Category Archives: Taxes

How Trump’s tax plan will shift housing demand

Source: OC Housing News

Trump’s tax plan will shift housing demand from move-ups to entry-level

Like it or hate it, Trump’s Tax Plan will impact real estate markets across the County. By greatly reducing the tax advantage of mortgage debt, many renters may choose to remain renters rather than assume large debts to buy a house. However, by reducing taxes on lower-income Americans, Trump’s tax plan should stimulate demand for entry-level housing.

Photo: The Orange County Register

One of Trump’s tax proposals involves raising the standard deduction. The Trump Plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000.

So how would increasing the standard deduction impact the home mortgage interest deduction? When people file taxes, they can either itemize or take the standard deduction. Only high wage earners with deductible expenses greater than the standard deduction itemize, and most of them do so because they have a large mortgage debt that costs them more than $12,600 per year in interest.

At 4% mortgage rates, any family with a mortgage larger than $315,000 pays more than $12,600 in mortgage interest debt alone to prompt itemizing on taxes. Most Coastal California homebuyers borrow more than this amount because house prices are so high, it’s a necessity. If the standard deduction were raised to $30,000, only borrowers with mortgage debt exceeding $750,000 would pay the $30,000 in mortgage interest that provides them enough deductible expenses to itemize. A huge swath of Coastal California borrowers will stop itemizing and stop taking advantage of the HMID.

Further, since high-wage renters would have a $30,000 personal exemption, the pressure to buy rather than rent would lessen, reducing demand overall.

The current home mortgage interest deduction provides a strong incentive for high wage earners to buy rather than rent. This distorts the market in areas like Coastal California and inflates house prices, and in the end, the subsidy only benefits bankers.

An increase in the personal exemption is a major tax cut for low-income and middle-income Americans because it reduces their taxable incomes by $18,400 per year. Increased disposable income will increase demand for low-end housing. So while the increased personal exemption may reduce demand in high-cost neighborhoods, this may be offset by increased demand in low-cost neighborhoods.

What the heck is Mello Roos?

If you’re new to Orange County, or even if you’ve been here a while, you’re probably curious about Mello-Roos. Many home buyers become acquainted with it when they see it in listings, ie “No Mello-Roos!” Or, you may have friends or family members who own homes in a Mello-Roos area and mention it (usually as a complaint or a warning). Let’s get the facts.

The newer homes in the Talega community of  San Clemente have Mello-Roos taxes. Click the image for more info.

The newer homes in the Talega community of San Clemente have Mello-Roos taxes. Click the image for more info.

What is Mello-Roos?
Mello-Roos is simply a special tax assessed to homeowners in a community as repayment for bonds used to fund the infrastructure within their community. This is why Mello-Roos has a negative connotation–it’s a tax. The monthly payment for a home in a Mello-Roos community will be significantly higher than it would be for a home in a non Mello-Roos community.

Advantages of a Mello-Roos District to Home Buyers

  • New schools, parks, recreation centers, etc can be built and funded using the revenue generated from the Mello-Roos income
  • More housing inventory will be created when undeveloped locations are built up
  • Generally speaking, low crime rates and highly desirable new schools are common in Mello-Roos communities

Disadvantages of a Mello-Roos District to Home Buyers

  • Cost of housing may be increased because of the tax, possibly limiting the amount of prospective buyers when it comes time for resale
  • Maintenance of the improvements could be more costly than anticipated

Why is it called Mello-Roos?
The term Mello-Roos was derived from the names of its co-authors, Senator Henry Mello and Mike Roos. It is also generally termed as the Community Facilities District Act (CFD). The CFD started when people in California voted for Proposition 13 in 1978 to limit property taxation. Therefore, new initiatives were considered to finance public constructions and improvements. In 1982, the California State Legislature made Mello-Roos legitimate.

Why do certain communities have Mello-Roos while others don’t?
Two thirds of a community must vote in favor of becoming a Mello-Roos district for it to happen. What’s frustrating to many home buyers is that they weren’t part of the community when the vote was taken.

How does a Mello-Roos community operate?
In a Mello-Roos community, bonds are issued to help fund the community infrastructure. Normal services and infrastructure would include police services, schools, roads, ambulance and fire protection services, utility connection, sewer lines, and streetlights. Once Mello-Roos is established, residents must repay the bonds in order to fund ongoing projects. A special tax is assessed to the homeowners as the repayment method and levied yearly. An ongoing lien is used to make sure that the taxes are safe and secured.

What about a non Mello-Roos community? How do they pay for infrastructure? 
In a non Mello-Roos community, the infrastructure and services would be paid for by the surrounding residents or the actual builder.

Where is Mello-Roos most commonly found?
In Orange County, most cities with new construction will have at least one community with Mello-Roos; however, the southern portion of Orange County is where it is most prevalent. Likely cities might include: Irvine, Mission Viejo, Aliso Viejo, Tustin, Laguna Hills, Rancho Santa Margarita, Coto De Caza, and San Juan Capistrano.

What year homes have Mello-Roos?
Almost always, Mello-Roos is found in areas with newer neighborhoods and subdivisions built between 1994 and the present.

How long does Mello-Roos typically last?
The length of the Mello-Roos tax varies from subdivision to subdivision. Fifteen years from the original build date is about average. The payment very rarely extends beyond 30 years or is shorter than 7 years.

How much is it on a monthly basis?
Depending on the year of construction, it can range anywhere from $25 to over $300 per month; the actual tax is usually collected annually or semi-annually.
So, should you consider a home in a Mello-Roos community? It’s really up to you. It’s best to ask yourself if the amenities of a Mello-Roos community warrant the increased monthly payment. For many people, the attraction of a newly built home in a newer community is very high and worth the expense. No matter what, if the home was built after 1994, ask if there is Mello-Roos tax. It could be a significant part of your finances for years to come.

 Source: Realty Times

Tax time, part 3: Tax breaks for capital improvements

If you’re looking to sell your home after making improvements to it, there may be some tax benefits to you. It’s smart to keep track of what you spend on capital improvements to your home because there are tax breaks when you sell the property.

improvements

Source: Houselogic.com

It’s no secret that finishing your basement will increase your home’s value. What you may not know is the money you spend on this type of so-called capital improvement could also help lower your tax bill when you sell your house.

Tax rules let you add capital improvement expenses to the cost basis of your home. Why is that a big deal? Because a higher cost basis lowers the total profit—capital gain, in IRS-speak—you’re required to pay taxes on.

The tax break doesn’t come into play for everyone. Most homeowners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to track capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.

What Counts As a Capital Improvement?
Although you may consider all the work you do to your home an improvement, the IRS looks at things differently. A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.

Capital improvements can include everything from a new bathroom or deck to a new water heater or furnace. Page 9 of IRS Publication 523 has a list of eligible improvements.

There are limitations. The improvements must still be evident when you sell. So if you put in wall-to-wall carpeting 10 years ago and then replaced it with hardwood floors five years ago, you can’t count the carpeting as a capital improvement. Repairs, like painting your house or fixing sagging gutters, don’t count. The IRS describes repairs as things that are done to maintain a home’s good condition without adding value or prolonging its life.

There can be a fine line between a capital improvement and a repair, says Erik Lammert, former tax research specialist at the National Association of Tax Professionals. For instance, if you replace a few shingles on your roof, it’s a repair. If you replace the entire roof, it’s a capital improvement. Same goes for windows. If you replace a broken window pane, repair. Put in a new window, capital improvement.

One exception: If your home is damaged in a fire or natural disaster, everything you do to restore your home to its pre-loss condition counts as a capital improvement.

How Capital Improvements Affect Your Gain
To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name a few. You should be able to find all those costs on the settlement statement you received at your closing.

Next, you’ll need to account for any subsequent capital improvements you made to your home. Let’s say you bought your home for $200,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $225,000.

Now, suppose you’ve lived in your home as your main residence for at least two out of the last five years. Any profit you make on the sale will be taxed as a long-term capital gain. You sell your home for $475,000. That means you have a capital gain of $250,000 (the $475,000 sale price minus the $225,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.

Here’s where it gets interesting. Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you’ve saved about $5,000 in taxes based on the  15% tax rate on capital gains. Well worth taking an hour a month to organize your home improvement receipts, don’t you think?

Related: Tax and Home Records Checklist: What to Keep and For How Long

The top rate for most homesellers remains 15%. For sellers in the 39.6% income tax bracket, the cap gains rate is 20%.

Watch Out for These Basis-Busters
Some situations (below) can lower your basis, thus increasing your risk of facing a tax bill when you sell. Consult a tax adviser.

  • If you use the actual cost method and take depreciation on a home office, you have to subtract those deductions from your basis.
  • Any depreciation available to you because you rented your house works the same way.
  • You also have to subtract subsidies from utility companies for making energy-related home improvements or energy-efficiency tax credits you’ve received.
  • If you bought your home using the federal tax credit for first-time homebuyers, you’ll have to deduct that from your basis too, says Mark Steber, chief tax officer at Jackson Hewitt Tax Services.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

Source: Houselogic.com

Tax time, part 2: Deductions for rental properties

Now that we’ve reviewed general tax deductions for homeowners, let’s talk about rental properties. Aside from rental income on a monthly basis, one of the major benefits of rental properties is the tax deductions.

dana point rental
Source: Houselogic.com

Writing Off Rental Home Expenses
Many rental home expenses are tax deductible. Save receipts and any other documentation, and take the deductions on Schedule E. Figure you’ll spend four hours a week, on average, maintaining a rental property, including recordkeeping.

In general, you can claim the deductions for the year in which you pay for these common rental property expenses:

  • Advertising
  • Cleaning and maintenance
  • Commissions paid to rental agents
  • Home owner association/condo dues
  • Insurance premiums
  • Legal fees
  • Mortgage interest
  • Taxes
  • Utilities

Less obvious deductions include expenses to obtain a mortgage, and fees charged by an accountant to prepare your Schedule E. And don’t forget that a rental home can even be a houseboat or trailer, as long as there are sleeping, cooking, and bathroom facilities. Moreover, the location of the rental home doesn’t matter. It could even be outside the United States.

Limits on Travel Expenses
You can deduct expenses related to traveling locally to a rental home for such activities as showing it, collecting rent, or doing maintenance. If you use your own car, you can claim the standard mileage rate, plus tolls and parking. For 2014, it’s 56 cents per mile.

Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relates to rental activities.

Repairs vs. Improvements
Another area that requires rental home owners to tread carefully is repairs vs. improvements. The tax code lets you write off repairs—any fixes that keep your property in working condition—immediately as you would other expenses. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years. (More on depreciation below.)

Think of it this way: Simply replacing a broken window pane counts as a repair, but replacing all of the windows in your rental home counts as an improvement. Patching a roof leak is a repair; re-shingling the entire roof is an improvement. You get the picture.

Deciphering Depreciation
Depreciation refers to the value of property that’s lost over time due to wear, tear, and obsolescence. In the case of improvements to a rental home, you can deduct a portion of that lost value every year over a set number of years. Carpeting and appliances in a rental home, for example, are usually depreciated over five years.

You can begin depreciating the value of the entire rental property as soon as the rental home is ready for tenants and you hold it out for rent, even if you don’t yet have any tenants. In general, you depreciate the value of the home itself (but not the portion of the cost attributable to land) over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.

Depreciation is a valuable tax break, but the calculations can be tricky and the exceptions many. Read IRS Publication 946, “How to Depreciate Property,” for additional information, and use Form 4562 come tax time. You may need to consult a tax adviser.

Profits and Losses on Rental Homes
The rent you collect from your tenant every month counts as income. You offset that income, and lower your tax bill, by deducting your rental home expenses including depreciation. If, for example, you received $9,600 rent during the year and had expenses of $4,200, then your taxable rental income would be $5,400 ($9,600 in rent minus $4,200 in expenses).

You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.

If your modified adjusted gross income (same as adjusted gross income for most persons) is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.

Let’s say that for the year rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss. If your modified adjusted gross income is below $100,000, you can deduct the full $3,000 loss. If you’re in a 25% tax bracket, a $3,000 loss reduces your tax bill by $750, plus any applicable state income taxes.

Tax Rules for Vacation Homes
If you have a vacation home that’s mostly reserved for personal use but rented out for up to 14 days a year, you won’t have to pay taxes on the rental income. Some expenses are deductible, though the personal use of the home limits deductions.

The tax picture gets more complicated when in the same year you make personal use of your vacation home and rent it out for more than 14 days.

Source: Houselogic.com

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

See IRS Publication 527 for all the details on reporting rental income and expenses on your return.

Tax time, part 1: Deductions for homeowners

It’s that time of year again–tax time. Thankfully, owning a home can pay off at tax time. In fact, many people take the plunge of home ownership for the tax benefits.

dana point house

Here are some of the tax deductions and strategies that can lower your tax bill.

Source: Houselogic.com 

Mortgage Interest Deduction
You can claim a mortgage interest deduction on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home–and your home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.

Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.

If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.

PMI and FHA Mortgage Insurance Premiums
You can deduct the cost of private mortgage insurance (PMI) as mortgage interest on Schedule A if you itemize your return. The change only applies to loans taken out in 2007 or later.

By the way, this year may be the last year you can claim this deduction unless Congress renews it. That remains to be seen.

What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized down payment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).

If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you can’t claim the deduction (10% x 10 = 100%).

Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser can help you calculate this deduction. Also, the rules vary between the agencies.

Prepaid Interest Deduction
Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest.

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.

Home mortgage interest and points are reported on Schedule A of IRS Form 1040.

Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed the purchase of your home or your refinance closing.

Property Tax Deduction
You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.

If you bought a house this year, check your HUD-1 settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.

Energy-Efficiency Upgrades
If you made your home more energy efficient in 2014, you might qualify for the residential energy tax credit.

Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades.

The credit carries a lifetime cap of $500 (less for some products), so if you’ve used it in years past, you’ll have to subtract prior tax credits from that $500 limit. Lucky for you, there’s no cap on how much you’ll save on utility bills thanks to your energy-efficiency upgrades.

Among the upgrades that might qualify for the credit:

To claim the credit, file IRS Form 5695 with your return.

Vacation Home Tax Deductions
The rules on tax deductions for vacation homes are complicated. Do yourself a favor and keep good records about how and when you use your vacation home.

  • If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.
  • Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted on Schedule E.
  • Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.

Next week, I’ll do posts on tax deductions for rental properties, and tax breaks when you do improvements to your home. Stay tuned!

Source: Houselogic.com 

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

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