Feb. 9: Tax primer for real estate agents

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. See more

What’s this? Fifty five thousand residents in one mile-high building? Doesn’t Tokyo have earthquakes?

 

Sales of new homes

 

They got a shot in the arm in December, with completed transactions of new single-family homes growing a healthy 10.8 percent to hit an annual rate of 544,000, according to last week’s report from the Census Bureau. Compared to a year ago, this was 9.9 percent higher than December 2014’s rate of 495,000.

 

This was the highest rate in 10 months, and many housing market watchers chalked it up to December’s relatively mild weather. All told, 2015 saw 501,000 new homes sold, which was 14.5 percent higher than 2014’s total of 437,000.

 

“This is a promising sign for the housing market as we move into 2016,” Genworth Mortgage Insurance Chief Economist Tian Liu told the New York Times. “We expect the strong increase in new-home sales to continue as the fundamentals in the housing market remain strong and newer vintage homes are in short supply.”

 

Looking at price, the median sales price of new homes sold in December was $288,900 and the average sales price was $346,400. In terms of inventory, there were 237,000 new homes for sale at the end of December, representing a 5.2-month supply at December’s sales pace.

 

 

Tax season is in full swing:

 

Over 200 years ago, Ben Franklin said it best: “…nothing can be said to be certain except death and taxes.”

 

If you purchase a home, is it considered a tax benefit? What about selling your home? Are there only tax disadvantages? The answer is yes and yes, sometimes. As with all things tax related, the answers are not black and white but incredibly gray.

 

In the market today with an apparent shortage of homes, potential sellers are hesitant to list their homes why? Is it lack of other homes to purchase, limited or no current equity, soaring costs of rent? What about capital gains?

 

Capital gains taxes are charged when you sell something that’s increased in value such as an investment like a stock or property. If you held onto the asset for more than a year before you sold it, then you are taxed on a long-term capital gain at a tax rate of 0% to 20%. An important exception to the capital gains tax kicks in when you are selling your home, if you meet specific requirements. How do home improvements factor in? Well it depends on your initial purchase price, the amount of money you spent on home improvements, and the sales price of your home. If you owe taxes, the amount you will pay depends on your tax bracket. According to Forbes, there are 9 common real estate tax myths associated with selling a home.

 

Many taxpayers think you have to live in your house while it’s listed in order to claim the exclusion.

 

The exclusion, which is up to $250,000 of the gain from your income ($500,000 for married taxpayers), is available to taxpayers who have owned and lived in their home for two of the five years prior to sale.

 

You can’t claim the capital gains exclusion unless you’re over the age of 55.

It used to be the rule that only taxpayers age 55 or older could claim an exclusion and even then, the exclusion was limited to a once in a lifetime $125,000 limit. The Taxpayer Relief Act of 1997 changed all of that.

 

You can’t claim the capital gains exclusion unless you invest the proceeds from your home into the purchase of a new house.

 

This was sometimes referred to as the “rollover rule.” This rule no longer applies.

You can claim the capital gains exclusion for any number of homes.

 

You can only claim the exclusion for one house at a time. For purposes of the capital gains exclusion, the sale must be your principal residence. However, if you sell your primary home and move into your vacation house or investment property for two years (and otherwise meet the criteria), you can take the exclusion on a subsequent sale.

 

You’re stuck with a capital gain on the sale of a house since you can only offset the gain with a loss from another sale of a house.

 

You can’t claim a loss on the sale of your home, gains don’t have to match up in order to offset.

You can deduct the cost of painting and other improvements for the purpose of getting the house ready for sale.

 

Expenses related to merely improving your personal residence are never deductible.

“Obamacare” imposes a 3.8% Medicare tax on the sale of all real estate.

 

Under the new health care law, investment/unearned income for high income tax payers is imposed.  In other words, individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000. Investment income includes, for this purpose, gain from the sale of your home applies for purposes of the Medicare tax no matter what your income level. If your income is below the threshold, the Medicare tax does not apply.

 

Moving expenses are always deductible.  You can only deduct moving expenses which are work-related and even then, there are strict rules about qualifying expenses.

 

Although this information is interesting and useful, it is only the tip of the iceberg. ALWAYS ask or have your client ask a tax professional for precise details.

 

 

While on a road trip, an elderly couple stopped at a roadside restaurant for lunch. After finishing their meal, they paid & left the restaurant, and resumed their trip.

When leaving, the elderly woman unknowingly left her glasses on the table, and she didn’t miss them until they had been driving for about forty minutes. By then, to add to the aggravation, they had to travel quite a distance before they could find a place to turn around, in order to return to the restaurant to retrieve her glasses.

All the way back, the elderly husband became the classic grouchy old man. He fussed and complained, and scolded his wife relentlessly during the entire return drive. The more he chided her, the more agitated he became. He just wouldn’t let up for a single minute.

To her relief, they finally arrived at the restaurant.

As the woman got out of the car, and hurried inside to retrieve her glasses, the old geezer yelled to her, “While you’re in there, you might as well get my hat and the credit card.”

 

 

 

Rob

 

(Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman. To subscribe please visit www.knowledgeforrealestateagents.com.)