Freedom to think, to love, to live.  A chance to be alive and live our life to our fullest potential. A chance to find happiness and joy.  Giving thanks that we have an opportunity to control our gratitude and attitude!!!

Have a Happy Thanksgiving!

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.

HAPPY HALLOWEEN!!!!

If you check in on occasion with my web logs and rants, you may have followed the articles written in August of this last summer about a North Portland Oregon duplex purchase and renovation started in August and completed in September.  Go to http://fabulousportland.com/2009/08/10/soi-took-my-own-adviceit-is-a-good-time-to-buy/ or scroll down on the right hand side of the page to the “Archives”>August to read all of the entries.  Anyway, by mid-September we were ready to rent!  I posted online and put out signage and flyers in front of the North Vancouver address, knowing that the popularity of the North Mississippi neighborhood and North Williams corridor would entice potential renters!!  Almost immediately the phone began to ring.  Many of the callers inquired as to whether we would accept “Section 8″ renters.  Section 8 is a division of the Housing Authority of Portland or HAP.  Their mission is dedicated to providing safe, decent and affordable housing for individuals and families who are challenged by income, disability or special needs.  I didn’t know much about Section 8, but was certainly not adverse to learning more.  I met with two young single mothers and was much impressed with their vitality, ambition and personality.  They explained the program and indicated their excitement that I was definitely willing to work with them and HAP!  We started the vetting process only to hit roadblock after roadblock.  Everyone at HAP was very helpful, but their hands are tied by what I perceive to be an antiquated system of establishing rents.  Our duplexes were 3 bedrooms, 1.5 baths and 1200 SF and I had established the going rate for the area to be a certain price point.  In an attempt to be competitive, I go online and compare other properties offered for rent and try to price my rentals a bit below other comparable properties.  So, I really felt I was asking market rent, considering the updated condition and location, or even a bit below market!  HAP’s system includes a process of assigning “points” for certain amenities such as garbage disposal, air conditioning, dishwasher and more but absolutely NO consideration for condition.  This encourages a lack of respect for living conditions and pride in one’s home.  These two young single mothers wanted to provide not just little extras (as a matter of fact neither even cared we didn’t have a garbage disposal) but wanted a pretty and safe and enjoyable home for their families to live.  They loved that the units had been lovingly restored and updated.  I was sorely disappointed, as I too, had raised two children as a single mother and knew what struggles these two vivacious women faced.  I wanted to help but HAP could simply not see fit to pay market rent.  There was an article in the Oregonian regarding HAP attempting to educate landlords about being open to Section 8 tenants.  I believe they must first readjust and update their thinking about how to value rents! By the way, I did quickly re-rent both units for my asking price!!

What is a reverse mortgage?  Simply a way for those 62 years of age and older, to tap into existing equity in a home to purchase a primary residence!  Reverse mortgages got a “bad rap” in the ’60s, as the original incarnation involved the bank actually taking title to your home.  In the ’80s, FHA (Federal Housing Administration) got involved and started revising this mortgage instrument.  A reverse mortgage or HECM (Home Equity Conversion Mortgage) is an FHA-insured reverse mortgage which enables home buyers, 62 years or older, to purchase a primary residence and obtain a reverse mortgage in simultaneous transaction with no monthly mortgage payments.  It also allow these buyers to combine reverse mortgage proceeds with a down payment from their current home sale or other assets, to purchase a new home. 

• There is no income, health or credit score qualification
• There are “purchase and “refinance” options
• Must be a primary residence
• Down-payment is based on age, interest rate and home value
• Interest is added to the balance and the borrower gets the principal payment

So, a reverse mortgage is really just a negative amortization loan.  The maximum loan amount, at least through 2009, is $625,500.  But, the buyer can pay the difference is they purchase a more expensive property.  There is a 2% origination fee on the first $200k and 1% on anything above that. 

Eligible properties include:

• HUD approved condos
• Single family
• Owner-occupied, 1-4 units
• Manufactured homes built after 06/15/1976

Not Eligible:

• Bed & Breakfast
• Co-ops
• 2nd home
• Manufactured homes built before 06/15/1976

This is just another tool available to buy and sell homes in the Portland Oregon real estate market.  If you need more info for yourself or a family member, do call or write and I’ll refer you to some loan officers familiar with the process!

What is a short-sale?  It is simply an unfortunate situation where a seller simply owes more on the property than it is worth in today’s market.  Often this seller has an adjustable rate readjusting and can’t continue to make payments at the new interest rate.  Sometimes a seller took a “tickler rate” in hopes of appreciation or job improvement would allow for the inevitable rate hike.  Many times the forced sale is brought on by loss of a job or spouse.  Anyway, there are a million stories in the city!!  Portland real estate has plenty of stories to add to the mix.  We can debate all day whose to blame, but now there is no choice but to deal with the aftermath.  One solution is a short sale.  Since it is a solution for the seller (there credit is not as negatively affected as in a foreclosure) and a solution for the bank (they get a sale and do not have the expense and time involved in foreclosing), WHY is it so hard and tedious to get the banks to approve???  It is an exercise in “ultimate frustration” (the name of a new reality show???).  The listing Realtor begins the process of marketing the property to sale short.  The banks will not even talk with you until you have an offer.  Now once you have a willing buyer and a supposedly willing seller, you must deal with miles of bureacracy and red tape between the offer and any type of resolution.  You call the various banking loss mitigation departments and get a different “customer service” rep every time.  They simply read to you from a computer screen as to the progress (or the lack thereof).  You can be in review for months and don’t even get me started if there is both a 1st loan and a 2nd loan that must come to an agreement on what each will get…..oh my!!!  The entire process is cumbersome and lacking in any sense of urgency!  In the meantime, the attrition rate is huge as buyers balk because they get tired of waiting OR they continue to look for another property that doesn’t involve the short-sale process and find a suitable replacement. 

There is some hope on the horizon with federal incentives coming for short sales.  The mortgage servicing industry will see in coming weeks the details of an incentive program aimed to prevent foreclosures by encouraging servicers to pursue short sales.  The US Treasury Department confirmed that they expect to issue details on the program later this month.  The program is being finalized and will be announce as soon as possible according the Federal Housing Administration.  This program is supposed to simplify the process of pursuing short sales, which will encourage more servicers and borrowers to participate in the program.  The program will standardize the process, documentation and timeframe.  Yeahhhhhh!  is all I can say.

FHA will hire a risk manager.  They will increase audited financial net worth requirement of approved FHA lenders from $250,000 up to $1,000,000.  The will increase minimum credit score standards for buyers.  And, they will now require income verification on streamline FHA refinances.  This may disqualify some buyers that are on the edge of qualifying and it will decrease the number of lenders that can do FHA loans. 

These new developments plus the up-coming end of the 1st-time homebuyer credit (homes must be closed by November 30th, 2009) should motivate some buyers to “step up to the plate”!!!