First Ohio Home Finance

Well it appears the new housing bill had some concessions for home buyers, but at the expense of home sellers. So what’s up with capital gains tax and mortgage and real estate? Check this out.

With HR 3221, Congress created revolutionary new rules to capture more tax revenue on capital gains - rules that could prove detrimental to many families holding mortgage loans in Ohio. You see, under the old rules, sellers were tax-exempt on up to $250,000 of home sale gains as long as they lived in the home for 2 of the last 5 years.

However, under the new rules effective January 1, 2009, exemptions from capital gain taxes are a more complicated formula based on the actual number of days a home was “primary” residence during the last 5 years.

So if you only lived in a home for 2 years, you will be paying taxes on 60% (3 divided by 5) of gains under $250,000. Would you rather have 40% (2 divided by 5) of your honest gain tax-free — or the current 100%?

Are lawmakers assuming very few are still making real estate gains?  Are they trying to encourage a flurry of sales this year?   How will the IRS determine residency date?  Doesn’t this seem like a raw deal for the average homeowner who ends up renting their old home since they are having a hard time selling?

Check out this sample analysis from AgentGenius.

You bought a home in January 15 2004 and paid $500,000. This has been your primary residence until this year, January 15 2008, when you bought another property and moved your primary residence. Say you sell your original property next year, January 15 2009, for $600,000. Your capital gains are $100,000. Your capital gains exemption formula:

1460 [days] / 1825 [days] = 0.80 x $100,000 = $80,000 Capital Gains Exclusion

Which means you would pay capital gains tax on $20,000. Capital Gains Tax is currently at 15%, so you would pay $3,000 in new taxes that you would have avoided prior to this new law. *Please note this does not account for the state portion of capital gains…

It may sound like a small number when you profit $100,000 to only pay $4200, but what happens if the new government leaders change the Capital Gains Rate? This rate has been as high as 45.5 percent in the past. This is not good for future sellers of real estate.

As always, remember we are a mortgage company.  If you think the new Capital Gains Exclusion rules will impact you personally, get professional advice about it.   If you do not have a qualified accountant, (which we think that’s a critical part of building wealth) we would like to refer one to you.

h/t Dan Green

Starting today and continuing for the next handful of posts, I want to explore some of the interesting parts of this new law. How will it help homeowners? How will it help first-time buyers? How will it help America? And what are its drawbacks? It’s only right that we get an understanding of what’s going on in real estate.

Here are the highlights:

• First-time home-buyer tax credit up to $7,500
• Major increases in capital gains tax
• FHA Foreclosure Rescue
• Prohibition of Seller-funded downpayment programs
• Conforming loan limit increases to $625,000 in high-cost areas
• Neighborhood revitalization funds (up to $4 Billion)

The first part of HR 3221 to understand is the Homebuyer Tax Credit. Now you will undoubtedly hear this touted from Realtors, builders and others. But you would do well to read the fine print. Here’s how I see it working.

• Only available for first-time home buyers – no homeownership for past 3 years
• Get a tax credit of 10% of your home purchase price, up to $7,500
• The credit must be repaid on your federal income taxes at the rate of 6.67% per year
• If the home is sold, the pro-rata remainder must be collected and returned to the IRS
• Applies to purchases between April 2008 and July 2009
• Buyers must have income below $75,000 single, $150,000 couple.

So what do you think?  Sound like a good deal?

Well, you get to reduce your federal tax bill in the year you purchase, so you are essentially borrowing from the government. This is going to generate enormous tax refunds to Americans. So its not only an incentive to buy, it will stimulate the economy. Just be sure you realize it has to be paid back.

Taking an average central Ohio example, the Smiths buy their first home for $250,000, and fit the income guidelines for this tax credit. They get to claim $2,500 tax credit on their taxes files in April 2009. When you wash their tax liabilities against their payroll deductions, they end up getting a $4,200 tax refund in May ($1,500 normal refund plus $2,500 homebuyer credit). If they are like most Americans, the money will disappear into vacations, home improvements and debt reduction before the end of summer.

When they file taxes in 2010 (and going forward), they have to pay back the credit by adding $167 (remember, 6.67%/year) to their tax bill. This reduces their refund in the summer of 2010 from $1,500 to $1,333. No big deal.

Ohioans, on average, move every 4-5 years. If the Smiths follow that average, they would sell the home in 2013 and have an IRS charge of $1,665 (6.6% x 5 years) on their settlement statement. Again, that’s not going to make or break most home sales.

Assuming that there are a million first time home buyers next year, that means the U.S. Treasury will lend without interest about $2.5 BILLION. Those are your dollars!

As always, though, remember that I am a mortgage guy and not a qualified accountant. If you think the new tax credit rules will impact you personally, get professional advice about it.