Real Estate Tax Issues, Post Election

Whatever your position on the recent elections, now that they have been decided, there will be consequences concerning real estate tax issues.

First, there has been much confusion and discussion about a 3.8% real estate tax included in Obama Care. Now that President Obama has been re-elected, Obama Care is a certainty. With that said, there is a 3.8% tax in the bill and, while it is not specific to real estate, it does affect certain real estate transactions. The tax will affect only higher income demographics and will apply only for significant capital gains. (See prior entries for more specifics on this tax.)

Along with the tax described above, it is likely that new revenue will be required to avoid the fiscal cliff that is to occur by year's end if the government does not act. There are several revenue/tax options on the table which could affect many of you. Depending on your circumstance, you may want to let your elected officials know where you stand.

The mortgage interest deduction is likely in play and should be the most concerning to anyone who owns their primary residence and has a mortgage on the property. As interest is front-loaded on mortgages, the newer the mortgage you have, the greater advantage you receive from the deduction. While the deduction will likely remain, there is a good chance it will be reduced.

Similar to the 3.8% tax mentioned above, there is a capital gains exemption on your primary residence which is based on income levels and amount of gain. This exemption may also be modified or eliminated.

For anyone involved in a short sale, under tax law, the forgiveness of debt creates a taxable event and is considered income. Under current law, there is an exception for mortgage debt forgiveness relating to short sales. However, this exception is due to expire (I believe at the end of the year), so it is incumbent upon anyone engaged in a short sale to determine whether the exception will be in place at the time of your closing.

These are just a few financial issues to consider relating to the the sale of property.

Please keep in mind that I am not an accountant, tax attorney, or financial planner. This information is cursory in nature and anyone concerned with the issues mentioned above needs to consult an expert for details.

Declining Inventory Could Skew Annual Trends

Over the past few weeks, the data points with respect to housing in general have been fairly consistent. Prices are stabilizing and, in some areas, increasing slightly. Homes are selling closer to their asking prices and are requiring fewer days on the market in order to sell. The above has resulted in a dearth of inventory, which leads me to my point...


Since the market decline which began in 2006, as a general proposition there has been a glut of inventory. Given annual cycles, many sellers chose to take their properties off the market during this time of year as the summer months are typically a slow time for buyer activity in the Northeast. However, this may be a year to buck this trend.


I have personally seen a lack of inventory of quality properties, particularly in the more affluent areas and at price points which would cater to upper-middle class income buyers.  My suggestion is that anyone looking to sell should take the pulse of his or her local market (I recommend doing so here) and not necessarily assume that the next month will be the "slow season". If there is no or little inventory comparable to your property, a contrarian play may be the way to go this year!


As an aside, real estate professionals plan their lives around annual trends and the vast majority take advantage of this next month or so to vacation. This includes agents, lenders, brokers, appraisers and attorneys, so you may want to add an extra week's time when planning a closing date.

The 3.8% Real Estate "Medicare" Tax

Many questions and concerns have been presented to me recently by homeowners regarding a "real estate" tax included in the controversial health care bill passed by Congress in 2010. Let me start by saying that this tax, like most, is complicated. Therefore, I am not going to provide examples of how exactly the tax will be calculated, but here is some general information which may or may not belay your fears.

The tax does exist, although it is not specific to real estate, but targets "unearned income" of "high income earners". It is scheduled to take effect on January 1, 2013. The tax, however, does not apply to all real estate transactions.

Regarding one's primary residence, the capital gains exemption - of which many of you are aware - will shield a primary residence from this tax. Therefore, if the capital gain is less than $250,000 for a single person, or less than $500,000 for a married couple, the tax will not apply. Similarly, the tax does not apply to individuals with adjusted gross incomes of less than $200,000 or married couples with adjusted gross incomes of less than $250,000.

To put it another way, unless you make what the government has determined to be a lot of money and you are making what the government has determined to be a large profit on your primary residence, you need not be concerned with this tax. With that said, if you have any doubt as to whether the tax applies to you, you should consult an expert prior to making any decisions on a primary residence sale scheduled to close post-2012. (I am not a tax attorney or accountant. Do not rely on these comments as legal or tax expertise.)

As an aside, the tax may also apply to investment properties and rental income.

(Source: National Association of REALTORS, "The 3.8% Tax Real Estate Scenarios & Examples")

Civility

I continue to be impressed with the value and power of social networking. I don't think I'm that old, but I remember my dad putting aluminum foil on the rabbit ears of the television so we could better see the Hagler/Duran/Leonard fights. Time might be passing me by, but in many societies, age is revered. With age supposedly comes wisdom. This is my long-winded way of saying that we over-40s have seen a few things and may be able to add some perspective to the social media era...


This country is predicated on freedom, including freedom of speech. With that said, freedom of speech is not a mandate to share every thought one has. When you share on Facebook, Twitter, etc., you may as well place an ad on a national network. It may seem like no big deal and some may feel like they finally have a forum. True and so be it, but as often stated, with great power, comes great responsibility.


In short, don't disparage people online unless you have thought it through. Think about a bad review before you post it. Think about an endorsement before you put your name behind it.


Never has it been this easy to reach so many people and have such an immediate impact.