Pikes Peak Homes and Land
Chris J Clark, REALTOR®
Broker/Owner
Phone (719) 464-5839
Chris@PPHAL.com

Blog

Year End Tax Newsletter

One of the first steps in a good outcome is knowing a little bit about what you’re about to undertake.  By being aware of some of the areas regarding homes that may not come up every year in a tax return, you’ll be able to point them out to your tax professional or seek more information from IRS.gov.

Look through this list of items for things that could affect your tax return.  Even if you have relied on the same tax professional for years to look out for your best interests, they need to be aware that there could be something different in this year’s return.

If you bought a home for a principal residence last year, check your closing statement and identify any points or pre-paid interest that you or the seller paid based on the mortgage you received.  These can be deducted on your Schedule A as qualified home interest if you itemize your deductions.  See Home Mortgage Interest Deduction | IRS Publication 936 (2018 version not released as of this newsletter).

Keep track of all money you spend on your home that might be considered a capital improvement.  Get in the habit of putting receipts for money spent on your home that is not the house payment or utility bills.  Repairs are not tax deductible but improvements, even small ones, can be added to the basis of your home which can lower the gain when the home is sold.  Years from now, your tax preparer can sift through them and determine whether they’re capital improvements or maintenance. See Increases to Basis | IRS Publication 523 Selling Your Home (2018 version not released as of this newsletter).

By making additional principal contributions with your mortgage payment, you’ll save interest, build equity and shorten the term of a fixed-rate mortgage.  See Equity Accelerator.

If you sold a home last year, the payoff on your old mortgage included interest from the last payment you made to the date of the payoff.  That interest is tax deductible.  You may need a breakdown of the payoff to the mortgage company; you should be able to get that from your closing officer.

If you refinanced your home, unlike a home purchase, points paid to refinance are not deductible as interest in the year paid; they must spread ratably over the life of the mortgage.  See Home Mortgage Interest Deduction | IRS Publication 936 (2018 version not released as of this newsletter).

For homeowners who have lost a spouse, there is an exception regarding the exclusion on the sale of a principal residence.  If the surviving spouse concludes a sale of the home within two years of the death of their spouse, they may exclude up to $500,000, instead of $250,000 for single taxpayers, of gain provided ownership and use tests are met prior to death.

The two-year period begins on the date of death and ends two years after that date.  See Sale of Main Home by Surviving Spouse | IRS Publication 523 Selling Your Home (2018 version not released as of this newsletter).

There could be significant tax consequences to a person selling a home that was received as a gift as compared to receiving the home through inheritance.  With a gift, the basis of the donor becomes the basis of the donee.  With inheritance, the heir usually gets a stepped-up basis and avoids potential unrecognized gain.  See Home Received as Inheritance | IRS Publication 523 Selling Your Home (2018 version not released as of this newsletter).

Click here to download a Homeowners Tax Guide.  This is meant for information purposes only and advice from a qualified tax professional should be sought to find out about your individual situation.

Your Real Estate Resource

Being a better homeowner is a full-time job.  It’s not just about making better decisions when you buy and sell; it’s making better decisions throughout the time you own the home.

It takes good information to make good decisions.  Think of times when you need advice on financing, taxes, insurance, maintenance, finding reasonable and reliable contractors and lots of other things.  Imagine how nice it would be to have a real estate information line you could call whenever you have a question.

During the purchase or sale, the obvious place to get real estate answers is your agent but where do you go the rest of the time? Since homeowners are now staying in their homes for ten to twelve years or more, they need a reliable resource for good information and advice.

Our objective is to move from a single purchase or sale to customers for life; a select group of our friends and past customers who consider us their lifelong real estate professional.   We believe that if we help you and your friends with all their real estate needs not just when they buy or sell but for all the years in between, we can earn the privilege to be your real estate professional.

Throughout the year, we’ll send reminders and suggestions by email and social media that enhance your homeowner experience.  When we find good articles to help you be a better homeowner, we’ll pass them along.  You’ll discover new ways to maintain your property, minimize expenses and manage debt and risk.

We want to be your “Go-To” person for everything to do with real estate.  If you have a question, please call us at (719) 464-5839.  If we don’t have the answer, we’ll find it for you or at least, point you in the right direction.

We’re here for you and your friends…now and in the future.  Please let us know how we can help you.

More Comfortable, Convenient and Secure

Smart home technology promises to make your home more comfortable, convenient and secure.  It may not be the home from the Jetson’s but artificial intelligence is the hope to make it the home of the future which is available now and controlled from anywhere you have an Internet connection.

When Alexa appeared at Christmas-time two years ago, most people thought it was a novelty to ask what the weather will be or to play a song.  Few people understood the vision of Amazon would be verbally purchasing everything imaginable and that your calendar, contacts, lights, and appliances would all be connected.

There are plenty of players in the market including Amazon Alexa, Google Assistant, Samsung Smart Things, Apple and others.  It starts with a hub that acts like a brain for your system to connect the different home automation devices.  You’ll establish an online account with the hub manufacturer so that you can adjust settings and controls.

You could start simple with switch and plug receptacles that would allow you to control lights either vocally through your hub or from your Smartphone or tablet anywhere in the world where you have an Internet connection.

Programmable thermostats can lower your monthly utility costs while conveniently regulating your comfort by adjusting temperatures on your heating and cooling systems.  These can be particularly effective in homes with zoned systems where you might live in one area during the day but sleep in a different zone.

Door bells might be one of the next additions to your automation.  Not only can you communicate with the person at your door, you don’t have to go to the door to do it.  The device cameras are motion activated so you’ll see who is there regardless of whether they rang the doorbell or not.

Door locks can be convenient because instead of giving someone a key, you can issue a temporary code to let them enter.  You can give them permanent access and rescind it any time you want without having to change the locks.  You’ll know when they enter and leave your home.

Other security options can include door and window sensors, motion detectors and cameras for outside or inside the home.  The homeowner will be able to monitor from inside or anywhere else they have an Internet connection.

Smoke and carbon monoxide detectors, as well as water sensors to determine leaking water around water heaters or in basements give homeowners peace of mind.

Most of these devices are available in wireless models so you won’t have to string wire throughout the home.  The Wi-Fi can introduce a potential problem of hackers who could illegally access your system.  This is true with any home that has a Wi-Fi router and precautions should be taken.

The big box stores like Lowes, Home Depot, and Amazon offer a wide variety of brands and modules.  Many people prefer it as a do-it-yourself project and others would rather have a professional do it for them.  YouTube has a lot of videos that can probably show you exactly how to install the ones you select.

40 First Time Homeowner Pitfalls to Avoid

https://www.familyhandyman.com/smart-homeowner/40-first-time-homeowner-pitfalls-to-avoid/view-all/

Another Type of Financing Concession

Price, condition and terms are factors that any owner must consider when marketing their home.  Price is usually the easiest to adjust to compensate for shortcomings in location or condition of the home.  Improving the condition of the property is more time consuming but updates to kitchens, baths and other things can appeal to a buyer.

One of the most overlooked marketing factors are terms which are also referred to as financing concessions.

Paying part or all a buyer’s closing costs is the most common financing concession.  By doing so, the buyer doesn’t need as much cash to get into the home which can be attractive to more buyers.

There is another financing concession that is not used very often in today’s market but it is still allowed and can increase the marketability of a home. A temporary buy-down of the interest rate makes a lower payment for an initial period.

It is still a fixed-rate mortgage that the buyer must qualify for at the note rate and there is no negative amortization.  The seller pre-pays the interest in advance at closing so the buyer has lower payments in the initial period.

Instead of lowering the price of the home, let’s say the seller has decided to offer $6,875 worth of financing concessions that the buyer can apply any way they want.  One way might be to get a 2/1 buy-down which means that the first year, the payment would be based on 2% less than the note rate of the mortgage and the second year, it would be 1% less than the note rate.  The third through thirtieth years, the payment would be the actual note rate.

On a $275,000 home with a 3.5% down payment at 5% for 30 years, the first year’s mortgage payment would be figured at 3% which would be $305.76 less than normal.  The second year’s payment would be figured at 4% and would be $157.65 less than normal.  The third through thirtieth years, the payment would be the normal payment of $1,424.59.

It would save the buyer $5,560.90 in interest in the first two years and there would still be $1,314 of the financing concession to apply toward the buyer’s closing costs.

The financing concessions paid by the seller give the buyer lower payments for the first two years and less money needed for the closing cost.  An added bonus for the buyer is that the buyer can deduct the pre-paid interest the seller paid as qualified mortgage interest.

Some lenders may tell you that temporary buy downs cannot be done.  They’ve been around for over thirty years and can still be done today on FHA, VA and conventional loans.  Call (719) 464-5839 if you need a recommendation of a trusted mortgage professional or check out a 2/1 Buydown with your own numbers.

44 Times More Than a Renter

The Federal Reserve Board’s Triennial Survey of Consumer Finances recently revealed the net worth of a homeowner was $231,400 compared to $5,200 for a renter.  The net worth of homeowners increased 15% from 2013 to 2016 while renters’ decreased by 5%.

Appreciation and principal reduction are the two dynamics that affect a homeowner’s equity.  Each payment is applied to the interest for the previous month and the principal reduction to retire the mortgage.

A $300,000 home purchased with a $294,566 FHA mortgage at 5% for 30 years has an average monthly principal reduction $362 in the first year. Two percent appreciation would benefit the buyer by $500 a month.  In this example, the equity grows by $860 a month for the homeowner.  A tenant would have to invest $660 a month over and above the rent they’re paying.

Based on the assumptions listed above, the $10,500 down payment would become approximately $85,000 of equity in seven years. Leverage and forced savings contribute to the difference in addition to the appreciation and principal reduction.

The rent paid by tenants help the landlord recoup their investment in the home and a return on their investment.  Some people say, regardless if a person rents or buys, they pay for the house they occupy.  The choice is whether to buy it for themselves or their landlord.

Check out some of the benefits using your own numbers with this fill-in-the blank Rent vs. Own.

Gift of Equity

There is a little-known mortgage program that could provide the vehicle for the right person to get into a home.  If a person sells their home to another for less than the fair market value, the difference in the appraised value and the sales price is considered a gift of equity for the buyer.

FHA requires that borrowers receive gifts of equity only from family members transferring title to the borrower.

An appraisal is required to determine the value of the home.  The sales price is subtracted from the appraised value to determine the equity to be gifted.  If a home appraises for $300,000 when the owner will sell it for $250,000, the gift is $50,000.

The gift is applied to the down payment.  In this example, the borrower would have to qualify for a $250,000 mortgage which would require private mortgage insurance because a 20% down payment on a $300,000 home would be $60,000.  If the buyer had an additional $10,000 in cash to put down, the PMI would not be required, and the monthly payments would be lower.

The seller would need to provide a gift letter stating the amount of the gift, the date the gift, and that no repayment is expected or required.  It also needs to have the donor’s name, address, phone, email and relationship to the buyer.  In addition, the settlement statement will need to show the gift being credited from the seller to the buyer.  The lender may require additional documentation.

Beginning in 2018, the annual gift tax exemption is increased to $15,000 per person per year and lifetime exemption to $5.6 million.  The fact that the $50,000 exceeds the individual amount doesn’t mean there will necessarily be any gift tax due now.  The seller should consult their tax professional.

Roll the Repairs into the Mortgage!

It’s been said that if you can find a home that has most of what you want, you should go ahead and purchase it.  Many first-time buyers are using everything they have for a down payment and closing costs and would have to “live” with the less than perfect home until they can save the money to make the changes.

The FHA 203(k) mortgage allows a borrower to purchase a home and provides additional funds for improvements to be made.  These types of renovations can include kitchen and bathroom remodels, flooring, plumbing, heating and air conditioning systems, additions and other things.

The benefit to the buyer is that they have the opportunity to consider a home that needs repairs and might have been unacceptable without a program like this.  Being a FHA loan, a minimal down payment is required, fair interest rates and generous qualifying requirements.

The 203(k) Streamline can be used for cosmetic improvements, appliances and minor remodeling up to $35,000 in cost.

As you can im.agine, this is a specialized program and not all lenders choose to make 203(k) loans.  They usually take longer to process and getting firm bids on the work to be done will be required.  It is important to find out how much experience a lender has with this particular type of loan.    

It will also be required that you work with a 203(k) consultant in addition to the mortgage officer.

For more information, go to Hud.gov.  FNMA has a similar conventional loan program called HomeStyle Mortgage.  Your real estate professional will be able to help with recommendations.  Call me at 719-464-5839

Getting the “Right” Home

Finding the right home is still the biggest challenge buyers are faced with in today’s market as is shown in the latest Confidence Index Survey.  Assuming the buyers find the “right” home with determination, perseverance and the help of a real estate professional, 88% of all transactions last year required financing to get the buyer’s address on the home.  93% of first-time buyers needed financing.

Pre-approval is an essential step that needs to be handled before buyers begin searching for a home.  The benefits to the buyer fall into the category of confidence.

PRE-APPROVAL GIVES YOU CONFIDENCE

  • Knowing the amount you can borrow
    the mortgage amount decreases as interest rates rise
  • Looking at the right priced homes
    price, size, amenities, location
  • Comparing and identifying the best loan
    rate, term, type
  • Uncover issues early that could affect the most favorable loan terms
    time to cure possible problems
  • Bargaining power to negotiate with the seller and possibly, competing buyers
    price, terms, & timing
  • Settlement can occur sooner after contact is accepted
    verifications have already been made

Items Needed for Pre-Approval

  • Photo ID
  • Two months current pay stubs
  • Last two year’s W2s
  • Complete copies of checking and savings statements for last three months
  • Copies of statements for IRAs, 401k, savings, CDs, money market funds, etc.
  • Employment history for last two years with addresses and contacts
  • Proof of commissioned or bonus income
  • Residency history for last two years with addresses and contacts
  • Assets for down payment, closing costs, and reserves; must provide paper trail
  • If self-employed, last two years tax returns, current profit and loss statement and balance sheet; copy of partnership/corporate tax returns for last two years if owning more than 25% of company
  • FHA requires driver’s license and social security card
  • VA requires original certificate of eligibility and DD214
  • Other things may be required such as previous bankruptcy, divorce decree

Contact us at (719) 464-5839 or Chris@PPHAL.com if you’d like a recommendation of a trusted mortgage professional.

Start Early and Live Happily Ever-after

As storybooks go, the character is introduced, they meet their love interest, a villain thwarts their intentions, true love overcomes, they marry and live happily ever-after. It’s a very familiar formula.
Similarly, there is a formula that couples follow in real life. They go to college, get a good job, rent a home, fall in love, get married and buy a starter home. They start a family, move into a larger home, save for their children’s education, start planning for their retirement and if they live within their means, they invest their surplus funds.

An alternative to this might be to start investing in rental homes early in their adult life before their standard of living becomes so expensive that they don’t feel like they have the money to purchase rentals.  There are infinite possibilities but let’s say a single person, after getting a good job, buys a small three or four-bedroom home with an owner-occupied, minimum down payment.  They move into the home and possibly, rent out the bedrooms to other singles who need a place to live.

At some point, they decide to buy another home to live in with a minimum down payment and either rent out their bedroom in the first home or rent the whole home to a tenant.  And they repeat the process again with the second home.

This could continue until they acquired several homes.  Let’s say, that in the meantime, they have met their love interest, decide to get married and together, they buy a starter home for them to live in.

This concept advances the investment in rental homes from the latter part of their lives to the early part of their life.  The early investment gives them more time for appreciation and wealth accumulation.  A simple principle of investing is that sooner is better than later.  By delaying gratification to own your “dream home” early, a person may be able to accumulate more net worth in the same period of time.

Buying a property initially as owner-occupied permits a lower down payment of 3.5% compared to a typical down payment for non-owner-occupied properties is 20%.  By using more borrowed funds, leverage can increase the yield on the investment.

It may be too late for some people reading this article to adopt this strategy but if they have kids in college, it may be something for them to consider.