March, 2010

The New York Times is reporting that starting next month, the government will launch a program that allows owners to sell their homes for less than they owe, and walk away with $1500 in cash for moving expenses. The bank that services the loan would get $1000, and the actual lenders will be compelled to accept short sales – taking less money for homes than the loans are worth.

If everything works as the Obama Administration hopes, borrowers will be spared serious damage to their credit ratings, lenders will get more money for the homes than they could hope for from foreclosure, and communities will have more occupied homes and fewer properties sitting vacant and neglected.

There is growing evidence across the country that more and more homeowners who have defaulted on their mortgages are getting to stay in their homes for several months rent-free, even after their lenders have claimed ownership.

Data from two separate real estate tracking firms suggest foreclosures are taking longer to complete than they were a year ago, and the Washington Post reports that in some areas, there are so many foreclosures that lenders simply cannot keep up with the backlog. In some cases, the banks are loathe to evict the former homeowners because by flooding their markets with more houses, prices would be driven down even further. And there’s also the matter of protecting the lender’s interests. By keeping the homes occupied, the banks do not have to maintain the homes or see them fall into neglect.

In one area of Southern California known as the inland empire, economists estimate 100,000 former homeowners are living rent-free. Getting a nationwide estimate would be difficult, economists say, because only the banks know for sure who has stopped paying their home loans.

Looking at those sales by region, we can see that home sales in the Northeast were hit the hardest, with an adjusted rate of just 24,000 new homes being sold in January, a 35% drop from December and 20% fewer than the previous year.

New Home sales in the West were off 14%, year-to-year, while sales in the south fell 11% from January 2009.

Ironically, the best results were in the midwest, which has been hit harder by unemployment than the other regions. New home sales in January were actually up 2% compared to December, although they were also down 8% year-to-year.

With sales at record lows across the country, the nation’s supply of new homes in January stood at 9 months worth of inventory, the highest rate in 8 months. .

As the New York Times points out, the news is kind of baffling, given that the government has lined up tax credit incentives for both new and existing homeowners, and that mortgage rates continue to linger near record lows.

None of this seems to be getting buyers off the fence. Applications for home mortgages in recent weeks have fallen to 13-year lows as well.

The economy badly needs the home building industry to recover – not just for the real estate business, but even more for the jobs that construction provides.

Last week, we told you that President Obama is taking steps to try again and kick start the construction trade by proposing government rebates for home energy audits and other green remodeling projects, and it will be interesting to see in coming weeks what other steps the administration will take to bolster the construction and real estate industries.

As of now, the federal homebuyer tax credits are scheduled to expire at the end of April, but we’ll have to see what kind of impact it actually has on the markets.

There are a number of rules and exceptions that come into play with this. In order to exclude that profit from your taxable income, you must have owned and lived in the home as your primary residence for at least two of the five years prior to its sale.

There is no limit on the number of times you can do this, but you may not take the exclusion more frequently than every two years, and you may only exclude the profit on your primary residence, not on any vacation or investment properties you may own.

There are some special circumstances that may apply if you are widowed or divorced, as well as for homeowners who are in the military, foreign or intelligence services. You should check with your tax adviser to see if those rules can be helpful in your situation.

What if your profit exceeds that $250,000 or $500,000 limit? The good news is you made a pretty good investment! The bad news is that any profit you make in excess of the exclusion limit must be reported as a capital gain on the Schedule D form of your tax return.

That said, there are ways to chip away at that possible tax hit. For one thing, any improvements you’ve done to the house–new roof, new bathroom, hey, even making improvements so you can sell the place–all that can be deducted from the profit. So, if your profit is say, 30-grand over the exemption, but you’ve done 25-grand worth of improvements? Your taxable profit is now just $5000. And this is why you must save the receipts for any major improvements you’ve had done to your property. And of course, make sure you talk with your accountant about all of this.

So far, so good… But I can hear a lot of you out there screaming “Hey – aren’t there any tax breaks for us homeowners who had to sell after just a couple of years?” Well – in some cases, the government does offer some help for you.

Let’s say you bought a home last year, but then received a great job offer out of town, and you have to sell. Or, if you have an some other kind of unforeseen circumstance that keeps you from following that “two-of-the-past-five-years” rule – such as a divorce or an unexpected change in the size of your family. Well, the IRS – in some cases – will grant what they call a ‘reduced profit exclusion.’

But again, remember that under today’s rules, you’re taxed on the profits you made on your house only if they’re greater than a quarter-million as an individual or half a million if you’re married filing a joint return. If any of you out there bought a house in the last two years and made that kind of profit in this economy, maybe just pay the tax bill and count yourself lucky!

The biggest of course, are the tax credits for first time and repeat home buyers.

If you are a first time buyer, and you bought a home last year–or get one under contract by the end of April that closes by the end of June–you could qualify for the $8000 tax credit.

What if you already own a home but want to trade up or down? Well, if you did it after November 6th, 2009, or again, you get a house under contract by the end of April and close by the end of June, you could get the repeat home buyer credit of $6500.

There are a few restrictions. Here are some examples:

• If you purchased your home from a sibling, parent or grandparent, you are not eligible for the tax credit. However, buying from an aunt, uncle, niece or nephew is still OK.
• If you purchased your home after November 6th, there is an $800,000 dollar limit on the price.
• There are income limits as well, depending on when the home was purchased. The homebuyer tax credits for properties that sold before November of last year had an income limit of $95,000 for individuals and $170,000 for married couples. Since November, those limits have been increased to $145,000 for individuals and $245,000 for couples.

To take advantage of the 2009 tax credit, you will need to fill out an additional tax form. It’s IRS form number 5405. You’ll also need a copy of the settlement statement that you received when you purchased your home. All of this should be included in the tax return that you send to the IRS. And you will be sending that return through the mail, because the credits cannot be claimed through electronic returns.

Again, these homebuyer tax credits will expire on April 30th. It’s akin to the government taking up to $8000 right off your tax bill, so if you can take advantage of the opportunity, make sure to call your Realtor and ask about it. Then go see some houses!

But this tax credit isn’t the only one-time tax break you’ll have when you buy a house. If you moved more than 50 miles, and a new job is the reason why, you can deduct some, if not all of your moving expenses, including storage, hotel and travel costs, and even mileage on your car.

You’ll also find one-time tax savings at the closing table. Any pre-paid interest points you may have paid on your loan are also fully deductable, and so are local or state property taxes, regardless of whether you wrote the check yourself or if they were withdrawn from your home’s escrow account.

So you can see why the first April 15th after you buy your home can be a very happy tax day indeed!

But remember, there are one-time tax deals, and even better ones, that help you on your taxes year after year! And of course, the biggest one is the interest you pay on your mortgage. All of that interest is fully deductable up to a million dollars a year. Property taxes can be deducted too, every year.

When you add it all up, deducting your mortgage interest and your property taxes will have a huge impact on your tax bill. A positive impact!

If that isn’t enough to put a smile on your face, here’s one more tax saving tip:

Two weeks ago on the show, we shared many of the different tax benefits you can enjoy as a homeowner: from deducting home business expenses to receiving tax credits for installing green appliances in your home. If you missed out on those tax tips, you really should check them out!

So from all of us here at Real Estate Today, we wish you the best this tax season. We hope in some small way, we’ve helped you navigate the tricky waters of the tax code.