1. Review health and dental care choices. Many employers allow you to make changes to your benefit plans now. Check with doctors and dentists to make sure they’re still in your plan’s preferred provider network and that your family has adequate coverage.

2. Review use-or-lose accounts. Pretax Flexible Spending Accounts (FSAs) are set up this way. Review your plan to see if you have some spending to do, or if your employer offers a grace period. Even then, make sure 2011 expenses are still allowed in 2012.

3. Review your withholding. Check the withholding calculator at the IRS website. If you haven’t been withholding enough to cover your taxes, you might want to increase the amount. Under-withholding can result in penalties.

4. Get ready for 2011 taxes. Check last year’s returns to see who needs to send you what tax documents, and by when. Make a list and follow up if anyone holds you up at the beginning of the year. Also, check last year’s return for itemized deductions. See if you should make deductible purchases now or wait until 2012.

Note: Be sure to consult with a tax professional before making any decisions related to your tax situation.

5. Set your 2012 financial goals. Now is the time to write down what you’d like to achieve financially next year. Save money for a down payment on a new house? Start a college fund for your kids? Put more into your retirement fund?

Thanks Sidney and People’s Bank for the wonderful and helpful tips!

 

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

The Truth about the 3.8% Medicare Tax
What it Means When You Sell Your Home

The new health care legislation includes a 3.8% Medicare tax that may apply to certain real estate transactions in certain very specific circumstances. Unfortunately, this has been misreported all over the internet in some alarming ways. For example:

“The new health care legislation imposes a 3.8% tax on all home sales.”
“If you sell your home for $400,000, you’ll pay a $15,200 ’sales tax.’”
“Middle-income people will pay the full tax even if they’re only ‘rich’ the day they sell their home.”

Please note: Every one of the above statements is COMPLETELY FALSE.

What the Law Really Says

One of the provisions of the Patient Protection Affordable Care Act (PPACA) health care legislation makes so-called “high-income” households subject to a new 3.8% Medicare tax on investment income beginning in 2013. All the misreporting arose because this provision is contained in a complicated section of a complicated piece of legislation. But here are the facts:

The Medicare tax is not a 3.8% “sales tax” on all real estate transactions. In truth, it is not a sales tax at all and it does not apply to all real estate transactions. The 3.8% Medicare tax is a tax on investment income (which may or may not come from the sale of a property). And it is for persons who earn more than certain amounts specified in the bill.

When you sell your home, there is still a capital gains threshold of $250,000 per individual or $500,000 per couple. This is profit NOT subject to capital gains tax. However, you will be required to pay the added 3.8% Medicare tax on any gain you realize above your applicable threshold.

Most Home Sellers Not Affected

Experts tell us most people selling their homes won’t be impacted by this new regulation. Your home sale would have to make you a so-called “high earner” and here’s what that would take. For example, a couple will be subject to the 3.8% tax only if they made MORE THAN $500,000 profit on the sale of their home. And if they did, the 3.8% tax would apply only to the part of that profit that was ABOVE $500,000. So, if their profit were $600,000, they would have to pay $3,800 of that as tax–3.8% of the $100,000 profit above the $500,000 threshold. Their net profit would still be: $596,200.

We hope this clearly explains how the 3.8% Medicare tax is not a tax on all real estate sales. Instead, it is a tax on investment income that may result in an extremely small percentage of home sellers paying additional taxes on their home sale profits above the designated threshold amount that applies to them ($250,000 for individuals, $500,000 for couples).
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It has been estimated that the bill’s definition of “high earners” includes less than 5% of all taxpayers. In addition, as of March 2011, the median existing home sale price was $159,600. So, mathematically, only a small percentage of home sales will likely be affected when the Medicare tax is implemented in 2013.

As always, consult with a professional tax advisor before making any decision with tax implications. And for home financing or refinancing, please feel free to call or email us with any questions. We’re always glad to talk…. Have a great day!   Thank you People’s Bank for the great article!

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

Would an owner of investment property be willing to give our church a reduction in rent if we paid for the property tax?

    Commercial properties – office space, warehouses, etc – are almost always leased on a “triple net” basis, which means that the tenant pays all taxes, insurance and maintenance as part of the lease, so your proposal offers them no benefit.  If an owner is still depreciating the building, they might have some tax benefit in leasing it for a lower amount because their income would be lower.  Whether they could claim the difference in market rent and your rent as a charitable contribution, I doubt, but that is a question for an accountant.  Living facilities are typically not permitted in commercial/industrial areas unless they are homes that existed at the time the zoning was changed to that designation. 

     Conversely, if you get a house in a residential area and plan to use it for anything other than a residence, i.e. offices, meeting space, etc., you will need to get a conditional use permit, which involves filing an application, notifying neighbors and participating in a hearing regarding the proposal in front of the hearing examiner.  The examiner would make the final decision.  There could be some advantage to a property owner to rent to you if the lower rental amount were offset by you paying the property taxes, although the net result to the owner could be the same if the rental discount were equivalent to the tax amount. 

How would you suggest our church locate an owner of investment property that would be willing to lease the property to our church?

To explore the residential possibilites, the best place to find such a property owner may be within your own membership and their sphere of influence. If that is not productive, I would suggest taking to residential property management companies.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

Recently, when we think of a distressed property, we think of an owner who is behind on their payments or who owes more on their home than it is worth.  Other types of distress can cause a property to be sold at auction…as noted in the following question:

I just saw a notice in the classified section of the newspaper saying that my neighbor’s property is going to be sold at auction to pay the back taxes.  Can I just go pay the taxes?

Yes, you can…and if you would do it to save the property for your neighbor, I must say that is an incredibly nice thing for you to do.  Paying the taxes will remove the lien.  On the other hand, if your idea is that you can pay the taxes and get the property, you need to hold off for the auction.  The process goes something like this: 

     In the State of Washington, when a property owner is 3 years delinquent in tax payments, the County in which the property is located can give notice to the owner, through mailed and published notices, that they intend to foreclose on the property unless the owner brings the taxes current.  The notice process is defined by law as to when and how notice must be given.  If the owner does nothing, the property is auctioned on the courthouse steps (in Whatcom County, it happens inside the courthouse rotunda) on the designated Friday morning.  Buyers must have cash or its equivalent.  Any amount generated more than the taxes due and foreclosure fees is paid to the owner.  It is also interesting to note that the same process can be initiated by a homeowners association for non-payment of dues.

     In both cases, there is no title insurance provided (a buyer might want to check the title ahead of time and buy a title policy), there is no opportunity to look inside any structures and there is no disclosure of property condition, so there are some risks.  In addition, it may be possible for the owner to come back for up to a year after the sale and reclaim the property upon payment of all the costs. 

     It may be a screamin’ deal, but buyer beware!

 

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

 

The $8000 Tax Credit Expires Today 

 How Do You Get the Extended Home Buyer Tax Credit?

This is what the National Association of Realtors suggests you do

You’ve decided to purchase a home and take advantage of the Extended Home Buyer Tax Credit. Here’s what you have to do to get your benefit:

• Close on your home purchase between November 7, 2009 and April 30, 2010, or have a binding written contract in place by April 30, 2010 with a closing date no later than June 30, 2010.
•  Decide whether to:Â
  1. apply the credit to your 2009 tax return, filed on or before April 15, 2010;
  2.  file an amended 2009 return; or, 
  3. apply the credit on your 2010 return, filed on or before April 15, 2011.
• Attach documentation of purchase to your return.

Documentation of Purchase

Details concerning the precise documents required to confirm your purchase have not yet been released. When this information becomes available, we will include instructions and links to the appropriate forms.

When to Apply the Credit

Buyers purchasing homes on or before December 31, 2009 may claim the credit on their 2009 tax returns.

Buyers purchasing in 2010 will have the option to:

•  Claim the credit on their 2009 return, even if the purchase is completed after December 31, 2009;
•  File an amended return for 2009 if their purchase is completed after April 15, 2010; or,
•  Claim the credit on their 2010 tax returns.

Applying the Credit to Your 2009 Taxes

You will need to do three things to claim the credit on your 2009 tax return:

1. Fill out Form 5405 to determine the amount of your available credit;
2. Apply the credit when you file your 2009 tax return or file an amended return;
3. Attach documentation of purchase to your return or amended return.

 

Other Sources of  Tax Credit Information

If by this time, you have a king sized head ache and would like some other sources of information, you might want to try one of the following, the National Association of Realtor’s site,  Internal Revenue Services web site, the National Association of Home Builder’s web site.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

Expectations of higher interest rates were not realized this week, as some rates softened a bit from 2 weeks ago.  The rate for a conventional, 30 year fixed rate loan dropped to 4.875% and the jumbo 30 year fixed rate was down to 5.5%.  The rest held steady 

A financing tip from Sidney: 

If you are planning to take advantage of either home buyer tax credit ($8,000 for a first time buyer or $6,500 for a repeat buyer), remember that you must have a signed contract in place no later than April 30, and the transaction must close no later than June 30.

Home loan rates as of Wednesday, April 21 are in the following table.  For more details, or a custom quote, contact SidneyStonecypher at People’s Bank, 360-676-4597 or sidney.stonecypher@peoplesbank-wa.com.  Remember that many variables come into play in determining the rate a lender will give a borrower.  If you are getting a rate quote from a lender who does not have all your information, that rate may not be real.  What with the low rates and the tax credits, it is a great time to buy a house!

 If you have other questions about financing, don’t hesitate to contact us and we will get you the answer.  If you are wondering, other people probably are as well.  For general financing and market information, check out our website.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

Prior to and since the crazy days of real estate financing, FHA loans have been the primary loan of choice for those borrowers with downpayments of less than 20%.  The 20% rule gives a lender more cushion against falling prices and the inevitable rising foreclosure rate they bring.   With FHA’s typical downpayment requirement of 3.5%, there isn’t much of a cushion. 

Before we talk about the changes, let’s make clear how an FHA loan works:

The FHA doesn’t make loans – they guarantee loans written to their standards and made by FHA authorized lenders.  Think of the agency as an insurance company who insures the lender so they will make a riskier loan.  The borrower buys the insurance policy for the bank in lieu of making a larger downpayment.  There is an upfront premium that is financed as part of the loan and monthly premiums that are added to the monthly payment amount.  The premiums collected by FHA are supposed to cover losses the agency may incur.   

Unfortunately, the financial problems our economy is experiencing have hit the FHA particularly hard.  A few numbers tell the tale:

• Congress requires FHA reserves of 2% based on their insurance guarantees.  Last fall they had reserves of 3%.  As of November, they had reserves of .53%
• The amount of single-family mortgages insured by FHA in fiscal 2009 were more than 4 times the amount insured in fiscal 2007.
• Almost half of first time homebuyers get an FHA loan to purchase.
• In the 3rd quarter of 2009, 14.4% of FHA loans were deliniquent, compared to 9.6% of all loans.

As a consequence, FHA is doing what any insurance company must do to control losses:  they are tighening the qualifying requirements for coverage.  Changes and impacts include the following:

• The upfront premium amount is increased from 1.75% to 2.25%, and it is proposed to increase the monthly premium from .5% to .55%.  Since the initial premium is financed as part of the loan, the payment increases.  As already noted, the monthly premium also increases the monthly payment.  Since borrowers are limited to monthly payment amounts based on their income, they will be able to afford less expensive houses.
• In the past, the seller of a house to an FHA borrower could pay up to 6% of the purchase price toward the borrower’s cost of getting the loan.  The new rules cap this at 3% of the purchase price, which is comparable to the amount of seller contribution for a conventional loan.  This means a buyer will need more cash to buy a home, even though the downpayment amount stays at 3.5% (for now).
• In addition, the agency will be monitoring lenders who offer FHA loans more closely and is asking Congress to increase the liability of those lenders.  This may reduce the number of lenders approved for or willing to make FHA loans.

Over the past 20 years (and before), there has been a great deal of pressure to increase homeownership in the United States.  There have been strong sociological as well as political reasons for this pressure.  The pressure has lowered the standards required to get a home loan at the same time that lenders were getting very creative with buyer qualification.   The current economic downturn has destroyed paper equity and caused loss by foreclosure for homeowners at all economic levels, but those who stretched the hardest to buy or who had the least “skin in the game” have been more likely to lose their homes. 

There will be criticism of this move on the part of the FHA, but a question that should be asked is, “Which is the more negative impact on a family:  living in rented housing or fighting to buy a home and then losing it because they really weren’t strong enough financially to handle it”?  There has to be a balance somewhere – hopefully these changes bring it closer. 

I would love to have your thoughts and/or clarifications on this topic – limiting the number of people who can buy a home right now is not where most of us want to be.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

There are so many different first time homebuyers and so many specific situations that there are a lot of questions out there…

I filed for the first-time homebuyer tax credit of $7500 on my 2008 tax return for a home I purchased early in 2009.  That tax credit has to be repaid.  Is there any way I can get the $8000 tax credit that doesn’t have to be repaid instead?   Yes.  File an amended tax return for 2008 removing the $7500 tax credit and claim the $8000 tax credit on your 2009 return. 

Can I use the $8000 first-time homebuyer tax credit for my down payment?   Basically, No.  There is a provision allowing a lender to do a short term loan of the tax credit for down payment or closing costs, but I have yet to hear of any lender who will do so. 

Do I have to pay back the $8000 tax credit?  No, unless you use it as your primary residence for less than 36 months.  In that case, you will owe the full amount of the tax credit in the year you stop living in the house as your primary residence.

My parents are cosigning the loan for my first house.  They do not qualify for the first-time homebuyer tax credit.  Can I still take it?   Yes.  You will be the homeowner and as long as you meet all the requirements, you get the credit.

I am getting married later this year.  I qualify for the first-time homebuyer tax credit, but my future husband does not.  If I buy a house before we are married, can I take the tax credit?   Yes, as long as it is your primary residence.  Talk to your accountant about how you should file your tax return.  One note:  if a couple is married when they buy a house, the IRS position is that neither of them can have owned a primary residence within the past 3 years if they are to qualify for the first-time homebuyer tax credit.

I am looking at a fixer house that needs a lot of work.  Can I buy it and get the first-time homebuyer tax credit even if I don’t move in until after the renovations are finished?   Only if you actually occupy the home as your primary residence prior to June 30, 2010.

Are there any income limits for claiming the first-time homebuyer tax credit?   Yes.  For a single taxpayer, the modified adjusted gross income limit is $125,000; for married taxpayers, it is $225,000.  Incomes of up to $20,000 more can qualify on a proportionate basis, but phase out completely at $145,000 and $245,000.  Modified adjusted gross income is the adjusted gross income shown on your tax return, plus some types and amounts of foreign-earned income.  Check with the IRS for details.

What is the difference between a tax credit and a tax deduction?   A tax credit reduces the amount of tax you owe by the full amount of the credit.  A tax deduction reduces the amount of income on which you pay tax. 

What if I don’t owe $8000 in taxes?  You will receive a check back from the IRS for the difference between the amount of the credit and the amount you owe.

There are two excellent websites with additional information and examples of both the first-time homebuyer tax credit and the repeat buyer tax credit at the National Association of Homebuilders and the IRS website.  While these sites address some specifics, you will want to talk with your personal tax advisor, who knows your financial situation and can give you the best advice. 

Please share any experiences, information you have gleaned or additional questions – we can all help each other.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

Do I have to sell my existing home to get the repeat homebuyer tax credit of $6500 if I buy another one?   No, you do not.  You simply need to meet the requirements for the tax credit.  If you need financing to buy the replacement home, however, it behooves you to confirm your ability to get that financing up front.  Loan requirements have changed for this type of situation, both in the amount of down payment required (20-25%) and the amount of liquid reserves required (possibly enough to cover payments for both properties for at least 6 months). 

I kept my home and rented it 3 years ago when I moved to another city.  If I buy a primary residence now, can I get either of the tax credits?  Yes, you qualify for the first time homebuyer tax credit of $8000, since you have not owned a primary residence for 3 years.  The same would be true if you had kept your original home as a second home for the last 3 years.   

My husband and I would like to downsize into a smaller home.  Would a less expensive home still qualify us for the repeat tax credit?  Absolutely.  There is a top end limit of $800,000 on the price of the replacement home, but there is not bottom limit.  And the further good news is that if the capital gain on your existing primary residence is $500,000 or less, you will have no federal income tax due on the sale.

I sold my home 2 years ago and have been renting since then.  Do I qualify for the repeat homebuyer tax credit?  Provided that you lived in the home you sold for 5 consecutive years within the past 8 years, you qualify.

We are building a new home.  Will we qualify for the repeat homebuyer tax credit?  You will if you are living there by June 30, 2010, as long as you have a binding purchase contract in place by April 30, 2010.

Are there any income limits for claiming the repeat homebuyer tax credit?  Yes.  For a single taxpayer, the modified adjusted gross income limit is $125,000; for married taxpayers, it is $225,000.  Incomes of up to $20,000 more can qualify on a proportionate basis, but phase out completely at $145,000 and $245,000.  Modified adjusted gross income is the adjusted gross income shown on your tax return, plus some types and amounts of foreign-earned income.  Check with the IRS for details.

How do I get the tax credit?  You will claim it as a credit against your taxes due on either your 2009 or 2010 tax return, depending on when you close on the replacement home and when you file your income taxes.  You must have closed on the home to claim the credit and must attach a copy of the HUD-1 settlement statement to IRS form 5405. 

Are there limitations on the type of home I can buy?  There is a price limitation of $800,000.  The home cannot be purchased from a family member.  Beyond that, if it meets the IRS definition of a principal residence, it should qualify.  This means condos, townhomes, mobile homes, and houseboats as well as single family detached homes.

What if I don’t owe $6500 or $8000 in taxes?  The government will send you a check for the difference in the amount you owe and the amount of the credit. 

For more information, the National Association of Homebuilders and the IRS website both have answers to questions and examples of scenarios that are very helpful.  Ultimately, however, your best source of information is your tax advisor, because they are familiar with your specific information.

If you have a thought or an experience to share, please feel free.  Pooled knowledge is really helpful.  Just post a comment – or a further question – and we can all help each other.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!

The homebuyer tax credit signed into law on November 6th not only extended the deadlines for homebuyers to take advantage of the opportunity, but it also expanded the pool of homebuyers eligible to benefit.  It now applies to not just first time homebuyers, but also to some of those who already own a home and want to sell it and buy another.

The table below shows the basics of the program.  Later posts will deal with specific questions relative to its implementation. 

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!