3.8% Medicare/Real Estate Tax

I had a call this week from a neighbor who had just learned of the new tax that MAY be applied to the proceeds of his selling his house.  He was pretty upset, thinking that once again, the administration will be stimulating others using his proceeds from the sale of his house. 

So I thought this would be a good time to explain this new tax and how it will be applied. As a long-time Realtor, I try to be aware of these laws, but if you suspect the law applies to you, be sure to call your CPA or tax professional to discuss just how it will apply to you—or not.  This so called Medicare tax is a part of Obama Care, and was added to the healthcare package hours before the final vote—as Nancy Pelosi said, “we have to pass it to find out what’s in it.”  It was added without Congressional review.  Realtors strongly oppose this tax and our trade association NAR remains hopeful that it will not go into effect—BUT—if it does, here’s what you need to know.

The tax is neither a real estate “sales tax” nor a real estate transfer tax under any federal law. The new 3.8% tax is a tax on unearned income (see below) gains, and will take effect January 1, 2013.  In truth, it will not apply to most of us, but it is a method of taxing interest and dividends and a “taxable event” like selling a house.

All Americans who qualify will be subject to this tax. Including “singles” who have Adjusted Gross Income (AGI) of more than $200,000. Or “married” couples filing a joint return with AGI of more than $250,000. (The AGI threshold for married filing separate returns is $125,000.)

This tax is on unearned income.  This is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses (if the investor is not an active participant in the business). The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.)

The amount of the gain will be measured in the same way that it is for income tax purposes. This rule applies to real estate and all other appreciating capital assets. Net capital gains are taxable only in the year of sale. 

In an effort to make this simple, the tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds were the smaller amount, then the 3.8% tax would apply only to the excess amount.

Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from your income tax. The new tax will NOT apply to this excluded amount of the gain.

Landlords need to be aware that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation, cost of repairs, property taxes and interest expense associated with debt service. AGI includes net income from rent, so if your AGI is above the $200,000/$250,000 thresholds, then your rental income might be subject to the tax. 

Rent from a second home may be subject to the 3.8% tax, the application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented or whether the property is solely for the enjoyment of the owner. If the owner has rented the home out to others, then the 14-day rent exclusion will continue to apply.
If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.

Even if the vacation home has been used solely for personal enjoyment (i.e., there is no rental income and no associated expenses), then a gain on sale would be treated as net investment income and could be subject to the tax. Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply to any net rental, interest or dividends income.

Dane Hahn is a real estate professional practicing in Englewood Florida.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com

In Florida it's looking pretty good...

As mom used to say, “important if true”, applies to the revisions of the sales forecasts real estate gurus have recently made.  All the numbers for Florida look promising, and Englewood is not being left behind.  The only weakness noted is that actual sold prices are not keeping pace, but every other number is better that I would have guessed.

Both Fannie Mae and Freddie Mac, have upped their take on sales and prices this year and next. “The Freddie Mac House Price Index for the U.S. showed a brisk 4.8 percent gain from March to June 2012, the largest quarterly pickup in eight years.

Freddie now forecasts prices flat in 2012 and up 2 percent next year, an improvement over its June forecast of a .5 percent drop in 2012 and a 1.5 increase in 2013.

Bank of America improved its price forecast for the year from a .5 percent increase over 2011 to a 2 percent increase, citing shrinking inventory and a shift toward short sales.

Even internet real estate site Zillo’s chief economist Stan Humphries revised his 2012 vision, stating: “The housing market has finally turned a corner and he forecasts home values will rise 1.1 percent.” That’s a net change of 4.8 percent in six months.

Let me try to cut through the mumbo-jumbo provided by the egg-heads. In layman’s terms:

We’re halfway through 2012, and in Englewood sales of homes are up 29.5% Last year we sold 95 homes, this year 123 homes. 

Last year in Englewood a home took 87 days to sell, (from the time it went on the market until a buyer was found), this year, homes are selling in 51 days. That’s a 41.4% improvement.

At the rate we were selling houses last year, in 2011 it would take us 11.4 months to sell all the houses we had listed.  This year we will sell all our listings in 6.8 months. And we have more listings too. That’s an improvement of 40%

As I mentioned, the only weakness is the median price actually received by a seller, which is down by 7.4%.  This is a function of the many short sales which seem to often be give-away prices.  But the good news is the average sale price has gone up some 6.8%.  Meaning that the higher priced homes are starting to sell as well.

Fannie Mae is also increasingly bullish on this year’s national marketplace. Within the past month, its economists have changed their price forecast from negative to positive, signaling that they believe prices have bottomed.

Fannie also now sees existing home sales across the US up 8.2 percent to 4.6 million this year, the same level forecast by the National Association of REALTORS®.

Kiplinger’s experts go so far as to suggest housing will lead the overall economy in the second half of the year. “Housing will be one of few brighter spots in a slow-growing economy in the second half of 2012.

Moody’s predicts price appreciation to be modestly stronger in Case-Shiller’s second quarter 2012 report, followed by mild declines through early 2013. It has moved back its prediction for the price trough from fourth quarter 2012 to the first quarter of 2013.

Obviously the impending presidential election is a referendum on the economy.  Jobs are the key to the long term recovery. Job growth provides the dual benefit of stimulating new household growth AND it relieves distressed homeowners.  Today homes are affordable to those who qualify for the low interest mortgages now available, so is it a good time to buy? There has probably never been a better time to invest in real estate.

Dane Hahn is a real estate professional practicing in Englewood.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the net at www.danesellsflorida.com.

Millennials: It's Cool to Save Money

Who would have guessed in the heady old days of President George Bush (the senior) when the mantra was, “whoever dies with the most stuff, wins”, that it’s now "cool" to save money. Even big banks are cashing in on the trend and coming up with hip tag lines like, "frugal is the new cool" as they promote ads and videos online that help consumers learn ways to save money.

The poor economic times—some would say “inherited” from the Bush family--are causing some major shifts in homeownership. Many young people choose to rent longer rather than buy.  Others are driven by the fact that they can’t afford a down payment or simply don’t qualify for a loan.  But add that to the fact that today there is a larger than ever percentage of single people. This results in smaller households, and these folks are seeking smaller and highly walkable places to live and work.

The Millennials (those born in the decade and a half prior to the turn of the century--1985-2000,) share some specific desires regarding their housing needs. Today the Millennials are under 30, and they are moving out of their parents houses, they want to drive less and have public transportation nearby. They don’t necessarily need or want to own a home right now. Instead, they might prefer to rent a newer, hip and modern place instead of one they might have to fix up.  (Think HGTV apartment searchs).

Generally the under 30’s are strapped for cash, so they want lots of amenities included in the rent–like a common area pool, wifi and cable; and the use of a gym. Small is OK for them, but quality and location is high on their list of priorities since this generation is trying to save money on things like transportation, and utility bills. Walking to coffee shops and social venues is also highly desired.

While renting may be the solution for most Millennials, some still want to own their own home. In particular, single moms and women from this under 30 generation view eventual homeownership as important to them. But home ownership is a goal not necessarily a target to be achieved this year or next. This group, at about 80-million strong, will make a big difference in our housing and economic future. They are presumed to be a huge rental market opportunity for landlords.

Marketeers are calling the Millennials the first generation that will choose to room together for extensive periods in order to help save for their own homes in the future. This is the Apple generation that values high tech and higher education, maybe more so than owning a home.

Landlords interested in targeting this massive generation need to observe some key points. This group has grown up with technology, so searching for a place to live will likely come by way of the Web but not just through websites; instead they will get information about rental listings from social media, like Facebook, Twitter, Instagram, and other sharing sites. To be competitive as a landlord, you have to market to this generation where they are familiar with getting their information–and that is not necessarily the newspaper.

This group also watches a lot of video—on their phones, computers and TV’s—but they are always online. And always connected.  Videos that feature your rental home and showcase how close it is to retail and entertainment centers will go far in getting this generation to stop in and check out your listing. Point out the energy-efficiency systems you’ve put in and how much tenants can save on their utility bill. Demonstrate the easy-to-care-for simplicity of your home.

Since this generation is young, it is still developing. Keeping a close eye on the Millennials will help you better understand their housing needs and desires.

Dane Hahn is a real estate professional practicing in Englewood Florida. You can reach him at dane.hahn@gmail.com or on the web at www.danesellsflorida.com

Real Estate Bill of Rights

One of the unique characteristics of real estate is that the really good ideas seem always to come from the west coast (of the United States) and make their way to the east coast.  Generally the really good (or really bad) ideas need the approval of each state's legislature, and students of these things can trace the adoption of the regulations from west to east.  And so it is I am looking closely at the new California Homeowner Bill of Rights.  This document was just signed into law by Governor Jerry Brown.

This is national groundbreaking legislation that limits a lender’s ability to file and proceed with a foreclosure action against a homeowner so long as certain conditions have been met.

The new law will generally prohibit lenders from engaging in dual tracking, require a single point of contact for borrowers seeking foreclosure prevention alternatives, provide borrowers with certain safeguards during the foreclosure process, and provide borrowers with the right to sue lenders for material violations of this law. I would hope Lawmakers throughout the country would read this bill carefully and consider adopting it with few modifications.  I have recently seen local mortgage lenders run all over Florida borrowers who have found themselves in financial straits.

The California  law will go into effect January 1, 2013.  In a nutshell it regulates first trust deeds secured by owner-occupied properties with one-to-four residential units (that's most borrower's situation).  To qualify a borrower must be a natural person (not a corporation, trust or other legal entity) and must potentially be eligible for a foreclosure prevention assistance program offered by the lender.  It does not protect people who have filed bankruptcy, did a deed-in-lieu, or working with an outside foreclosure defense company or attorney.

 
What this means is a lender who has agreed to to allow a borrower to enter into a short sale and all parties to the transaction have also agreed to it (second mortgage holders, mortgage insurer, etc), and a buyer has been found who has provided proof of funds to complete the short sale transaction, then the lender can not simultaneously proceed with a foreclosure action while the short sale is pending.  This prevents lenders from dragging out the short sale process in order to get their foreclosure actions ready to implement the second the short sale falls through.  A lender must also cancel or rescind any pending trustee’s sale during this time.

 
Any borrower who has been in default and tried to work out an arrangement with their lender will tell you one of the biggest problem’s is being shuffled around from person to person and department to department depending on what day of the week you happen to call your lender.  You almost can never talk to the same person two times in a row.  The new law states the mortgage servicer must--upon a borrower requesting a foreclosure prevention alternative--promptly establish and provide a direct means of communication with a single point of contact. The single point of contact must remain assigned to the borrower’s account until all loss mitigation options offered by the mortgage servicer are exhausted or the borrower’s account becomes current.

 
A mortgage servicer generally cannot record a notice of default, notice of sale, or conduct a trustee’s sale for a nonjudicial foreclosure if the borrower’s complete application for a first lien loan modification is pending as specified, or if a borrower is in compliance with the terms of a written trial or permanent loan modification, forbearance, or repayment plan. (The so-called dual-tracking modification).

 
A mortgage servicer cannot collect any late fees while a complete first lien loan modification application is under consideration, a denial is being appealed, the borrower is making timely modification payments, or a foreclosure prevention alternative is being evaluated or exercised.

 
A mortgage servicer must provide written acknowledgment of receipt within five business days of a borrower’s submission of a complete first lien modification application or any document in connection with a first lien modification application.

 
No entity can record a notice of default or otherwise initiate the foreclosure process, except for the holder of the beneficial interest under the deed of trust, an authorized designated agent of the holder of the beneficial interest, or the original or substituted trustee under the deed of trust. Furthermore, a mortgage servicer must ensure that certain foreclosure documents are accurate and complete, and supported by competent and reliable evidence. (This is in direct response to the robo-signing litigation that shook the foreclosure industry).

 
A mortgage servicer cannot record a notice of default for a nonjudicial foreclosure until the mortgage servicer informs the borrower of the borrower’s right to: (1) request copies of the promissory note, deed of trust, payment history, and assignment of loan if any to demonstrate the mortgage servicer’s right to foreclose.
Whenever a trustee’s sale is postponed for at least 10 business days, the lender or authorized agent must provide written notice of the new sale date and time to the borrower within five business days after the postponement.

Borrowers can access the  courts to enforce their rights under this legislation.

 

The California Homeowner Bill of Rights also contains a variety of bills outside of the conference committee process. These will enhance law enforcement responses to mortgage and foreclosure-related crime, in part by empowering the Attorney General to call a grand jury in response to financial crimes spanning multiple jurisdictions. Additional elements will help communities fight blight related to foreclosure, and provide enhanced protections for tenants in foreclosed homes.

 

Dane Hahn is a real estate professional working in both New Hampshire and Florida.  He can be reached at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com