Archive for Home Buyer Tax Info
Tax Day is Approaching – IRS Limits Interest Deduction for Non-Married Couples
Posted by: | CommentsThe IRS recently ruled may interest many taxpayers who co-own property with a person who is not their spouse.
Basics of the home mortgage interest deduction
- Taxpayers who itemize deductions on Schedule A can include interest paid on mortgages with certain limitations:
- Only interest paid on a loan secured by a principal residence and second home is deductible
- Only deduct interest on loans for which they are legally liable, so paying someone else’s mortgage doesn’t count.
Once the above conditions are met, the following applies:
- Only interest on the first $1,000,000 of debt for first and second residences combined can be deducted, for Single or Married filing Jointly and married filing separately, the limit is reduced to $500,000 each.
- Only the interest on the first $100,000 of home equity loan debt.
- In this example, an unmarried taxpayer with a mortgage and home equity line of credit could deduct the interest on $1,100,000 in total.
Recently the IRS ruled that, for an unmarried couple who jointly owns the home together the $1,100,000 limit applies to the residence, not the taxpayer.
- One or two homes which are the principal and second homes cannot provide more than a home mortgage interest credit on $1.1 million of debt total regardless of how many people own the homes.
- Once the $1.1 million of interest deduction is used from the first and second home, no further interest deduction can be claimed.
- In this example John and Jane own two homes jointly but are not married. Home one has a mortgage debt of $1.5 million and home two has a mortgage debt of $1 million, with no home equity line of credit on either property. According to the ruling, John and Jane cannot together claim interest on more than $1 million of total mortgage debt. However if John owned home one and Jane owned property two, then each taxpayer could claim the full limit providing they were otherwise eligible.
Tax planning becomes very important in this situation. Seeking the advice of a qualified tax professional can be extremely helpful prior to purchasing a home to be sure the structure permits maximum deductions.
Based on blog article by Jerry M Feeney, Residential Real Estate Attorney. Information in this article is to be used for informational purposes only, and not to be considered legal, tax or financial advice by the Real Estate Geezer.
Shopping for the Best Mortgage Rates
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Are you enticed by the mortgage interest lowest rates in decades? If so you’re not alone, but they are often out of borrowers’ reach. Lenders base their rates on perceived risk. Only if you can show you’re low-risk would you qualify for a rate that matches those seen in headlines.
If you’re looking for the lowest available rates consider these basic factors:
- Credit Score: The ideal FICO score is around 740 or higher. This will put you in the best place for pricing.
- Points: 1% of the loan amount is a point, and by paying points you can reduce your mortgage rate. Be sure to ask for a zero point quote as well to compare the two rates.
- Property Types: Such property types as duplexes, condominiums in newer buildings or with lower down payments, commercial properties or non-owner occupied properties come with higher rates.
- Down Payment: Experts say putting down at least 25% could lead to more attractive pricing. Lenders offer different breaks on rates if equity is higher.
- Loan Length: ARM and 15-year loans are often lower than those on the 30-year loan. Consider how long you plan to live in the property and weigh your options.
- Other considerations:
- Lock-in: You may receive a lower rate for a shorter lock period 30-45 days rather than the usual 60 days
- Additional ownership costs, taxes, insurance and maintenance.
Inspired by New York Times Article by Vickie Elmer published January 12, 201
New York Mansion Tax? I don’t live in a mansion!
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According to New York State, if the purchase price of an apartment is $1 million or more, you are buying a mansion! Therefore your purchase would be subject to a 1% Mansion Tax, calculated on the entire purchase price, not just the part that exceeds $1 million. Buy at $999,999.99 no tax; buy at $1,000,000.00 or more, and you’ll owe $10,000+ tax.
If you’re thinking you’re safe if the purchase price is less than $1 Million, but are paying fees or taxes that would have otherwise been paid by the seller, think again. Those fees become part of the consideration for the property and could lead to being responsible for the Mansion Tax.
According to Joel E. Miller, a Queens tax lawyer, although the mansion tax is not deductible, however it does increase the property’s tax basis so it will ultimately reduce the tax paid on a gain on the sale of the property.
Foreign Investor? Some Considerations When Buying US Real Estate
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Recently with the devaluation of the dollar and the uncertainty of investments elsewhere around the world, many more foreign nationals have been interested in purchasing Manhattan residential real estate as an investment.
It is no more difficult for a foreign national to obtain a mortgage than for an American citizens buying in New York City if the residence is to be a primary residence (or at least a pied-à-terre). However, an investor who is not prepared to pay in cash and wants to obtain a mortgage for a property that will be used as an investment (i.e. with rental income), will find it difficult or impossible to find a mortgage with low rates.
The foreign national buyer, in addition to putting together a search team including a real estate broker and a mortgage lender (if necessary), should search out a New York City attorney who may be able to help save thousands of dollars in taxes or at least alert you to the tax consequences of the purchase.
For just such an investor, I recently had the pleasure of working with Michael C. Xylas of Abrams Garfinkel Margolis Bergson, LLP. One of the partners, Neil Garfinkel, recently published an extremely informative discussion, very helpful to foreign buyers, summarized below and found in its entirety here.
Foreign investors are lured to US real estate by the stability and security of the US Real Estate market. Generally they can enjoy a steady appreciation of US real property and without the volatility of financial markets, making the prospect of economic gain through rental income and capital growth the strongest attraction. With relative political and economic stability in the US, there are fewer barriers to foreign purchase of US real property. The weaker dollar and lower property prices make these investments even more attractive for foreign investors.
While easy to purchase as a foreigner, real property comes with reporting and tax consequences that must be considered.
“For the purpose of US Income Tax, a Foreigner or non resident alien (NRA) is an individual who is neither a US Citizen, a green card holder nor US Tax resident. The test to determine if an NRA qualifies for the same status as a US citizen or resident individual is based on ‘substantial presence’. This is defined by the number of days that one must reside in the US to achieve such status. For the purpose of US Estate and Gift Tax, the test is more subjective, based on one’s intent of permanency in a particular country. Importantly NRA’s are nevertheless subject to estate and gift taxes on any asset that are actually situated in the US.”
It is extremely important for foreign investors to work with a qualified team of legal, accounting and brokerage/valuation advisors who understand the rules in the foreigner’s home country as they correlate with the laws of the United States; if handled correctly, the transaction will be most suitably structured with consideration for investment, accounting and tax purposes.
Consider the Structure used to purchase the asset while planning your purchase:
- Individual owner (Direct Ownership) and Single Member LLC
- Real property used as a residence for personal use
- Least complex
- Required to file US Income Tax return
- Estate Tax issues, Federal and possibly State
- Shareholder in a domestic or foreign corporation
- Domestic Corporation
- Provides a liability shield
- The Corporation is the taxpayer, eliminating the need for individual annual tax returns
- Does not avoid US Federal estate tax liability
- Two levels of tax imposed on corporation income:
- Corporate level tax imposed
- 30% withholding tax on dividends paid to individual owner/imposed (this could be lower based on a favorable tax treaty between the foreign investor’s country of residence and the US)
- Foreign Corporation
- Limits tax liability, mostly used to avoid US income tax as well as US estate tax.
- Pass on US real property to estate beneficiaries without paying US taxes
- No individual US Tax return, however
- 30% branch profits tax against the foreign corporation ‘dividend equivalent amount’ (regardless of any current distributions to the shareholders, the tax is imposed on corporation’s taxable income that is effectively connected to a US trade or business.
- Foreign corporation which owns a US corporation
- More complex structure, both foreign corporation and domestic US corporation are formed
- Foreign Corporation owns the Domestic US corporation which owns the real estate asset.
- more costly and complicated
- Investor is provided a limited liability shield and does not file any US tax return
- Federal estate and gift tax are not applicable
- Branch Profits tax not applicable
- Ultimate investor would be transparent
- Income tax would be taxed at a less favorable rate compared to individual ownership
- Domestic Corporation
Congress To Extend First Time Home Buyer Credit and Give Repeat Buyers A Credit Too!
Posted by: | CommentsIn addition to last week’s passage of a bill to extend through 2010 Freddie Mac, Fannie Mae and FHA loan limits to $729,750, the extension and expansion of the home buyer tax credit is the pending business in the Has passed the Senate.
After a long week of negotiation on the credit, an agreement on the scope of both expansion and extension has been reached. The agreement on the extension and expansion of the credit is as follows:
- Credit available for purchases before May 1, 2010. Prospective purchasers with binding contracts in place as of April 30, 2010 will be allowed an additional 60 days to complete the transaction.
- Credit remains at $8000 for first-time purchasers. No change to definition of first-time purchaser.
- New $6500 tax credit for repeat buyers who purchase between December 1, 2009 and May 1, 2010. Repeat buyers must have lived in their homes consecutively for 5 of the previous 8 years.
- Income limits are expanded to $125,000 on a single return and $225,000 on a joint return. Current law $20,000 phase-out retained.
- New anti-fraud limitations are imposed.
The White House has indicated that President Obama will sign the has signed the legislation into law.
If you’re a first time homebuyer in New York City and you can close on an apartment by December 1st 2009, you may be wondering how you can leverage the $8,000 tax credit to buy your first condo or co-op. The question then comes to mind, “How much can I afford or want to spend on my new home?”
The first thing you need to know is that a couple (or two individuals jointly) buying their first home who want to use the Federal Housing Tax Credit can only have an annual combined income of $150,000 or $12,500 per month.
When you apply for a mortgage, the first thing the mortgage broker or lender is will calculate is your debt-to-income ratio. This ratio takes into account your monthly debt including the monthly mortgage payment, maintenance (for co-ops) or common charges and taxes (for condos), student loans, car payments credit card payments etc. They like to see that your total monthly debt expenses do not exceed 40% of your monthly income. If your gross monthly income is $12,500, then your total monthly debt cannot exceed $5,000 (12,500 x 40%).
The calculation above may be adequate to receive financing for a condo purchase, but many coops only will allow your maximum monthly housing expenses (principal and interest payment on the mortgage and maintenance), to be typically 28% of your monthly income (could be 25% or lower for some co-ops, which is the limit set by the co-op board, not the lender).
Using a limit of 28% for housing expenses, a buyer with an income of $12,500 per month would have approximately $3,500 per month to spend on housing expenses.
So depending on the amount you have for a down payment (assume at least 20%), the mortgage rate and other debt, you may be able to spend between $3500 and $5000 per month to for your Manhattan co-op or condo.
You can use this link to StreetEasy.com to adjust the variables and see what’s available for you based on your personal circumstances.
See a video here and read the FAQ here
The Good, the Bad and the Ugly of Using Your 401k to Buy Your First Home
Posted by: | CommentsThe combination of a tumbling stock market, where 401k holders watched the value crumble, and the decline of home prices has made it an attractive time to take the leap into buying a first home. Rather than watch their stocks, bonds, mutual funds and other investments continue to lose value, many first time buyers have cashed out all or some of their 401k and used it toward the down payment or for covering other costs.
Like any major financial decision, using a 401k to buy your first home has some good, some bad and some ugly things you need to be aware of.
The Good
• Great deals on purchases. The good news is that real estate prices have fallen to the point where you can find better deals and there’s a wider selection than in the recent past. It may even mean that you can buy a co-op or condo that you were never able to afford before the decrease in value.
• Upside appreciation. This also means that when real estate values return to normal that you’ll probably profit when you sell (assuming you sell for more than you paid and what you owe on the mortgage).
The Bad
• Loss of income. When you decrease the value of your 401k account, the lower principal balance means you have less money from which to earn interest, dividends and appreciation.
• Depletion of nest egg. Since the purpose of a 401k is to provide income for your retirement years, when you spend this money now, it’s not going to be available for tomorrow.
The Ugly
• Tax penalties. The ugliest part of early withdrawal from a 401k is that good old Uncle Sam hits you with tax penalties can really hurt—and it diminishes the amount you wind up with when you make a withdrawal.
• Fees. The investment firm that manages your 401k may also charge you a penalty or fee for liquidating the investments early, which may leave you with even less money than you anticipated.
