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Property taxes --- and what is deductible

Taxes

Can property taxes be deducted?

Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.
Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.

How are property taxes configured?

Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate, on average 1.5 percent of the property's current market value. These annual local assessments by county or local authorities help pay for public services and are calculated using a variety of formulas.

How does home mortgage tax deductions work?

The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.

What is an impound account?

An impound account is a trust account established by the lender to hold money to pay for real estate taxes, and mortgage and homeowners insurance premiums as they are received each month.

Are points deductible?

If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only. You also can deduct any points you pay when you refinance your home, but you must do so ratably over the life of the loan. Consult your tax or financial advisor.

Are there tax breaks for first-time buyers?

Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time homebuyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier.
Requirements vary from program to program. People wanting to apply should contact their local housing or community development office.
Some things to keep in mind:

• Some credit may be claimed only on your owner-occupied principal residence.
• There are maximum income limits, which vary by locality and family size.

You must be a first-time homebuyer, which means you must not have had any kind of ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas. Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.

Are home improvements deductible?

What you spend on permanent home improvements, such as new windows, can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.

However, the 1997 tax changes virtually eliminate the capital gains tax for most homeowners (the exemption is $250,000 for single homeowners and $500,000 for married homeowners.

Still, it is worthwhile to save all receipts for permanent home improvements just in case. They also can be useful documentation when it comes to marketing your home when you sell.
Have a productive day and we will see you at closing!

Improving Real Estate

Are there government programs for rehabilitation?

The U.S. Department of Housing and Urban Development's Section 203 (K) rehabilitation loan program is designed to facilitate major structural rehabilitation of houses with one to four units that are more than one year old. Condominiums are not eligible.

The 203(K) loan is usually done as a combination loan to purchase a fixer-upper property "as is" and rehabilitate it, or to refinance a temporary loan to buy the property and do the rehabilitation. It can also be done as a rehabilitation-only loan.

Plans and specifications for the proposed work must be submitted for architectural review and cost estimation. Mortgage proceeds are advanced periodically during the rehabilitation period to finance the construction costs.

For a list of participating lenders, call HUD at (202) 708-2720.

If you are a veteran, loans from the U.S. Department of Veterans Affairs also can be used to buy a home, build a home, improve a home or to refinance an existing loan. VA loans frequently offer lower interest rates than ordinarily available with other kinds of loans. To qualify for a loan, the first step is to apply for a Certificate of Eligibility.

Another program is the Federal Housing Administration's Title 1 FHA loan program.

How much can I expect to spend on maintenance?

Experts generally agree that you can plan on annually spending 1 percent of the purchase price of your house on repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained over the years.

What repairs should I make before putting a home on the market?

If you want to get top dollar for your property, you probably need to make all minor repairs and selected major repairs before going on the market. Nearly all purchase contracts include an inspection clause, a buyer contingency that allows a buyer to back out if numerous defects are found or negotiate their repair.
The trick is not to overspend on pre-sale repairs, especially if there are few houses on the market but many buyers willing to buy at almost any price. On the other hand, making such repairs may be the only way to sell your house in a down market.

Can neighbor problems de-value the property?

While it may not reduce the actual value, a cluttered landscape next door can detract from the positive aspects of your home. Review your local laws, which should be on file at the public library, county law library or City Hall.
A typical "junk vehicle" ordinance, for example, requires any disabled car to either be enclosed or placed behind a fence. And most cities prohibit parking any vehicle on a city street too long.

It also may be worthwhile to check into local zoning ordinances. An operator of a home-based business usually is required to obtain a variance or permanent zoning change in residential areas.

In addition, if a neighbor's repair work produces loud noises, he may be breaking local noise-control ordinances, which are enforced by the police department.

Before bringing in the authorities, you may want to make a copy of the pertinent ordinance and give it to your neighbor to give them a chance to correct the problem.

Have a productive day and we will see you at closing!

Condos and Home Associations

Are condos a good investment?

Condominiums have held their value as an investment despite economic downturns and problems with some associations. In fact, condos have appreciated more in the past few years than when they first came on the scene in the late 1970s and early 1980s, experts say.
While there are lots of reports about homeowners association disputes and construction-defect problems, the industry has worked hard to turn its image around. Elected volunteers who serve on association boards are better trained at handling complex budget and legal issues, for example, while many boards go to great lengths to avoid the kind of protracted and expensive litigation that has hurt resale value in the past.
Meanwhile, changing demographics are making condominiums more attractive investments for single homebuyers, empty nesters and first-time buyers in expensive markets.

What kinds of rules and regulations do Associations regulate?

Typical covenants, codes and restrictions (CC&Rs), which govern condo associations, give the board authority to make and enforce reasonable rules for the use of common property. But that would not apply to interior spaces owned by smokers themselves.
A homeowners association's board of directors can restrict smoking if it applies to indoor common spaces such as hallways or recreation rooms. Outdoor spaces are a different story, say legal experts. Any restriction would probably hinge on local laws (i.e. if a city banned smoking outdoors, a homeowners association probably could restrict smoking in its outdoor spaces).
The 1990 Americans with Disabilities Act does not require strictly residential apartments and single-family homes to be made accessible. But all new construction of public accommodations or commercial projects (such as a government building or a shopping mall) must be accessible. New multi-family construction also falls into this category.
In all states, the Federal Fair Housing Act provides protection against discrimination for people with physical or mental disabilities. Discrimination includes the refusal to make reasonable modifications to buildings that aren't accessible to the disabled.

What fees can I expect to pay a home association?

Condominium owners pay a fee, usually monthly, to the homeowner�s association to cover the costs of managing and maintaining all common areas. In addition, you may pay extra assessments for major maintenance projects. In general these must be voted on by the association board or in some cases by all of the owners. The particular cost of monthly fees and the rules regarding special assessments vary from association to association. When considering a condominium, it�s a good idea to thoroughly research the fees and bylaws of the condo association.

Are homeowner association fees tax deductible?

Homeowners association fees are considered personal living expenses and are not tax-deductible. If, however, an association has a special assessment to make one or more capital improvements, condo owners may be able to add the expense to their cost basis. Cost basis is a term for the money an owner spends for permanent improvements throughout their time in the home and is used to reduce eventual capital gains taxes when the property is sold. For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work.
To find out more about how the IRS views condo association fees, look to IRS Publication 17, "Your Federal Income Tax," which includes a section on condos. Order a free copy by calling (800) TAX-FORM.

Have a productive day and we will see you at closing!

Rent to own homes may be an option, but the choices are very limited.

Less than 5% of available homes are offered with a rent to own option.

What Is a Rent-to-Own? A rent-to-own purchase is a lease combined with an option to purchase the property within a specified period, usually 3 years or less, at an agreed-upon price. The borrower pays a down payment fee, usually 3% to 5% of the price, which is credited to the purchase price. The borrower pays rent, and an additional rent premium that is also credited to the purchase price.If the purchase option is not exercised, the buyer loses both the down payment fee and the rent premium.

As with any kind of financial contract, rent-purchase deals can be structured in such a way that all the benefits flow to one of the parties and none to the other. Buyers especially need to be careful.

Contract Features of a RENT to OWN-Purchase

1. PRICE - The sale price of the house and the rent are market-determined, yet subject to negotiation just as in a straight purchase or rental transaction. Buyers often know less about the market than sellers, which places buyers at a disadvantage unless they do some homework, which is advisable.

2.TIME - Buyers generally prefer a long option period because it provides more time to build equity and repair credit. A long period can boomerang on them, however, if they are never able to exercise the option, since they lose the rent premium they have been paying all the while, in addition to the down payment. Sellers generally prefer a short option period, but if it is too short, the house won’t be sold.

3. DOWN PAYMENT - The down payment and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they will soon own. Fully anticipating that they will exercise the option, the only cost is the interest they would otherwise have earned. To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. That the benefit to the seller generally exceeds the cost to the buyer makes the rent-to-own deal a possible win-win.

4.OPTION to BUY - A rent to own purchase also may give the renter/buyer the right to assign the option to buy. This will usually have considerable value to the buyer, because it means that the option can be sold in the event that it has value but the buyer is not able to exercise it. It is a cost to the seller for the same reason.

The rent to own purchase offers home ownership opportunities to consumers who can't qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate equity while living in the house.

Consumers who need to rebuild their credit rating during the option period should understand that paying their rent on time won’t do it. Rent payment information is not used in compiling credit scores. Lease-purchase buyers who need a higher credit score must focus on their credit cards and loans.

A possible alternative to a rent to own/purchase deal for consumers with poor credit and/or no cash is a sub-prime loan. The high-cost sub-prime market, which actively solicited clients and victimized many, was pretty much gone by 2008 but sub-prime loans continue to be available at reasonable prices from community groups or state and local finance agencies. Borrowers have to search out these sources, but if they can qualify for a loan from one, it is probably a better route than a rent to own purchase.

Even though it is costly, the right not to exercise the rent to buy option is of value to buyers. If there is something seriously wrong with the house, neighborhood, or neighbors, the money left behind on a lease-purchase is much smaller than the cost of an outright purchase followed by a quick sale.

Dangers to BUYERS - The contract used in this program made it all too easy for the seller to avoid having to sell when it was more profitable to evict the tenant and do another deal with another hopeful buyer. Buyers generally pay top dollar, perhaps including some assumed future appreciation.

The moral to buyers: read the contract very carefully to make sure you are confident you can live up to all the terms, such as paying your rent on time, every time.

Using a Lease-Purchase to Sell - Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Buyers generally pay top dollar, perhaps including some assumed future appreciation. The deal may fall through, but in that case the seller gets to pocket the option fee and rent premium.

The seller also enjoys the tax deduction on his mortgage interest payments during the option period.

Remember - The typical rent to own option may require 5% or more as a down payment. In most cases the deposit is used as a down payment when the final purchase is executed. On a $100,000 this would be $5000. Based on the standard rent to own contract, buyer and seller agree to the terms, which include, purchase price, down payment, rent payments, a time limit in which the final purchase must be completed, distribution of the down payment, and other conditions.

Many sellers will require the buyer to be enrolled in a credit repair program if their credit score is below 640. It is advisable to enroll in a credit repair program as soon as possible.

If the purchase can not be completed within the specified time, the seller may ask the buyer to agree to forfeit the deposit funds. This is a condition which must be carefully considered. An automatic extension period may be added to the agreement, contingent upon conditions, such as enrollment in a credit repair program, and additional down payment, and other terms.

The minimum rent amount is usually calculated on the mortgage payment of the purchase price, with an interest rate of 6%, plus taxes, and other expenses. On a $100,000 home the mortgage amount may be around $600 per month. The rental amount would be $600 a month plus taxes, usually between $300-$400 per month, plus other expenses. On a $100,000 home, minimum monthly payments may begin at $900 per month. The seller may request an additional amount which may be applied to the down payment for the final purchase.

Since the goal of a rent to own property is to obtain a mortgage to purchase the property, the first step is to determine the mortgage amount you will qualify for. You can contact me for a list of local lenders I have worked with in the Waukesha County and Lake country areas, as well as anywhere in Jefferson, Dodge, Washington or Milwaukee Counties. You may want to check with the bank you are now doing business with. A licensed loan officer will be able to tell you how much of a home you can afford, based on your income. They will also explain your credit score and counsel you on maintaining, or raising your credit score. If you find out you need to raise your credit score, I can send you a list of lenders offering credit repair services.

Once you meet with a lender, you will have the information you need to move forward on a home purchase. If you qualify for a mortgage, you may want to consider this option, rather than a rent to own.

- The USDA Rural Housing loan in Wisconsin is 100% financing available (0% downpayment) in Jefferson and Dodge Counties, as well as other areas of Wisconsin. Waukesha or Milwaukee Counties are not eligible. Further details available upon request.

- The My Community Loan designed for first time homebuyers with little or no credit history and little money down. The My community program allows homebuyers to qualify for a mortgage at conforming interest rates and lower pmi premiums. The program's automatic underwriting engine allows for credit scores down to 580. Manual underwriting requires at least 640 credit scores. However, banks may require higher credit scores than posted by Fannie Mae. My Community Mortgage program requires only 3% down payment. FNMA is also flexible on the source of down payment. It can be the borrower's cash on hand, gift from a relative, or even from the employer.

Time to start thinking SELLING - Here's how to get started...

Selling Your Home

1. Take a Fresh Look at Your Home

Your home looks great to you, but a buyer wants to see it since he and his family will be living in it -- so take a fresh look at your dwelling. Hop in your car, drive around the block, and then scrutinize your home as a prospective buyer will see it for the first time. First, consider what's called "street appeal;" does it need washing or painting? Does the driveway need repair work? Is the landscaping in good shape? Remember, be very critical; your buyer will be.

Next, pull into the driveway and take a good, hard look. Is the yard neat and trimmed? What about the view from the front yard? Then, walk inside and size up the interior as though seeing it for the first time. Take a tour and imagine what your real estate agent might say about each room, look into cabinets, open doors, check out the bathroom.

Then, make a mental note of the things that might put off potential buyers, along with another list of the things that first attracted you to the dwelling. Remember, the home's become a great place for you, but a new buyer will see things that you don't.

2. Clean Out the Clutter Before You Start to Sell

Before putting your home on the market, get rid of clutter in every area -- closets, attic storage, kitchen cabinets, drawers, bath vanities, and shelves -- everywhere.Remember, this is no time to be sentimental: if you don't use it, lose it. Potential buyers are seriously put off by clutter, and most of us drag a lot more things through life than we really need.

Also, don't forget the furniture and fixtures when getting rid of clutter -- most of us put too much in too little space, which makes a buying prospect, think your home is too small.

Then, have a great moving sale with all the stuff you've collected and use the proceeds for paint or whatever other materials you need for repair projects. If you just can't bear to part with some possessions, store them in the attic or some other place that's out of sight to a potential buyer.

3. To Sell, Sell, Sell -- Clean, Clean, Clean

After you've cleared out the clutter, it's time to really clean. Have the carpets professionally cleaned, strip and polish the floors, scour the bathrooms, go over the laundry room, polish the furniture, scour out the cabinets, wash the windows and window coverings, and spiff up the ceiling fans and kitchen appliances. In short, clean everything.

Don't forget the exterior; paint or power-wash everything that needs the work. Remember, this is a ceiling-to-floor, roof-to-foundation clean-up project.

4. Get More for Your Home: Repairs Pay Off

After you've cleaned the place to within an inch of its life, the next project is making all the repairs necessary to attract a buyer.

So, patch up the roof, touch up all the paint, repair the screens, spruce up the porch framing, and make your entry area really shine. Don't forget to water the lawn and landscape beds, and take the time to trim, mow, edge and get rid of sick or dying plants. Inside, fix the grout in the bathrooms and on tile floors, adjust any doors that need it, fix any scratches on the walls, cover any stains, and be sure to fix any plumbing problems. Remember, do what your home needs before the first buyer appears at your door.

Also, it's a good idea to get all this done before getting the real estate broker to make the first listing -- a good agent will advise you on what needs to be done. Also, if you have friends willing to be brutally honest about what your home needs to sell, invite them to assess the fix-up needs.

There is, however, an alternative to the sweat equity you get from a total fix-up --but it carries a price. An "as-is" sale keeps you from doing all this work, but a buyer will assess about twice the price you would have paid for the repairs. Then, the buyer will deduct that amount from your asking price before making an offer.

5. Putting Your Home on the Market: Show It to Sell It

After you have cleaned, shined, mowed, and generally whipped your property into shape, it's time to attract a buyer.

Regardless of who markets your home, you or a broker, there are other, small things you must do to attract buyers. For example, even if it's bright daylight, open the blinds and turn on the lights. Also, open all the interior doors to make the home appear roomier. Be sure to remove all your kids and pets -- they're cute, but a prospect wants to see your home, not your pride and joy. In addition, make sure your pet's litter pan is clean so the home smells clean and fresh, not like air freshener. Remember, you need to make sure your home is available to be seen by a prospective buyer with as little notice as possible. That means less than an hour, or even five minutes, if possible.

6. Get a Sense of the Market

Before you put your home on the market, take a weekend day to check out the competition: homes with similar prices and in similar neighborhoods. Remember, you don't have to go out and buy new furniture just to look like that beautiful new model in the new development -- what you want is the feel of that new model -- clean, uncluttered, and fresh.

Remember, after location, the most important item to a buyer is a well maintained home. Many flaws can be overlooked if the buyer knows he can move in without a lot of trouble and expense.


Have a productive day and we will see you at closing!