While a principal residence and a second home have some similar benefits, they have some major differences. A principal residence is the primary home where you live and a second home is used for personal enjoyment while limiting possible rental activity to a maximum of 14 days per year.

The Mortgage Interest Deduction allows a taxpayer to deduct the qualified interest and property taxes on a principal residence and a second home. The interest is limited to a maximum of $1,000,000 combined acquisition debt and a combined $100,000 home equity debt for both the first and second homes.

The gain on a principal residence has a significant exclusion for taxpayers meeting the requirements. The gains on second homes must be recognized when sold. Even if you sell a smaller second home and invest all of the proceeds into a larger second home, you’ll need to pay tax on the gain.

Tax-deferred exchanges are not allowed for properties having personal use including second homes.

If the home is owned for more than 12 months, the gain is taxed at the long-term capital gains rate. If the home is owned for less than 12 months, the gain is taxed as ordinary income which would be a considerably higher rate.

The article is intended for informational purposes. Advice from a tax professional for your specific situation should be obtained prior to making a decision that can have tax implications.


If I’d Only Bought

June 18, 2012

We’ve probably all said or at least thought “if I knew then, what I know now, I would have done things differently.” We should have stayed in school longer. We should have listened to our parents. We should have bought Apple stock in 2002 for $8.50 or gold in 2000 for $300.

Years from now, if we look back at 2012, it may be clear that this was the best buyer’s market ever. The prices are down nationwide 35-40% from four years ago, mortgage rates have never been this low and rents are rising. Few homes have been built in recent years to keep up with a growing population. There may never be a better time to buy homes than now.

The housing affordability index which is considered to be good at 100 has increased to over 200 for several months. Shrinking inventories and rising prices in some markets are causing the index to fall for the first time in years.

This ‘buying” opportunity applies equally to acquiring a home to live in or to rent as income property. It is estimated that about one-third of the homes purchased last year were done by investors. It is reasonalbe because the positive cash flows far exceed most other investment alternatives.

The question we’re all faced with this year is whether we’ll be saying we seized or missed an opportunity of a lifetime.

Happy Father’s Day

June 17, 2012

We enjoyed a day with my parents and much of my family yesterday to celebrate our dad.  He has 4 children, 4 in-laws, 8 grand children, 8 great grandchildren and more on the way.  We almost lost him about 12 years ago with a brain aneurism.  I remember seeing him so helpless and frail in that Atlanta hospital with the doctor telling us he may not make it and if he did, most likely he would be completely dependent on full time care.  What progress he has made.  The average person would never know he had been so gravely ill.  He’s not as sharp as he used to be, but he’s still very much my dad.  He remembers events from long ago, but does have the occasional confusion as to which grandchild goes with which child.  My dad loves his family and depends on my mom heavily.  They’ve been married 57 years.  We talk about where they will live when they are unable to care for themselves.  My sister and her husband cared for my his mother and uncle years ago.  Even building a home to accommodate all of them including their children.  There seems to be a trend towards families supporting each other with homes that can host aging parents and/or grown children moving back.  Our 27 year old daughter moved back home 3 years ago to finish college.  What we thought would be a roughly 2 year process will certainly be at least a 4 year term.  Hopefully she will find work and be able to have a home of her own.  I’m happy we’ve been able to assist her in our small garden home even though it’s been a challenge in small quarters.  Personalities, privacy, parking places and finances can be just a few of the obstacles that can make or break combined family homes.  I’m hearing “empty nester” far fewer times now as I help folks find new homes and I have several friends that have parents living with them or planning for that inevitable day. I do look forward to the day that it’s just my husband and I together alone.  Coming up on 32 years of marriage, it will be worth the wait. 

Gift or Inherit

June 11, 2012

Transferring the title of a home from one person to another may seem simple but it could have a significant tax implication.

When a person inherits property, the basis is “stepped-up” to fair market value at the time of the decedent’s death. On the other hand, a gift has a carry-over basis which means that the recipient receives the unrealized gain also.

As an example, let’s say an elderly parent, in an attempt to get their affairs in order, gives their home to their adult child. The rationale might be that they are the sole beneficiary and will get the property eventually. In an effort to settle things early, unnecessary income tax may be incurred.

If the home was purchased for $20,000 and worth $100,000 at the time of transfer, there is a possible gain of $80,000. However, if the adult child inherited the property at the time of the parent’s death, their new basis would be $100,000 or the fair market value at the time of death and the possible gain would be zero.

This is meant to be an example and many other variables could be involved. If you’re concerned about a situation, you should seek specific advice from a tax professional. As always, I’m here to help you I can as your real estate professional.

Assumption Opportunity

June 4, 2012

The low interest rates secured by borrowers recently on FHA mortgages may become valuable in a different way in the future. FHA and VA mortgage are assumable at the existing interest rates subject to buyer qualification.

Buyers wanting to assume an existing FHA mortgage must be owner-occupants and meet the current FHA guidelines. Applicants should have a minimum 600 credit score, total debt with house payment to be assumed not to exceed 41% of their monthly gross income and meet other standard income, credit and qualifying requirements.

The benefits are not only assuming a lower interest rate resulting in lower payments but the closing costs on an assumption are much less than originating a new loan. The fact that the mortgage is already into an amortization schedule and that lower interest rate loans amortize faster than higher interest rate loans make it build equity faster than a new mortgage.

When interest rates eventually rise, assumptions will provide an opportunity for buyers to lower their cost of housing significantly while improving their wealth positions.

Golf anyone?

June 2, 2012

So I participated in my 3rd time ever playing golf this week in a scramble.  Friends and overcast weather treated me to a nice relaxing afternoon socializing with folks in my industry.  I’ve heard families who play together, stay together.  Since my 2nd family are those that I work with, we have a great time playing whether it be golf, luncheons, conferences, conventions, CE classes, picnics, baseball games and other social events.  Now golf is an odd game.  I always looked at it rather puzzled why anyone would consider it a sport much less physically challenging.  After playing some and even taking lessons recently it became apparent to me that there is skill involved and if you have a bad back already, you hurt like all get out when you’re done.  I looked up some fun facts about golf.

  • Originally golf balls were stuffed with feathers. The tighter packed the feathers, the further the ball would fly. This type of ball was used until 1848.
  • Golf was banned in Scotland from 1457 to 1502 to ensure citizens wouldn’t waste time when preparing for the English invasion.
  • Between 1990 and 2003, developers built more than 3,000 new golf courses in the United States, bringing the total to about 16,000.
  • There are 336 dimples on a regulation golf ball. A dimpled golf ball can travel up to four times farther than smooth-surfaced golf balls.
  • The term birdie comes from an American named Ab Smith. While playing in 1899, he played what he descried as a “bird of a shot”, which became “birdie” over time.
  • Tiger Woods made his first ace at the age of eight years old
  • When golf was first played professionally there were only 13 rules. Now there are 34.
  • There are currently 2 golf balls sitting on the moon.
  • About 25% of golfers are women.
  • The world’s highest golf course is the Tactu Golf Club in Morococha, Peru, which sits 14,335 feet above sea level at its lowest point.
  • The odds of making a hole-in-one are 3,000 to 1 for a tour pro, 5,000 to 1 for a low-handicapper and 12,000 to 1 for an average player. (According to a study by Golf Digest in 2000)
  • The youngest player to score a hole-in-one was Jake Paine in 2001; he was 3 and aced a 65-yard hole in Lake, Forest California.
  • 1947 was the first televised golfing event at the U.S. Open in St. Louis.
  • The most expensive course to play a round of golf at is Shadow Creek in Las Vegas, Nevada with a price tag of $500 per round.

I now understand the game, sort of, and the fascination with it.  Perhaps I will take more lessons and practice, but will not be jumping up to participate in a very serious game any time soon.

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