Maryland Real Estate

Tax Time

2011-03-21T04:57:00.000-07:00

If you sold your home recently, you're probably wondering how this large transaction figures into your income tax liability.

The U.S. tax code treatment for home sales and mortgage financing is extremely favorable, and you can save a lot of money by understanding the tax code. Before the recession, many people made a lot of tax-free income by buying and selling homes every two years or so and taking advantage of available exclusions. Knowing what the Internal Revenue Service (IRS) allows not only helps home sellers, but also helps those who plan on making a home purchase in the future.

The three key points we're going to cover here are: 1) Whether you need to report capital gains; 2) Calculating your capital gains; and 3) Deduction of points paid but not yet amortized.

Excluding capital gains from the sale of your home

In instances where you have met certain ownership and occupancy requirements, you can exclude capital gains from a home sale.

Single and separate filers whose gains don't exceed $250,000 and married couples with gains of $500,000 or less are off the hook. You are not even required to report the sale. Here are the main requirements for exclusion, detailed at IRS.gov:

During the five years leading up to the sale, you must have owned the property for at least two years;
In that five-year period, you must have used the home as your primary residence for at least two years. These periods do not have to be continuous, and they don't have to be concurrent. For example, if you had a lease option, you may have lived in the home while you didn't own it, and then you may have bought the property but then rented it out.

If you determine that your capital gains can be excluded, you don't have to do anything else.

There are some exceptions (as this is the IRS, there are exceptions to everything). You can still claim some or all of the exclusion in the following cases:

You become too ill or disabled to care for yourself at home and you did live there at least one year;
Your previous home was destroyed or condemned;
You are a member of the uniformed services or Foreign Service, an employee of the intelligence community or an employee or volunteer of the Peace Corps;
You have to sell involuntarily because of your employment, health or other unforeseen circumstance.

If you meet the above requirements, the rest of the calculation is a no-brainer. For instance, if you sold your home for less than $250,000, obviously you didn't see capital gains exceeding the maximum--you are done.

If that's not your situation, you have more calculations to do.

Calculating the capital gain on the sale of your home

Here's how to calculate the gain on the sale of your home for the IRS:

Take the selling price of the property and subtract the expenses of the sale (such as real estate commissions) to get your net proceeds.
If you receive form 1099-S, the amount in 'box 2' is your proceeds. (Note: you won't receive a 1099-S if your entire gain can definitely be excluded.)
From the net proceeds, subtract what you paid to acquire the property--which is the sales price plus closing costs (but not mortgage lender fees). You can find this number on your closing statement.
You may have to make some adjustments. For example, if you made improvements to the property or paid a special assessment for local improvements, you subtract those costs from your gain. When sellers pay points to lower buyers' mortgage rates, those amounts must be added back. If you ever rented the home out and deducted depreciation, you have to add the amount deducted back in when calculating your gain.

Example of capital gains calculation:

John sold the home he owned and lived in for the last eight years for $600,000, and he is not married. He calculates his gain as follows:

Sales price is $600,000;
Subtract $20,000 in selling expenses to get $580,000;
Add back $5,000 for the points that the seller paid when John purchased the home--balance is $585,000;
Subtract the $70,000 that he spent renovating the kitchen--balance is $515,000;
Finally, subtract what John spent to buy the home. The purchase price was $200,000 and his closing costs (excluding loan fees) were $3,000, leaving a balance of $312,000.

That $312,000 would all be taxable income if John didn't qualify to exclude his maximum of $250,000, but he does. So he only has $62,000 of income from the sale of his home subject to income tax. He reports this amount on Schedule D and will pay the long-term capital gain rate of 15 percent.

Another exception from the IRS determining your capital gains: If you received the home as a gift or inheritance or you are a surviving spouse, your basis is calculated from the fair market value of the home when you received it.

Is there anything else I need to take care of?

People often forget about deducting points paid to lower their mortgage rates. For example, if you paid $3,000 in points when you refinanced your home two years ago, you were probably able to deduct only $100 per year (because points paid in a refinance transaction must be amortized). If that's the case, you may have $2,800 in undeducted points that you may be able to deduct this year.

Toilet Paper & Life

2011-01-08T04:26:00.000-08:00

I started reading a lot of blogs to see what people are writing about and do you know what I found? They write about stuff. About thoughts. About observations. And those are the most popular blogs. It's not news. It's not links to shopping... it's stuff.

I started thinking about this blog. It's a news-y kind of thing. Updated it once a week with something real estate news-y. I see people clicking over to it, I see people coming from Facebook. All good, but the blog just doesn't seem compelling. I read some of the posts, and I was a little bored.

Then I went to the bathroom (No, not a bunch of potty humor now) and, since now I am in self discovery mode, start looking at the roll of toilet paper. For my whole life, I always put the roll in so the paper feeds over the top. ALWAYS. If it was coming out the bottom, it needed to be fixed.

Today, I live! I changed the roll so that it feeds out of the bottom of the roll. Viva la change. The blog is changing to be more fun. Still good info, but not as stodgy. It feels liberating. Watch for more here! I'm going to change more! Not sure what, but stuff is changing. The new Mark is here.

Maybe it's time to change the way your toilet paper rolls too! Just a thought, not a sermon.

Can I really buy?

2010-12-09T06:29:00.000-08:00

If you are currently renting, maybe you shouldn't be. Everyone buys real estate. You can either buy it and own it for yourself, or if you are renting, you are buying it for someone else.

Consider this: if you are paying (for example) $1,200/mo in rent for your 2br, 2ba apartment or townhouse you can probably own a nice place for the same money. And it's yours!

That $1,200/mo rent probably equates to the same payment you would have on a $175,000 home! Interest rates are at all time lows. Today I see you can get a mortgage for around 4.5%. Of course this depends on your credit, but for the sake of argument, let's assume credit is good.

Here's how the numbers breakdown:
- A $175,000 home at 4.5% means that your payment to the bank for principal and interest would be about $897/mo.
- You have to pay property taxes (which you don't when you rent). Assume they are $2,000/yr. $2,000/12 = $167/mo.
- You have to pay home owners insurance to cover the home in case of fire, etc. That's probably around $44/mo. You are probably paying some of this now for your renters insurance.
- You have to pay mortgage insurance to the bank if you get an FHA loan (everyone gets FHA loans today because you only have to put 3.5% down). That's about $74/mo.
So, total monthly payment to own is $1,182!

When you are ready to move, you'll get money back (you won't renting!).

Just food for thought... why rent?

The Condo Problem/Opportunity

2010-12-01T17:17:00.000-08:00

Condos, Condos, Condos... not too long ago, FHA (where most people these days are getting their loans) said that if more than 15% of a condo development is delinquent on condo fees FHA will not lend any money for mortgages in that development.

In today's economy, where people are losing work and investments are losing value, there are a lot of people using their money for things other than condo fees (like food, clothing, etc). That 15% delinquency is getting worse in lots of condo developments.

Then Fannie Mae and Freddie Mac made the same rule for their CONVENTIONAL loans. Delinquency rate over 15%... NO LOANS.

What's that mean? It means condos won't get sold because buyers can’t get a mortgage to buy them. Period.

Sellers still need to sell. So they lower the prices to fire sale pricing to attract cash buyers. That’s why prices are SOOOOO low for condos. Condos that were selling for $200k a few years ago and listed for <$100k now and still not selling (no mortgages!). My Doctor told me today that units in his development that sold for $300k 2 years ago (for 3,000sqft units) are listed for <$50k now. Sellers are trying to attract cash buyers. But… cash buyers won't buy condos because they cant sell them.

That's the problem. The opportunity is: When the condo problem is fixed and people can buy condos again, prices will go back up.

Prices are low now because there is no (buyer) demand. Once the problem is fixed and the demand is restored, prices will go up.

If you can wait for the condo problem to be fixed (who knows how or when it’s going to be fixed) you can get a condo at FIRE SALE prices now. What if you bought one at today's 40-50cents on the dollar and rented it until the problem is fixed and then sold it when prices were zooming back up? Good idea? who knows, but an idea just the same.

when it's time to move... move

2010-07-14T05:46:00.000-07:00

this week is an advice column...

when you've decided that it's time to move, it probably will be for reasons other than to make money selling your house. It might be to move your kids into a new school district, buy a bigger house so your family is more comfortable, buy a smaller house because your kids are grown or whatever the reason, it will be a "life reason"

You've made the decision to move. Price your house so that you get what you need and be done with it. Don't price it high to "test the market" and plan to lower it. Go out with both guns blazing, set a fair price, sell your house and move on/up!

I see, too often, people that can't move because they tried to get too much for their house, "tested" the market with a high price, lowered it after a few weeks but the market had fallen out from under them. Now they can't get what they need and they are stuck in the house that is in the wrong school district, or too small or too big.

If you are moving for the money that's one thing. If your reasons are anything else,
-- PRICE YOUR HOUSE TO SELL RIGHT AWAY,
-- PRICE IT AT A FIRM PRICE AND DON'T BUILD IN NEGOTIATION BUFFERS,

Don't be stuck where you are.

Week in review

2010-06-04T05:57:00.000-07:00

It's been a busy week. Why?

- Rates are super low. Depending on your credit (and other factors) rates can be as low as the high 4's.

- Inventory is high. There are a lot of houses on the market and more coming on quickly. There are a lot of houses still on the market that are over-priced or in poor condition but the nice ones that are priced right are selling!

- Home prices continue to decline. Bad news for sellers but good news for the market in general. Prices are coming back to where they should be. That will be good for the market as buyers see value and buy. Prices will come back when inventory is lower (high inventory = low prices, low inventory = high prices)

Buying in a fast(er) paced market

2010-06-04T05:45:00.000-07:00

I have seen too many times lately, a buyer who loves a house and then looses it to someone else while they try to make up their minds.

In a market where more and more people are competing for a smaller and smaller number of (nice) houses, the early bird gets the worm. Meaning, you have to be prepared, as a buyer, to act when you find the home of your dreams.

Buying a house is a BIG step. I understand. When you (a buyer) find a house you like, in a area that you like for a price you like... make and offer! As a Realtor, it's part of my responsibility to help point out potential "gotchas" and to make sure that the contracts are structured so that you are not forced into buying a home that has problems.

For example:
- You'll get a home inspection (and septic, well, water quality, radon, etc). Those experts will tell you if there are problems. If the problems are workable, we'll ask the seller to correct. If not, you'll be able to back out and move on. Each transaction can be different so I'll make sure you understand what you are getting into.

- In Maryland, we use a contract that has a financing contingency, meaning that if you are unable to get a loan, you won't be forced into buying the house.

When you find a nice house at a nice price, you should know that other people are also going to recognize the value. Make a decision and then we'll let the expert inspectors confirm that you have made the right choice.

2010-03-01T04:55:00.000-08:00

Things are picking up! Twice last week I had foreclosures sell before my buyers could make up their minds. Of course, it's always best to do your due dilegence but don't wait long in a warming market!

seller decisions...

2010-02-21T07:17:00.000-08:00

Sometimes in today's Real Estate market, your only offer is your best offer. Problem is that we don't have a crystal ball to see into the future. Take for example a (fictional) house that in Sept was listed for $325k and had an offer for $310k. Too low for the sellers. Now, in Feb it's getting offers for $285k... So, we'll wait for the market to come back, sellers say...

Now I'm not an expert but the research I can find on the Internet says that since the 1890's real estate has appreciated at roughly 3%-4% per year. There have been decades where appreciation has been 8%-10% and decades where it has had negative growth. So, assume 4% a year. It will take the seller above ~5-6 years to get back to where they were a few months ago.

With another wave of foreclosures looming, a tough job market, fears of higher interest rates and inflation I don't think prices are going to go up soon.

Tough decisions for any seller...

2010-02-17T04:19:00.001-08:00

Seems like we are finally digging out of the snow! Good thing too (real estate wise) because there is a lot of pent up demand, lots of good incentives to buy and the banks are helping (go figure, low rates...)

Anyway, the IRS tax credit for first time home buyers ($8,000) and repeat buyers ($6,500) is expiring in April. You can get it if you have a house under contract by April 30, 2010. There are other rules (see www.irs.gov) but that is the main one.

It's open house season too! Some agents don't like them but I LOVE 'em.

Come see 1616 Brimfield Ct Eldersburg MD 21784 (4br, 2.5ba, colonial, .3 acres, backs to woods, sweet, $323,500) on Sat Feb 20 from noon to 2

Come see 808 Weeping Cherry Ct Eldersburg MD 21784 (5br, 3.5ba, huge 5,000sqft colonial, .25acres, amazing! $600,000) on Sunday Feb 21 from noon to 2.

Mark Davis, over and out!

2010-01-23T04:32:00.000-08:00

I was going to run with the Charm City Run group this morning. Supposed to do 14 miles as part of my training for my first marathon (frederick). But we have a showing on one of my nicest listings (808 Weeping Cherry in Eldersburg MD) that I want to be there for. So, duty calls.

Then I follow with showings in Halethorpe, Columbia and Laurel. The market really seems to be picking up!

back in the saddle

2010-01-22T12:02:00.000-08:00

Where to start... 2009 was a wonderful year to help people get into the homes of their dreams (or out of the homes that were not dreams...). Thank you to all who trusted me with the roof over their heads!

Each day I'll be updating this blog with thoughts, links to info, new listings and all other things real estate.

I'll also be posting what I am up to.

Happy 2010~

Distressed Property Certified!

2009-04-03T06:11:00.000-07:00

I passed the CDPE exam so now I am Distressed Property Certified. What's that mean? It's specialized training and certification to help people that are in danger with their mortgages. From helping to re-negotiate terms to negotiating with a lender to sell a house for less than what's owed.

I'm partnering with a legal team and an accounting team so that when you call for help, we can offer the expertise to help. More on that later.

As more and more people lose jobs, have mortgages that are adjusting to crazy monthly payments or have events in their lives that affect their ability to make the mortgage payments, I want to help.

We are all neighbors on this planet.

Short Sales

2009-03-24T05:46:00.000-07:00

I see more and more people that owe more than their house is worth and want to consider a short sale. Short sale is negotation with the mortgage holders so that you can sell your house for less than you owe.

The most important consideration (for the bank) is that you must have a verifiable hardship. Something that is having a negitive effect on your ability to pay your mortgage. Loss of a job and a death in the family are both frequent hardships. The mortgage holder will want verification of the events impact on your finances.

There are other equally important considerations in the short sale negotiation. Call me @ 410.596.2273 and we can discuss your options.

At the end of the day, if you have a verifiable hardship (among other things) and are having trouble with your mortgage payment a short sale might be an option. There are others too!

Radon in Maryland

2009-03-24T05:44:00.000-07:00

Wow, this stuff is all over in our part of Maryland (Carroll County). I saw my highest reading last week of 274 and it took 2 fans and a lot of work from the radon guy to get it corrected. Take a look at www.epa.gov for more information on Radon.

If you are thinking of buying or selling, make sure your Realtor (if it's me it'll be done) gets your homes tested for Radon.

back from Las Vegas convention

2009-03-16T05:53:00.001-07:00

I am back from the Re/Max convention in Las Vegas. Got a lot of good information but the best was getting started on CDPE certification. It's Certified Distressed Property Expert and is for Realtors specializing in helping homeowners avoid foreclosure. Should have the test passed this week and certification in hand.

It was interesting to learn that 4 in 10 of us are behind on our mortgages. Even more interesting that in 70% of foreclosures, the homeowner never reached out for help. Turns out that there are a lot of options from working with the mortgage company to selling the property. Even if a homeowner is upside down on their mortgage, there are ways a QUALIFIED realtor can help.

I have personally been involved in short sales (a homeowner selling their home for less than what is owed) and I am here to testify that a lot of agents don't know how to navigate this process successfully. Trust your future to someone that knows what they are doing!

More on this topic in future posts. Take care!

Carroll County Maryland Real Estate

2009-01-16T12:31:00.000-08:00

Well, here we are in the new year and there is indeed a lot of activity with Carroll County MD homes for sale! Buyers are able to drive harder bargains than ever before and sellers are more receptive to them than ever before. It's a "make an offer" environment!

welcome

2008-09-24T12:10:00.000-07:00

hello everyone and welcome to my blog. I'll be focused on Carroll County real estate but have opinions and observations about central Maryland real estate as well.