Cece Blase

The Obamacare Tax Scare on Real Estate Sales--

A few weeks ago, I met with an invetment buyer at a little condo on Russian Hill who is active in the Nevada County real estate market. He asked me if I had details on the Obamacare real estate sales tax. He was dead certain it was coming down the pike and was going to be in the range of 5%.

I began to hear a bit of buzz about the tax shortly thereafter, maybe because my radar was up about it. The gist of the news I got is that most people are misinformed about the details of the tax. Here's the real scoop:

When Obamacare passed, lawmakers included a provision in the law imposing a new 3.8% tax on the investment income of high-income people. High income is defined as those earning more than $200,000 a year for singles or $250,000 for married couples.

According to Census Bureau figures, that means that only about 2% of US households are subject to the tax. But even then your tax hit is limited to the first $250,000 in profit from the sale of a personal residence for a single, or the first $500,000 in the case of married couples.

Beth Peerce, the president of the California Association of Realtors has been swamped with calls about the bill. To address how it really works, she offered this hypothetical example of a married couple that purchased a home in Southern California years ago for $350,000. Let's say they sell it for $1 million after the tax kicks in (around 2013).

Their sale would normally translate to a profit of $650,000. But the couple can immediately exclude $500,000 from their tax obligation, leaving $150,000 subject to taxation. Even then, tens of thousands of dollars in additional exemptions could be claimed for improvements to the property over the years and costs related to its sale."

The tax on the gain becomes a bigger problem for those who are selling rental property. If you plan on doing that in a couple of years, you should find a good CPA or Tax Attorney before you put your property on the market. Once the investment closes, you won't be able to unring that bell on the capital gains tax. Proper planning, however can limit damage control and even avoid the tax if you choose to do a 1031 Exchange.

Given recent market trends in San Francisco, those who bought investment property in the last five years or so may not have to worry about a gain-- unless our market enjoys a significant rebound in the next two years. If it does, and you do enjoy a profit, you might want to count your blessings before paying the IRS piper. Profit is a high-quality problem in our stressed out economy.

Two weeks ago, on a rare sunny day, I strolled the neighborhood near my new listing at 1380 Greenwich (2BR/2BA condo-- coming soon). Part of my walk took me up the stairs above Greenwich and Leavenworth to enjoy that breathtaking view across the Alice Marble tennis courts.

More interesting than the view that day was a sign that cautioned me to beware of coyotes! You'd almost think it was a joke, except the posting looked quite serious. . .

When I Googled "Coyote sightings in San Francisco" this morning, I learned that they've been wandering around City Parks for the past three years. Frequently seen in the Presidio and Golden Gate Park, they attacked two dogs near Speedway Meadow in the summer of 07. The most recent sighting I could find online came in earlier this month, as reported in the San Francisco Examiner.

San Francisco's Animal Control now gets on average one call a day from coyote spotters. Tips to keep coyotes at bay are to keep a careful eye on your kids (duh), don't feed them (double-duh), and take extra care when walking your dogs at night. The best way to try and chase them off is rocks and screaming.

I'm uncertain on whether coyotes have actually been spotted at Alice Marble. Aside from the fright factor, I enjoy visualizing their commute from the Presidio to Russian Hill. Do you think they took Marina Boulevard?

3471 Washington, $4,950,000- 6BR/4.5BA. Totally remodelled with all bedrooms on the same level. Lots of Golden Gate Bridge Views.

This home was last sold in April 2006 for $3,800,000. At that time it needed work.

1940 Broadway #6, $4,350,000 - 3BR/4BA. 1940 Broadway is one of San Francisco's most exclusive co-op buildings. Each unit is a full floor. The architecture is old world. The views, divine. . .

1940 Broadway #6 last sold in February of 2010 for $4,100,000.

567 Vallejo, #500, $4,300,000- 3BR/3BA. Brand new penthouse unit in 5 unit building. Heart of North Beach. Large outdoor terrace with urban cityscape views.

This home was on the market last year at the same price. This time they are trying to pull in car collectors and package a large indoor parking lot next door into the deal.

1636 Diamond, $2,460,000. 4BR/4.5BA. Nearly 4000 square feet. Brand new construction with lots of sexy bells and whistles, like iPod docking stations on every floor and multiple outdoor roofdecks and terraces.

1636 Diamond came on the market last September for $2,590,000. It was reduced to its current price before being pulled off the market for the holidays.

When a seller receives an offer on their property, it can be managed one of four ways: accept, counter, reject or ignore. Managing multiple offers is essentially the same, with the added choice of responding to more than one offer.

When reviewing multiple offers, it's important to review terms as well as price. Depending on a Seller's situation, the highest offer isn't always the best offer. Cash remains king, and a lower all-cash offer often beats the higher offer with a loan contingency.

Occasionally there is one offer that blows all the others out of the water. We often can see this offer coming before it is submitted. These are the buyers whose eyes light up each time they walk into the house and come armed with a tape measure on their second showing. They become so emotionally committed to the home that they are ready to go to exceptional lengths to become its owners.

Other times the offers are close in price but the lower offer has stronger terms. In this instance, we often recommend the seller give the lower offer an opportunity to match the higher offer.

A third option is to counter more than one offer on price and/or terms. The objective here is to draw forth an offer that delivers the best price and terms possible. In a 'hot market' this multiple counter strategy could draw buyers to counter back even higher. This scenario doesn't happen as frequently now-- it can alienate a precious buyer pool and the seller runs the risk of losing the strongest contender.

When there is more than one offer, we usually advise the seller to put the second strongest offer into back up position. In our uncertain market, this is a prudent strategy. It leaves a Seller a second-choice option. A back-up offer also tends to keep the first-place buyer in line, and less apt to attempt a negotiation for credits during escrow.

Bad news always sells better than good news. And The San Francisco Chronicle's Chicken-Little-Sky-is-Falling article about foreclosures two weeks ago made for good copy. The online version at SFGate.com is even better as it is enriched with the usual cascade of reader comments from those who want the world economy and property owners in particular to "get what they deserve."

The reporter's main (and mostly misleading) point is that foreclosure sales are surging in even the better neighborhoods. Here's a sample quote:

"Still, more people are falling behind on their mortgage payments. Some 1,885 San Francisco households received notices of default, the first step in the foreclosure process, in 2010, DataQuick said. That was down from 2009's record number, but still more than double the historic average."

How exactly does a reduction from 2009 = "more people falling behind"? It's also important to remember that a notice of default does not necessarily imply a forthcoming foreclosure. It means someone was late paying their mortgage.

Another article quote:

"In San Francisco, the 709 foreclosures represented just 0.052 percent of all households, DataQuick said, while in Contra Costa the foreclosure rate was 2.3 percent. In the nine-county Bay Area, 1.78 percent of all households went through bank repossession in 2010."

Here's a salient point of the whole article: the SF foreclosure rate is 70% below the 9-county Bay Area rate. And if you broke off the more expensive northern part of the city, it would probably be 88-90 % below the Bay Area rate.

The article makes a lot of comparisons of 2010 with 2007, but the wrenching market change in the fall of 08 isn't news. What's more interesting is that 2010 unit sales were above those of 2009, and median prices have now been stable for 7 quarters (21 months). San Francisco real estate market activity since September 2010 has been quite strong, and market activity since the beginning of 2011has been stellar. It appears that national economic conditions are improving.

Here are some statistics from MLS pulled two days after the article appeared:

Out of 465 Active house listings, only 40 are REOs, of which 24 (60%) are our entry level housing market out in our southern district (Bayview to Oceanside). Only 2 are in tonier district 5 (Noe/ Castro/ Haight), and there are zero in District 7 (Pacific Heights/ Marina). Those waiting for an upcoming deluge of bank-owned houses in the better neighborhoods of the city (and a downward spiral of prices) are probably waiting in vain.

The number of REO sold houses in 2010 in SF was 291 (out of 2309 sales) down from 309 sales in 2009. Of the 291 REO house sales in 2010, 216 (74%) were in districts 3 & 10. In district 7, there were 3 REO houses sold in 2010, less than 1 per quarter.

Out of 721 Active condo/TIC listings, only 41 (5.7%) are REOs, of which 15 are in the overbuilt SOMA/ South Beach neighborhoods. 6 are in district 5, and 1 is in district 7.

The number of REO condos sold in 2010 did go up with 38 more sales year-to-year-- but 26 of those sales were split among two large developments-- Oceanview Terrace and The Beacon. Percentage-wise, the increase is to 7.7% from 5.6%. Still a relatively small percentage of total sales. And our more expensive northern neighborhoods remained static: of the 239 condos and TICs sold district 7 in 2010, only 10 (4%) were REO sales.

REO sales have had and will continue to have an effect on the SF home market-- but none of these stats from MLS suggest that foreclosure sales in the better neighborhoods of San Francisco in 2011 will have a significant downward effect on current values.