Fiscal Cliff Approval and Real Estate

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Real Estate Tax Provisos for 2013

 

Finally, “fiscal cliff” debate is over! For months now, it’s been impossible to turn on the TV or radio without getting an earful of breathless and mostly unwanted information.  Even though most of us now regard Congress as on a par with cockroaches, what happens there does have an impact on our lives. All the more reason for members of Congress to act like grownups, but that’s another topic…

home money

Real Estate Tax Deductions

Rushed through at the last minute, the “fiscal cliff” legislation contains a number of important provisions and none more important than those that relate to real estate.  Here are a few of the most salient.

  • Short sale taxation relief extended for another year until January 1, 2014
  • Deduction of mortgage insurance premium is retroactive to 2012 and extended to 2013 for incomes under $110,000
  • 10% tax credit [up to $500] for energy-saving home improvements retroactive to 2012 and through 2013.
  • Capital gains tax stays at 15% except for those earning over $400,000 [single filer] or $450,000 [joint] and then it’s 20%.
  • $250,000/$500,000 [single/married] exclusion on capital gain from sale of principal residence remains unchanged.
  • Estate taxes on first $5 million for individual and $10 million for family estates are ZERO.  Above those amounts, the rates are 35% and 40% respectively.

Effect of Real Estate Provisos of 2013

Given these provisos, it’s clear that real estate remains in a privileged position as far as federal taxes go. Not only do homeowners get a tax deduction  for the interest in their mortgage payments, which is unheard of in other developed countries, such as Australia and Canada, but we can deduct mortgage insurance premiums which are only applied if the equity in the home is less than 20%. By extending this tax deduction, Congress is implicitly encouraging home ownership among those who do not have the traditional 20% down payment. Is this a good thing? Considering the recent mortgage meltdown, maybe not.  It does help lenders and real estate professionals, though.

Homeowners also get to purchase equipment for their homes and then deduct some of the cost–just so long as it saves energy and fits the criteria.  Naturally, no one can argue that energy-saving is bad, but here the government supports homeowners and no one else.

Additionally, estate taxes on the first $5 or $10 million, depending, amount to nothing. This also supports homeowners since a large proportion of most estates of this size is made up of real estate holdings, both principal residence and investment properties. Again, the tax code is supporting home ownership and investment in property.

Last, but not least, the tax code encourages home ownership by not taxing any capital gain up to $250,000 or $500,000 respectively. This means that home owners can sell their homes frequently, pocket the gain or purchase a more expensive home, without worrying at all about taxes. This has been part of the tax code several decades, though the amounts have increased, and does encourage home ownership. In fact, it encourages or at least does not discourage serial home ownership.  Of course, this benefits those who change jobs and must change jobs, but it also benefits lenders and real estate professionals.

Extending the tax relief to those who short sale their homes is in a different category. So long as underwater homeowners face no tax penalties for short selling their homes,  they will usually prefer it to the foreclosure alternative. At the same time, short sales are a much faster way of  dealing with an inability or unwillingness to pay the mortgage in underwater homes.  Short sales help to clear the vast inventory of underwater property which has been clogging the system for the past few years making it difficult for the real estate industry to recover.

 

Does It Pay to Remodel? If It’s Energy-Efficient, Yes

The Energy Star logo is placed on energy-effic...
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Back in the time of the “bubble” when it was easy to get money from your equity line of credit, home construction projects made sense.  The home’s value was appreciating by the minute. Adding a few upgrades,  new kitchen cabinets here, some granite counters there, all seemed perfectly reasonable because the money spent would defintely come back to you in the form of greater value.

That was then. This is now.  Does it still make sense to remodel?  In the present real estate market, the answer is all about improving energy efficiency.  If you’re looking to become more energy-efficient, and who isn’t these days, it’s a great time. Because tucked into some of that much-ballyhooed legislation to help home buyers, are some important tax credits to help home owners make their homes more energy-efficient.

If you are serious about making your home more energy-efficient, you can now get tax credits worth up to 30% of the value of  the item, and a $1500 lifetime credit. The tax credit is retroactive to January 1, 2009 for improvements made through the end of 2010 and for some through 2016. Notice this is not a tax deduction, but a tax credit so it eliminates any tax you owe dollar for dollar.

And, what might be these energy-efficient items? Some energy-efficient improvements are eligible for installation and materials cost credits, such as for HVAC [air-conditioning] systems, solar water heaters, solar panels, geothermal heat pumps, wind-energy systems and fuel cells.   Some components are covered only for the cost of the material. This group includes sliding patio and French doors, meeting certain criteria, though windows do not.

Some appliances are also eligible for the credit. Especially if your appliances are more than 15 years old, 10 in some cases, it really pays to change them for new Energy-Star ones. It’s estimated that a household spending about $2000 per year on energy would save about $700 per year in costs. That’s not counting the tax break. Not all appliances are eligible, but the most energy-efficient usually are. Check out this website for all eligible products.

If you purchase any of these items, you will need IRS Form 5695 available at the IRS website.

Notice also that Southern California Gas is offering rebate for purchases of tankless water heaters of up to $200 depending on the model as well as furnaces and a number of other items.  The DWP [Department of Water and Power] is offering terrific deals on electric lawn mowers for those willing to trade their old gas-guzzlers. And, it will also give rebates for new clothes washers.

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