Taxation | Bay Area Real Estate Finance

California Home Buyer Tax Credits – New Construction AND First Time Buyer – DETAILS

Tax Credit Reference Sheet
California Assembly Bill 183

Background

Part of the Governor’s big Jobs Initiative. This is his #1 priority. Credit for new construction stimulates job creation/preservation, and credit for first time buyers stimulates homeownership.
Total Availability of funds is $100 Million for new construction AND $100 Million for first-time buyers

Terms

Lesser of 5% or $10,000k (200k min purchase to maximize claim)
Must enter contract between May 1-Dec 31 2010
Credit is received over 3 years, equal installments

Eligibility

Purchase new construction property OR
Purchase existing property as a first-time buyer
1. First Time Buyer is still defined as having not owned residence for the three years preceding purchase
If married, filing separately, split allocations
If unmarried, purchasing together, split according to ownership stake in property

Restrictions

No income restrictions
Cannot be a dependent on somebody else’s tax filing
Cannot purchase from a relative *
Cannot be under the age of 18
Cannot have received CA home buyer tax credit from 2009
2 year recapture
If first time-buyer AND new const – new const allocation overrides

Procedures

Reserve credit by contacting Franchise Tax Board with notice that a contract has been signed (not required)
Follow-up with FTB within 2 weeks of closing with:
1. Settlement statement and cert by seller of non-occupancy (new const)
2. Settlement statement and cert by buyer that they are first time buyer

If you have questions about how this might affect your plans to buy or sell a home in California, please email me

* Internal Revenue Code for Family (IRC 267 section (c)(4):
(4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants

*** Please consult with your tax professional for advice specific to your situation!

Stevie Ray Vaughan Called; He Wants His Social Security Back

According to The Tax Foundation for 2007 (most recent data):

the top 1% of tax filers paid 40.4% of all Federal taxes (up from 39.9%)
the top 1% of tax filers made 22.8% of total reported adjusted gross income
$410,100 income required to be considered top 1%
top 5% paid 60.6% of all Federal taxes on 37.4% of adjusted gross income
$160,000 income required to be considered top 5%
top 10% paid 71.2% on 48% of all income
$113,000 to be in the top 10%
bottom 50% of all filers paid 2.9% of the total income tax bill

UPDATE: Proposed Changes to Tax Credit, Conforming Limits

Republican amendments to the current stimulus package up for vote later today include:

-Restoring the $729,750 loan limits in some areas

-Temporarily offer homebuyers a tax credit worth $15,000 or 10% of a home’s purchase price, whichever is less, with the option to utilize all in one year or spread out over two years. The credit does not have to be paid back. It would be available to all purchases of any home from date of enactment for one full year – no longer just a first time homebuyer credit, and borrowers would be able to claim the credit against the 2008 tax return.

-Other details:

buyers must occupy the home for two years as their principle residence
includes a two year recapture provision (if they leave the home in two years they lost the credit)
purchases of homes by investors are ineligible

The bill is still working its way through Congress, and the House of Representatives must still negotiate with the Senate since the House bill does not contain the credit.

Proposed Changes to Homebuyer Tax Credit, Conforming Limits

Rumors are going around about the following ideas, supposedly on the table for legislative discussion:

First Time Buyer Tax Credit Change:
Currently, the credit is up to $7500 for qualified first time buyers, and the funds are expected to be repaid at the rate of $500 per year for the ensuing 15 years.

Proposed changes are for increasing the credit to $14,000, and also to make it forgivable. In other words, no requirement to be repaid. Ever.

That is a significant change, and would represent a MAJOR incentive to enter the market.

Conforming Loan Limits:
Currently, the limit is 417k nationally, and in some high cost areas, it can be as high as 625,500. All 9 Bay Area counties are currently at 625,500. During 2008, the ceiling was higher – 729,750, but the “temporary” classification caused the lenders, who still operate in a free market world, to have almost zero interest. It didn’t really work. The 625,500 level was more conservative, but permanent. It has helped, but not quite as well as intended.

Proposed changes would reinstate the ceiling at 729,750 for qualified California property, or, according to one source, raise the ceiling to ~$932,000 for qualified California property.

Also potentially significant change, unlocking many borrowers with high outstanding loan balances on expensive property. No way of knowing if lenders will have an appetite for these deals or not, but it’s something to keep an eye on…

What If You Could Set Your Own Tax Assessment Value?

Here in California, Prop 13 puts limits on periodic tax assessments, but in many other states the values change up and down with the county assessor’s opinion of the value of the property. There is an inherent conflict here where the county wants maximum tax revenue, and homeowners don’t want to have to deal with a bureaucratic protest every year when their tax bill feels like an insult.

Paul Kasriel recalls a concept for a solution to this conflict, as discussed by a former Fed official, and how it might relate to current challenges we are facing with “fixing” the economy. Specifically, he is looking at the “bad bank” concept currently being mulled over, and how current banks and the bad bank would theoretically agree on a value for the “bad assets”.

But backing up a step, I found the basis for the analogy more interesting. The self-assessment theory works as follows:

Let the owner of the real estate place the value on his property.
The taxing authority has the right to purchase the property at the owner-decided value.

Owners are deterred from placing too low a value on their properties, and no incentive to place too high a value on their properties. An efficient system for maximizing and fairly taxing the property in the county. The alternative, which is related to the cringing sounds you hear from economists watching government regulation, intervention, and inter-mediation in this broken-down marketplace, is one where there are more rules, regulations, loopholes and inconsistencies.

It’s a very thought-provoking piece. 2 pages of your time…

Planning To Walk Away?

I wrote about an interesting trend/website a while back, and noticed this comment on a legal blog post. Even though the economic stimulus package included a provision for tax protection in cases of debt forgiveness, it appears that at the state level there still may be some exposure. Just as Julia says here, consult a tax professional for more details, especially if you are considering what happens when You Walk Away.

1031 Exchange Sees 180 Day Rule Challenged

If you have ever dealt with a 1031 Exchange, you are familiar with the 180 day term. If you have not, the basic gist is as follows:

A person selling real estate can roll over the proceeds into a new like-kind investment and defer taxation on the gain, but the replacement property needs to be identified within 45 days of sale, and the investor needs to take ownership of the new property within 180 days after the sale.

The Mortgage Meltdown/Credit Crisis/Credit Crunch/Subprime Meltdown/whatever you want to call it has officially sucked the 1031 market into its vortex, and according to the 10/19/07 Kiplinger Tax Letter, the IRS is considering soft enforcement of this 180 day rule. 1031 Exchanges involve an ‘intermediary’ to handle the exchange, and because so many of these entities have gone into bankruptcy, the cash involved in the exchanges has been tied up in court, hampering the ability of the investors to settle within 180 days.

In previous cases where an intermediary caused such a delay, the IRS claimed they were powerless to extend the deadline. This current attitude may be reflective of a ‘bail-out’ friendly attitude in various parts of our government.

Please consult your tax advisor for more specifics, or contact me if you need a referral to one.

Income Taxes Of The Rich And Famous (redux)

2005’s tax analysis is in! You can read the summary from the 2004 figures here for a comparison.

The top 1% of filers paid 39.4% of all income taxes on 21.% of total adjusted gross income
Minimum income needed to be in the top 1% of filers: $364,000 (AGI)
The top 5% of filers paid 59.7% of all income taxes on 36% of total AGI
Minimum income needed to be in the top 5% of filers: $145,300
The top 10% of filers paid 70% of all income taxes on 46% of total AGI
Minimum income needed to be in the top 10% of filers: $103,900
Bottom 50% of filers shouldered 3.1% of total income tax

Today is Super Tuesday. Who did you vote for?

Let me know if you need some ideas about how mortgage planning can lead you to a more tax efficient balance sheet.

Mortgage Relief Act HR 3648 Update From CMPS

Update # 1 – Mortgage Relief Passed by Congress & Signed Into Law by the President!

On Thursday, December 20th, President Bush signed into law a bill passed by Congress: HR 3648 –Mortgage Forgiveness Debt Relief Act of 2007. The three major points are:

· Elimination of the “phantom tax” on foreclosures, short sales or other discharges of debt on a primary residence. Consider this scenario: A property is worth $250,000, and the mortgage balance is $300,000. Under the old rules, if a lender forgave the $50k difference as part of a foreclosure, short sale, refinance or loan modification, the borrower had to claim the $50k as income and pay federal income taxes on that amount. The new law eliminates this “phantom tax”, and the forgiven debt is no longer treated as taxable income to the borrower as long as certain requirements are met, such as the discharged mortgage balance must be on the taxpayer’s principal residence.

· The tax deduction for mortgage insurance premiums is now extended until December 31, 2010 instead of expiring at the end of 2007. The same rules apply as before in terms of the income limitations etc.

· The capital gains exclusion is now $500,000 instead of $250,000 for an unmarried individual who sells their primary residence within 2 years of the time their spouse has died. This new guideline applies to sales after December 31, 2007, and provides relief for widows and widowers by giving them a 2 year window from the time their spouse has died to sell their home and receive the $500,000 exclusion. Of course, the same rules apply as before, where the individual(s) need to have lived in the home as their primary residence for 2 out of the last 5 years.

You can read the full version of the bill by visiting the THOMAS Library of Congress web site and searching for HR 3648. Version # 6 (the enrolled / ENR version) is the final version that was passed by both the House and Senate.

Update # 2 – AMT Relief Passed by Congress

After much drama and a few rounds of chicken between the House and Senate, Congress FINALLY passed AMT relief on Wednesday, December 19. The President has indicated a strong willingness to sign this bill into law, and it is currently awaiting his signature. Under this one year patch, approx. 20 million taxpayers have escaped the clutches of the AMT. However, approx. 3.5 million taxpayers are still expected to be subject to the AMT.

If you have questions related to any of these updates, consult with your tax advisor or contact me for more info.

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*** Posted with help from CMPS Institute

Government Taking Steps To Ease The Bubble Burst

On the docket in the US Senate right now is a piece of legislation designed to help take some of the sting out of the current burn many are experiencing in the housing arena. With lending standards being raised so suddenly, and values starting to come down on a national level, there is increasing concern of a snowball effect from the segment of homeowners who cannot re-qualify for a mortgage to replace the one they currently have. Problems arise when the homeowner’s loan terms change for the worse, and they cannot sell the home or refinance the debt. Stuck between a rising payment and a hard place (to sell)…

This proposal just passed the House with 89% approval. There are three points of significance. To understand the first point, it helps to understand the “Phantom Tax”. Phantom Tax is a cost incurred by somebody who has a debt that is forgiven. If a borrower owes 250k on a home, but the home is worth only 200k, and that borrower agrees into a Short Sale of the home for 200k, the borrower is receiving a benefit of 50k in forgiven debt. The IRS views this as income, and taxes the borrower accordingly… This legislation currently before the Senate seeks to eliminate this tax. Its a huge gift to homeowners caught upside-down in housing.

The legislation also calls for an extension of the mortgage insurance deduction through 2014. It is otherwise set to expire at the end of the year, making mortgage interest non-deductible to all filers.

On the other side of the equation, there needs to be a way for Uncle Sam to make up for these expected short-falls in tax revenue. So the legislation also changes the current homeowner exemption rules. Currently, the tax law allows you to live in a second home as a primary home for 2 of the last 5 years, and then take the $250k capital gains exclusion ($500k for married couples). The proposed change would require filers to pro-rate the number of years that you have lived there as your primary home when taking the exemption. For example, if you have owned the home for 4 years, but lived there for 2 as a primary home, you would only get 50% of the exclusion. There is a grandfathering provision, but it will affect anyone selling a 2nd home eligible for this exclusion for sales beginning in 2008.

If you have questions about any of this, please consult with your tax advisor, or refer to the official language in the legislation for interpretation.