residence more energy efficient and for buying certain energy efficient items.  There is the Residential Energy Property Credit and this new law increases the energy tax credit to 30% of the cost of all qualifying energy-efficient improvements to existing homes.  This includes windows, doors, insulation, water heaters, energy-efficient heating and air conditioning systems, roofs, biomass stoves.  And, there are no income limits and no AMT (Alternate Minimum Tax) ramifications. It also raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.  Go to http://www.energystar.gov for loads more information!

There are a few other tax breaks such as new car purchases.  If you bought a qualifying new car or truck ($49,500 or less) between February 16 and December 31, 2009, you may be able to deduct the sales or excise tax (for state of Washington buyers).  Your income must be less than $125,000 for a single taxpayer or $250,000 for a couple to get the full deduction.  The benefit applies to more than one vehicle, as long as all of them qualify and delivery was taken by December 31st.

Unemployment benefits are usually fully taxable.  If you received any unemployment benefits at any time during 2009, you are eligible to exclude the first $2,400 of these benefits when you file your tax return.  For a married couple, the exclusion applies to each spouse separately.

If you were unemployed in 2009 but you got a new job, moving expenses may be deductible, if you moved more than 50 miles away and you don’t have to itemize to get this deduction.  For 2009, you can deduct the cost of getting yourself and your household goods to the a new area 50+ miles away, this includes 24 cents per mile for driving your own vehicle, plus parking fees and tolls.

Don’t forget the Private Mortgage Insurance (PMI) tax deduction!  If you put down less than 20% on a house, you were required to purchase private morgage insurance, which protects the lender in the event you default on the home loan.  Starting with loans issued or refinanced in 2007, and continuing through 2010, you can deduct each year’s premiums paid on PMI for your principal residence and for a non-rental second home.  The tax break was originally good for 2007 only, but the government extended it for three years.  The deduction begins to phase out once your adjusted gross income (AGI) reaches $100,000 ($50,000 for married filing separately) and disappears entirely at an AGI of $109,000 ($54,000 for married filing separately).

There is also a Residential Energy-Efficient Property Credit witch covers very expensive but green products such as solar electric, solar water heaters, geo-thermal heat pump, wind energy and full-cell power plants with a 30% credit for qualifying costs.  With all of these credits, financing is permitted!  Again, go to http://www.energystar.gov for specifics and, of course, always consult with your tax professional!!!

Ted C. Jones Brings Strong Opinions/Humor to Portland Oregon Economic Forecast!

Ted C. Jones, Chief Economist for Stewart Title

•   ”and, I think it’s gonna be alright,
• yes, the worst is over now.
• The morning sun is shining like a red rubber ball”. 

The Cyrkle/1966  http://www.youtube.com/watch?v=hOxLaHPPzzw

  Ted C. Jones, Ph.D.
Senior Vice President-Chief Economist, Stewart Title Guaranty Company
Director of Investor Relations, Stewart Information Services Corporation NYSE-STC  gave a robust presentation today, Thursday February 25th, 2010 at the Columbia Yacht Club to a room full of Real Estate Brokers, Mortgage Brokers and Title reps hungry for information and tidbits of foresight on economic predictions for Portland, Oregon.  There were no “defining moments” or “jarring revelations” at this seminar, but lots of good facts, figures, opinions and observations!  His real estate and economic predictions (which he reminded us were just about “spot on” last year, except concerning interest rates) simply concurred with a lot of other reading and presentations I have attended.  However, he made the material interesting, palatable and interspersed what he called “Ted’s Solutions” to a myriad of problems.  You don’t have to agree with everything but he certainly backed up his opinions and prophecies with a lot of graphs and historical data.   

• Wall Street:  liquidity and Washington realizing that they can’t contol
• Jobs:  he feels the stimulus is not working
• Time-Bomb loans:  now concerned about commercial
• Terrorists attacks
• Pandemic:  like Bird Flu
• Inflation and cap rates going up
• Tax-cuts
• Energy:  US imports 63% of oil
• All the band-aid fixes for real estate, autos, credit cards and banks

Just as a regular citizen trying to reign in a budget and make their finances work, the US must start with decreased spending.  He definitely believes (as do most in the industry) that interest rates are artificially low and will definitely begin to creep up.  He believes we will not see interest rates as low as we are now experiencing in our lifetime again (I guess it matters how old you are).  Those buyers with good credit or cash, a bit of patience and some luck will make some great buys in the existing market.  And, he feels our next crisis will be in the commercial real estate market.  “History doesn’t repeat itself, but it certainly does rhyme!”….Mark Twain.

1031 Tax-Deferred Property Exchange and Who Wouldn’t Want to Defer Taxes??!!

A 1031 Tax-deferred exchange is a real estate transaction involving the sale of one property with the tax on the capital gain deferred because ofthe qualified purchase of another like-kind property in exchange.  For 1031 exchange purposes, the term like-kind property is interpreted as any type of investment property, rather than property owned for personal use.  The 1031 exchange involves a purchase that must close within 180 days of the sale.  There is also a reverse 1031 exchange in which the sale occurs after the associated purchase.  Investors utilize the 1031 exchange to defer taxes by selling an investment property and using the profits to buy one or more new properties without immediate tax consequences.  Both real and personal property can be exchanged but they are not like-kind to one another.  Almost any property, whether real or personal, which is held for productive use in a trade or business or for investment, may qualify for a tax-deferred treatment under Section 1031.  You can exchange an investment property for any other qualified investment property.  In other words, you have a rental house which now has lots of equity accrued and you would like to sell and purchase two duplexes or sell a duplex and move-up to a small apartment building, etc.  As long as they are “like-kind”, it is allowable.  It’s a great way to continue utilizing both the equity in your investments and other people’s money to acquire wealth through real estate investments.  And, who doesn’t like the idea of deferring taxes?  The tax payer has 45 days from the sale of the original property to identify the new property and 180 days to close.  There are relatively strict rules on the procedures for a qualified tax-deferred exchange, so I use an experienced intermediary to make sure the process is seamless and my tax deferral is protected!  You do not have to use all the funds from the original sale in the exchange.  A tax payer/exchanger can choose to withhold funds or receive other property in an exchange, but it is considered “boot” and will be subject to federal and state taxes.  Anyone owning investment property with a market value greater than its adjusted basis should and could consider a 1031 exchange and I would definitely consult your accountant or CPA!  If you’d like a referral to tax-exchange specialist to further discuss options, please contact me. 

I have noticed that investment properties are “holding their own” in the Portland, Oregon real estate market.  Investors with good credit and/or cash are attempting to locate good rental properties.  Being a landlord is not for everyone but the rewards can be great.  If you think about it, you have someone else paying the mortgage, hopefully a bit of cash flow (and the promise of more over time), plus some appreciation (albeit slow in this market) and the opportunity to set up passive income for the future.  Real estate is also a very tangible investment, as you can drive by…touch and see it.  I love that!!! 

“Are We There Yet”??? Predictions for Housing and the Economy for Portland and Oregon!

“I’ve Been Down So Long, It Looks Like Up to Me”**!!!  Today the Oregon State Economist, Tom Potiowsky presented his “State of the Oregon Economy” predictions and updates for 2010!  I read a lot of financial blogs and feeds so I wanted to see if Mr Potiowsky’s predictions corroborated other analysts.  The answer is “yes”!  The era is being called the “Great Recession” (note: not “Great Depression”) due to this being the longest economic downturn since 1930!  According to economists, this recession actually began in December 2007 and has now been deemed “technically ended” for the US in summer 2009 and for Oregon in the fall of 2009!  Mr. P emphasized time and time again in his discussion today that the “technical” ending is quite different than the “feel good” ending.  This “feel good” ending to our downturn will be very personal and much slower to realize.  He predicts that by the 2nd half of 2010 and/or the first half of 2011 we will begin to “feel better”.  And, the key to recovery is continued repair and loosening of the credit markets!

This has been a global recession.  For the US, imports and exports slowed considerably and our CPI (consumer price index) has decreased in ‘09 for the first time since 1955!  Consumers, businesses and governments have restrained spending.  Now there are inflation>deflation>inflation worries.  But, Mr. P did not believe that inflation was a big worry for 2010 and 2011.  Fiscal stimulus and lower energy prices have helped to spark the recovery and there’s still a lot of stimulus money to spend.  Labor has to get higher wages to pay for inflationary prices.

Despite the fact that this morning there were positive numbers for unemployment (10%, down form 10.2%), Mr. P feels that the unemployment rate is a lagging indicator of economic condition.  He expects that there could be more job losses in early 2010.  We should, he believes, pay more attention to job creation!  How many jobs are actually being created?  In the 2001 recession, it took four years for jobs to completely recover.  It may take 5-6 years to get back to our former job rate this time around.

The US dollar recovered briefly but has dropped again.  Mr. P feels that the value of the dollar is a relative value against other currencies….that’s all!  The dollar value is going down to where it used to be and where he believes it should be, at a more natural level.

What happens after we spend all the stimulus money?  What’s behind the stimulus to continue the recovery?  Labor markets may remain weak because businesses will be conservative and reluctant to re-hire until they’re sure this recovery “has legs”.  He compares our recovery to the constellation “Cassiopeia” (the shape of a soft “W”) and there could be a recovery with a slight dip.  In Oregon we hit 12% unemployment in March of ‘09 and down to 11.3% in October ‘09.  For some perspective, we were at 5% in April of ‘07!!  Some of our jobs are gone for good, others are simply in hibernation.  And, keep in mind that unemployment figures do not include those that have quit looking or those that have taken part-time work until they find full-time employment.

Mr. P believes we are at or very close to the bottom and predicts a slow housing recovery with a possible 35% increase in housing starts by between 2013 and 2015.  Metro predicts that our population will grow by one million people in the next 10 years.  The Housing Price Index “Rate of Decline” slowed and California is starting to gain ground.

Leading indicators for Oregon show that the economy has turned, but it will be a slow growth!  We will see more signs of this recovery in the 2nd half of 2010 and in 2011.  Mr. P predicts some positive job growth for Oregon in the 2nd half of 2010 but it could be 2011 before we really start to show positive numbers.  Commercial real estate will remain weak till 2012 with a mild recovery that is absolutely dependent on the credit markets.  Private investor groups will continue to buy up property since credit markets are tight.

Risks to this forecast:

• Credit Markets: There must be credit availability to the credit worthy.
• H1N1 Virus:  He does not see this as a risk as big as the media plays it.
• Export Markets:  Must stay viable.
• Geopolitical:  Some unseen geographical/political event.

**Referencing the book by Richard Forina

How Interest Rates Affect the Bottom Line!

Did you know that a ½% change in interest is approximately equal to a 5% change in sales price? It’s powerful to realize the importance of the relationship of interest rates to your monthly payments.  This is the reason why our present low interest rates are so important!!  When I started my real estate professional life, interest rates were at 13% and when they dropped below 10%, we thought we’d just won the lottery!!!  So, our historic low interest rates coupled with the present market reality of decreased pricing is a serious reason to consider real estate as an investment!!!

All About the Move-Up/Repeat Homebuyer Tax Credit!!

It’s time to celebrate!!!  Not only did the “powers that be” see fit to extend the first-time home buyer (for actual 1st time home buyers OR those that have not owned a home for three years), but they have expanded this credit to include repeat buyers (with certain specific parameters).  Go to http://fabulousportland.com/2009/06/08/free-money-first-time-buyer-credit-update-and-faqs/ for information on the extended “First-Time Home Buyer” Tax Credit and read on for frequently asked questions concerning the NEW extended “Move-up, Move-down, Move-around, Repeat Home Buyer Tax Credit”!!  Here are some facts and figures:

The Worker, Homeownership and Business Assistance Act of 2009 has established a tax credit of up to $6,500 for qualified move-up/repeat home buyers (existing home owners) purchasing a principal residence after November 6, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).  The following questions and answers provide basic information about the tax credit.  If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

•1)       Who is eligible to claim the $6,500 tax credit?

Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.

•2)      What is the definition of a move-up or repeat home buyer?

The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a home owner who has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date.  For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.  Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.

•3)      How is the amount of the tax credit determined?

The Tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500.  Purchases of home priced about $800,000 are not eligible for the tax credit.

•4)      Are the any income limits for claiming the tax credit?

Yes.  The income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return.  The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits.  The phase-out range for the tax credit program is equal to $20,000.  That is the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 (single) or $245,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

•5)       What is “modified adjusted gross income”?

Modified adjusted gross income or MAGI is defined by the IRS.  To find it, a taxpayer must first determine “adjusted gross income” or AGI.  AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted.  On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form.  For Form 1040-EZ, AGI appears on line 4 (as of 2007).  Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

•6)      If the modified adjusted gross income (MAGI) is above the limit, can a buyer qualify for any tax credit?

Possibly.  It depends on your income.  Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phase-out limits.

•7)      What is an example of how the partial tax credit is determined?

Just as an example, assume that a married couple has a modified adjusted gross income of $235,000.  The applicable phase-out to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount.  If you divide $10,000 by the phase-out range of $20,000, the yield is 0.5.  When you subtract 0.5 from 1.0, the result is 0.5.  To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5.  The result is $3,500.

•8)       How does this home buyer credit differ from the tax credit that Congress enacted in July of 2008?  How is this different from than the rules established in early 2009?

The previous tax credits applied only to first-time home buyers and were for different amounts of money.

•9)       How do buyers claim the tax credit?  Is there a special form or application?  Are there documentation requirements?

You can claim the tax credit on your federal income tax return.  Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount online 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns).  No other applications are required, and no pre-approval is necessary.  Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed purchase.

•10)    What types of homes will qualify or the tax credit?

Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000.  This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes and houseboats.  The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000/$500,000 capital gain exclusion for principal residences. You cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc), your lineal descendants (children, grandchildren, etc) or your spouse or your spouse’s family members.

•11)    What does it mean that the tax credit is “refundable”?

The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset.  Typically this involved the government sending the taxpayer a check for a portion or even the entire amount of the refundable tax credit.

•12)    Instead of buying a new home from a home builder, can someone hire a contractor to construct a home on a lot that I already own and still qualify for the tax credit?

Yes.  For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house.

•13)    Can a buyer claim the tax credit if the purchase of the home is financed under a mortgage revenue bond (MRB) program?

Yes.  The tax credit can be combined with an MRB home buyer program.

•14)    Can someone claim the tax credit if that is not a US citizen?

Perhaps.  Anyone who is not a nonresident alien (as definite by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits.  For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.  The IRS provides a definition of “nonresident alien” in IRS Publication 519.

•15)    Is a tax credit the same as a tax deduction?

No.  A tax credit is a dollar-for-dollar reduction in what the taxpayer owes.  That means that a taxpayer who owes $6,500 in income taxes and who receives a $6,500 tax credit would own nothing to the IRS.

•16)    Is there a way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 or 2010 tax return?

Yes.  Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding.  Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay.  This money can be applied to the downpayment.

•17)    HUD allows “monetization” of the tax credit.  What does that mean?

It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund.  These funds may be used for certain downpayment and closing cost expenses.

•18)    If a buyer is qualified for the tax credit and buys a home in 2009 (or 2010), can they apply the tax credit against 2008 (or 2009) tax returns?

Yes.  The law allows taxpayers to choose to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). 

•19)    For a home purchased in 2009 or 2010, can the buyer choose whether to treat the purchase as occurring in the prior or present year, depending on which year the credit amount is the largest?

Yes.  If the applicable income phase-out would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.

This Ain’t Scary: Tax Credit Extension AND Expansion!!!

HAPPY HALLOWEEN!!!!

Portland Area Housing Inventory Down for 6th Straight Month

Local Portland Oregon housing inventory was down to 7.3 months for the month of July 2009!!!  This is the 6th consecutive month of lower inventory of homes for sale, down from 10 months in July 2008 and down from 19.2 months in January 2009!!!  This coupled with the national lower unemployment figures and other recent positive economic indicators leads me to conclude we could be near the “bottom” and nearing the end of our recession.  That does not mean that we don’t have some more “repair work” to do.  I do believe it’s going to take some slow, steady re-building to fully rejuvenate our real estate market.  But, every little positive piece of the puzzle is welcome! To see full market statistics, please visit:  http://bit.ly/JulyMarketStats

Higher Interest Rates to Come?

 Over the last 7 business days, the Bond Market (where Mortgage-Backed Securties are sold) has taken a significant drop.  Not quite as big as the drop that followed Memorial Day Weekend, but it seems to be heading in that direction.  As Mortgage-Backed securities (MBS)decline in pricing, rates tend to go up.  Around Memorial Day, the Federal government slowed down its purchases of MBS, which earlier in the year was artificially propping up the pricing and helping rates.  Plus, there started to be an over-supply of new debt being sold.  In simple terms, all these stimulus programs bring debt for the country.  That debt is sold on the Bond Market.  When there is more to sell that there are buyers, the basic supply-and-demand rules take effect.  Too much debt to sell equals lower price which means higher interest rates!  This may continue as the economy is showing signs of recovery.  Today’s jobless rates came in better than expected and some sectors are showing profit gains.  So, it’s a mixed bag of news, as our economy recovers we may experience the pain of higher interest rates for homes.

A Follow-Up to My Recent Post on Loan Modification Fraud!

As a follow-up to a recent post:  “Loan Modifications:  Be Careful Out There”  ( http://bit.ly/jgeHx ), here is a recent Inman News article ( http://bit.ly/5QRdS ).  The article shares examples of loan mod company deceptions and fraudulent activity in California!  A majority of the time, if there is an opportunity for negotiating a modification of your existing loan, you can deal directly with your lender.

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