Reduce your capital gains tax even further
How to use property improvements to recalculate cost basis
Thursday, August 16, 2007
By Ilyce R. Glink
Inman News
Q: I want to sell my house and downsize to a condo. My parents, who are both deceased, transferred their house to me back in 2001, when they were alive.
They bought the home in 1966 for $38,750. Today it should sell for about $650,000. I now know that this was a mistake because of the huge capital gains tax I will owe on the property. I am single, so I have only a $250,000 exemption, which means I'll have a big tax bill to pay.
I'm trying to make the best of a bad situation. In calculating the cost basis for the property, how does one distinguish between a home improvement and a repair?
Can an improvement such as a fence be counted more than one time? We've put in three fences over the 40 years since the house has been built.
Also, I want to know if it's OK to estimate the cost of some of these improvements, since some of them took place 35 to 40 years ago and there is no formal documentation for them. Also, my parents took out a mortgage when they first purchased the house; can this be considered an improvement?
Finally, I just had both the outside and inside of the house professionally painted; can this be counted as an improvement? (I think that I already know the answer to this one). Thanks! I hope that you can answer my questions!
A: Yes, transferring ownership to you via a quitclaim deed was a mistake. I'm glad you recognize that now, although it would have been better to consult an attorney in the beginning.
And while you'll have a big tax bill to pay, you have to think about the silver lining -- at least the property has risen dramatically in value and you'll wind up with a big chunk of that cash.
When it comes to calculating the cost basis, you can include anything that was a structural fix, including adding or replacing fences, replacing the roof, adding rooms to the property, gut-renovation and home improvement such as a new bathroom. But you cannot include decorating, nor can you subtract the cost of the original mortgage.
You should take a look at a booklet published by the Internal Revenue Service: Publication 523, "Selling Your Home." It has some good examples and guidelines you need to follow to compute the basis for the home.
The booklet has a laundry list of items that are considered improvements to a home. Among those items are fences. In looking at the items you may also recognize other improvements that you or your parents added to the home, including landscaping, new windows, insulation and new kitchen appliances.
But if you installed various fences in the many years you or your parents lived at the home, you won't be able to add the cost of installing multiple fences to your cost basis. According to Publication 523, you will be able to add only the cost of the most recently installed fence to the cost basis of the home.
Since there is no formal documentation, you'll have to estimate based on your knowledge of what was done to the property. Please talk to a good accountant who can assist you with this. If you have no written paperwork to support your expenses, you may have trouble supporting your claim if you were to get audited by the IRS.
Before you add it all up, don't forget to include the costs for purchase and sale, including the commission, advertising or marketing costs, and any other fees you paid.
Q: I am in a very bad situation. I bought my house 18 months ago for $358,000. Now, similar homes in the area are selling only for $345,000.
I tried to sell the property but I'd have to come up with almost $30,000 to close, and that's money I just don't have. I can't afford the payments anymore, and yet, if I don't sell the property or figure out a way to come up with the payments, I'm going to be forced not to pay them.
I want to try to convince my lender to do a short sale. Can I do that before being late on my payments? Help!
A: You're in an incredibly difficult situation. From where I sit, you have only two options at the moment, neither of them particularly pleasant: You can either get a part-time second job to help increase your income (so that your payments are affordable), or you can sell your home and find a way to get $30,000 in order to pay off the lender.
You can ask the lender to do a short sale. If you don't have any other assets, the lender may agree to it, but that will bring up another unpleasant subject: income taxes.
What you may not realize is that the IRS treats a short sale as income to the borrower. So if you owe $350,000 on your loan, but sell your home for $330,000, you owe $20,000 to the lender. If the lender accepts the lesser amount (known as a short sale), the IRS will see the missing $20,000 as "phantom" income. You'll then owe income taxes on the phantom income.
I know this seems unfair, so I hope you can figure a way out of this problem. Please talk to a good real estate attorney about how short sales work and whether this is truly a good option for you at this time.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
Thursday, August 16, 2007
Stocks Tank on Countrywide Fears
Stocks tank on Countrywide fears
Analyst: Forced asset sales could cause bankruptcy
Thursday, August 16, 2007
Inman News
A Merrill Lynch analyst's warning that Countrywide Financial Corp. could go bankrupt, coupled with alarming news from other lenders, helped kill a stock market rally Wednesday and reinforced fears that investors are no longer willing to fund mortgage lenders.
Countrywide's stock dipped below $20 at one point Wednesday afternoon in furious trading over fears that a shortage of liquidity in secondary mortgage markets could force the company to curtail its lending.
The stock rallied to close at $21.29, down 13 percent for the day and 53 percent off its one-year high. The Dow Jones Industrial Average fell 167 points to a four-month low, erasing gains made earlier in the day.
Countrywide, the nation's largest mortgage lender, said Tuesday that loan production dropped 14 percent in July compared to the previous month, to $39 billion, following warning that "unprecedented disruptions" in the secondary market could restrict the number of loans it can make.
Falling home prices and rising delinquencies and foreclosures among loans made on risky terms have raised uncertainties about the value of investment securities backed by mortgage loans. That's reduced the amount of investment capital flowing into such securities, making it harder for some lenders to get the money they need to continue making loans.
In a research report released Wednesday, Merrill Lynch & Co. analyst Kenneth Bruce said the acceleration of margin calls and forced asset sales in capital markets could make it hard for Countrywide to finance its mortgage operations. If liquidations of assets occur in a weak market, Bruce said, "it is possible for (Countrywide) to go bankrupt."
Countrywide officials did not immediately comment on the report.
In an Aug. 2 statement, Countrywide reassured investors that it had nearly $50 billion of "highly reliable" short-term funding available to continue funding loans. But in its most recent quarterly report, the company warned that "a prolonged period of secondary market illiquidity" could reduce loan production volumes, hurting its future earnings and Countrywide's "financial condition."
Unlike large banks, which can use depositor's money to make loans, Countrywide is almost entirely dependent on the secondary markets to fund mortgages. In the first six months of the year, the Calabasas, Calif.-based lender sold 97 percent of its mortgage banking division's loan production on the secondary market, or $226.2 billion in loans.
Other reports by lenders this week also highlighted problems in the secondary market.
Impac Mortgage Holdings Inc. said it racked up $274.2 million in losses in the first six months of the year, and that deteriorating conditions in the secondary and securitization markets have made it more difficult to sell loans to investors and prompted margin calls by creditors.
KKR Financial Holdings LLC, a former real estate investment trust that is attempting to liquidate its residential mortgage assets, reported a loss of $40 million on the sale of $5.1 billion in residential mortgage loans. KKR warned it could lose its entire $200 million stake in its remaining mortgage-backed securities, an indication that the mortgage loans that serve as collateral for the securities have declined in value.
***
Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.
Copyright 2007 Inman News
Analyst: Forced asset sales could cause bankruptcy
Thursday, August 16, 2007
Inman News
A Merrill Lynch analyst's warning that Countrywide Financial Corp. could go bankrupt, coupled with alarming news from other lenders, helped kill a stock market rally Wednesday and reinforced fears that investors are no longer willing to fund mortgage lenders.
Countrywide's stock dipped below $20 at one point Wednesday afternoon in furious trading over fears that a shortage of liquidity in secondary mortgage markets could force the company to curtail its lending.
The stock rallied to close at $21.29, down 13 percent for the day and 53 percent off its one-year high. The Dow Jones Industrial Average fell 167 points to a four-month low, erasing gains made earlier in the day.
Countrywide, the nation's largest mortgage lender, said Tuesday that loan production dropped 14 percent in July compared to the previous month, to $39 billion, following warning that "unprecedented disruptions" in the secondary market could restrict the number of loans it can make.
Falling home prices and rising delinquencies and foreclosures among loans made on risky terms have raised uncertainties about the value of investment securities backed by mortgage loans. That's reduced the amount of investment capital flowing into such securities, making it harder for some lenders to get the money they need to continue making loans.
In a research report released Wednesday, Merrill Lynch & Co. analyst Kenneth Bruce said the acceleration of margin calls and forced asset sales in capital markets could make it hard for Countrywide to finance its mortgage operations. If liquidations of assets occur in a weak market, Bruce said, "it is possible for (Countrywide) to go bankrupt."
Countrywide officials did not immediately comment on the report.
In an Aug. 2 statement, Countrywide reassured investors that it had nearly $50 billion of "highly reliable" short-term funding available to continue funding loans. But in its most recent quarterly report, the company warned that "a prolonged period of secondary market illiquidity" could reduce loan production volumes, hurting its future earnings and Countrywide's "financial condition."
Unlike large banks, which can use depositor's money to make loans, Countrywide is almost entirely dependent on the secondary markets to fund mortgages. In the first six months of the year, the Calabasas, Calif.-based lender sold 97 percent of its mortgage banking division's loan production on the secondary market, or $226.2 billion in loans.
Other reports by lenders this week also highlighted problems in the secondary market.
Impac Mortgage Holdings Inc. said it racked up $274.2 million in losses in the first six months of the year, and that deteriorating conditions in the secondary and securitization markets have made it more difficult to sell loans to investors and prompted margin calls by creditors.
KKR Financial Holdings LLC, a former real estate investment trust that is attempting to liquidate its residential mortgage assets, reported a loss of $40 million on the sale of $5.1 billion in residential mortgage loans. KKR warned it could lose its entire $200 million stake in its remaining mortgage-backed securities, an indication that the mortgage loans that serve as collateral for the securities have declined in value.
***
Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.
Copyright 2007 Inman News
Monday, August 13, 2007
Seller Downpayment Assistance
Real Estate Articles from Inman News
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MBA goes to bat for seller-funded down-payment assistance
Industry claims rule change could halve FHA loan volume
Monday, August 13, 2007
By Matt Carter
Inman News
Sellers have probably abused their right to provide down-payment assistance through nonprofit groups, but regulators should establish caps and more stringent eligibility requirements on FHA loans rather than ban the practice outright, an industry group maintains.
In a letter to the Department of Housing and Urban Development, The Mortgage Bankers Association said seller-funded down-payment assistance on loans insured by the Federal Housing Administration has "provided an important tool for low-income, minority and first-time home buyers," and should be reformed, rather than scrapped.
HUD has proposed tightening the rules governing down-payment assistance on FHA insured loans, in part because of concerns that allowing sellers and others who profit from a home's sale to participate in circular financing arrangements artificially inflates home prices.
Of particular concern are charitable organizations that sellers often use to circumvent FHA restrictions on seller-funded down payments. Down-payment assistance from nonprofit groups has grown from 1.7 percent of FHA-insured single-family mortgages in 2000 to more than 30 percent this year.
In addition to inflating home prices, studies suggest loans that rely on seller-funded down-payment assistance don't perform as well as other similar loans. A November 2005 study by the Government Accountability Office found that the default rate on such loans was 22 to 28 percent, compared with 11 to 16 percent for loans with other forms of down-payment assistance.
New rules now under consideration would prevent sellers from providing charitable donations or service fees from the proceeds of a home sale to charities that provide down-payment assistance.
The proposed rule change would still allow down-payment assistance from family members, governmental and public agencies, employers and labor unions, and IRS approved tax-exempt charitable and educational groups. The IRS no longer considers charities that provide down-payment assistance tax exempt if they accept money from sellers.
Citing testimony from such groups, the MBA says seller-funded down-payment assistance has helped nearly 500,000 low- and moderate-income buyers purchase a home, with 81 percent of those loans still performing.
The proposed rule could reduce FHA loan volume by 30 to 50 percent -- at the expense of low-income, first-time and minority home buyers, the group said.
"Considering that (FHA's) market share is lower than at any time in recent history -- less than 2 percent -- the impact to FHA could be quite serious," MBA Chairman John Robbins said in the Aug. 7 letter to HUD.
"While there appears to be much evidence that … seller-funded down-payment assistance has been abused, it is unnecessary to fully eliminate the program in order to address concerns of abuse," the industry letter said.
Requiring more stringent controls could reduce the percentage of nonperforming loans and keep artificial price inflation in check while preserving the benefits of the program, the MBA said.
The MBA recommended that HUD:
Cap seller-funded down-payment assistance at 6 percent or "what is customary for the area," whichever is less.
Establish more stringent loan eligibility requirements and screening for high-risk factors such as low or no reserves or poor credit history.
Introduce better valuation controls to reduce the likelihood of inflated sales prices for homes with seller-funded down-payment assistance. In addition to standard appraisals, lenders could be required to use automated valuation tools "when available and appropriate" or perform desk reviews.
The National Association of Realtors advocates allowing the FHA to insure zero-down-payment loans for first-time home buyers, which the group claims would be "a major step" in eliminating the incentive for the "most abusive" seller-funded down-payment programs.
The House of Representatives in July passed legislation that would allow the FHA to introduce risk-based pricing and insure zero-down loans. The Expanding American Home Ownership Act of 2006 has been referred to the Senate Banking Committee.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MBA goes to bat for seller-funded down-payment assistance
Industry claims rule change could halve FHA loan volume
Monday, August 13, 2007
By Matt Carter
Inman News
Sellers have probably abused their right to provide down-payment assistance through nonprofit groups, but regulators should establish caps and more stringent eligibility requirements on FHA loans rather than ban the practice outright, an industry group maintains.
In a letter to the Department of Housing and Urban Development, The Mortgage Bankers Association said seller-funded down-payment assistance on loans insured by the Federal Housing Administration has "provided an important tool for low-income, minority and first-time home buyers," and should be reformed, rather than scrapped.
HUD has proposed tightening the rules governing down-payment assistance on FHA insured loans, in part because of concerns that allowing sellers and others who profit from a home's sale to participate in circular financing arrangements artificially inflates home prices.
Of particular concern are charitable organizations that sellers often use to circumvent FHA restrictions on seller-funded down payments. Down-payment assistance from nonprofit groups has grown from 1.7 percent of FHA-insured single-family mortgages in 2000 to more than 30 percent this year.
In addition to inflating home prices, studies suggest loans that rely on seller-funded down-payment assistance don't perform as well as other similar loans. A November 2005 study by the Government Accountability Office found that the default rate on such loans was 22 to 28 percent, compared with 11 to 16 percent for loans with other forms of down-payment assistance.
New rules now under consideration would prevent sellers from providing charitable donations or service fees from the proceeds of a home sale to charities that provide down-payment assistance.
The proposed rule change would still allow down-payment assistance from family members, governmental and public agencies, employers and labor unions, and IRS approved tax-exempt charitable and educational groups. The IRS no longer considers charities that provide down-payment assistance tax exempt if they accept money from sellers.
Citing testimony from such groups, the MBA says seller-funded down-payment assistance has helped nearly 500,000 low- and moderate-income buyers purchase a home, with 81 percent of those loans still performing.
The proposed rule could reduce FHA loan volume by 30 to 50 percent -- at the expense of low-income, first-time and minority home buyers, the group said.
"Considering that (FHA's) market share is lower than at any time in recent history -- less than 2 percent -- the impact to FHA could be quite serious," MBA Chairman John Robbins said in the Aug. 7 letter to HUD.
"While there appears to be much evidence that … seller-funded down-payment assistance has been abused, it is unnecessary to fully eliminate the program in order to address concerns of abuse," the industry letter said.
Requiring more stringent controls could reduce the percentage of nonperforming loans and keep artificial price inflation in check while preserving the benefits of the program, the MBA said.
The MBA recommended that HUD:
Cap seller-funded down-payment assistance at 6 percent or "what is customary for the area," whichever is less.
Establish more stringent loan eligibility requirements and screening for high-risk factors such as low or no reserves or poor credit history.
Introduce better valuation controls to reduce the likelihood of inflated sales prices for homes with seller-funded down-payment assistance. In addition to standard appraisals, lenders could be required to use automated valuation tools "when available and appropriate" or perform desk reviews.
The National Association of Realtors advocates allowing the FHA to insure zero-down-payment loans for first-time home buyers, which the group claims would be "a major step" in eliminating the incentive for the "most abusive" seller-funded down-payment programs.
The House of Representatives in July passed legislation that would allow the FHA to introduce risk-based pricing and insure zero-down loans. The Expanding American Home Ownership Act of 2006 has been referred to the Senate Banking Committee.
Subscribe to:
Posts (Atom)