Buying In 2017? 7 Steps You Must Take Now
If you’re thinking about buying a home in 2017, October to December is the perfect time to “warm up” for the house hunt so you can hit the ground running in the new year. And whether you’re looking in Lake Como, New Jersey or Lake Como, Italy… the prep work is relatively the same.
Here’s what prospective homebuyers should do to ready themselves for buying a home. From organizing finances to saving money to finding a real estate agent and mortgage lender, there is plenty to keep you busy!
1. Check Your Credit Score
A credit score is a numerical representation of your credit report. FICO scores range from 300 to 850, and the higher your score, the better. Good credit is like gold when obtaining a mortgage. A higher credit score should net you a lower mortgage rate. That lower rate, even if it’s only 1 or 2% lower, can mean saving thousands of dollars per year.
If your credit score falls short, get busy repairing it.
RELATED: How to Improve Your Credit Score
Correct any errors that might be on your report, start paying all your bills on time, and get your credit limit raised. Note, though, that you shouldn’t max out your card each month. It’s best to use 30% or less of your total available credit.
2. Don’t Open New Credit Cards
Tempting as saving at the checkout line can be, opening new credit cards may hurt your chances of getting a mortgage, or at least of getting the best rate on a loan. What could save you a few dollars now could cost you far more in the long run if your mortgage payments will be higher.
By opening the account, you have created another line of credit. That credit line, and what is borrowed, can change the application numbers and jeopardize the application.
And along those same lines, don’t overspend during the holiday season. Especially on impulse purchases that can be tempting during the holidays.
3. Suggest Financial Gifts for The Holidays
Besides the mortgage loan, you’ll need a sizable amount of cash to buy a house. There’s the down payment to consider, closing costs, and moving costs.
You should also set aside money for unexpected repairs and costs. Not being prepared is probably why nearly half of millennials incurred up to $5,000 in unexpected costs during the mortgage process, according to a recent TD survey.
A potential solution? Bulk up that emergency fund. Instead of getting gifts for the holidays, prospective homebuyers can suggest cash instead that will be put toward their home. And remember, you might be getting some money back after you file your tax return. Don’t blow it on vacation. A tax refund is a great way to add to your cash reserves for a down payment.
4. Interview Potential Real Estate Agents
If your neighbor, relative, or friend of a friend happens to know (or is) a real estate agent, that’s great. This person might be the perfect agent for you. But you owe it to yourself to shop around.
RELATED: How to Interview a Real Estate Agent
Look for an agent that is knowledgeable, good, integral, and can assist you in reaching the goal of homeownership. Make sure they are not a novice, new, or just unaware of how to do a specific transaction. The end of the year is usually a slow time for agents, so take this opportunity of their extra time to truly dig deep during your interview.
5. Keep Tabs On Interest Rates
If you hear that interest rates are at historic lows or that interest rates are on the rise, you should not assume that you can get the rock-bottom rate. Not everyone gets the same interest rate on a mortgage loan. It depends on your financial picture and on the lender you choose.
Everyone knows that home prices are, at least to some extent, negotiable, but loans can be the same. Shop around for the lowest interest rates. Note that closing costs can vary too, so discuss with your real estate agent ways to keep yours down.
6. Find A Mortgage Lender
Before you even start looking for a home (and yes, we even mean browsing online listings), look for a mortgage lender to find out if you can afford to buy a home. If you can’t right now, there’s no use torturing yourself by finding your dream home that’s just out of reach.
But how do you find a lender? If you have a trusted Real Estate Agent with deep roots in the community, start by asking them. They will likely have a network of qualified professionals who can help. Or, if you have a bank you’ve been with for years you can ask them
Compare [that lender] with two others. Look at what they offer, costs, points, and how long to close.” Once you know how much home you can afford, perform your home search based on your preapproval amount or less.
7. Get Preapproved
When a lender gives your financials the once-over and preapproves you for a mortgage, you’ll be able to show sellers that you really can buy their house.
But how do you get preapproved? By preparing a few documents, which you can do several months in advance of the actual purchase.
Here’s what you need to buy a house:
• Tax returns for the past two years
• W-2 forms for the past two years
• Paycheck stubs from the past few months
• Proof of mortgage or rent payments for the past year
• A list of all your debts, including credit cards, student loans, auto loans, and alimony
• A list of all your assets, including bank statements, auto titles, real estate, and any investment accounts
FREE DOWNLOAD: The Ultimate Guide to Buying Your Dream Home
Do you plan to buy in 2017? How are you getting ready? Share your tips on the Patrick Parker Realty Facebook Page, on our Twitter feed or on LinkedIn. And don’t forget to subscribe to the monthly Patrick Parker Realty HOME ADVICE email newsletter for articles, tips and guides like this delivered straight to your inbox.
20 Best Questions to Ask a Real Estate Agent… and the Answers You Want to Hear
Looking to hire a real estate agent to sell your home? Play 20 Questions.
Ask these questions of real estate agents before you hire one. Compare as many agents as you need until you feel comfortable and confident with one:
1. Do you work full or part-time as a real estate agent?
Full-time agents are likely to give you (and your potential home buyers) more time and attention.
2. How many homes have you sold in my neighborhood in the past year or two?
Ideally, you want someone with a track record in your neighborhood and preferably in your price range. If you live in a town that has different property types (e.g. co-op, condo) see how much experience they have selling what you have.
The more stats and data the agent is willing to provide (houses sold, prices, average sale to list price ratio, average days on the market, etc.), the more confident they are in sharing their expertise and their ability to sell your home.
3. How many sellers are you representing now?
This can cut two ways; a busy agent may be too busy and an agent with no clients may have more time to market your home. You should try to read the situation and consider how they answer your other questions.
4. What aspects of the transaction will you personally handle and which will be delegated to others?
You want to know the extent of your agent’s work and involvement in the process. While some delegate – and that’s not necessarily bad – others are hands-on and take you through the process from beginning to end.
This question ultimately tests the agent’s knowledge of the process; marketing/advertising / signage, open houses, negotiation of price and terms, qualification of buyers, contract negotiation, title, home inspections, closing.
5. Are your fees negotiable?
Most real estate agent compensation is negotiable. There are many ways to go, from a flat fee to a traditional percentage of the sales price. Business models are continually evolving. If you are the creative type and have an idea on compensation, run it by the agent.
6. At what price do you think my house will sell in the current market? And why?
This will give you an understanding of the agent’s knowledge of the market and their thought process in pricing your home, the most important decision you’ll have to make.
An experienced Realtor will refer to the recent market data, the current pool of comparable homes on the market, and your home’s condition and amenities in giving you an answer. If they rely solely on a value based on Zillow or any computer generated home value … run!
7. Can you give me a written CMA and a list of homes currently on the market?
All agents should give you a written comparative market analysis (CMA). The detail (or lack thereof) of the report will tell you a lot about the agent and their knowledge of the market. If there are comps in there you know are crappy, play it cool and ask the agent why so-and-so’s home is comparable. Their answer will be revealing.
8. What is your advertising and marketing plan for my house?
A blend of online and offline marketing will reach a broader spectrum of buyers. Know the manner and frequency of advertising and any open houses. The issue of open houses is hotly debated by professionals, many who feel they do not produce buyers. There should at least be brokers’ open.
FREE DOWNLOAD: Getting Your Home Sold! Your 25-Point Marketing Plan
Photos: The more photos a listing has, the more attention the home will get. Ask how many will be taken and by whom. A professional photographer is preferable. There is an ongoing debate whether video is necessary for a listing to sell. A video of the home and/or neighborhood, done by a professional videographer will make your home stand out – so ask.
Ask to see sample marketing materials. All agents will list your home in the local MLS and on their website (make sure they have one) so that’s a given. You want to know what else will be done. Compare it to the marketing plan and materials of other agents.
9. How long must I list my house with you?
Most consumer experts say a three month or less listing period is preferable. In this market, that may not be enough time to evaluate the abilities of your agent but you can always renew the listing agreement. If you have the free right to cancel the listing agreement (if you are unhappy with the agent), the term is not that important.
10. How long have you been a real estate agent?
Generally an agent with at least four years’ experience shows a dedication to the profession and an ample opportunity to acquire a good sense of the market. As far as education goes, by law, agents are required to take classes to keep their license in good standing — so look for education that goes above and beyond their minimum requirements. Ask what kind of ongoing coaching they receive in-house at their brokerage.
11. Is your real estate license in good standing and have you ever been subject to a client complaint?
There are websites to check an agent’s license. Ask the agent to provide it to you.
TIP: Check the New Jersey Real Estate License Search
Enter the name or the agent and select “Actively Licensed” from the Select License Status dropdown menu. You should not need Ref Number or License Type. If you liked the agent you met with but were unable to find them, ask why, it may be an issue with the full name they are licensed under, or a Ref Number of License Type can help.
12. Can you provide me the names and phone numbers of past clients as references?
Ask if any of the references are relatives. Check out the references.
TIP: Another option is to check New Jersey Real Estate Agent Reviews on sites such as Zillow
These are often unsolicited, unbiased and show a client’s interest in sharing their experience with others… this says a lot about that experience.
13. Do you work with stagers or will you stage my home?
In this market, your house has to be dressed to sell. Home staging truly is a must. It is one thing to take a listing and market it and quite another to sell it. Ask the agent to make suggestions to improve the salability of your home – it will probably involve your kitchen and baths, the most common areas of buyer interest and generally the best home improvement return on investment (ROI).
Don’t be offended if an agent asks you to remove personal items. We know it is your home, we know these items are sentimental, but you really want prospective buyers to see themselves in your home. And your home in their future. Their future does not include the family photos you are so proud of. It is hard, but try and think like the buyer on this one.
RELATED: The Importance of Home Staging
14. How often will you communicate with me?
Ideally, your Realtor should communicate with you regularly, updating you with any new information/concerns. They must inform you of all offers. They should have email and be reachable most of the time should you have a question or concern. Ask when they are not reachable.
Another good question to ask is their preferred communication method. Everybody has one, even you. Perhaps you’ll get a quicker response via text than you will via email. It is helpful to know these things.
15. Why should I hire you over your competition?
The agent should have a ready answer. Most sellers are looking for a real estate agent who is:
– Experienced in the local market
– Excellent negotiators
– Readily available by phone or e-mail
– Good communicators
– Quick to return calls or emails
– Successful in getting results
16. May I see the documents I will have to sign?
These should include, of course, the listing agreement and sales contract. If the listing agreement does not have a cancellation clause, ask if you can cancel if you are unhappy with the services. Again, if you have the free right to cancel, the length of the listing agreement does not matter much. Read all documents and ask questions if you don’t understand anything. There are several types of listing agreements. Like any legal document, you can run it by an attorney.
17. What will be my closing costs?
A feel for closing costs helps sellers understand the process more completely. And understanding removes anxiety.
RELATED: How Does the Closing Process Work?
18. Can you explain the process to me?
This will give you all the steps involved in selling a home and why an agent is a valuable expert to have on your side.
RELATED: The Home Selling Process
19. Do you have a website and/or blog?
Virtually all agents have a website. Visit it to get a sense of the agent and the brand. Not many agents have blogs – though if you’re reading this you know Patrick Parker Realty does. Visit and read Real Estate Blog Posts. You will not only get a feel for the expertise of the Agent and their team, but blogging is a critical aspect to overall marketing these days… content of value pulls qualified buyers inward toward your Listing!
20. What haven’t I asked you that I need to know?
This catch-all can prevent surprises later on.
What apartment decorating and rental rules have you broken? Sound off on our Facebook or Twitter pages and don’t forget to sign up for our monthly Patrick Parker Realty eNewsletter for articles like this delivered straight to your inbox!
5 Myths About Buying a Home
Once upon a time buying and selling a home was simple. You took your time to view properties, made an offer conditional upon inspection and financing, you went back and forth on price and you moved in. Unfortunately, times have changed. Let’s take a look at five myths that may no longer hold true in today’s breakneck housing market.
Myth 1: Closing Costs are a Drop in the Bucket
A lot of first-time homebuyers make the mistake of not budgeting for closing costs. Closing costs typically add up to between 1.5% and 4% of the purchase price of your home. If you’re buying a home for $500,000, your closing costs could end up being as much as $20,000. Closing costs cover everything from your home inspection, real estate lawyer fees and land transfer taxes. It’s important to budget for them, as you bank won’t foot the bill, you’ll have to come up with the funds yourself.
Myth 2: It’s Always Better to Buy than Rent
There’s a misconception out there that it’s always better to buy than rent. While buying a home makes sense in a lot of cases, it may not be the best move for everyone. As mentioned, closing costs can add up to a lot. You have to recoup your closing costs just to break even when selling your home. Unless you have a steady job and you plan to stay in your home for five years or longer, you’re most likely better off renting.
Myth 3: Real Estate is a Better Investment than the Stock Market
With the housing market booming across the country, why invest in the stock market when you could invest in real estate? Although real estate has posted impressive appreciation in recent years, it hasn’t outperformed the stock market.
Myth 4: Location, Location, Location
We’re often told the three most important factors in real estate are location, location, location. While there’s no denying location matters a great deal, you don’t necessarily need to purchase in your dream neighborhood in the here and now. If you’re not ready to sacrifice size for location, you may consider buying in an upcoming area. If you see a lot of houses being topped up, it’s usually a good sign a neighborhood is on the upswing.
Myth 5: You Can Get a Great Deal if You’re the Only Buyer
A common tactic for sellers is to list their property below market value to drum up interest. Sometimes sellers list their property $50,000 or more below its true market value in hopes of a bidding war. While this tactic often works, it doesn’t always, especially during slower months.
So what if you’re the only bidder, the seller has to give the home to you for your lower offer, right? Wrong. Some sellers actually refuse the lower offer and relist their home at a higher value.
RELATED: About Our Negotiation Process
As your Buying Agent we are committed to your best interests. Contact a Patrick Parker Realty professional will help you discern myth from fact.
From the Patrick Parker Realty Tax Season Blog Series:
Tax Advantages of Buying Your First Home
Tax breaks ease the cost of mortgage
Buying a home is when you begin building equity in an investment instead of paying rent. And Uncle Sam is there to help ease the pain of high mortgage payments. The tax deductions now available to you as a homeowner will reduce your tax bill substantially.
If you have been claiming the standard deduction up until now, the extra write-offs from owning a home almost certainly will make you an itemizer. Suddenly, the state taxes you pay and your charitable donations will earn you tax-saving deductions, too.
So make sure you know about all these breaks covered here that may now be available to you:
• Mortgage interest
• Real estate taxes
• Private Mortgage Insurance premiums
• Penalty-free IRA payouts for first-time buyers
• Home improvements
• Energy credits
• Tax-free profit on sale
• Home equity loans
• Adjusting your withholding
For most people, the biggest tax break from owning a home comes from deducting mortgage interest. You can deduct interest on up to $1 million of debt used to acquire or improve your home.
Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098. If you are in the 25 percent tax bracket, deducting the interest basically means Uncle Sam is paying 25 percent of it for you.
When you buy a house, you may have to pay “points” to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment equals the points.
For example, if you paid two points (2%) on a $300,000 mortgage—$6,000—you can deduct the points as long as you put at least $6,000 of your own cash into the deal. And believe it or not, you get to deduct the points even if you convinced the seller to pay them for you as part of the deal. The deductible amount should be shown on your 1098 form.
Real estate taxes
You can deduct the local property taxes you pay each year, too. The amount may be shown on a form you receive from your lender, if you pay your taxes through an escrow account. If you pay them directly to the municipality, though, check your records or your checkbook registry. In the year you purchased your residence, you probably reimbursed the seller for real estate taxes he or she had prepaid for time you actually owned the home.
If so, that amount will be shown on your settlement sheet. Include this amount in your real estate tax deduction. Note that you can’t deduct payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real estate tax amounts paid out of the account during the year.
Private Mortgage Insurance Premiums (PMI)
Buyers who make a down payment of less than 20 percent of a home’s cost usually get stuck paying premiums for Private Mortgage Insurance, which is an extra fee that protects the lender if the borrower fails to repay the loan. For mortgages issued in 2007 or after, home buyers can deduct PMI premiums.
This write-off phases out as adjusted gross income increases above $50,000 on married filing separate returns and above $100,000 on all other returns. (If you’re paying PMI on a mortgage issued before 2007, you’re out of luck on this one.) The PMI write-off is set to expired at the end of 2014, although Congress may extend it into future years.
Penalty-free IRA payouts for first-time buyers
As a further incentive to homebuyers, the normal 10 percent penalty for pre-age 59½ withdrawals from traditional IRAs does not apply to first-time home buyers who break into their IRAs to come up with the down payment. This exception to the 10 percent penalty does not apply to withdrawals from 401(k) plans.
At any age you can withdraw up to $10,000 penalty-free from your IRA to help buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents. However, the $10,000 limit is a lifetime cap, not an annual one. (If you are married, you and your spouse each have access to $10,000 of IRA money penalty-free.) To qualify, the money must be used to buy or build a first home within 120 days of the time it’s withdrawn.
But get this: You don’t really have to be a first-time homebuyer to qualify. You’re considered a first-timer as long as you haven’t owned a home for two years. Sounds great, but there’s a serious downside. Although the 10 percent penalty is waived, the money would still be taxed in your top bracket (except to the extent it was attributable to nondeductible contributions). That means as much as 40 percent or more of the $10,000 could go to federal and state tax collectors rather than toward a down payment. So you should tap your IRA for a down payment only if it is absolutely necessary.
There’s a Roth IRA corollary to this rule, too. The way the rules work make the Roth IRA a great way to save for a first home. First of all, you can always withdraw your contributions to a Roth IRA tax-free (and usually penalty-free) at any time for any purpose. And once the account has been open for at least five years, you can also withdraw up to $10,000 of earnings for a qualifying first home purchase without any tax or penalty.
Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace and any additions.
You can’t deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is now tax-free, it’s possible for the IRS to demand part of your profit when you sell. Keeping track of your basis will help limit the potential tax bill.
Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit worth up to $500. A tax credit is more valuable than a tax deduction because a credit reduces your tax bill dollar-for-dollar.
You can get a credit for up to 10 percent of the cost of qualifying energy-efficient skylights, outside doors and windows, insulation systems, and roofs, as well as qualifying central air conditioners, heat pumps, furnaces, water heaters, and water boilers.
There is a completely separate credit equal to 30 percent of the cost of more expensive and exotic energy-efficient equipment, including qualifying solar-powered generators and water heaters. In most cases there is no dollar cap on this credit.
Tax-free profit on sale
Another major benefit of owning a home is that the tax law allows you to shelter a large amount of profit from tax if certain conditions are met. If you are single and you owned and lived in the house for at least two of the five years before the sale, then up to $250,000 of profit is tax-free. If you’re married and file a joint return, up to $500,000 of the profit is tax-free if one spouse (or both) owned the house as a primary home for two of the five years before the sale, and both spouses lived there for two of the five years before the sale.
Thus, in most cases, taxpayers don’t owe any tax on the home-sale profit. (If you sell for a loss, you cannot take a deduction for the loss.)
You can use this exclusion more than once. In fact, you can use it every time you sell a primary home, as long as you owned and lived in it for two of the five years leading up to the sale and have not used the exclusion for another home in the last two years. If your profit exceeds the $250,000/$500,000 limit, the excess is reported as a capital gain on Schedule D.
In certain cases, you can treat part or all of your profit as tax-free even if you don’t pass the two-out-of-five-year tests. A partial exclusion is available if you sell your home “early” because of a change of employment, a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.
A partial exclusion means you get part of the $250,000/$500,000 exclusion. If you qualify under one of the exceptions and have lived in the house for one of the five years before the sale, for example, you can exclude up to $125,000 of profit if you’re single or $250,000 if you’re married—50 percent of the exclusion of those who meet the two-out-of-five-year test.
Home equity loans
When you build up enough equity in your home, you may want to borrow against it to finance an addition, buy a car or help pay your child’s college tuition. As a general rule you can deduct interest on up to $100,000 of home-equity debt as mortgage interest, no matter how you use the money.
Adjusting your withholding
If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don’t have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay. Get a W-4 form and its instructions from your employer or go to www.irs.gov.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.
Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.
For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.
From the Patrick Parker Realty Tax Season Blog Series
Tax Aspects of Home Ownership
This post will address some of the most common topics:
• Do I have to pay taxes on the profit I made selling my home?
• How do I qualify for this tax break?
• How do I qualify for a reduced exclusion?
• Deciding whether to take the exclusion
• Do I have to report the home sale on my return?
• Figuring the gain on the sale of a home
• What is the original cost of my home?
• What is the adjusted basis of my home?
• Postponed gains under the old “rollover” rules
• Converting a second home to a primary home
• At the bottom of this post we refer you to many helpful IRS Publications and Forms
Tax Aspects of Home Ownership
Though most home-sale profit is now tax-free, there are still steps you can take to maximize the tax benefits of selling your home. Learn how to figure your gain, factoring in your basis, home improvements and more.
Profit on home sale usually tax-free
Most home sellers don’t even have to report the transaction to the IRS. But if you’re one of the exceptions, knowing the rules will help you hold down your tax bill.
Do I have to pay taxes on the profit I made selling my home?
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you “exclude” this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can’t take a deduction for that loss.)
You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven’t claimed the exclusion on another home in the last two years.
If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.
How do I qualify for this tax break?
There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:
• Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn’t have to be continuous, nor does it have to be the two years immediately preceding the sale. If you lived in a house for a decade as your primary residence, then rented it out for two years prior to the sale, for example, you would still qualify under this test.
• Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
• Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.
If you’re married and want to use the $500,000 exclusion:
• You must file a joint return.
• At least one spouse must meet the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.
Even if you don’t meet all of these requirements, there are special rules that may allow you to claim either the full exclusion or a partial exclusion:
• If you acquire ownership of a home as part of a divorce settlement, you can count the time the place was owned by your former spouse as time you owned the home for purposes of passing the two-out-of-five-years test.
• To meet the use requirement, you are allowed to count short temporary absences as time lived in the home, even if you rented the home to others during these absences. If you or your spouse is granted use of a home as part of a divorce or separation agreement, the spouse who doesn’t live in the home can still count the days of use that the other spouse lives in that home. This can come into play if one spouse moves out of the house, but continues to own part or all of it until it is sold.
• If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership-and-use test.
Members of the uniformed services, foreign service and intelligence agencies
You can choose to have the five-year-test period for ownership and use suspended for up to ten years during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services, Foreign Service or the federal intelligence agencies. You are on qualified extended duty when, for more than 90 days or for an indefinite period, you are:
• At a duty station that is at least 50 miles from your main home, or
• Residing under government orders in government housing
This means that you may be able to meet the two-year use test even if, because of your service, you did not actually live in your home for at least the required two years during the five years prior to the sale.
How can I qualify for a reduced exclusion?
In certain cases, you can treat part of your profit as tax-free even if you don’t pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests because of a change of employment, or a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. So if you need to move to a bigger place to find room for the triplets, the law won’t hold it against you.
Note: A reduced exclusion does NOT mean you can exclude only a portion of your profit. It means you get less than the full $250,000/$500,000 exclusion. For example, if a married couple owned and lived in their home for one year before selling it, they could exclude up to $250,000 of profit (one-half of the $500,000 because they owned and lived in the home for only one-half of the required two years).
Deciding whether to take the exclusion
Would it ever make sense to turn down the government’s generosity and not claim the exclusion?
Although it’s very unlikely, paying tax on a home sale can make sense if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can’t use it more than once every two years.
Do I have to report the home sale on my return?
You generally can skip reporting your home sale on your income tax return, as long as you did not receive a Form 1099-S: Proceeds from Real Estate Transactions from the real estate closing agent — a title company, real estate broker or mortgage company.
To avoid getting this form (and having a copy sent to the IRS), you must give the agent some assurances at any time before February 15 of the year after the sale that all the profit on the sale is tax-free. To do so, you must assure the agent that:
• You owned and used the residence as your principal residence for periods totaling at least two years during the five-year period ending on the date of the sale of the residence.
• You have not sold or exchanged another principal residence during the two-year period ending on the date of the sale or exchange of the residence.
• No portion of the residence was used for business or rental purposes by you or your spouse.
• At least one of the following three statements applies:
o The sale price is $250,000 or less
o You are married, the sale price is $500,000 or less, and the gain on the sale is $250,000 or less
o You are married, the sale price is $500,000 or less, and:
You intend to file a joint return for the year of the sale or exchange.
Your spouse also used the residence as his or her principal residence for periods totaling two years or more during the five years ending on the date of the sale.
Your spouse also has not sold or exchanged another principal residence during the two-year period ending on the date of the sale or exchange of the residence.
Essentially, the IRS does not require the real estate agent who closes the deal to use Form 1099-S to report a home sale amounting to $250,000 or less ($500,000 or less for married couples filing jointly).
You should not receive a Form 1099-S from the real estate closing agent if you made these assurances. If you don’t receive the form, you don’t need to report your home sale at all on your income tax return.
If you did receive a Form 1099-S, that means the IRS got a copy as well. That doesn’t necessarily mean you owe tax on the sale, though. It could be a mistake, or the closing agent might not have had the proper paperwork. If you qualify for the exclusion to make all of your profit tax-free, don’t report the home sale. But make sure all your paperwork is in order to show the IRS if it asks.
Figuring gain on the sale of a home
You have a gain if you sell your house for more than it cost. Ah, but how do you calculate the real cost? For tax purposes, you need to pinpoint your adjusted basis to figure out whether or not you have gained or lost in the sale.
The adjusted basis is essentially what you’ve invested in the home; the original cost plus the cost of capital improvements you’ve made. Capital improvements add value to your home, prolong its life, or give it a new or different use. They don’t include expenses for routine maintenance and minor repairs, such as painting. Examples of improvements are a new roof, a remodeled kitchen, a swimming pool, or central air conditioning. You add these expenses to your original cost to increase your adjusted basis (which in turn decreases the amount of gain on a sale).
On the other hand, you need to subtract any depreciation, casualty losses or energy credits that you have claimed to reduce your tax bill while you’ve owned the house. Also, if you postponed paying taxes on the gains from selling a previous home (as was allowed prior to mid-1997 for homeowners who used the profits to buy a more expensive replacement house), then you must also subtract that gain from your adjusted basis. Let’s say you bought a house for $50,000 in 1993, sold it for $75,000 in 1996, and postponed the tax on the $25,000 profit by purchasing a new home for $110,000. The basis of the new home would be $85,000 (the $110,000 cost minus the $25,000 of non-taxed profit on the first sale).
What is the original cost of my home?
The original cost of your home, for most people, is the amount you paid for it.
If you purchased your home from someone else, the price you paid is your purchase price (plus certain settlement and closing costs). Your closing statement should list all of these costs. Don’t include items from your closing statement that are personal and routine expenses, such as insurance or homeowner association dues, and don’t include the prorated amounts for property taxes and interest.
If you built your home, your original cost is the cost of the land, plus the amount it cost you to construct your home, including amounts paid to your contractor and subcontractors, your architect fees, if any, and connection charges you paid to utility providers.
If you inherited your home, your basis in the home will be the number you use for “original cost.” For death’s in any year except 2010, your basis is the fair market value of your home on the date of the previous owner’s death, or on the alternate valuation date if the executor of the estate elected to value the estate’s assets as of six months after the owner’s death. If the person died in 2010, special basis rules apply depending on your relationship to the deceased. Check with the executor of the estate, who should be able to provide you with information about the basis of your home.
What is the adjusted basis of my home?
The adjusted basis is simply the cost of your home adjusted for tax purposes by improvements you’ve made or deductions you’ve taken.
For example, if the original cost of the home was $100,000 and you added a $5,000 patio, your adjusted basis becomes $105,000. If you then took an $8,000 casualty loss deduction, your adjusted basis becomes $97,000.
Here’s how you calculate the adjusted basis on a home:
Start with the purchase price of your home (as described above)
• Or, if you filed Form 2119 when you originally acquired your old home to postpone gain on the sale of a previous home (back in 1997 or earlier), use the adjusted basis of the new home calculated on your Form 2119. (See Postponed Gains Under the Old “Rollover” Rules section.)
To that starting basis add:
• The cost of any improvements that added value to your home, prolonged its useful life, or gave it a new or different use
• Any special tax assessments you paid
• Amounts spent after a casualty (a disaster such as a hurricane or tornado) to restore damaged property
From that upwardly adjusted basis subtract:
• Certain settlement fees or closing costs
• Depreciation allowed for any business use portion of your home
• Residential energy credits claimed for capital improvements
• Payments received for easements or right-of-ways
• Insurance reimbursements for casualty losses
• Casualty losses (from accidents and natural disasters) that you deducted on your tax return
• Adoption credits or nontaxable adoption assistance payments for improvements added to the basis of your home
• First-time homebuyer credit
• Energy conservation subsidies excluded from your gross income
• Any mortgage debt on your principal residence that was discharged after 2006 but before 2014, if you excluded this amount from your gross income
The result of all these calculations is the adjusted basis that you will subtract from the selling price to determine your gain or loss. This adjusted basis is what’s considered to be your cost of the home for tax purposes.
Basis when you inherit a home
If you inherited your home from your spouse in any year except 2010 and you lived in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin—your basis will generally be the fair market value of the home at the time of your spouse’s death.
If you lived somewhere other than a community property state, your basis for the inherited portion of the home in any year except 2010 will be the fair market value at your spouse’s death multiplied by the percentage of the home your spouse owned. If your spouse solely owned the home, for example, the entire basis would be “stepped up” to date-of-death value. If you and your spouse jointly owned the home, then half of the basis would rise to date-of-death value.
If you inherited your home from someone other than your spouse in any year except 2010, your basis will generally be the fair market value of the home at the time the previous owner died. If the person you inherited the home from died in 2010, special rules apply. Your basis generally is the same as the person you inherited the property from. However, the executor has the option to increase the basis of property passing to a non-spouse by $1.3 million and property passing to a spouse by $3 million. To find out the exact basis of any property you inherit, check with the estate’s executor.
Divorce and tax basis
If you received your home from your former spouse as part of a divorce after July 18, 1984, your tax basis generally will be the same as your basis as a couple at the time of the divorce. So if your former spouse was the sole owner of the home, his or her basis becomes your basis. If the place was jointly owned, you now claim the full basis.
If you divorced before July 19, 1984, your basis will generally be the fair market value at the time you received it.
Postponed gains under the old “rollover” rules
In the past, you may have put off paying the tax on a gain from the sale of a home, usually because you used the proceeds from the sale to buy another home. Under the old rules, this was referred to as “rolling over” gain from one home to the next. This postponed gain will affect your adjusted basis if you are selling that new home. The tax on that original sale wasn’t eliminated, just deferred to some future date.
You can no longer postpone gain on the sale of your personal residence. For sales after May 7, 1997, you normally must choose whether to exclude the gain on the sale of your personal residence or to report the gain as taxable income in the year it is sold. You no longer have the option to postpone paying taxes on the gain by purchasing a more expensive residence.
To see how a rollover of gain prior to the change in the law can affect your profit, consider this example: Let’s say you bought a house for $50,000 in 1993, sold it for $75,000 in 1996 and postponed the tax on the $25,000 profit by purchasing a new home for $110,000. The basis of the new home would be $85,000 (the $110,000 cost minus the $25,000 on non-taxed profit on the first sale).
Converting a second home to a primary residence
Although the rule that allows homeowners to take up to $500,000 of profit tax-free applies only to the sale of your principal residence, it has been possible to extend the break to a second home by converting it to your principal residence before you sell. Once you live in that home for two years, you have been able to exclude up to $500,000 of profit again. That way, savvy taxpayers can claim the exclusion on multiple homes.
Note: Congress has clamped down on this break for taxpayers who convert a second home into a principal residence after 2008. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion, even if the seller meets the two-year ownership-and-use tests.
The portion of the profit subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total amount of time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2013 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest would qualify for the exclusion of up to $500,000.
For more information
For information on figuring out whether you have a gain or loss on the sale of your home, see IRS Tax Topic 703: Basis of Assets. For general information on the sale of your home, see IRS Publication 523: Selling Your Home, and Tax Topic 701: Sale of Your Home.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
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The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.
For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.
How Patrick Parker Realty Saves You From the Hidden Costs of Home Ownership
Here at Patrick Parker Realty we know that one of the worst things that can happen to you as a seller is to walk away from closing with less than what you expected. We know you need the proceeds of your sale to fund other major purchases, like a replacement home, every nickel counts.
So how can you be sure you don’t face any hidden surprises at closing? Easy… ask us for an estimated net sheet prior to accepting an offer. While not exact it will provide a fairly clear picture of how the chips will fall at closing.
Some of the items to carefully review include:
Real estate agents are required to disclose their fees in writing, but if you have negotiated a lower rate or there have been some unexpected expenses with the sale, this amount could rise. Be sure to review the commission amount on the closing statement for any errors.
If you are closing your transaction at a time that is close to the same time you typically pay your annual property tax premium, be sure to bring a receipt to the escrow officer so you don’t pay the tax twice. While you would no doubt receive a refund for the balance, it may take weeks or months to extract it from the taxing authority.
If you purchased or refinanced your home within the last two years, it’s likely that you may qualify for a discount on your title insurance premium. If you are being charged the full premium, be sure to request a re-issue rate.
Buyer closing costs
If you have agreed to pay for closing costs on behalf of the buyer, place a limit on how much you can be charged. Without a cap this can amount to a blank check allowing the lender to charge fees they may typically have waived if the buyer were paying the closing costs.
In many states and local municipalities a transfer tax is charged when a home is sold. Be sure you are clear about the amount that will be charged and the formula for how this is calculated.
Notary and document preparation fees
The escrow company charges fees to prepare the closing documents. To be sure they are competitive with other escrow companies in the area, put on your detective cap and make a few calls to their competitors. This is especially true if the closing will be handled by an out of area firm, an attorney, or even a local real estate broker.
Don’t forget about your refunds! These could include money being held by your lender to pay for annual tax and insurance payments (often referred to as impound accounts). While they are often credited in your final payoff, sometimes they aren’t. Also talk to all of your service providers, from phone service providers to power companies, about any deposits which you may have coming back.
When you arrive at closing be sure to bring along your estimated closing statement. By comparing your first estimate with the actual closing statement you can often discover ways to save a few dollars just by asking some simple questions.
And remember, you can always contact us with any questions regarding costs associated with closing. We are here to help!
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