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November 2007 Entries
Real Estate Agent Advantages
How do Real Estate Agents sell homes? When a professional Real Estate Agent is retained to sell a home, the agent will develop a marketing plan that has proven effective for selling homes quickly and for the maximum sale price.
The Real Estate Agents will perform a market analysis, comparing the home with similar homes in your neighborhood that have recently sold. Your agent will evaluate the current real estate market in order to develop a price opinion for your home. The next step will be to make recommendations about preparing your home so that it is presented to its best advantage. A description of the home will be uploaded into the local Multiple Listing Service, and your agent will implement a marketing plan tailored to your home.
By listing your property, you expose it to thousands of Real Estate Agents throughout the region. MLS exposure is one of the most valuable services a Real Estate Agents can provide sellers. Real estate professionals aslo network with other agents in their office when they bring new listings to the market. Does this system work? 85% of the homes sold today use this method.
Enough said!
Dress For Success in Real Estate
Looking good is important when you want to make a great impression, whether for a job interview or a social function. The same is true of a home that is on the market. When the "For Sale" sign goes up in front of your home, it should be "dressed" for the occasion.
Since the first impression will be of the front of the house, a well-groomed exterior is crucial, from the landscaping to the paint. The interior of your home should be clean and tastefully decorated. Take care of any minor cosmetic repairs that are needed, such as cracked plaster or peeling paint. A sparkling kitchen and shiny bathrooms, clean windows, and the absence of clutter will help your home "show well". Keeping your home looking good at all times is hard work, especially if you have children and are packing for a move. However, the dividends are impressive, because a home that looks well cared for has an excellent chance of selling quickly and for the best price.
Tax Deductions in Real Estate
Here is a question which is often asked about real estate sales: which home loan fees are deductible for income tax purposes? It is good to know the answer to this question before you sign on the dotted line. It may influence which loan you will choose. Loan fees for certain services are not itemized on your fee statement, but are grouped together into a single category.
The most obvious deductible fee is the loan fee paid to acquire a mortgage for a principal residence. The IRS recently ruled that the buyer could deduct the fee in the first year, even if the seller paid it! Other deductions include pro-rated property taxes and mortgage interest. On these items, the buyer may only deduct their share.
Most of the other closing costs are not deductible, but you may add them to your home's adjusted cost basis when calculating appreciation. Among these costs are appraisal, attorney, and inspection fees, as well as title, recording and notary fees. Fire insurance fees are neither deductible nor do they figure into the cost basis. If you are not sure which fees are deductible, consult a professional tax advisor.
Tax Breaks in Real Estate
Most homeowners are keenly aware of the interest tax deduction on their home loan, but there are many other tax breaks which are often overlooked at income tax time. Pro-rated property taxes and mortgage interest in the year of sale are deductible. You will find these amounts listed on your closing settlement statement. If you paid off your mortgage and had to pay a pre-payment penalty, it qualifies as tax deductible interest. If you paid an "acquisition mortgage loan fee" on a home loan, this fee can be deducted as itemized interest. Home improvement loan fees are also deductible. Any remaining loan fees from re-financed or paid-off mortgages are fully deductible at the time of the mortgage payoff.
Certain items don't qualify as deductions, but can be added to the cost basis of your home, such as transfer taxes, recording and title fees, and special local property tax assessments for new sidewalks, streets, or sewers.
Don't be intimidated by the tax code! A little research or consultation with an expert can help you maximize your real estate tax advantages.
Terms in Real Estate Sales (the B Section)
balance sheet
A financial statement that shows assets, liabilities, and net worth as of a specific date.
balloon mortgage
A mortgage that has level monthly payments that will amortize it over a stated term but that provides for a lump sum payment to be due at the end of an earlier specified term.
balloon payment
The final lump sum payment that is made at the maturity date of a balloon mortgage.
bankrupt
A person, firm, or corporation that, through a court proceeding, is relieved from the payment of all debts after the surrender of all assets to a court-appointed trustee.
bankruptcy
A proceeding in a federal court in which a debtor who owes more than his or her assets can relieve the debts by transferring his or her assets to a trustee.
before-tax income
Income before taxes are deducted.
beneficiary
The person designated to receive the income from a trust, estate, or a deed of trust.
bequeath
To transfer personal property through a will.
betterment
An improvement that increases property value as distinguished from repairs or replacements that simply maintain value.
bill of sale
A written document that transfers title to personal property.
binder
A preliminary agreement, secured by the payment of an earnest money deposit, under which a buyer offers to purchase real estate.
biweekly payment mortgage
A mortgage that requires payments to reduce the debt every two weeks (instead of the standard monthly payment schedule). The 26 (or possibly 27) biweekly payments are each equal to one-half of the monthly payment that would be required if the loan were a standard 30-year fixed-rate mortgage, and they are usually drafted from the borrower’s bank account. The result for the borrower is a substantial savings in interest.
blanket insurance policy
A single policy that covers more than one piece of property (or more than one person).
blanket mortgage
The mortgage that is secured by a cooperative project, as opposed to the share loans on individual units within the project.
bona fide
In good faith, without fraud.
bond
An interest-bearing certificate of debt with a maturity date. An obligation of a government or business corporation. A real estate bond is a written obligation usually secured by a mortgage or a deed of trust.
breach
A violation of any legal obligation.
bridge loan
A form of second trust that is collateralized by the borrower's present home (which is usually for sale) in a manner that allows the proceeds to be used for closing on a new house before the present home is sold. Also known as "swing loan."
broker
A person who, for a commission or a fee, brings parties together and assists in negotiating contracts between them. See mortgage broker.
budget
A detailed plan of income and expenses expected over a certain period of time. A budget can provide guidelines for managing future investments and expenses.
budget category
A category of income or expense data that you can use in a budget. You can also define your own budget categories and add them to some or all of the budgets you create. "Rent" is an example of an expense category. "Salary" is a typical income category.
building code
Local regulations that control design, construction, and materials used in construction. Building codes are based on safety and health standards.
buydown account
An account in which funds are held so that they can be applied as part of the monthly mortgage payment as each payment comes due during the period that an interest rate buydown plan is in effect.
buydown mortgage
A temporary buydown is a mortgage on which an initial lump sum payment is made by any party to reduce a borrower’s monthly payments during the first few years of a mortgage. A permanent buydown reduces the interest rate over the entire life of a mortgage.
Real Estate Glossary (A's)
acceleration clause
A provision in a mortgage that gives the lender the right to demand payment of the entire principal balance if a monthly payment is missed.
acceptance
An offeree’s consent to enter into a contract and be bound by the terms of the offer.
additional principal payment
A payment by a borrower of more than the scheduled principal amount due in order to reduce the remaining balance on the loan.
adjustable-rate mortgage (ARM)
A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
adjusted basis
The original cost of a property plus the value of any capital expenditures for improvements to the property minus any depreciation taken.
adjustment date
The date on which the interest rate changes for an adjustable-rate mortgage (ARM).
adjustment period
The period that elapses between the adjustment dates for an adjustable-rate mortgage (ARM).
administrator
A person appointed by a probate court to administer the estate of a person who died intestate.
affordability analysis
A detailed analysis of your ability to afford the purchase of a home. An affordability analysis takes into consideration your income, liabilities, and available funds, along with the type of mortgage you plan to use, the area where you want to purchase a home, and the closing costs that you might expect to pay.
amenity
A feature of real property that enhances its attractiveness and increases the occupant’s or user’s satisfaction although the feature is not essential to the property’s use. Natural amenities include a pleasant or desirable location near water, scenic views of the surrounding area, etc. Human-made amenities include swimming pools, tennis courts, community buildings, and other recreational facilities.
amortization
The gradual repayment of a mortgage loan by installments.
amortization schedule
A timetable for payment of a mortgage loan. An amortization schedule shows the amount of each payment applied to interest and principal and shows the remaining balance after each payment is made.
amortization term
The amount of time required to amortize the mortgage loan. The amortization term is expressed as a number of months. For example, for a 30-year fixed-rate mortgage, the amortization term is 360 months.
amortize
To repay a mortgage with regular payments that cover both principal and interest.
annual mortgagor statement
A report sent to the mortgagor each year. The report shows how much was paid in taxes and interest during the year, as well as the remaining mortgage loan balance at the end of the year.
annual percentage rate (APR)
The cost of a mortgage stated as a yearly rate; includes such items as interest, mortgage insurance, and loan origination fee (points).
annuity
An amount paid yearly or at other regular intervals, often on a guaranteed dollar basis.
application
A form used to apply for a mortgage loan and to record pertinent information concerning a prospective mortgagor and the proposed security.
appraisal
A written analysis of the estimated value of a property prepared by a qualified appraiser. Contrast with home inspection.
appraised value
An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property.
appraiser
A person qualified by education, training, and experience to estimate the value of real property and personal property.
appreciation
An increase in the value of a property due to changes in market conditions or other causes. The opposite of depreciation.
assessed value
The valuation placed on property by a public tax assessor for purposes of taxation.
assessment
The process of placing a value on property for the strict purpose of taxation. May also refer to a levy against property for a special purpose, such as a sewer assessment.
assessment rolls
The public record of taxable property.
assessor
A public official who establishes the value of a property for taxation purposes.
asset
Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).
assignment
The transfer of a mortgage from one person to another.
assumable mortgage
A mortgage that can be taken over ("assumed") by the buyer when a home is sold.
assumption
The transfer of the seller’s existing mortgage to the buyer. See assumable mortgage.
assumption clause
A provision in an assumable mortgage that allows a buyer to assume responsibility for the mortgage from the seller. The loan does not need to be paid in full by the original borrower upon sale or transfer of the property.
assumption fee
The fee paid to a lender (usually by the purchaser of real property) resulting from the assumption of an existing mortgage.
attorney-in-fact
One who holds a power of attorney from another to execute documents on behalf of the grantor of the power.
Affordable Housing (Doing Business with Freddie Mac)
Created by Congress, Freddie Mac's job is to ensure a reliable supply of funds to mortgage lenders in support of homeownership and rental housing. We attract capital from around the world to finance housing in America, and we constantly innovate to deliver it as effectively as possible. As a result, mortgage rates are lower, 30-year fixed-rate financing is plentiful, and borrowers get loan approvals in minutes.
Valuable Partnerships
Freddie Mac further advances its affordable housing mission through valuable partnerships with other similarly committed groups. These groups include local and state government entities, non-profit organizations and non-lender participants in the housing industry. Freddie Mac is dedicated to working with these and other organizations to provide the service and innovation necessary to continue the record growth of homeownership in America.
Expanding Markets
The nation's homeownership rate has reached a record high, with record numbers of families of all racial and ethnic backgrounds owning homes. Playing a vital role in our nation's mortgage markets, Freddie Mac has opened doors for more than 50 million families. Still, less than half of America's minority households have achieved the dream of homeownership.
Freddie Mac's Expanding Markets products and services are more accessible than ever before, providing lenders with the solutions they need to reach more borrowers and make a difference in their communities. Together, we work with community housing organizations and non-profit agencies to strengthen communities.
We're up to the challenge of doing more. Building on our strong record of expanding access to the mortgage market, Freddie Mac has launched a number of high-impact initiatives to accelerate the growth in minority homeownership. Our initiatives range from best-in-class homebuyer outreach and education to new technologies and mortgage products designed to put families into homes they can afford and keep.
Affordable Rental Housing
Making the rental housing market more affordable is another part of Freddie Mac's business. From investing in low-income housing tax credit partnerships to developing mortgage products that speed the construction and rental of very low-income housing, our multifamily division has made affordable housing possible for more than 4 million families.
More Information About Affordable Housing
FREDDIE MAC TO OFFER $6 BILLION OF PREFERRED STOCK
McLean, VA – Freddie Mac (NYSE: FRE) today announced that it will issue $6 billion of non-cumulative perpetual preferred stock. The issuance will involve a larger offering of non-convertible non-cumulative perpetual preferred stock, and a substantially smaller offering of convertible non-cumulative perpetual preferred stock. Both offerings are expected to price in the near term.
Last week, Freddie Mac announced that, in order to meet the 30 percent mandatory target capital surplus directed by the company's safety and soundness regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), as well as to have the flexibility to further its franchise value, it planned to take near-term capital raising actions. As also announced today, the company has decided to reduce its fourth quarter common stock dividend to $0.25 per share.
Freddie Mac's estimated regulatory core capital was approximately $34.6 billion at September 30, 2007. Freddie Mac's minimum capital requirement at that date was $26.2 billion and the 30% mandatory target capital surplus was an additional $7.9 billion. Accordingly Freddie Mac's estimated regulatory core capital at September 30, 2007 represented an estimated cushion of $8.5 billion in excess of the company's regulatory minimum capital requirement and an estimated surplus of $0.6 billion in excess of the 30 percent mandatory target capital surplus imposed on the company by OFHEO. The capital raised through this offering will be used to bolster the company's capital base in light of actual and anticipated losses necessitated by GAAP accounting requirements and help Freddie Mac meet the 30 percent surplus going forward.
"Freddie Mac is announcing today a proactive capital management plan that will help us meet the 30 percent surplus and address regulatory concerns and GAAP accounting requirements, provide sufficient capital to continue fulfilling our important housing mission through the current market environment, and better position us to effectively manage the company going forward," said Freddie Mac Chairman and Chief Executive Officer Richard F. Syron.
The preferred stock is being offered via a syndicate of dealers headed by Lehman Brothers Inc. and Goldman, Sachs & Co. An application has been made to list the preferred stock on the New York Stock Exchange.
Information about these transactions is available in the preliminary Offering Circulars on the Investor Relations page of the company's Web site at www.FreddieMac.com/investors/preferred_stock.html. Copies of the preliminary Offering Circulars can also be obtained from the underwriters at the following addresses:
Lehman Brothers Inc.
c/o Broadridge
Integrated Distribution Services
1155 Long Island Avenue
Edgewood, New York 11717
(888) 603-5847
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Attention: Prospectus Department
(212) 902-1171
This announcement is neither an offer to sell nor a solicitation of offers to buy any of these securities. Any such offering will be made only by an offering circular.
Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to support homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible more than 50 million times, ensuring financing for one in six homebuyers and more than four million renters.
Countrywide says lending, borrowing ability sound
Countrywide Financial Corp , the largest U.S. mortgage lender, said on Tuesday it does not expect issues affecting Freddie Mac and Fannie Mae to materially hurt its ability to make home loans.
via www.askaboutrealestate.net
Help Your Real Estate Agent
Once your home is listed for sale, it may be difficult for you to step aside and let your agent take over. When prospective buyers arrive, you may want to stand by to point out the closet extenders, the hidden spice cabinet behind the kitchen door, the energy-saving storm windows or the updated copper plumbing. If you really want to help, however, you will leave the house whenever it is being shown!
We have found that the sales process does not really begin until buyers have begun to voice their objections about a property. Sometimes these concerns are serious enough to remove your house from consideration. Often, however, people voice objections as an automatic response when they really love the house and want to buy it. Real estate professionals are trained to know the difference.
If a seller is standing at the agent's elbow, the buyer won't be comfortable enough to allow the process of raising objections take place. If the buyer feels intimidated or suppressed, we could lose the sale.
The best way to "help" is to give your Real Estate Agent room to make the sale.
Spotless Homes Sell (Top Real Estate Tip by Real Estate Agents)
Ideally, real estate agents want the properties we market to look spotless, but even the most impeccable housekeepers find it difficult to keep the house in prime showing condition all the time.
Keeping the beds perpetually made, dishes washed, bathrooms spotless and the closets neat is a lot of work. Is it worth it? Yes, it is -- if you want to get your house sold in a reasonable amount of time for the best price.
Often when buyers see normal household clutter, what registers is "this place hasn't been maintained." They see bathtub rings and think "plumber's bills." They see lint under the refrigerator and grease on the electric range and imagine having to replace all of the appliances. It isn't particularly logical, but people often respond with their feelings when buying a house. When making their final selection, buyers may be going on emotion and adrenaline rather than reason and logic. You can help your real estate agent by minimizing the amount of imagination they will need to fall in love with your home.
House Odors - How this impacts your Real Estate Sale
What is "H.O."? You can probably guess--it means "house odors".
Be careful of odors in your home. If your family room smells stuffy and stale, or if your cat or dog has left a distinctive odor in the hallway, take action by eliminating the source of the odor rather than merely treating the effects.
Smells have a powerful effect on the way people react to a house, and no amount of room freshener or vanilla on the light bulbs can mask a serious odor problem. In fact, such remedies may draw attention to the problem. Real Estate Agents have seen homes with an odor problem languish unsold on the market for months or sell for significantly less than comparable homes in the neighborhood.
If you think that you may have a problem, talk candidly with your Real Estate Agent. Your agent should be able to offer some constructive suggestions, and perhaps refer you to a professional who can help banish H.O. from your home!
Lighting Up the Sale in Real Estate
Lighting is an important factor to take into account when you are selling your home. Natural and artificial lighting can create a mood that buyers notice when they walk into your home, so don't overlook this significant factor which can favorably influence a potential buyer.
Before your house is shown, walk through each room with an eye to creating a pleasant ambiance through lighting. Accentuate the natural light by keeping curtains open and windows sparkling clean. Arrange your furniture to take advantage of the best view. You may want to install indirect lighting to highlight a vaulted ceiling or to draw attention to indoor plants. Dimmer switches can create simple and inexpensive lighting appeal. Place a lamp and table arrangement in a dark alcove or corner to brighten up the area.
Year-end Planning: Keeping the Tax Tab Down:
It may be late in the year, but there is still time to take a closer look at your business' financial situation and consider potential tax savings strategies. As you evaluate potential credits and minimization opportunities, keep in mind that the application of various strategies may differ depending upon your business's unique situation and accounting method. The cash method allows for deductions and income reported for the year they are paid and received, while the accrual method applies income and expenses in the year incurred.
Some tax-saving tactics and strategies worth considering:
- Defer income—If cash flow permits, any payments your company can receive in January, as opposed to December, will reduce the current year tax burden. When using this strategy, the company's entity structure and annual profits and losses should be considered.
- Contribute to a retirement plan—Make payments to an existing plan, or set up a plan prior to year-end. Contribution limits vary depending upon the plan type. There are numerous retirement plan options to choose from, it is recommended that you choose the plan that best fits your business, number of employees and retirement goals.
- Pay bonuses—If you've had a good year and want to reward employees (provided your accounting is done an accrual basis), accrue year-end bonuses. Deductions are allowed for accrued bonuses to employees as long as they are paid within two-and-a-half months of year-end (March 15 for businesses with a December 31 year-end).
- For bonuses given to owners:
- S Corps may deduct bonuses for shareholders or owners who have any percent ownership when bonuses are paid.
- C Corporations may only deduct bonuses for shareholders or owners who have 50% or more ownership when bonuses are paid in order to get the deduction.
- Make charitable contributions—If possible, make contributions prior to the beginning of the next year, so they may be deducted in the current tax year. Be sure to retain receipts.
- Incur expenses—For cash-basis taxpayers—cash flow permitting—pay as many expenses as possible prior to year-end to maximize deductions. Examples include:
- utilities,
- printing new marketing collateral,
- office supply purchases and
- equipment purchases—In this case, you have multiple write-off options (see “Deducting equipment and assets—Section 179 deduction” below). The equipment must be in your office and in use by year-end.
- Write off bad debt—The IRS allows deductions for actual write-offs, not those allowed for in your “allowance for doubtful accounts.” If the item is truly a bad debt—meaning you're able to show you've tried to collect the debt and payment is unlikely—go ahead and write it off. Note: Only businesses using the accrual method of accounting can write off bad debt.
- Write off obsolete inventory—If you have inventory, update your records, write off any obsolete or damaged inventory.
- Deducting equipment and assets—Section 179 Deduction—Generally assets have to be depreciated, but under Section 179, a business or self-employed individual may be able to deduct the full amount of certain equipment or asset purchases in the year of purchase. Guidelines and considerations are as follows:
- Certain types of tangible personal property are eligible, such as furniture and fixtures and machinery and equipment, and there is a very limited deduction for passenger automobiles. Real property and investment property are not eligible.
- For tax years beginning in 2007, the maximum deduction is $125,000.
- If your total qualifying property purchases exceed the $500,000 threshold, the maximum Section 179 deduction gets reduced.
- Section 179 deductions can't be used to make business income go negative. Deductions that reduce income below zero can be carried forward for an unlimited number of years to a year when the business has positive income and can be applied to that year.
- Perform a cost-segregation study if you own real estate—If you own your business's real estate or build a building, consider taking advantage of a cost-segregation study, which can accelerate depreciation and increase cash flow. (To learn more, check out the IRS's Cost Segregation Audit Techniques Guide.)
- Increase energy efficiency to receive tax credits—Specific tax credits are outlined in the Energy Policy Act of 2005. Generally, businesses are eligible for tax credits for buying hybrid vehicles, for building energy-efficient buildings and for improving the energy efficiency of commercial buildings. (For more information, see the U.S. Department of Energy's “What the Energy Bill Means to You.”)
- Manufacturers should explore the Section 199 Domestic Production Activities Deduction—Small businesses in the manufacturing sector should evaluate this tax deduction. An overview of the deduction is as follows:
- A business engaged in a “qualifying production activity” is eligible to take a tax deduction of 3% in tax years 2005 and 2006. The deduction increases to 6% in year 2007, and 9% in year 2010.
- The deduction is limited to 50% of annual W-2 wages allocable to the domestic manufacturing activities.
- Nonqualified activities include construction services that are cosmetic in nature, leasing or licensing items to a related party or selling foods and beverages prepared at a retail establishment.
- Determining the deduction is based on determining qualified production activity income (QPAI).
Careful planning is the best way to capitalize on available opportunities. There are many other potential tax-minimization strategies that may apply to your company, regardless of type. Consult an accounting professional about your unique circumstances when evaluating the strategies that are best for your business.
Special thanks to Patrick Hardison, CPA, a Tax & Business Services Senior Manager at CPA firm Weaver and Tidwell, LLP.
2007 TAX UPDATE
As usual, there were a spate of changes for the tax year. As you ready your paperwork for yourself or your accountant, you may want to bear in mind the following shifts for 2007.
The IRS briefly highlights these initial key changes:
- Self-employment tax—The maximum amount of self-employment income subject to Social Security taxes increases to $97,500 in 2007, up from $94,200 in 2006. The self-employment tax rate remains 15.3% on earnings to the Social Security maximum and 2.9% after the maximum.
- Social Security tax—The maximum amount of wages subject to Social Security tax increases to $97,500 in 2007, up from $94,200 in 2006. The tax rate remains 7.65% on employers and employees.
- Business standard mileage rate—The standard business mileage rate increases to 48.5 cents per mile for miles driven in 2007 for business, up from 44.5 cents per mile in 2006. (You can deduct the cost of parking and tolls in addition to the mileage allowance.)
- Tax-free parking for employees—Starting in 2007, firms can pay for $215 a month of parking tax free for employees, up $10 per month from 2006. The cap on tax-free transit passes rises to $110 a month, up $5 a month from 2006.
- Section 179 Expense Deduction—The maximum amount of qualifying property placed in service in 2007 that businesses can expense increases to $125,000, a $17,000 uptick from 2006. The annual investment limit increases to $500,000 for 2007, up from $430,000 the year before. Thus, you won't lose the benefit of expensing until you place more than $500,000 of fixed assets in service in 2007. The large increase is due in part to the Small Business and Work Opportunity Tax Act of 2007, which President Bush signed into law on May 25, 2007. According to tax service provider's CCH's Small Business and Work Opportunity Tax Act of 2007 Special Report, under the new law, the base $100,000 limit ($112,000 as indexed for inflation for 2007) is increased to $125,000 for tax years beginning in 2007 through 2010. In addition, the investment limitation is raised to $500,000 for tax years beginning in 2007 through 2010. The $500,000 amount is indexed for inflation in tax years beginning after 2007 and before 2011. (See online tax resource service TaxAlmanac's outline for a more complete listing of the act's provisions.)
- Additional impacts of the act based on the CCH report:
- The act extended the Work Opportunity Tax Credit (WOTC) through August 31, 2011. It had been set to expire for employees hired after December 31, 2007. The new law also broadens the scope of the credit. The expanded WOTC was effective as of May 26, 2007.
- It also includes a package of S Corp reforms. The changes affect the treatment of passive investment income, partial sale of qualified subchapter S subsidiaries (QSubs), interest deduction by electing small business trusts (ESBT), reduction of earnings and profits (E&P) and banks operating as S Corps.
- Domestic Production Activities Deduction—Beginning in 2007, this deduction increases to 6% of qualifying business net income from domestic production activities, up from 3% in 2006. This deduction applies to businesses engaged in construction, engineering or architectural services; film production; or the lease, rental or sale of equipment manufactured in the U.S.
- Hybrid cars—The IRS site notes that the Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006. To learn more about which autos qualify and the tax credit associated with each, see the IRS's “Hybrid Cars and Alternative Motor Vehicles.”
- Help with health care—Inc. magazine's “New Tax Breaks for 2007” article outlines the way in which the Tax Relief and Health Care Act of 2006 made it easier to help employees cover medical coverage through Health Savings Accounts (HSAs). If you pay for a high-deductible (low-cost) health plan, tax-deductible contributions can be made to HSAs to pay medical costs not covered by insurance. Income earned in these accounts then builds up on a tax-deferred basis. Withdrawals to pay medical costs not covered by insurance are tax-free, but unused funds can be withdrawn at any time for any purpose; they are taxed and there is a 10% penalty for withdrawals for non-medical purposes before age 65. For 2007, the annual deduction is up to $2,850 for self-only coverage, or $5,650 for family coverage. The contribution is no longer limited to the policy's deductible and the contribution need not be pro-rated for those who become eligible for HSAs during the year. Under the new legislation, employees can fund HSAs through a one-time transfer from an IRA, a flexible-spending account or a health reimbursement account; no deduction can be claimed for these funding options.
The IRS outlines a few forward-looking tax issues to consider as well.
- Energy-saving improvements to commercial real estate—This special expensing for the cost of energy-saving improvements to commercial building is no longer available after 2007.
- The tax credit for energy-efficient homes—The special credit for builders selling energy-efficient homes expires after 2007.
- Changes for 2009 and beyond:
- Solar heating credit—In 2009, the current 30% tax credit for businesses on the cost of solar heating units and fuel cells falls to 10% for those placed in service after 2008.
- Domestic Production Activities Deduction—Beginning in 2010, this deduction increases to 9% of qualifying business net income from domestic production activities. This deduction applies to businesses engaged in construction, engineering or architectural services; film production; or the lease, rental or sale of equipment manufactured in the United States.
- Decreased Section 179 Expense Deduction—The maximum amount decreases to $25,000 in 2011.
- Withholding on government contracts—Beginning in 2011, amounts paid out under government contracts will be subject to a 3% withholding tax. This will affect contracts with the federal government, state governments and any municipality that pays out $100 million or more annually on contracts (interest and payments for real estate are exempt).
For Quick Reference
The chart below outlines a number of personal and business tax rate changes.
| |
|
|
| Social Security Taxable Wage Base |
$97,500 |
$94,200 |
| Medicare Taxable Wage Base |
No limit |
No limit |
| |
|
|
| Roth IRA |
Lesser of $4,000 or 100% of earned income |
Lesser of $4,000 or 100% of earned income |
| Traditional IRA |
Lesser of $4,000 or 100% of earned income |
Lesser of $4,000 or 100% of earned income |
| |
|
|
| Roth and traditional IRA additional annual “catch-up” contributions for account owners age 50 and older |
| |
| |
$1,000 |
$1,000 |
| |
|
|
| |
|
|
| Defined contribution plan dollar limit on additions to qualified plans, 403(b) plans and SEP plans |
| |
|
|
| |
$45,000 |
$44,000 |
| |
|
|
| Defined benefit plan limit on benefits |
|
|
| |
Lesser of $180,000 or 100% of average compensation for highest three consecutive years |
Lesser of $175,000 or 100% of average compensation for highest three consecutive years |
| |
|
|
| Maximum compensation used to determine contributions |
| |
|
|
| |
$225,000 |
$220,000 |
| |
|
|
| Elective deferral limits for 401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs |
| |
Lesser of $15,500 or 100% participant's compensation |
Lesser of $15,500 or 100% participant's compensation |
| |
|
|
| Additional catch-up contributions (individuals age 50 or older) for 401(k) plans, 403(b) plans, 457(b) plans, and SAR-SEPs |
| |
$5,000 |
$5,000 |
| |
|
|
| Elective deferral limits for SIMPLE 401(k) plans and SIMPLE IRA plans |
| |
Lesser of $10,500 or 100% participant's compensation |
Lesser of $10,000 or 100% participant's compensation |
| |
|
|
| Additional catch-up contributions (individuals age 50 or older) for SIMPLE 401(k) plans and SIMPLE IRA plans |
| |
$2,500 |
$2,500 |
| |
|
|
| Compensation defining highly compensated employee |
| |
$100,000 |
$100,000 |
| |
|
|
| Compensation threshold used to determine a key employee in a top-heavy plan |
| |
$1 for more than 5% owners; $145,000 for officers; $150,000 for more than 1% owners |
$1 for more than 5% owners; $140,000 for officers; $150,000 for more than 1% owners |
| |
|
|
| Compensation triggering Simplified Employee Pension (SEP) contribution requirement |
| |
$500 |
$450 |
| |
|
|
| Business mileage, cents per mile |
48.5 |
44.5 |
| Charitable mileage, cents per mile |
14 |
14 |
| Medical and moving mileage, cents per mile |
20 |
18 |
| |
|
|
| Maximum Section 179 Expense Deduction |
$125,000 |
$108,000 |
| Phase-out for Section 179 |
$500,000 |
$430,000 |
| |
|
|
| |
2007 |
2006 |
| Commuter highway vehicle and transit pass, per month |
| |
$110 |
$105 |
| Qualified parking, per month |
$215 |
$205 |
| |
|
|
| Married filing jointly or surviving spouse |
$10,700 |
$10,300 |
| Single (and married filing separately) |
$5,350 |
$5,150 |
| Heads of Household |
$7,850 |
$7,550 |
| |
|
|
| Married filing separately |
$78,200 |
$75,250 |
| Phase-out for all others |
$156,400 |
$150,500 |
| |
|
|
| Amount |
$3,400 |
$3,300 |
| |
|
|
| Kiddie Tax |
|
|
| Net unearned income for an under-age-18 child that is not subject to the “kiddie tax” |
| |
$1,700 |
$1,700 |
| |
|
|
| Amount you can give to each recipient |
$12,000 |
$12,000 |
Real Estate Quote of the Week
T"he tragedy of life doesn't lie in not reaching your goal. The tragedy lies in having no goal to reach." Benjamin Mays, 1895-1984, Educator and Minister
Preparing For Sale (Real Estate)
When preparing to sell your home, it is useful to know how homebuyers respond when they look at a house. Very few people will buy a home because they are attracted by fantastic bathrooms. Buyers do react to bathrooms that are not cared for, however, because they view them as a reflection of the overall condition of the property.
Many buyers know that plumbing repairs potentially represent a major expense. They get nervous about dripping faucets, loose tiles, and running toilets. Your pre-marketing preparations should include making sure that your plumbing is working properly and that any cosmetic damage caused by former leaks has been repaired.
Keep the bathroom spotless while your home is on the market. Remove any traces of mold or mildew and scour away any build-up on the bathtub and basin. Re-caulk around the tub and shower, if necessary. A new shower curtain, bath mat, plush towels and scented soap can help give the buyer one more positive reason for liking your home!
When in question, ask you Real Estate Agent what they feel should be addressed so that you are making the best of your home's "First Impression." Strong First Impressions sell, while Weak Impressions linger.
Tax Implications of Selling Your Home
Most clients profit from selling their homes, and they often have questions about capital gains tax. When you sell your primary residence, you are not taxed on your profit if (1) you have lived in the home for two out of the last five years and (2) your gain does not exceed $250,000 as a single taxpayer or $500,000 as a married couple filing jointly. Gains above these limits are taxed at the current rate of 15% for higher income taxpayers and 5% for lower income taxpayers.
In 2008 the 15% rate will continue for higher income taxpayers; while the 5% lower income rate will drop to 0% for the 2008 tax year only.
On January 1, 2009, the long-term capital gains tax rates will once again be 15% and 5% through 2010. Homeowners can use this tax-free provision every two years. As set forth in the American Job Creation Act of 2004, properties converted from a 1031 exchange property into a primary residence must be held and used as a primary residence for at least five years to qualify for the tax exemption.
Consult your tax accountant for more detailed information regarding your particular circumstance.
1031 Exchange Rules in Real Estate
One of the most popular "tax deferring" strategies for real estate owners who are selling one property and acquiring another is the use of Section 1031 of the Internal Revenue Code. It is an effective way to defer paying income tax on capital gain generated by the sale of a property when you intend to reinvest the proceeds in a similar, "like-kind" property. Almost any kind of real property is considered "like-kind" with any other real property.
A recently enacted law closes what was considered a loophole in the Section 1031 rules. In some cases, owners of investment real estate have used the 1031 Exchange to swap their investment property for real estate that could be readily converted to an owner-occupied residential property. After the exchange, they made the property into their principal residence, lived in it for a couple of years, then sold it. Now the American Job Creation Act of 2004 has ruled that properties converted from a 1031 exchange property into a residence must be held and used as a principal residence for at least five years to qualify for the tax exemption. Otherwise, the basic tax-deferring benefits of 1031 exchanges remain the same.
Consult your tax advisor for more detailed information.
When to Take a Walk in Real Estate
Your agent calls to say they are bringing prospective buyers to see your home at 2:00 p.m. You quickly straighten up the house and run the dishwasher. What should you do then? If you have to let them into the house--then take a drive or walk the dog!
Many owners think they should linger close by while their home is being shown. They are afraid that the Real Estate Agent might miss the storage shelves in the basement or forget to point out the beautiful new floor in the kitchen. It is better for the agent to miss something than for you to be ushering the buyers around, so resist the temptation to stay while your house is being shown.
Buyers usually base their decision to buy on an attraction that often has more to do with emotions than pure logic, and a lot goes on between buyer and agent during a showing. The buyer needs to evaluate the home's pluses and minuses, and the agent needs the opportunity to work with the buyer's objections. This process cannot take place comfortably if the seller is on the scene.
Buyers have to take ownership of the property in their mind and they find it hard to do that when seller's are around. As a seller, do yourself a favor for a successful showing - take your pets, kids and all of your family out of the area and let the buyer be SOLD by your home. The home sells itself - give it an opportunity to do so.
Real Estate Agent Referrals
It takes time for Real Estate Agents to build a business. Since a lot of our success depends on referrals from satisfied buyers or sellers, we work hard to exceed your expectations for service.
If a Real Estate Agent has done a superb job of selling your house or finding you a new one, the best way to say "thank you" is to give that person's name (and phone number!) to anyone you know who is considering a move. You are not only doing the agent a favor, you are also directing your friends to a competent, knowledgeable and experienced salesperson. Buying a house or condo can be a little scary if you don't have a strong professional guiding you through the process. Real Estate Agents try extra hard to please referrals of friends or pleased customers. Agents are in the business for the long term and prosper by giving consistently high quality service.
If someone you know is looking for a Real Estate Agent in an area where they and you do not know anyone, make it easy for them and go to www.askaboutrealestate.net and request PROFESSIONAL Real Estate Agent Services from one of our TOP performers.
Ask About Real Estate Listing Service
When you list your house with a Real Estate Agent who participates in the Ask About Real Estate Listing Service (AARELS), you get a lot of service for your money. Depending upon the region, there may be hundreds of participating members.
The Real Estate Agent who lists your home works to get it sold. This is done by marketing directly to home buyers, but an even more powerful tool is marketing your home to other agents who have buyers. Your Real Estate Agent makes all the crucial information about your home available to the other members through the Ask About Real Estate Listing Service (AARELS).
Information such as your home's location, size, the number of rooms, the style of architecture, what personal property is included, and any other special features is posted. The Ask About Real Estate Listing Service (AARELS) description will also contain information about any special financing that might be available, showing instructions, and special needs you may have with respect to closing. The Ask About Real Estate Listing Service (AARELS) is a powerful tool for real estate matchmakers.
Legal Documents in Real Estate
The stacks of papers that you have to sign in order to buy a house can leave you confused. The person conducting the closing will ask you to sign your name to countless documents that are filled with legal jargon. Some buyers just barely glance at each form and sign them without a lot of questions, while others find it very frustrating to try to read every form at the closing table.
You should read and understand the papers you sign. If you are getting a loan to buy the property, most of the paperwork will come from the mortgage company. In most cases, there is little time to read everything in advance because the forms arrive at the closing office shortly before closing is scheduled to begin. Most of the documents use standardized language, however, and you should be able to get copies of the documents ahead of time from the lender so that you can have your questions answered and be comfortable with the settlement process.
Discuss Your Real Estate Options
When you are working with a Real Estate Agent to find a home, it is very important that you take the time to discuss the full range of your housing and financing options. Your Real Estate Agent wants to understand your criteria and your expectations. Be very clear about the features you want in a home, describing what elements are essential to you and where you are willing to compromise.
When you start looking at homes, you may find that the available homes in your price range require much more of a financial commitment than you were prepared to make. Let your agent know if you are willing to consider alternative mortgage options to increase your buying power. Discuss the possibilities for buying in an area you had not previously considered. Would you consider a house with the same amenities in a different neighborhood, a "handyman special", a smaller yard or fewer bedrooms? An open mind and honest communication are crucial ingredients as you work with your Real Estate Agent to find the best possible home for your needs.
Finding Real Estate Buyers
When a home owner tries to sell "By Owner", they commonly use two basic marketing techniques to advertise the property. They place a "For Sale" sign in the front yard and a classified ad in the local newspaper. When a seller lists their home with a professional Real Estate Agent, however, a very sophisticated process is set in motion in order to facilitate the home sales transaction.
Real Estate Agents have a backlog of prospective buyers for the homes in their market. Through the Multiple Listing Service and Ask About Real Estate.net - www.askaboutrealestate.net, the agent cooperates with other brokers in the area who will show your home to their prospective buyers. Professional Real Estate Agents also combine direct mail, telephone calls, and specialized advertising techniques incorporating media such as the Internet, to reach the sales market. In this way we create activity on our listings that help them to sell quickly--and for the best price.
Choosing A Real Estate Agent
When you buy or sell a home, you want to work with a Real Estate Agent who has the experience and expertise to handle such a complex transaction with a minimum amount of stress. When choosing a Real Estate Agent, you should look for technical competence and interpersonal skills.
Ask prospective Real Estate Agents several questions.
1. How long have you been in the business? 2. How do your services differ from those of your colleagues? 3. Do you have a principal broker/owner who works closely with you and serves as a backup person if you are not available?
Keep in mind that there are no "right" answers to these questions. Don't rule out a less-experienced agent who brings energy and enthusiasm to the job. You want personalized professional service from someone whom you can trust to lead you through the process.
If you do not know where to being you can request TOP Real Estate Agent services from Ask About Real Estate.net . Their home page is www.askaboutrealestate.net.
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