Month: March 2015

Sold Your Parents’ Home in 2014? Check This Tax Advice

Mature couple worrying about finances

Q. We sold our parents’ home in 2014. What do we need to know for taxes this year?

A. The tax implications of a home sale can be complex, particularly when you’re selling a relative’s property rather than your primary residence. It’s always best to consult a professional tax adviser to get individualized advice, but there are some general tax tips that could apply to your situation.

 

Selling a home as an heir to the property

Your tax bill will vary according to how you acquired the property and when.

Recent inheritance

If you inherited your home through a will or a trust and you sold it right away, you won’t have to pay a capital gains tax.

Your residence. If you’ve lived in the property as your primary residence for at least two of the past five years, then you would be eligible for a capital gains exclusion up to $250,000 (single tax filer) or $500,000 (married couples filing jointly), says Simasko.

Investment property. On the other hand, if you’ve kept the home for a few years, you could owe taxes on your profit from the sale if you haven’t claimed it as your primary residence, Simasko says. This situation applies whether the home has been empty or you’ve used it occasionally.

Heirs who sold their parents’ home without having lived in it—but did not do so immediately after the property was inherited—will have to determine the “basis,” or value of the property, for tax purposes, you subtract the basis price from the sales price to determine whether you have a profit or a loss.

The good news is that beneficiaries typically have a “stepped-up” basis for a home, which is the property’s fair market value at the date of the parents’ death, says Borges. When you sell that property, you pay taxes only on gains over that basis, not the original price of the home.

For example, if your parents purchased their home for $50,000, but the property value when they passed away was $100,000, you would pay capital gains taxes only if you sold the house for more than $100,000. If you keep the house for years and then sell it for $200,000, then you would owe capital gains taxes on the $100,000 profit, says Borges.

Selling a home when your parent moves to assisted living

A similar situation applies if one of your parents has already passed away and the other recently moved into assisted living.

If one of the parents is deceased, the surviving parent receives the ‘step up’ in basis at the time of death.

If you sold the home on behalf of your parent, then the parent would be responsible for paying a capital gains tax on that stepped-up basis.

Simasko says, though, that your parent may owe extra taxes depending on how long he or she has been in assisted living.

The city or the county where the house is located can claim the house as ‘nonhomestead,’ considering the parent’s primary residence is the assisted-living facility. The taxes could be higher, because the property would be considered a second home.

Selling a home when the property has been transferred to your name

Borges warns that there are multiple tax and financial implications for transferring property from parent to child. For example, the child might owe transfer and gift taxes when the transfer is completed. There can be an inheritance tax owed on the percentage of the property being transferred to a child or children after death, as well as capital gains tax, if the child hasn’t been living in the property for two of the past five years.

As you can see, the tax impact of selling your parents’ home can be complicated, so it’s always wise to consult a tax adviser familiar with your state laws, IRS regulations, and your finances.

Advertisements

You Can’t Avoid Closing Costs—But You Can Reduce Them

Unless you’re LeBron James, it takes a long time to save for a down payment on a house. The rest of us sacrifice our gourmet coffee for the lukewarm in-office drip in the hope that setting aside a few dollars a day will magically compound into enough to buy our piece of the American Dream.

1234

And just when we think we have the necessary funds to make even the minimum 3% down payment, we’re slapped with another round of expenses: closing costs.

Closing costs typically amount to 3% to 6% of the purchase price. Why the broad range? Taxes. Buying a house means paying taxes and sometimes transfer fees upfront, at the closing. While there are settlement costs that go to your attorney, title insurance company, and lender, the biggest beneficiary is the government—city, county, and state.

Need some salt in that wound? Closing costs increased 6% last year and now average $2,539 on a $200,000 loan, according to Bankrate.com. Likewise, Bankrate.com says origination fees (i.e., lender commissions) also increased 9% to $1,877, while appraisal fees rose 1% to $662. (Bankrate.com did not factor real estate taxes and transfer fees into its analysis, which accounts for the discrepancy between its estimate and the more general 3% to 6% estimate.)

In every real estate transaction, there are closing costs. Everyone and anyone who had anything to do with the transaction has their hand out at the closing. That means the title company prints multiple checks to pay the brokers, the surveyor, the attorneys, the courier, and anyone else who can stake a claim against the property or its owner. So if you had your property staged and asked that the decorators be paid at closing, then they too get a check. If you had the bathroom remodeled and told the contractor you would pay them when the house sold, it’s now payday.

Just to make it more confusing, closing costs vary by location. Every state, city, and county has the authority to add fees, sometimes called transfer taxes or impact fees, to your transaction. Closings, in essence, are a money grab.

Texas has the highest closing costs in the country, according to Bankrate.com. Nevada has the lowest.

Some closing costs are negotiable: attorney fees, commission rates, recording costs, and messenger fees. Check your lender’s good-faith estimate for an itemized list of fees. Then use your GFE to comparison shop with other lenders.

But don’t despair, there are ways to circumvent the added expenses:

1. Look for a loyalty program. Some banks offer customers help with their closing costs, if they use the bank to finance their purchase. Bank of America, for instance, offers reduced origination fees for preferred reward members. It’s the bank’s way of offering a reward for being a customer.

2. Close at the end the month. One of the simplest ways to reduce closing costs is to schedule your closing at the end of the month. If you close at the beginning of the month, say March 6, you have to pay the per diem interest from the 5th to the 30th. But if you close on the 29th, you pay for only one day of interest.

3. Get the seller to pay. Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing cost credit. It’s a way to seal the deal—and a tax-deductible expense for the seller. Don’t expect this to happen much in hot markets where inventory is scarce (which is almost everywhere these days).

4. Wrap the closing costs into the loan. You’re already borrowing probably hundreds of thousands of dollars—why not tack on a few thousand more? Lenders charge more for this, but if you don’t have the cash, it’s a way to get into the house with less cash upfront.

5. Join the army. Military members have closing-cost benefits that are often overlooked. Service members and veterans may qualify for funds to help them purchase a home. These benefits are not limited to the VA loan. The key is to do the necessary research to make sure you get everything you are entitled to.

6. Join a union. AFL-CIO members get closing-cost discounts and rebates of up to $2,500 on real estate transactions when they get a mortgage through Chase. But only if they live in New York.

What Happens When You Buy a Home in a Tax Sale

Normally when you buy a house, you don’t want a home with any outstanding liens against it (that’s also why you pay for a title company). But what happens to those houses with outstanding taxes?

123

You can buy those, too. Or you can just buy the lien and profit from that. Here’s how it works.

What is a tax sale home?

There are two types of tax sale homes: tax lien sale homes and tax deed sale homes. Both represent sales of homes with unpaid property taxes.

A tax lien sale is when the liens are auctioned off to the highest bidder. The highest bidder now has the right to collect the liens, plus interest, from the homeowner. If the homeowner can’t pay the liens, the new lien owner can foreclose on the property.

In a tax deed sale, a property with unpaid taxes is sold in its entirety, at auction.

Where and how it works

A tax lien sale is a method many states use to force an owner to pay unpaid taxes. It gives homeowners a chance to pay those taxes along with high penalty fees. Twenty-nine states, plus Washington, DC, the Virgin Islands, and Puerto Rico allow tax lien sales.

Each state uses a slightly different process to perform tax lien sales. A typical process works like this:

-A property owner neglects to pay his or her taxes.
-A waiting period initiates. State laws vary on the waiting time before the tax collectors intervene; it can range from a few months to a few years.
-The unpaid taxes are auctioned off at a tax lien sale.
-The highest bidder gets the lien against the property.
-The tax collector uses the money earned at the tax lien sale to compensate for unpaid back taxes.
-The homeowner has to pay back the lien holder, plus interest, or face foreclosure.
-Making money off a tax lien sale

Homeowners whose properties have undergone a tax lien sale are given a window of time, known as the redemption period, in which to pay their overdue taxes plus interest to the new lien holder.

If the homeowner repays back taxes, the lien holder makes money from the amount accrued in interest. Interest rates vary by state. For example, Florida has a maximum interest rate of 18% while Iowa has only 2%, according to the National Tax Lien Association. The rate you get is also dependent on the auction—and it’s usually not the maximum rate.

If the redemption period passes and the taxes remain unpaid, the lien holder has the right to foreclose on the property. That’s not an easy task—the lien holder has to file a lawsuit to get the title to the property, which can be an expensive and time-consuming ordeal. The pa off may or may not be worth it, especially if the property is heavily damaged.

Tax deed sale and instant ownership

A tax deed sale is different from a tax lien sale in that it offers complete ownership of a property. In some states, the government will seize homes with unpaid property taxes and then sell the properties at a tax deed sale, which is a public auction. The property at a tax deed sale is usually sold for the amount due in unpaid taxes, plus fees and interest charges. It’s also known as a foreclosure auction.

Even though that amount could be relatively low, bidders usually drive up the price during the auction process. Before being transferred to the winning bidder, the property should be cleared of all mortgages and liens against it.

Use caution

Buying a home at a tax sale is considered risky. In many cases, you can’t even examine the house from the inside and have to guess on its interior condition. That also means no home inspection, so you can get stuck with a house filled with building violations and environmental hazards such as radon. And if you have to foreclose on a tax lien property with the homeowners still there, you have no way of knowing if they’re going to damage the property before they leave.

Should You Price a Home High or Low? A New Study Makes a Surprising Recommendation

Home prices are up. Mortgage rates are low. Housing supply is stretched thin. Suffice it to say—it’s a tight market.

Family looking at house for sale

And in a tight market, the conventional wisdom is to price your house a little lower than its actual value, in the hopes of sparking a bidding war that will result in an above-market sale price.

Not so fast! Homes priced higher might end up selling even higher, according to a study published in the Journal of Economic Behavior & Organization.

The authors surveyed more than 200,000 homes listed in Delaware, New Jersey, and Pennsylvania from 2005 to 2009 and found that homes priced 10% to 20% higher than similar homes saw a bump.

It’s tied to a psychological tendency called “anchoring”—using the first price we see as the anchor around which we base our judgment. It’s why sales make shoppers salivate—if jeans have an $80 price tag, then we think 20% off is a steal, even if another store sells jeans at $60.

We may also accentuate the positive in order to fit our anchored model—”a buyer exposed to a high-priced property might attend more to the attractive landscaping, than to the outdated plumbing,” the study notes.

But there are a few caveats—the numbers came before and during the market crash of 2007–2008. And the returns, while statistically relevant, may not mean much for the bottom line. A Wall Street Journal article on the study notes that brokers may also have to spend more time marketing the house to justify the price tag and the difference in fees wouldn’t be worth it.

In the current market, brokers suggest the opposite. All around the country, they research comparable sales. Could they price a home a little higher? Perhaps. But is it worth the risk?

Homes that sold last year for $200,000 easily sell for $205,000 or more this year, he says. So while comparable sales and research might suggest lower pricing, based on last year’s data, he might suggest a slightly higher price based on the current market.

So the home still sells, money changes hands quickly, and everyone walks away with a deal.

Correct These 10 Things That Are Dropping Your Home’s Value

There are a lot of things you can’t control in the home-selling process. You can’t force people to come see your home or make an offer on it. But you can make sure to take care of some easy repairs that would otherwise turn off prospective buyers. Look around and make sure you haven’t ignored any of these 10 repairs that can make a buyer think twice about your asking price.

iStock_000000596829_Large-1024x827

1. Paint colors that just don’t blend in

The color of your home is one of the first things a buyer will notice. If it’s a very different color from your neighborhood or general area, you should paint it something more innocuous. Most buyers don’t want to live in the only pink house in town.

The same goes for the interior. If your living room is bright orange, paint over it. Choose a neutral color so buyers can project their own ideas onto it.

2. A front door that’s not inviting

The front door is one of the next things a buyer will notice. If the door is flimsy, cheap, or outdated, it’ll discourage the buyer before it’s even opened. Spring for a new one—it’s the most reliable update you can perform to recoup your cost.

3. A busted doorbell

While you’re at it, don’t forget the doorbell! Having one that works with a friendly, crisp chime is a sign that your house has been well taken care of.

4. Tattered window and door screens

Buyers will notice screens that look more like Swiss cheese than insect shields. You don’t necessarily have to spring for a whole new set—just grab some screen repair patches (they’re cheap) and fill in the tears.

5. Depressing landscaping

As potential buyers drive up to your home, they’ll notice everything—the trees, the grass, the rock pathway, and the plants out front. And it matters. If your lawn is home to a half-dead tree, yellowing grass, unkempt shrubs, and a pathway swallowed by weeds, you might get more lowball offers than you anticipated.

Keep the plants trimmed and the grass freshly cut. Make sure the walkway is clear and fallen branches are removed from the lawn. A fresh layer of mulch will brighten up the outside, too.

6. An unpleasant smell of … something

Nothing can turn a buyer off faster than the stench of faded cigarettes or poorly trained pets. Of course, it’s hard for us to smell our homes after we’ve lived in them for a while, so ask a diplomatic friend to sniff your place. If it stinks, start cleaning.

7. Eerie dripping sounds

If potential buyers hear a dripping faucet or running toilet when touring the house, they might start questioning the building’s integrity or the seller’s level of care. These are quick DIY fixes that shouldn’t go ignored.

8. Bad lighting

Replace harsh lights with bulbs that have a softer glow. Clean out light fixtures to get rid of dirt or dead bugs that can mute the lighting (not to mention look gross).

9. Squeaky hinges

Doors that groan when they open are for horror movies, not homes for sale. Grab a lubricant (such as white lithium grease, but in a pinch you can use cooking oil) and grease the hinges to stop the squeak.

10. An outdated kitchen

Completely renovating a kitchen can get real expensive, real fast. Keep it simple by adding a fresh coat of paint. Although we did say you should keep paint colors neutral, here’s where you can try something more inviting—like pale yellow, a color we associate with light and joy. Switch out old cabinet knobs and handles for something fresher like nickel cup pulls.