home

Know What You Owe -- and What You Don't

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 25th, 2015

Tax time is still months away. But if you sold your house during this summer's selling season -- or plan to sell in the next few months -- it's a good time to familiarize yourself with the tax consequences of your transaction.

In most cases, the gain on your sale is taxable. But you may not have to pay taxes on a large part of your profit, and you might pay no tax at all.

If you owned the home and used it as your principal residence for at least two of the five years prior to the date of the sale, Uncle Sam allows you to exclude part or all of your gain. The two-year period need not be continuous, either; all you need is 730 days out of the previous five years.

How much you can exclude depends on how you plan to file. If you are married and filing jointly, you can exclude up to $500,000 of your gain. But if you are filing as a single person, the limit is $250,000. If you sell your house for a loss, whatever money you receive is not taxable. But the loss cannot be deducted from your other income.

There are a whole bunch of exceptions to the capital gains rule regarding principal residences. For example, if a marriage, separation, divorce or spouse's death occurred during the home's ownership, or if you moved because of work, health or an unforeseeable event, these could affect your taxes. Read over IRS Publication 523, "Selling Your Home," for more detailed information.

To determine your capital gain, subtract your cost basis from the selling price.

Cost basis is more than the price you paid for your house. It also includes certain settlement fees, closing costs and commissions associated with the purchase, as well as the sale of the property.

Add to this the cost of significant capital improvements you made to the house. This does not include repairs, like fixing a plumbing leak; rather, it is something that adds value to the place, like a new deck, an addition or improved landscaping.

All of the improvements you've made over the years will increase your cost basis, which will, therefore, lower your potential tax liability.

At the same time, several things can go toward reducing your cost basis. A lower basis will boost your profit, and possibly your tax. Among other things, the depreciation you claimed for your home office will have to be reclaimed in this manner, as will tax credits for energy-related improvements.

This is somewhat tricky, so let's review:

Add what you spent for the house, say $250,000, and improvements of $92,500, for a total of $342,500. Now deduct for $50,000 for depreciation, and you get a total cost basis of $292,500.

Next, from your selling price, say $875,000, subtract $55,000 in commissions and fees for a gross profit of $820,000.

Finally, subtract your cost basis from your gross profit, for a total capital gain of $527,500.

In this example from Charles Schwab, after taking the $500,000 capital gains exclusion for you and your spouse, you owe capital gains on $27,500.

The IRS "Selling Your Home" document includes a great worksheet that will help you do the math on all this. But it should quickly become evident that you need to have kept good records if you expect to minimize the tax bite from selling a house -- not to mention prove to the government that you didn't fudge your numbers. So if you didn't do so for this house, do yourself a favor and do it for the next one.

One of the tax benefits taken by people who purchased their first homes between 2008 and 2010, the first-time buyers' tax credit, may have to be paid back. If you were a rookie buyer in 2008, the entire credit must be recaptured when you sell that house, unless you qualify for an exception. If you bought in 2009 or 2010, you don't have to pay back the credit unless you sold or gave up the place within 36 months of taking ownership. See IRS Form 5405 for details.

If your gain from selling your house is not taxable, you need not report the sale to the IRS on your tax return come next April. But if you can't exclude all or part of the gain, or if you choose not to claim the exclusion, you must report the sale on your tax return.

You should have reported your new address to the IRS when you moved. If you haven't done so already, fill out IRS Form 8822.

All of the publications and forms mentioned here are available, for free, at irs.gov.

And finally, realize that none of the above applies to rental and vacation properties, which are another ballgame entirely. Those are covered in IRS Publication 527.

home

Wildfire Risk May Be Greater Than You Think

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 18th, 2015

Wildfires like those that engulfed many areas in the Western states this summer can't be prevented, for the most part. But there's plenty homeowners can do to protect their properties.

And don't think you shouldn't be bothered: About a third of all houses in the United States are located in what fire safety officials call wildland urban districts, which are near or among areas prone to wildfires. According to the latest Natural Disaster Housing Risk Report from RealtyTrac, moreover, 13 percent of all single-family houses -- some 10.6 million houses and condos -- are located in counties with a "high" or "very high" risk for wildfires.

Over the years, wildfires have ravaged houses in three-fourths of the states. And with more and more people choosing to reside farther from urban centers and closer to nature, the chances are greater than ever that someone you know -- maybe even you -- will lose a house to fire.

Already this year, more than 45,000 fires have burned some 8.6 million acres, according to the latest count by the National Interagency Fire Center in Boise, Idaho. The majority of those fires have been in the West, but fires have raged practically everywhere.

For example, the worst drought in North Carolina history set the stage for an awful wildfire in 2008, when a lightning strike ended up scorching 41,500 acres. In Georgia a year earlier, nearly 470,00 acres burned and 26 structures were lost in that state's worst fire. And in Florida in 1998, 4,899 fires took out half a million acres and 342 houses.

Wildfires are covered by standard homeowner's insurance policies. But the best insurance is prevention. Here, gathered from a number of sources, are some steps you can take to protect your house and improve its fire resistance.

-- Choose a firewise location. Canyons may offer a beautiful view, but they tend to act as chimneys, drawing the fire up and accelerating the speed at which it spreads. A level site is better than a sloped one. A grass fire moves up a slope four times faster, with flames twice as high as a fire on level ground, because hot gases rising in front of the fire preheat the up-slope vegetation.

If you're building new, you can avoid this kind of topography. Also, find out about prevailing winds, seasonal weather conditions and the local fire history, so you can plan your landscape accordingly.

If your place is already up, go to work on your surroundings so the landscape will not bring a fire to your door. Do this by creating three safety zones, the extent of which will depend on your property lines and your risk. In high-risk areas, 200 feet away from the house may not be enough.

The first zone should be a well-irrigated area that circles the structure for at least 30 feet on all sides. If your house is on a slope, though, a clearance of between 50 and 100 feet may be necessary, especially on the downhill side of the lot.

Plantings in this area should be limited to carefully spaced indigenous species. Beware of "ladder fuels": vegetation that serves as a link between the grass and treetops and enables the fire to climb into trees or onto your house.

Trees and shrubs are fine in the first zone, as long as dead or low-hanging branches are removed promptly and the height of ground vegetation is controlled. But the more grass, the better, because a wide lawn can serve as a fuel break just as much as a driveway. Ditto for plants with a high moisture content.

Your irrigation system also should reach the second zone, which can contain a limited number of low-growing plants and trees spaced at least 10 feet apart. Dead or dying limbs should be trimmed away, and no live limbs should come within 10 feet of the structure. On trees taller than 18 feet, prune away branches that are less than 6 feet from the ground.

In zone three, thin selected trees and remove highly flammable vegetation such as dead or dying shrubs and trees.

-- Plan another line of defense. The survival space you construct around your house should keep all but the most ferocious wildfires at bay. But if one does happen to break through this protective zone -- usually from wind-blown embers or firebrands, sometimes more than a mile away -- ignition is most likely to occur on the roof.

Fire officials say eye-catching, untreated wood-shake roofs are the No. 1 cause of home losses in wildland areas because they can catch wind-blown sparks. If local rules allow, a better choice is factory-treated shakes. But consider using such noncombustible or fire-resistant roofing materials as Class A shingles; metal, cement and concrete products; or slate, metal or terra cotta tiles.

Fire-resistant sub-roofing also can improve survivability. But don't be fooled into thinking an expensive roof sprinkling system will stop a fire. You need a large volume of water to make a roof safe, yet water pressure is generally at its lowest during a fire. Also, the electricity needed to run the system is likely to fail, and the high winds that usually accompany a wildfire often divert the spray away from the roof.

Walls, too, should be made of fire-resistant materials such as stucco or masonry. Vinyl can soften and melt during a fire, offering little or no protection.

If you're building a new house, minimize the number and size of windows on the downhill side, the side most likely to be exposed to a fire. Smaller windows perform better than larger panes in high heat, according to the National Association of Homebuilders Research Center, and double-pane or tempered glass are each more effective than single-pane glass. For greater protection, windows, sliding glass doors and skylights should have nonflammable screening shutters.

To prevent sparks from entering your house, screen your chimney with noncombustible wire mesh. Also cover exterior attic and under-floor vents with wire mesh -- plastic or nylon screening will melt -- no larger than an eighth of an inch. Screen under your porch, too, as well as any other areas below the ground line.

Also, locate your under-eave roof vents near the roofline rather than near the wall to prevent heat or flames from becoming trapped inside. For the same reason, the eaves themselves should be boxed or designed with minimal overhang.

Finally, inspect your house occasionally, looking for breaks and spaces between roof tiles, warping wood or cracks and crevices in the structure where fire or sparks could enter.

home

Simpler or Not, New Rules Are Coming

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | September 11th, 2015

More than a year and a half ago, Uncle Sam decreed that the pertinent mortgage information disclosed to borrowers at closing be simplified. So far, though, the process has been anything but simple.

Which leads to the question: Will "simplification" end up making it more expensive or more complicated -- or both -- for homebuyers to close on their loans?

Originally, lenders had 18 months to comply with the new rules, which combine the longstanding Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) disclosure statements into one (supposedly) easier-to-understand form. The new form is called TRID, which stands for TILA-RESPA Integrated Disclosure.

The original Aug. 1 deadline has come and gone, but the Consumer Financial Protection Bureau (CFPB) has granted lenders a two-month reprieve; they now have until Oct. 3 to start using the TRID disclosure form. But practically every wing of the home finance business has been grousing about the new requirements since the get-go. Their gripe: It's too expensive to reprogram their computers, and even more so to retrain their staffs to comply with the new edict.

Some background is in order here:

TILA and RESPA used to be administered by two separate federal agencies: TILA by the Federal Reserve and RESPA by the Department of Housing and Urban Development. But now, as part of 2010's Dodd-Frank consumer protection act, which lenders detest, those laws are under the purview of the CFPB. CFPB created the combined TRID form as part of its "Know Before You Owe" program.

By combining the two forms into one, the agency believes it has succeeded in making it easier for borrowers to understand exactly what they are getting into. It tested the new form in a quantitative validation study, and participants provided more correct answers using the new single form than they did using the previous disclosures.

"Our new disclosures are easier to understand and use than the existing disclosures," the CFPB said in a release about the TRID form. "In addition, the loan estimate you get after you apply for a mortgage and the closing disclosure you get before you close are designed to work with each other."

That's all well and good. But lenders maintain they are having a tough time implementing the new requirements.

According to Becky Walzak, president at rjbWalzak Consulting, a Deerfield Beach, Florida, firm that advises the lending community, there are something like 2,500 new calculations that have to be programmed into lender systems. And on top of that, employees also have to be "re-progammed."

Lenders that aren't currently in at least the beta testing stage on what they say is a massive undertaking are behind the eight ball, says Walzak. "People have been scared to death about this thing," she says.

Nevertheless, Walzak believes most lenders have not put off compliance until the last minute.

That may be true, but as an indication that not all lenders are on a fast track, compliance vendor Ellie Mae is still offering RESPA-TILA workshops. The latest one will occur just two weeks before the new TRID deadline. (Ellie Mae has posted on its website a countdown of the days left before the TRID "monster" takes effect. To illustrate how lenders feel about it, the post includes a cartoon T. rex getting ready to pounce.)

Even the CFPB itself is offering last-minute guidance for lender laggards on its website.

So, how will this all play out for homebuyers?

While TRID is indeed troublesome for lenders and may initially cause some disruptions that impact borrowers, Ann Fulmer, principal at mortgage consulting firm Paladin in Atlanta, says it will be "a positive thing." Above all, Fulmer says the new requirements will put an end to the unhappy surprises borrowers get at closing, such as when the amount they were told they could expect to pay at closing -- the TILA statement they received when they applied for a mortgage -- falls far short of what they must actually pay, according to RESPA's HUD-1 closing sheet.

"A lot of shenanigans creep in, a lot of errors creep in" during the period between loan approval and closing, Fulmer says.

The jury is out on whether the new rules will make it more expensive for borrowers, as lenders claim it will. But compared to other changes mandated by the CFPB, the costs associated with TRID may just be a "drop in the bucket," says Fulmer.

How about simpler? That, too, is a wait-and-see question. But Fulmer thinks TRID may help answer the most frequent consumer questions -- What is my interest rate? What is my monthly payment? -- by putting them upfront in boldface on the first page.

Receiving the new form three days in advance, as mandated under the new rules, should also help borrowers make sure they are getting the same deal at closing that they were promised originally.

At the same time, though, Fulmer points out that the new TRID statement contains so much verbiage that it could be even more confusing for consumers than the old ones.

"Some think there's so much information that it is going to cause a problem," she says.

(Freelance writer Mark Fogarty contributed to this article.)

Next up: More trusted advice from...

  • Footprints
  • Too Old
  • Lukewarm Water
  • Lifelong Income From a QCD?
  • How To Handle a Late Tax Payment
  • Are You a 'Great Investor'?
  • Claw Down
  • Placebo Effect?
  • Mysterious Felines
UExpressLifeParentingHomePetsHealthAstrologyOdditiesA-Z
AboutContactSubmissionsTerms of ServicePrivacy Policy
©2023 Andrews McMeel Universal