Suppose you move to another house, but have difficulty selling your previous home. If it looks like it may take a while to sell that house, does it make financial sense to rent it? In addition to the economics of the situation, there are several tax factors you should consider first.
When you rent your home, you must report the rental income on your tax return. However, you can deduct the expenses of the home from that income, including utilities, operating expenses, repairs and maintenance, and depreciation. You can fully offset the income with these expenses. Due to the passive activity loss rules, however, losses can only be used to offset other passive income, with any excess losses carried forward to future years. That said, a favorable exception allows an individual with an adjusted gross income (AGI) of $100,000 or less to deduct up to $25,000 of passive losses against other income, as long as they are actively involved in the property's management. This deduction phases out with AGI between $100,000 and $150,000.
Pay attention to how long you rent your home, especially if you expect a profit from the sale. In general, you don't have to pay income taxes on up to $250,000 of gain if you are single or $500,000 of gain if you are married filing jointly. However, to qualify for the exemption, you must use the home as your principal residence in at least two of the five years preceding the sale. Even if you qualify for the exemption, the exclusion of the gain does not apply to the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997. A maximum tax rate of 25 percent applies to the gain attributable to depreciation deductions.
If you sell the home at a loss, you can only deduct the loss if you prove the home was permanently converted to income-producing property. Your basis for calculating the loss is the lesser of your cost basis or the property's fair market value when it was converted to rental property. For instance, if you bought a home for $250,000, converted it to rental property when it was worth $225,000, claimed $10,000 of depreciation deduction, and sold it for $200,000, your loss would be $15,000 -- not $50,000.
Contact your CPA for details on how this will impact you.
Monday, May 31, 2010
Wednesday, May 26, 2010
FHA 90 day flip rule
Question: My FHA buyer's close of escrow is delayed because the lender is asking for the home inspection and information on the seller's LLC. Why?
Answer: We will assume the contract was executed within the 90 days of the seller acquiring the property. In February of this year, The Waiver of Requirements of 24 CFR 203.37 amended the FHA 90 day flipping rule, or flopping as it is now called by some underwriters. To keep things spicy, it was not amended in a mandated FHA mortgagee letter. Therefore some of the lenders are not as excited about originating financing within the 90 days. Keep in mind this is brand spanking new, and the banks that embraced it early on, are getting their hands slapped from HUD. In April, second appraisals were rare. But today, more often than not, it will be required. If the sales price is 20 percent or more over the seller's acquisition cost, the lender is required to get a property inspection. The thought process behind this guideline is that the home was purchased at a deep discount, therefore the seller should spend some bucks to gussie it up. And it better be darn next to perfect. The lender may require any and all repairs, including minor cosmetic items to be completed before close of escrow, even if your buyer could care less, and the appraisal did not mention anything about a stove and tip-over protection. A second appraisal is typical to cover the Bank's "you know what" to validate the purchase price. The second part of question can make you cross-eyed. FHA is scrutinizing the "Identity of Interest," between the buyer, seller and other parties participating in the sales transaction. And we aren't talking about being personally related. One bank informed us that if the property is owned by an investor, an LLC, and the selling real estate brokerage is an LLC, and if there is any ownership between the two, then FHA will not do the loan until after the 90 days is up. So, just to be clear, it is not okay during the first 90 days but the 91st day it becomes acceptable. This is one bank's interpretation of the ruling. Regardless, documentation on the LLC will be required. HUD is closely analyzing the purchases of these flopped properties. Be prepared for additional documentation and second appraisals. FYI: If your seller purchased the property under his name, then transferred it to an LLC at a later time, the date of the deed transfer, not the purchase, could start the clock for the 90 day flipping/flopping guidelines.
Answer: We will assume the contract was executed within the 90 days of the seller acquiring the property. In February of this year, The Waiver of Requirements of 24 CFR 203.37 amended the FHA 90 day flipping rule, or flopping as it is now called by some underwriters. To keep things spicy, it was not amended in a mandated FHA mortgagee letter. Therefore some of the lenders are not as excited about originating financing within the 90 days. Keep in mind this is brand spanking new, and the banks that embraced it early on, are getting their hands slapped from HUD. In April, second appraisals were rare. But today, more often than not, it will be required. If the sales price is 20 percent or more over the seller's acquisition cost, the lender is required to get a property inspection. The thought process behind this guideline is that the home was purchased at a deep discount, therefore the seller should spend some bucks to gussie it up. And it better be darn next to perfect. The lender may require any and all repairs, including minor cosmetic items to be completed before close of escrow, even if your buyer could care less, and the appraisal did not mention anything about a stove and tip-over protection. A second appraisal is typical to cover the Bank's "you know what" to validate the purchase price. The second part of question can make you cross-eyed. FHA is scrutinizing the "Identity of Interest," between the buyer, seller and other parties participating in the sales transaction. And we aren't talking about being personally related. One bank informed us that if the property is owned by an investor, an LLC, and the selling real estate brokerage is an LLC, and if there is any ownership between the two, then FHA will not do the loan until after the 90 days is up. So, just to be clear, it is not okay during the first 90 days but the 91st day it becomes acceptable. This is one bank's interpretation of the ruling. Regardless, documentation on the LLC will be required. HUD is closely analyzing the purchases of these flopped properties. Be prepared for additional documentation and second appraisals. FYI: If your seller purchased the property under his name, then transferred it to an LLC at a later time, the date of the deed transfer, not the purchase, could start the clock for the 90 day flipping/flopping guidelines.
Wednesday, May 5, 2010
Phoenix Metro Area March Home Sales
Phoenix region home sales held at a three-year high in March as a broader group of buyers entered the market, resulting in a slightly smaller share of sales to investors. For the second month in a row there were strong signs of price stability, including the first year-over-year increase in the region’s overall median sale price in more than three years, a real estate information service reported.
Buyers paid a median $135,000 last month for all new and resale houses and condos sold in the Phoenix metro area, flat compared with February but up 3.9 percent from $129,000 a year ago, according to MDA DataQuick of San Diego, which tracks real estate trends nationally via public property records.
Last month’s year-over-year increase is the first since the Phoenix region’s median sale price rose 1.4 percent in January 2007, to $255,000. Prior to this February, when the median was the same as a year earlier, the median had fallen on a year-over-year basis for 36 consecutive months.
The March median was 48.9 percent short of the peak $264,100 median reached in June 2006. Last month’s figure was also lower than the 12-month high for the median, which was $142,700 last November. The post-housing-boom low for the median was $125,000 in April 2009.
The median paid last month for resale single-family detached houses was also $135,000, up 2.4 percent from $131,900 in February and up 12.5 percent from a year earlier. It was the second consecutive month to post a year-over-year gain for the resale house median. However, last month’s figure was still 49.6 percent lower than the $268,000 peak in June 2006.
The median paid for resale condos in March was $94,000, up 2.7 percent from February but down 14.2 percent from a year earlier – the smallest annual decline in 19 months. The March resale condo median was 49.6 percent lower than the $186,500 peak in April 2007.
An alternative price gauge rose for the second consecutive month in March: The median paid per square foot for resale single-family (detached) houses was $75, up from $73 in February and up 15.4 percent from a year earlier. However, the figure remained 56.1 percent below the $171 peak in June 2006.
There are multiple reasons for recent year-over-year gains in various median sale prices. While the increases do indicate widening price stability, they also reflect significant changes in the types of homes selling this year compared with last. For example, there has been a substantial decline in foreclosure resales. Last month they represented 51.5 percent of the resale market, compared with 66.2 percent a year ago. In the past, foreclosed properties tended to sell at a discount and were located in some of the most affordable areas. Over the past year lenders have increasingly steered distressed borrowers into foreclosures alternative such as short sales and loan modifications.
In addition, today a smaller percentage of sales occurs below $100,000. Last month 30.6 percent of homes sold for less than $100,000, compared with 35.6 percent a year earlier. The combination of lower prices, lower mortgage rates and a soon-to-expire federal tax credit has stoked more sales in mid-to higher-priced neighborhoods, which also puts upward pressure on the median, which is the point where half of the homes sold for more and half for less.
It’s no surprise the median sale price didn’t budge between February and March: Foreclosure resales held steady, and there was little change, month-to-month, in the distribution of sales across the home price spectrum. For example, last month 28.4 percent of sales were over $200,000, compared with 28.0 percent in February. Moreover, the percentage of sales that were resale houses, resale condos and newly built homes changed little last month compared with February.
Where prices head from here depends largely on the economy’s ability to create jobs, as well as on the magnitude and timing of future foreclosures and the market’s response to waning government stimulus.
Last month a total of 9,626 new and resale houses and condos closed escrow in the combined Maricopa-Pinal counties metropolitan area, up 41.1 percent from the month before and up 16.0 percent from a year earlier.
A rise in sales between February and March is normal for the season, with that gain averaging 29.0 percent since 1994, when DataQuick’s complete Phoenix-area statistics begin.
March’s total sales were the highest for that month since March 2007, when 10,712 homes sold. Total resales – houses and condos combined – were the highest for a March since 2006.
Existing (not new) condo sales saw the biggest annual gain last month, rising 117.3 percent from a year ago. In March, condos were 12.4 percent of total sales, compared with 6.6 percent a year ago.
The number of newly built homes sold in March rose 40.7 percent compared with February but fell 5.0 percent from a year ago to the lowest level for a March in more than a decade. Builders continue to struggle to compete with low-cost foreclosures and other distressed sales.
Much of the housing demand still comes from investors and first-time buyers.
In March, 45.6 percent of all Phoenix-area home purchase loans were government-insured FHA mortgages, a popular choice for first-time buyers, according to an analysis of public property records. Absentee buyers purchased 39.8 percent of all homes sold in March, down from 41.2 percent in February, and paid a median $118,000 last month. Absentee buyers are mainly investors, but include second-home buyers and others who indicate at the time of sale that the property tax bill will go to a different address.
Buyers who appear to have used cash to purchase their homes accounted for 39.7 percent of all March sales, down from 43.6 percent in February. Last month’s cash buyers paid a median of $109,000. Specifically, these were transactions where there was no indication of a purchase loan recorded at the time of sale. Some of these “cash” buyers could have used alternative financing arrangements outside of a typical, recorded purchase mortgage, and in some cases these buyers might be taking out mortgages after their purchases. All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who don’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.
Last month about 3.5 percent of all homes sold had been “flipped,” meaning they had previously been sold on the open market between three weeks to six months prior. A year ago it was 1.4 percent.
Foreclosure activity rose in March: The 5,962 single-family house and condo units foreclosed on in the region represented a 28.6 percent increase from February and a 52.1 percent gain from a year earlier. For the first quarter (January through March) of this year, the number of housing units lost to foreclosure fell 2.4 percent from fourth quarter 2009 but rose 7.8 percent from first quarter 2009.
The foreclosure figures are based on the number of trustees deeds filed with county recorder offices. The document signals that a home was lost to foreclosure. The foreclosure totals can include units that the county assessor has designated as condos, but are currently used as apartments (e.g. a 100-unit complex designated as condos but used as apartments could be foreclosed on and those units would be reflected in the foreclosure total for that month). For this reason and others, the number of foreclosure filings has seesawed month-to-month over the past year, and a single month’s increase or decline doesn’t necessarily indicate the beginning of a lasting trend.
Phoenix MSA Home Sales
Number of sales Mar-09 Mar-10 Yr/yr%Chng
Resale houses 6,794 7,524 10.7%
Resale condos 549 1193 117.3%
New homes 957 909 -5.0%
All homes 8,300 9,626 16.0%
Median sale price Mar-09 Mar-10 Yr/yr%Chng
Resale houses $120,000 $135,000 12.5%
Resale condos $109,500 $94,000 -14.2%
New homes $194,000 $191,981 -1.0%
All homes $129,900 $135,000 3.9%
Media calls: Andrew LePage (916) 456-7157
Copyright 2010 MDA DataQuick Information Systems. All rights reserved.
Buyers paid a median $135,000 last month for all new and resale houses and condos sold in the Phoenix metro area, flat compared with February but up 3.9 percent from $129,000 a year ago, according to MDA DataQuick of San Diego, which tracks real estate trends nationally via public property records.
Last month’s year-over-year increase is the first since the Phoenix region’s median sale price rose 1.4 percent in January 2007, to $255,000. Prior to this February, when the median was the same as a year earlier, the median had fallen on a year-over-year basis for 36 consecutive months.
The March median was 48.9 percent short of the peak $264,100 median reached in June 2006. Last month’s figure was also lower than the 12-month high for the median, which was $142,700 last November. The post-housing-boom low for the median was $125,000 in April 2009.
The median paid last month for resale single-family detached houses was also $135,000, up 2.4 percent from $131,900 in February and up 12.5 percent from a year earlier. It was the second consecutive month to post a year-over-year gain for the resale house median. However, last month’s figure was still 49.6 percent lower than the $268,000 peak in June 2006.
The median paid for resale condos in March was $94,000, up 2.7 percent from February but down 14.2 percent from a year earlier – the smallest annual decline in 19 months. The March resale condo median was 49.6 percent lower than the $186,500 peak in April 2007.
An alternative price gauge rose for the second consecutive month in March: The median paid per square foot for resale single-family (detached) houses was $75, up from $73 in February and up 15.4 percent from a year earlier. However, the figure remained 56.1 percent below the $171 peak in June 2006.
There are multiple reasons for recent year-over-year gains in various median sale prices. While the increases do indicate widening price stability, they also reflect significant changes in the types of homes selling this year compared with last. For example, there has been a substantial decline in foreclosure resales. Last month they represented 51.5 percent of the resale market, compared with 66.2 percent a year ago. In the past, foreclosed properties tended to sell at a discount and were located in some of the most affordable areas. Over the past year lenders have increasingly steered distressed borrowers into foreclosures alternative such as short sales and loan modifications.
In addition, today a smaller percentage of sales occurs below $100,000. Last month 30.6 percent of homes sold for less than $100,000, compared with 35.6 percent a year earlier. The combination of lower prices, lower mortgage rates and a soon-to-expire federal tax credit has stoked more sales in mid-to higher-priced neighborhoods, which also puts upward pressure on the median, which is the point where half of the homes sold for more and half for less.
It’s no surprise the median sale price didn’t budge between February and March: Foreclosure resales held steady, and there was little change, month-to-month, in the distribution of sales across the home price spectrum. For example, last month 28.4 percent of sales were over $200,000, compared with 28.0 percent in February. Moreover, the percentage of sales that were resale houses, resale condos and newly built homes changed little last month compared with February.
Where prices head from here depends largely on the economy’s ability to create jobs, as well as on the magnitude and timing of future foreclosures and the market’s response to waning government stimulus.
Last month a total of 9,626 new and resale houses and condos closed escrow in the combined Maricopa-Pinal counties metropolitan area, up 41.1 percent from the month before and up 16.0 percent from a year earlier.
A rise in sales between February and March is normal for the season, with that gain averaging 29.0 percent since 1994, when DataQuick’s complete Phoenix-area statistics begin.
March’s total sales were the highest for that month since March 2007, when 10,712 homes sold. Total resales – houses and condos combined – were the highest for a March since 2006.
Existing (not new) condo sales saw the biggest annual gain last month, rising 117.3 percent from a year ago. In March, condos were 12.4 percent of total sales, compared with 6.6 percent a year ago.
The number of newly built homes sold in March rose 40.7 percent compared with February but fell 5.0 percent from a year ago to the lowest level for a March in more than a decade. Builders continue to struggle to compete with low-cost foreclosures and other distressed sales.
Much of the housing demand still comes from investors and first-time buyers.
In March, 45.6 percent of all Phoenix-area home purchase loans were government-insured FHA mortgages, a popular choice for first-time buyers, according to an analysis of public property records. Absentee buyers purchased 39.8 percent of all homes sold in March, down from 41.2 percent in February, and paid a median $118,000 last month. Absentee buyers are mainly investors, but include second-home buyers and others who indicate at the time of sale that the property tax bill will go to a different address.
Buyers who appear to have used cash to purchase their homes accounted for 39.7 percent of all March sales, down from 43.6 percent in February. Last month’s cash buyers paid a median of $109,000. Specifically, these were transactions where there was no indication of a purchase loan recorded at the time of sale. Some of these “cash” buyers could have used alternative financing arrangements outside of a typical, recorded purchase mortgage, and in some cases these buyers might be taking out mortgages after their purchases. All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who don’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.
Last month about 3.5 percent of all homes sold had been “flipped,” meaning they had previously been sold on the open market between three weeks to six months prior. A year ago it was 1.4 percent.
Foreclosure activity rose in March: The 5,962 single-family house and condo units foreclosed on in the region represented a 28.6 percent increase from February and a 52.1 percent gain from a year earlier. For the first quarter (January through March) of this year, the number of housing units lost to foreclosure fell 2.4 percent from fourth quarter 2009 but rose 7.8 percent from first quarter 2009.
The foreclosure figures are based on the number of trustees deeds filed with county recorder offices. The document signals that a home was lost to foreclosure. The foreclosure totals can include units that the county assessor has designated as condos, but are currently used as apartments (e.g. a 100-unit complex designated as condos but used as apartments could be foreclosed on and those units would be reflected in the foreclosure total for that month). For this reason and others, the number of foreclosure filings has seesawed month-to-month over the past year, and a single month’s increase or decline doesn’t necessarily indicate the beginning of a lasting trend.
Phoenix MSA Home Sales
Number of sales Mar-09 Mar-10 Yr/yr%Chng
Resale houses 6,794 7,524 10.7%
Resale condos 549 1193 117.3%
New homes 957 909 -5.0%
All homes 8,300 9,626 16.0%
Median sale price Mar-09 Mar-10 Yr/yr%Chng
Resale houses $120,000 $135,000 12.5%
Resale condos $109,500 $94,000 -14.2%
New homes $194,000 $191,981 -1.0%
All homes $129,900 $135,000 3.9%
Media calls: Andrew LePage (916) 456-7157
Copyright 2010 MDA DataQuick Information Systems. All rights reserved.
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