Category Archives: Tax Issues

Getting a Mortgage During the Shutdown? Expect Delays

This isn’t speculation anymore. I talked to an excited new homebuyer just yesterday, whose offer had been accepted from among multiple bids on a home in Berkeley, but whose mortgage broker had warned him that the closing could be delayed.

IRS wall_0Why? Because the lender will need to get his tax transcript from the IRS, and as part of the federal government shutdown, the IRS tax-transcript department has been furloughed. Even if the entire IRS were to reopen tomorrow, chances are their inboxes are already overflowing with backed-up requests.

So now, our new homebuyer waits. And he’s not even applying for a loan that specifically involves approval by the federal government, such as a FHA loan, USDA loan, or VA loan.

Fortunately, most every standard home purchase contract in California is written with a contract contingency stating that if the buyer can’t get a mortgage, he doesn’t have to go through with the sale. Unfortunately, the homebuyer is expected to take care of this and remove the financing contingency by a date even earlier than the closing, or face the possibility of the deal falling through.

In unusual circumstances such as these, however, it’s worth remembering that contracts are nothing more than an expression of the mutual interests of the parties involved. In this case, I would think both seller and buyer would be amenable to negotiating a delay of the contingency and closing dates so that the sale can go through as planned, and everyone can get back to watching CNN to find out when the folks in Washington, DC are going to end this nonsensensical shutdown.

Will This Be Your Year for Home Improvements?

No points for originality will be awarded to anyone currently thinking, “Gee, we can’t afford to move, so let’s remodel or add on to this place.” The amount of spending on such projects is set to double in 2013, according to a report from Harvard University’s Joint Center for Housing Studies. Homeowners are doing everything from retrofitting with the idea of aging in place to improving their homes’ energy efficiency. And some recent homebuyers or investors are finding that the distressed properties they now own will require some improvements, like it or not.

So, apart from their lack of originality, might home renovations be a good idea for you? Here are some issues to consider:

  • How will you pay for repairs? If you’ve got cash on hand, great. If you’ll be looking for a loan, and are underwater on your current mortgage, don’t bother. You will need equity to borrow against — 25-35% equity in your home, according to what Mark Yecies, an owner of SunQuest Funding in New Jersey, told The New York Times reporter Lisa Prevost.
  • Will the changes increase your home’s  market value? In the abstract, any home improvement should make your house more saleable, unless it’s truly weird, wacky, or suited to unique tastes and interests. But even sensible repairs with broad appeal don’t always cover their own costs when the homeowner sells, as described in Nolo’s article, “Do Home Improvements Add Value?
  • Will the costs reduce your capital gains tax bill when you sell? If your profits on an eventual home sale will take you over the $250,000 ($500,000 per couple) capital gains tax exclusion, it’s worth figuring out which of your renovations costs are considered “improvements” rather than mere “repairs,” and therefore which ones will raise your cost basis in the property (in effect, raise your purchase price and thereby reduce your profit). For more information, see IRS Publication 551, Basis of Assets, and look for the section on real property.

If all looks good, it’s time to start looking for a contractor. But get ready for some competition and possibly long waits. See “Hiring a Contractor for Home Improvements” for additional tips.


How the Fiscal Cliff Deal Helps Homeowners

The fiscal cliff deal (“H.R. 8”) reached on January 1, 2013 contains a couple of beneficial provisions for homeowners — tax-relief extensions that aren’t getting as much press as the rest of the bill. These include:

  • Extension of mortgage debt relief. A piece of the tax code that was due to expire at the end of 2012 allows homeowners whose mortgage debt was canceled or forgiven to exclude that amount from their income (up to a limit of $2 million or $1 million if married filing separately). If that doesn’t sound very exciting, realize that before 2007, homeowners who restructured their mortgages, gave the lender a deed in lieu of foreclosure, sold via a short sale, or in some other way discharged their obligation to their lender without paying the full loan amount were required to pay taxes on the difference. In other words, the amount of their debt that the lender had forgiven was considered taxable income, as if they had been handed that amount by the lender. The extension of this provision goes through tax year 2013.
  • Extension of PMI deduction. Homeowners paying less than 20% down are typically asked by their lender to pay “private mortgage insurance,” or PMI, which reimburses the lender if the homeowner can’t make the regular mortgage payments. PMI premiums were, from 2007 through 2011, deductible as “qualified residence interest” (like the rest of your mortgage interest). This deduction has been extended both retroactively (to cover 2012) and through 2013.  The deduction is phased out by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) is over $100,000. Thus, you can’t use the deduction if your AGI exceeds $110,000.
  • Extension of credit for energy-efficient home improvements. This one’s not likely to save you huge bucks, but Congress reinstated and extended through 2013 a 10% tax credit (under Section 25C of the Tax Code) for the cost of energy-efficient improvements to existing homes. This applies to such home features as windows, doors, skylights, fans, insulation, furnaces, and hot water heaters. Additional limits apply per item, and there’s a $500 overall limit for use of this credit.

See Nolo’s articles on “Finances and Taxes for Homeowners” for more information.

Lower Home Values Aren’t Translating Into Lower Property Taxes

Property tax bills were never tied precisely to the market. Because they are usually calculated as a portion of the home’s value, and allowed to rise at only a certain percentage per year, many homeowners’ property values still have not caught up to their home’s value of several years ago — which may, despite recent drops, still be higher than the current value.

But as Alyssa Abkowitz reveals in the February issue of SmartMoney magazine, there’s a new reason that you aren’t likely to see your property tax bill go down this year — even if you take the time to file an appeal. (See “Reassessing Property Taxes.”) County tax assessors are apparently looking for ways to keep the assessments (and therefore tax revenues) high. They are taking advantage of the very slowness of the market and lack of sales to say, in effect, “Gee, we don’t see any recent comparables that show your house has dropped in value.”

What’s more, says Abkowitz, homeowners are complaining that tax assessors’ offices are making the appeal process difficult to navigate, for example by forcing homeowners to file online appeals with fill-in-the-box spaces that don’t allow for a full explanation of your argument.

This article struck a chord with me. I had considered filing an appeal to my own property tax assessment this year, having observed home prices dropping and homes sitting unsold all around my neighborhood. But after spending hours poring over the actual comparable sales, I sadly concluded that I didn’t have anything close to a slam-dunk argument for reducing my bill. Maybe next year?