What does the ‘fiscal cliff’ mean to Real Estate?

LYNNE FRENCH – REAL ANSWERS

Q. How is the problem with the fiscal cliff going to affect the real estate recovery and interest rates?

A. The so-called “fiscal cliff” is a combination of tax increases and massive government spending cuts that will hit the U.S. economy in 2013 unless Congress takes action before the end of the year.  Most economists see the result of the fiscal cliff as something that will hurt the U.S. economy, with too many tax increases and spending cuts.  I discussed this with one of my mortgage advisors, Jay Voorhees.  He reminded me, first of all, that when stock prices go up, bond prices go down.  And when bond prices go down, rates go up.  With the fiscal cliff, such a threat to economic growth actually reduces interest rates.  If an actual compromise is reached in Congress to avoid the fiscal cliff, stocks will rally and bond prices will drop.  As he said, when bond prices drop, rates will go up.  Voorhees says that the increases in stock prices and interest rates will be temporary though because the Fed will continue to buy up bonds in what they call their QE111 program, which is a pledge to keep interest rates down.  So if nothing is done about the fiscal cliff, rates will probably go down.  If something is done about the fiscal cliff, rates will probably go up, but only temporarily.  It will help the real estate recovery because people will feel the confidence they need to make a move. I say this as long as they don’t mess with the mortgage interest deduction.

Q. We are almost ready to move into our new house.  What are some moving tips?

A. It is never too soon to start planning the move.  To-do lists are great so you don’t forget something critical.  This is a great time to sort and get rid of things that you really don’t need.  It feels good to start fresh with a lighter load.

When packing your boxes, put heavy items in smaller boxes.  Try to keep all boxes under 40 pounds.  Color-code the boxes for each room and label them on all sides.  That way you won’t have to move boxes to see the label.  Wrap every fragile item separately and use a packing material such as bubble wrap.  You can purchase these at moving stores.

Back up your computer files before moving your computer. 

Decide what items you are going to move on your own.  You might want to carry valuables, breakables and items with sentimental value with you; also, items that the movers won’t take, like plants.  Keep a bag with you that has necessities for that day such as snacks, tissue, medications, etc.  Keep all documents pertaining to the move with you including the movers’ name and contact information in your phone or phonebook.  Try to make arrangements for your children and pets to be away on moving day.  This will spare them the stress of the move.  When the movers arrive, inspect all boxes and furniture right away.

 

Send your question and look for your answer in a future column.  Email Lynne@LynneFrench.com.  French is the broker/owner of Windermere Lynne French & Associates and a Clayton resident.  For any real estate needs or questions, contact her at 672-878 7or stop in at 6200 Center Street, Clayton.

Posted on December 11, 2012 at 5:15 pm
Lynne French | Category: Government & Real Estate, Moving Tips, Real Estate Terms, Taxes | Tagged , , , ,

It figures that owning makes more cents than renting

Q.  I am deciding if I would be better off financially by renting or buying a home.  How do I do the calculation?

A.  It is really simple.  If you bought a $500,000 home your property tax would be around $6,500 a year.  This is totally tax deductible.  If your payment was $2,500 a month the majority of your payment at first is interest.  Let’s say $2,300.  That is $27,600 a year.  Adding $6,500 and $27,600 equals $34,100 total deduction.

If your taxable income is $75,000 you would pay tax on: $75,000 minus $34,100, or $40,900. 

If you have a 28 percent income tax rate your tax would be $11,452 instead of $21,000 for $75,000.  If you divide the savings over 12 months, $21,000 minus $11,452 equals $9,548; $9,548 divided by 12 months is a $795.66 a month savings.  It would make your effective payment $1,704.34. 

Most rents these days are higher than this in our area.  A couple of other things you should consider: In the first year many of your closing costs are also deductible.  The other factor is appreciation of value.  You will keep paying the same payment when your property value increases over the years.  I guess this is part of the reason that home ownership is the American dream.

Q.  Our family wants to sell our house.  We don’t want to buy another home for some time.  I am worried about capital gains.  Do we have to roll over our gain into a more expensive house to defer the capital gains?

A.  The law you are referring to was in place until 1997.  That year a new and better exemption for capital gains became the law.  If you meet certain criteria, $250,000 for a single person or $500,000 for a couple, you may be exempt from taxation.  Here are the criteria:

1. You have lived in the home as your principal residence for two out of the last five years;

2. You have not sold or exchanged a primary residence during the preceding two years;

3. You meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency. 

The way you calculate gain, start with what you paid for the property originally.  Add your costs of purchase, your cost of current sale and cost of improvements over the years.  Improvements such as repairs or cosmetic additions such as new carpet and paint don’t count.

For instance, if you paid $300,000 in 1990 and sold this year for $500,000 the initial gain would be $200,000.  If costs of purchase were $3,000, costs of sale were $18,000, and cost of improvements (such as a new deck, landscaping and kitchen expansion) was $70,000, that equals $91,000.  You would add $91,000 to the $200,000 gain, so your total base would be $291,000.  Now, subtract $291,000 from $500,000 for a total gain of $209,000.  This is well within the exemption for even a single owner.

You don’t have to buy again to receive this and you can do this again every two years.

 

Posted on October 30, 2012 at 11:11 pm
Lynne French | Category: Buying, Financing, Selling, Taxes