Tuesday, May 17, 2022

Existing Homeowners May be Facing Higher Payments



As a current homeowner, you may be basking in the consolation that you bought before the market got crazy with higher prices and interest rates. However, it doesn't mean that you may not be facing higher mortgage payments for next year.

Most homeowners pay their taxes and insurance into an escrow account with their mortgage payment.  The lender monitors the account to be sure there are enough funds available when the taxes and insurance are due.  If there is a shortage, it could cause your payment to increase.

In 2021, the national average increase in home prices was just under 20% but may have been considerably higher in some local markets.  The increased value of homes doesn't just affect buyers, in can affect the assessed value of properties across the board resulting in their property taxes going up.

Various taxing authorities, like state, city, school, and other special districts, can establish the rate they charge and exemptions that apply.  In most situations, there is a state assessment procedure for establishing the value subject to tax.

When the assessment is published, there is usually an opportunity for the owner to challenge the value.  The owner can submit evidence to justify lowering the assessment like comparable sales that indicate a lower value, mistakes in the size of the improvements or lot size, or possibly, deteriorated condition of the property.

There are companies who will represent sellers in the effort to lower the assessment.  Typically, they may charge a flat fee and a percent of the property taxes saved by lowering the assessment.  This particular year, some assessed values have gone up as much as 35-40% and it may not seem fair, but it really does accurately reflect market value.

Start investigating your situation as soon as you are notified of this year's assessment.  In most cases, the owner can represent themselves in the matter, but they will need to accumulate accurate, comparable sales, not use automated value models, found online.

Your real estate agent may be able to provide you a list of comparable sales.

Tuesday, May 10, 2022

Homeownership and the Three M's



Homes are valuable assets and must be maintained so they function properly, are safe, enjoyable and hold their value.  Attention to maintenance, minimizing expenses and managing debt & risk will protect your investment.

Maintenance

It is interesting that people understand the necessity to maintain a car and regularly have the car inspected, repaired and do regular maintenance.  Even though a house could be worth many times more than a car, homeowners regularly neglect what should be routine maintenance.

Failure to maintain a home properly adversely affects the value.  Many times, buyers will discount the price they are willing to pay for a home more than the actual cost of the repair or expenditure.  A home in good condition instills confidence while a home in less than good condition generates concern about unknown items that may also need repair.

HVAC systems, as well as appliances, run more efficiently when they are maintained which will result in lower utility bills.  Another big benefit is that small items in need of repairs, many times, turn into more expensive repairs or having to replace the items completely.

For example, failure to replace the air filters regularly could lead to a more expensive repair like having to clean the coils or it could even lead to a larger issue like burning out a HVAC motor.  In this example, the aggregate cost of replacing the filters is much less than the cost of a new furnace or A/C unit.

It can be more expensive to fix something that is not working rather than rather than prevent it from failing by regularly maintaining it.

Minimize Expenses

Every dollar you spend on maintenance, increases your cost of housing.  Some maintenance items may be easily done yourself and you'll save the cost of having a professional do them, like changing the filters.  However, the list of minimizing expenses goes way beyond maintenance.

Replacing all your light bulbs with energy efficient alternatives like LEDs is a great example.  In the spirit of Ben Franklin's adage that "a penny saved is a penny earned", every dollar you save on utilities lowers your overall cost of housing.

Windows and doors whose seals are not adequate, or a home not properly insulated could be using considerably more energy than necessary.  The cost of making these adjustments could be recaptured in utility savings in a short period of time.

Knowing the right service providers can be a big source of savings as well as give you peace of mind.  Your real estate professional has developed a wide range of trusted service providers who are both reputable and reasonable.  You should feel comfortable asking for a recommendation whenever you need one.

Manage Debt & Risk

Refinancing your home to get a lower interest rate can be a big savings but you'll need to analyze it to determine how long it will cost you to recapture the cost involved.  A Refinance Analysis calculator can help.

Other cost-saving items could be investigating multi-policy discounts for insurance, lowering your property tax assessment, low-flow toilets, smart thermostats, unplugging small appliances when not in use, and adjusting the temperature on HVAC units and water heaters.

While you are talking to your insurance agent about possible discounts, ask about your liability coverage also.  Homeowner policies have a stated amount of coverage, but your financial situation or exposure may indicate that you need to increase those amounts.  Generally, homeowners with pools or boats have increased risk and you'll want to ask your agent about your other extracurricular activities.

Owning a home has a lot of responsibility and having a good source of information is valuable.  Your real estate professional is uniquely qualified to be your source of credible real estate information.  If you are wondering why they would be helpful even when you are not buying or selling a home, it is because they want to establish long-term relationships so that whenever you need their help or services, not only will you feel comfortable asking but that you'll feel confident to refer them to your friends.

Tuesday, May 3, 2022

Will Selling Your Home Increase Your Tax Bill?



With home prices rising 20% nationwide in the past year and in some markets, even dramatically more, many homeowners are excited about the equity in their homes.  In the past, most homeowners were not concerned about profit from the sale being taxed but some may be surprised.

The profit homeowners make on the sale of their homes have enjoyed a generous exclusion.  Since 1997, for qualified sales, single taxpayers exclude up to $250,000 of capital gain and married taxpayers filing jointly, can exclude up to $500,000 of gain.

Prior to the Taxpayer Relief Act of 1997, homeowners over the age of 55 were only allowed a once in a lifetime exclusion of $125,000.  The new rule greatly increased the amount of excluded profit to the extent that most homeowners did not think about paying tax on the profit from their principal residences.

Section 121, commonly called the Home Sale Tax Exclusion, requires that you owned and used the property as your principal residence for two out of the previous five years.  This allows for a temporary rental of the property and still be able to qualify for the exemption. It can be claimed only once every two years.

Cost basis is determined by Purchase Price plus certain closing costs at acquisition plus capital improvements made to the home during ownership.  Sales price, less selling expenses, is considered net sales price from which the cost basis is subtracted to arrive at capital gains on the sale.

If the capital gain is less than the applicable exclusion, no tax is owed.  When the gain exceeds the exclusion amount, the overage is taxed at long-term capital gains rate which could be 0%, 15% or 20% depending on the taxpayer's taxable income.

Capital improvements made to a home increase the cost basis and effectively, lower the gain in the sale.  It is important for homeowners to keep records of the money they spend during the time they own the home.

Some improvements are apparent like a swimming pool, new fence, or roof but some are not so obvious.  Replacing a faucet or a light fixture can be a capital improvement and even though the cost is small, lots of these items over the lifetime of owning the home add up.

The three rules for identifying capital improvements listed in IRS publication 523 are: 1) does it materially add value to the property? 2) does it extend the useful life of the property?  3) does it adapt a portion of the home to a new use?

While taxpayers are allowed to reconstruct a register of the improvements made during the time they owned their home, some things will undoubtedly, be overlooked.  It is much better to have a written record of all money spent on the home in a contemporaneous manner and keep receipts for items over $75.

It is better to have the record of all items available when you are ready to make the capital gain determination.  You'll save time and probably pay less taxes having the list readily available whether you do your taxes or have a professional do them.

For more information, download the Homeowners Tax Guide.