Sandy's Journal

When Congress passed the Housing Assistance Act of 2008, their intention was to help those people who were losing their homes in foreclosure. One of the side affects of the bill, however, was a change that could effect taxation on the gain from the sale of your personal residence.

IRS law excludes $250,000 of the gain from taxation if you're single, and $500,000 if you're married, when you sell a primary residence you've lived in for at least two years of the last five years. This is so even if a portion of the gain was rolled over into the property in a 1031 exchange transaction.

For example, if you and your spouse sold a rental property in Michigan, and bought a property in Naples, Florida, rented it out for several years, and then moved into it as your primary residence for a couple of years, your excluded gain when you sell the Naples house could include gain that was rolled into it in your exchange.

The new law modifies that rule and penalizes you for time that your property is not your primary residence; you have to prorate the gain between the periods the property was not your primary residence, and the periods that it was. (Your primary residence is the place you live; the address you use on your drivers license; where you're registered to vote, etc.)

Only the non-residence period after January 1, 2009 is excluded. So, if you bought, or exchanged into, a property on January 1, 2007, rented it for three years, moved into it on December 31, 2009, then lived in it for 3 years until you sold it, you would have owned the property for 6 years, during which it was a rental for 3 and your residence for 3. However, since only one of the rental years was after January 1, 2009, the numerator in your calculation would be one (the number of rental or non-residence years after January 1, 2009), and your denominator would be 6 (the total number of years you owned the property). In other words, 1/6 of your gain would be taxable; if your total gain was $300,000, then $50,000 of that would be taxable, even though you would otherwise be entitled to an exclusion of $500,000.

We speak about the non-residence period rather than the rental period because it's not necessary that you actually rent the property – the law deals with the periods that the property is your residence, versus the periods that it is not. In the example above, if the Naples property had been your vacation home, instead of a rental, for the three years before you moved into it, and then your residence for the next three years, the result would have been exactly the same: $50,000 of the gain would be taxable out of a total gain of $300,000.

The new law only covers those situations where the period when the property was a rental or vacation home falls before it becomes your primary residence. It does not cover situations where it was your residence first, and then became a rental property – this was done so that homeowners who were forced to rent their former residence while they tried to sell it would not be penalized.

As time goes on, there will be lots of questions about this new law that will have to be answered by court cases or IRS rulings, such as what happens if you build a house on a piece of bare land that you've owned for years, but if you are planning to move into your current rental or vacation property at some point in the future, you should check with your CPA or other qualified financial advisor as soon as possible so as not to lose out on an opportunity.

Whether you're looking to buy your first home, or trading up to a larger one, there are many costs - on top of the purchase price - that you must figure into your calculation of affordability. These extra fees, such as taxes and other additional costs, could surprise you with an unwanted financial nightmare on closing day if you're not informed and prepared.

Some of these costs are one-time fixed payments, while others represent an ongoing monthly or yearly commitment. Not all of these costs will apply in every situation, however it's better to know about them ahead of time so you can budget properly.

Remember, buying a home is a major milestone. Whether it's your first, second or tenth home, there are many important details to address, during the process. The last thing you need are unbudgeted financial obligations cropping up hours before you take possession of your new home.

Read through the following checklist to make sure you're budgeting properly for your next move.

1. Appraisal Fee

Your lending institution may request an appraisal of the property which would be your responsibility to pay for. Appraisals can vary in price from approximately $175 -$ 300.

2. Property Taxes

Depending on your down payment, your lending institution may decide to include your property taxes in your monthly mortgage payments. If your property taxes are not added to your monthly payments, your lending institution may require annual proof that your taxes have been paid.

3. Survey Fee

When the home you purchase is a resale (vs. a new home), your lending institution may ask for an updated property survey. The cost for this survey can vary between $700- $1,000.

4. Property Insurance

Home insurance covers the replacement value of your home (structure and contents). Your lending institution will request proof that you are insured as it protects their investment on the loan.

5. Service Charges

Any new utility that services your hook up, such as telephone or cable, may require an installation fee.

6. Legal Fees

Even the simplest of home purchases you may have a lawyer involved to review all paperwork in some instances.  Shop around, as rates vary greatly depending on the complexity of the issues and the experience of the lawyer.

7. Mortgage Loan Insurance Fee

Depending upon the equity in your home, some mortgages require mortgage loan insurance. This type of insurance will cost you between 0.5% -3.5% of the total amount of the mortgage. Usually payments are made monthly in addition to your mortgage and tax payment.

8. Mortgage Brokers Fee

A mortgage broker is entitled to charge you a fee in order to source a lender and organize the financing. However, it pays to shop around because many mortgage brokers will provide their services free to you by having the lending institution absorb the cost.

9. Moving Costs

The cost for a professional mover can cost you in the range of:

• $50-$100/hour for a van and 3 movers, and

• 10-20% higher during peak demand seasons.

Selling a home in a declining market starts with a proper attitude and finding the right real estate Consultant who is optimistic and knows the right sales techniques in this tough market. Even though most people and economists are down on the housing market (feel it is depressed, that the economic recovery isn't going to happen in the next few months, and consumer confidence is down), it doesn't mean that you can't sell your home.

The truth of the matter is many people will sell their homes between now and this summer. While many sellers and their real estate agents take a reactive approach to market conditions, those sellers, who who have a professional Real Estate Consultant,  take a more proactive and realistic approach to the market will be the ones who sell their homes. These are the sellers who take advantage of this market and move up to their dream home! First, be honest about appraising the condition of your home.

The key to successful selling in a 'declining market' is pricing your home at today's market value, having your home in tip-top condition and being able to work with a prospective buyer on financing needs and terms. Don't let your ego or pride get in the way when determining a price for your home. Put yourself in the buyer's shoes and walk across the street. Curb appeal to a new buyer is a very important and is many-times overlooked.

Secondly, take a leisurely walk through your home jotting down the little things you might do to spruce it up. New carpeting, a fresh coat of paint, new light fixtures, mirrors, etc., are items that will give your home more emotional appeal and does not cost too much. Put away the clutter throughout the home. Rooms free of clutter will appear bigger and the new buyer can visually 'move into' your home much easier. Remember, new buyers are not buying your furniture.

Finally, be patient. The real estate market has changed considerably since the last run-up where homes sold in hours or days. We are now experiencing a more "normal market" where homes take 6 to 12 months to sell. Remember, inventories are at an all-time high right now. Bank foreclosures are all around you and many buyers will have difficulty qualifying for a new loan. Lenders also have very strict guidelines now and consumer confidence is very low. Allowing for a normal marketing period will do a lot to alleviate your impatience when you have few showings of your home or a lack of offers to review.

A good Realtor® Consultant will keep you abreast of market changes, activity on your home and others in the neighborhood, while maintaining a "teamwork" concept that is paramount for a successful sale. Properties need ample time to be exposed to the public and finding the right buyer requires a good understanding of the market as well as sales values. In all honesty, there are no easy answers but one thing is for certain, even in the worst markets, there are people selling homes and taking their equity!