Archive for Home Buyer Tax Info

In 1971, the city launched the 421a program as an incentive for developers to build projects on underused or unused land.  Today, a record number of condos have a 421a status.  Ranging from 10 years duration below 96th Street to 15-25 years in Upper Manhattan, the exemptions do have an expiration date.  The exemptions start to decrease annually after the first two years, which usually means rising common charges.

Historically, condos will sell for a higher price if the common charges are low.  While in development, the developer will set the rate for the monthly charges until a board is in place.  Luxury buildings with high-end amenities like rooftop decks, concierges, etc. may have lower common charges while the 421a Tax Abatement is in force.

Once the tax abatement expires, condo boards are generally scrambling to find ways to reduce costs.  Some condo bards have taken the drastic action of terminating their contracts with property management and hiring an on-site manager.  This extreme step takes a dedicated hands-on board to oversee the manager, decrease costs and look for ways to raise revenue.  Board members are generally volunteers, so finding people willing to give their time for the community is sometimes difficult

Some condo boards find other ways to chip away at the expenses; cutting staff, renegotiating mortgage rates, installing high-efficiency lighting in the common areas, and other similar strategies. Some cost-cutting measures come with risk of reduced services, but the upside remains – lower common charges generally create higher selling prices.

 

Inspired by The Real Deal Article by Hayley Kaplan

Sep
02

Co-op & Condo Tax Abatement – New Rules

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In New York City, real estate taxes are an important part of the value, and it seems the rules are about the change.

According to Jerry Feeney, Residential Real Estate Attorney   the following is a summary of the changes.  As always, it is important to see qualified advice when dealing with legal and tax matters.

 

  • Primary Residence:  The apartment must be the owner’s primary residence to be eligible for the abatement, and parking spaces and storage units are excluded.  This important change is effective July 1, 2014.  Non-residents who received the abatement in 2011/2012 will see the abatement phase out in 2012/2013 and 2013/2014.  By 2014/2015 the abatement will be completely phased out for non-residents.
  • Multiple unit ownership:  Ownership of 4 or more units in the same building disqualifies the owner from any abatement, regardless of whether one of them is a primary residence.   If one owner owns 3 or fewer units, and one is the primary residence, the abatement will apply to all of the units.  If none of the three units are owner occupied, none will get the abatement.
  • Other Exemption/Abatement programs:  This change in the law will not affect other real estate tax relief programs, but recipients of certain relief programs are ineligible for the co-op/condo abatement, without regarding primary residence status.  These programs are (a) J51, (b) 420c and 421a, b, and g. (c) HFDC, (d) DAMP, (e) Mitchell-Lama, and (e) clergy.  Personal exemptions, however, will have no impact on the receipt of the co-op/condo abatement.  Examples of these programs are:  (a) STAR, (b) disabled homeowner, (c) senior citizen, and (d) veterans
  • Trusts:  In determining principal residence for a unit owned by a trust, NYC Finance requires that the unit is the principal residence of the beneficiary of the trust, trustee, or in the case of a life estate, the life estate holder.

 

This post is provided as informational purposes only and should not be construed as legal, accounting or tax advice by the RealEstateGeezer. You should seek advice from a qualified professional.

 

Information provided by Jerry M Feeney, Residential Real Estate Law 

 

Aug
27

New Federal Tax on Investment Income

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On January 1, 2013, a new 3.8% Federal tax on the investment income of individuals, estates, and trusts is scheduled to come into force.  The tax was enacted in 2010 as part of the Administration’s health care legislation, and there is of course some political uncertainty regarding whether Congress will amend or repeal it before it comes into effect.  For the time being, though, we need to be prepared for this new tax that will be imposed on interest, dividends, annuities, royalties, rents, capital gains, and certain other items.  The tax will be in addition to all otherwise applicable Federal, state, and local income, transfer, and other taxes.

This memorandum focuses on the tax’s application to owner-occupied residential property (including single-family homes, condominiums, and cooperative apartments).1   Although the tax is complicated, here are a few simple rules to guide you:

  • In general, if an individual’s home is sold, the 3.8% tax will be imposed on the gain “recognized” by the seller (and not on the gross purchase price).
  • As you are aware, a limited portion of an individual’s gain on the sale of a primary residence (generally, $250,000 for a single individual, and $500,000 on a joint return) may not be taxable for ordinary Federal income tax purposes.  The same rule applies for purposes of the new tax.
  •  If the seller’s “adjusted gross income” (with certain modifications) is below specified levels (generally, $200,000 for a single individual, or $250,000 on a joint return), the seller may be exempt from the new tax.

We hope that this general guidance is helpful to you.  However, each seller should consult with a qualified tax advisor to determine the application of the new tax, as well as the application of all other tax rules, to the seller’s particular circumstances. 

For more information on this Federal Tax,  see our post “The New 3.8% Real Estate Tax Is Coming” and the Realtor.org document explaining the new tax with examples.

From REBNY.com newsletter

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The 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.

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Jan
30

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

 

 

 

 

 

 

 

Jan
23

Maintenance Fees are More than Just Maintenance

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For most buyers in Manhattan, getting past the asking price of a co-op or condo is only the first in a series of seemingly insurmountable obstacles.  The monthly maintenance fee is the second.  From a few hundred dollars a month to a few thousand depending on the various buildings, most owners find the maintenance fee never goes down, and rarely stays constant.   Most are adjusted on an annual basis.

Buyers need to be concerned about the fee as a direct impact on the property value, not just because of the cash going out every month.  The maintenance fee covers operating costs:  Staff Salaries, management fees, heat, water and sewer and other items.  In co-ops, the real estate tax bill and underlying mortgages on the entire building is part of the maintenance fee, and is proportional to the number of shares you own in the co-op corporation.

Condos are different. The common charges still cover the operating costs the same as co-ops, but the property tax bill goes directly to the owner because of the different ownership type.  Condos may have more amenities but lower common charges due to this distinction.

According to the Council of New York Tax Cooperatives and Condominiums, the fees have skyrocketed over the last decade.  For example, the median maintenance fee for co-ops on the West Side of Manhattan rose by 59% between 2000 and 2009, while condo common charges increased by 38% city-wide for the same period.

Increasing Real Estate Taxes are the main reason for the rise in co-op fees.  Both the tax rate and the assessment of property values have increased in recent years.  On the West Side, co-op median real estate taxes increased by 116% between 2000 and 2009.   On the East Side in 2000, 23% of the maintenance paid was attributed to taxes; by 2009, that figure had risen to 33.3%, indicating that taxes were a larger portion of the maintenance fees.

Land Leases are another issue for increased maintenance fees for some co-ops.  As a number of co-ops do not own the land their building sits upon, rather rents the land.  Some of those leases are coming up for renewal soon, and the experts predict there will be a huge jump in cost.

Finding savings to offset the increases is difficult.  Most costs are fixed, including salaries, taxes, insurance, upkeep and utilities.  Several co-ops have hired consultants to check for water leaks, while others are switching to natural gas from oil heat.  Still others are metering each apartment’s utilities separately.

Many co-ops are refinancing their underlying mortgages to take advantage of low interest rates.  Others are generating income by imposing or increasing fees for using the bike room, moving in or out or renting a unit.

Reviewing a building’s financials will give a buyer an understanding of how a building spends its money.  If you disagree with how a building spends the fees, there’s little point in moving there.   See our Series on reviewing building financials starting with  ‘Tis the Season: Many Manhattan Coop Financial Statements Are Released In May.

Inspired by New York Times Article on Jan 15, 2012 by Jim Rendon.

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Aug
18

The New 3.8% Real Estate Tax Is Coming

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Beginning January 1, 2013, a new 3.8% tax on some investment income will take effect.

It was passed by Congress in 2010 with the intent of generating an estimated $210 billion to help fund President Barack Obama’s health care and Medicare overhaul plans.

It’s complicated and difficult to predict how it will affect every buyer or seller.  The National Association of Realtors ® developed a brochure with examples and different scenarios

  • ·         Effective January 1, 2013, the 3.8% tax will affect some but not all income from interest, dividends, rents and capital gains.
  • ·         Only on individuals with an adjusted gross income (AGI) above $200,000 and couples filing a joint return with more than $250,000 AGI
  • ·         Applies to the Lesser of Investment income amount in excess of the AGI amount over $200,000 or 250,000

 Read more about it here.

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May
31

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.

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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

The IRS earlier this month released the new form that eligible homebuyers need to claim the first-time homebuyer credit this tax season and announced processing of those tax returns will begin in mid-February. The IRS also announced new documentation requirements to deter fraud related to the first-time homebuyer credit.

The new form and instructions follow major changes in November to the homebuyer credit by the Worker, Homeownership, and Business Assistance Act of 2009. The new law extended the credit to a broader range of home purchasers and added new documentation requirements to deter fraud and ensure taxpayers properly claim the credit.

With the release of Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and the related instructions, eligible homebuyers can now start to file their 2009 tax returns. Taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

The IRS expects to start processing 2009 tax returns claiming the homebuyer credit in mid-February after it completes the updating and testing of systems to meet the law’s new requirements. The updates allow the IRS to put in place critical systemic checks to deter fraud related to the homebuyer credit.

Some of these early taxpayers claiming the homebuyer credit may see tax refunds take an additional two to three weeks.

In addition to filling out a Form 5405, all eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

  • A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
  • For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

  • Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
  • Property tax records or
  • Homeowner’s insurance records.

The IRS also reminded homebuyers that the new documentation requirements mean that taxpayers claiming the credit cannot file electronically and must file paper returns. Taxpayers can still use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.

Normally, it takes about four to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. For those homebuyers filing early, the IRS expects the first refunds based on the homebuyer credit will be issued toward the end of March.

The IRS encourages taxpayers to use direct deposit to speed their refund. In addition, taxpayers can use Where’s My Refund? on IRS.gov to track the status of their refund.

http://www.youtube.com/watch?v=GkzB03uuGlg

More details on claiming the credit can be found in the instructions to Form 5405, as well as on the First-Time Homebuyer Credit page on IRS.gov.

In 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.

Here are the details directly fro the IRS.

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First Time Buyer $8000 Federal Housing Tax CreditIf 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

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The 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.

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