Property Taxes

A new year means new property taxes.  The 2016 general county property taxes become a lien on real property the moment that the new year begins even though the new tax amounts are not made available to the public until they have been certified by the assessor and the treasurer in early February.  Don't be surprised to find a special exception on your title commitment for 2016 taxes that are "not yet due or payable."  The treasurer will not accept any payment of 2016 taxes until after February 15th.  The first half tax bill becomes delinquent if unpaid on May 1st and the second half tax bill becomes delinquent if unpaid on November 1st. EXEMPTIONS: If your annual income does not exceed $35,000 and you own and reside in your home, including mobile homes, you may be entitled to a property tax reduction.  You must be at least 61 years of age or, if under 61 years, retired because of a disability and unable to work.  Property taxes may be deferred under certain conditions.  For details, visit the King County Department of Assessment, Taxpayer Assistance - Tax Relief webpage and go to the Senior Citizens/Disabled Exemption section or call 206.296.3920. CONTACTS: www.kingcounty.gov/Assessors/Contacts.aspx (contact info) www.kingcounty.gov/Assessor/Reports/LevyRateInformation.aspx (levy rates) For taxes and property information call Chicago Title, Customer Service at 206.524.2405. Today's blog courtesy of Sandy Andersen, Chicago Title Insurance Company of Washington Happy Investing!

Foreign Investment in Real Estate

Tax Increase for Sales Exceeding $1 million

The Foreign Investment in Real Property Tax Act ("FIRPTA") provides that the disposition of a U.S. real property interest by a foreign person for the purposes of U.S. income taxation is subject to income tax withholding. Under FIRPTA, the buyer is responsible for determining if the seller is a foreign person for the purposes of U.S. income taxation and if the buyer fails to do so, the buyer could be liable for the tax.  FIRPTA withholding is imposed at a rate of 10% on the amount realized from the sale (i.e. the purchase price). Changes to FIRPTA, effective February 17, 2016, increase the amount of the tax to 15% for sales where the amount realized from the sale (i.e. the purchase price) exceeds $1 million. The change applies to closings that occur after February 16, 2016. Happy Investing!

Mortgage Tax Relief

Christmas came early to Washington D.C. this past year. The Congress was busy again trying to pass a huge budget bill. Politicians were all packing in their favorite items into that new budget bill and it was passed by Congress right before Christmas; signed by the President, and has now become law.  Great news for all of us in the real estate industry!!!

For many who read our updates, this will appear like a reenactment of everything that had occurred the year before last, right at that same time, in 2014 before Christmas.  In 2014, at the time before Christmas, the Mortgage Forgiveness Tax Relief Act, that eliminated forgiveness of debt tax for most homeowners, had actually previously expired on December 31, 2013.

Most were surprised to see promises of its extension, but were disappointed when the extension ended on December 31, 2014, which was too little too late for most of our clients, as they had already made decisions based upon other criteria.  It was frosting on the cake for many clients, but it was no help for the future, as it expired about eight (8) days later on December 31, 2014. Back to ground zero. No longer did we have this favorable tax treatment going into 2015.

So we spent most of 2015, again in a quandary, not knowing if this favorable tax law for short sale sellers would be extended or not.  Frankly, in many articles I wrote, I did not expect Congress to further extend this favorable tax benefit for short sellers.  All of our attorneys, being conservative in our consultations, had advised clients to not expect any further extensions. So here we are again back in Congress, at the end of last year, right before Christmas with a big budget bill and a tax package contained within it that prompted action.

As part of the overall budget bill, a group of tax benefit items came in as part of the overall budget package.  Some affect us positively in Washington State, such as extending the sales tax deduction, allowing a deduction for mortgage insurance premiums and, most importantly, the extension of the Mortgage Forgiveness Tax Relief Act.

This positively affects those of you dealing with short sale sellers. It is a wonderful Congressional Christmas present of a further extension of the Mortgage Forgiveness Tax Relief Act, not only retroactively starting back on January 1, 2015, but extending all the way through December 31, 2016!!!

This is wonderful news as it allows us another year in which we can give all our customers good, strong and current advice knowing that they can plan and not be hesitant as to whether they should sell or not. Planning opportunities now abound for us in 2016.

WHAT EXACTLY IS THIS SPECIAL TAX EXCEPTION THAT IS BEING FORGIVEN?

This was a special exemption that originally came into existence in 2006/2007 and was extended literally until 2014. This tax law  allows homeowners, who have lived in their property as a primary residence two out of the last five years, in most instances, to be able to avoid any forgiveness of debt tax that would be payable except for this exemption. It is not as simple as this brief explanation. Our attorneys always go over this statute in detail with clients in our consultations. There are exceptions.

The forgiveness of debt creates income subject to ordinary income tax that, in many instances, could create a tax cost of upwards of $30K or $40K or more for a short sale seller.

Happy New Year!

Happy Investing!

Today's blog courtesy of Ed McFerran, McFerran and Burns Law

Capital Gains Exemption

THIS HOMEOWNER EXEMPTION IS BETTER THAN SLICED BREAD…

The exclusion of up to $500,000.00 of capital gains tax as a result of the sale of one’s primary residence can be a great tax benefit to home owners especially since they only use the exemption a few times during their lives.

We, as real estate professionals, ALWAYS need to encourage all of our customers to seek legal or tax advice as all areas of taxation are complicated and there can be traps for the unwary. The goal of this article is to address some of those traps.


LET’S TALK ABOUT THOSE WHO INVEST IN REAL ESTATE…IS THAT POSSSIBLY YOU?

For those who invest in real estate, this special tax code creates potentially wonderful tax planning opportunities. Imagine if you will, your customer (or you) wants to convert their rental property into a primary residence in an attempt to take advance of the primary residence tax exclusion and preclude, not only the capital gains as the property was held as an investment, but to tack on along the time period of the primary residence holding. When combined with the fact that this exemption can be used every two (2) years, this could be wonderful for a property investor.

Sorry. You weren’t the first to look at this opportunity. In fact, this whole scenario goes back as far as about 15 years ago when this whole exemption came into being. However, there are still opportunities, but read on. The Congress has made some changes:


A.      They in the past did preclude depreciation recapture from being eligible for favorable home owner exemption treatment.

B.      They required a longer holding period (5 years) in a Section 1031 tax deferred exchange for those parties who converted the use of their investment property.

C.      More recently (2008), the Congress has forced gains to be allocated between periods of “qualifying” use and periods of “non-qualifying” use of the property.


THE NUTS AND BOLTS OF THE HOMEOWNER EXEMPTION…(SECTION 121 OF THE TAX CODE)…

I think most of my readers have a pretty good understanding of the basic rules. It was created in 1997 by our Congress. No longer do we have to buy a new property [That was an old law]. No longer do we have a once in a life-time $125K exemption [That is also old law]. Our current law is called: “The Taxpayer Relief Act of 1997” and has been modified ever since then.

There are lots of special rules within it and the devil can be in the details. The Publication from the IRS for layman is not a walk in the park, but PUBLICATION 523 can be a great help to understand some of the nuances. Just Google Publication 523 and you can download and print it out. Again, this short article does NOT replace a good consultation with your tax attorney.

That Act allows a homeowner (individual) to exclude up to $250K of capital gain on the sale of a primary residence ($500K for a married couple) so long as the property was owned and the party used the property as their primary residence for at least two (2) of the last five (5) years.

PRACTICE POINTER: Keep in mind that BOTH SPOUSES don’t have to own the house even though this is a community property state. One of the two can own, but BOTH must live at that property to qualify for the $500K exclusion. Isn’t that cool?

One does not have to occupy the property at the time of sale. It is just 2 of the last 5 years. In other words, the time does not need to be even continuous. We just need 720 days in the last 5 years to qualify. If one moves out after qualifying for the initial two (2) years, then one has three (3) years to then sell the property and take advantage of the exclusion rule. Make sure you understand this clearly as it creates many misunderstandings among professionals and homeowners alike.

PRACTICE POINTER: If a seller does not meet the two (2) year rule, still have them talk with their tax counsel as they can get a partial prorated exemption if a change in place of employment, change in health, or “unforeseen circumstances” all of which require a tax attorney or tax counsel to review and advise. As the economy improves folks, sellers will soon again be experiencing this type of issue.


LIMITATION ON USE OF THE EXEMPTION…ONCE EVERY TWO YEARS…

This exemption can be used once every two (2) years.  Remember, so long as the requirement is met there is no limit to the number of times an individual can use that exemption during his or her life. I wonder how many of our customers out there want to move every two years?


VARIATION ON THE THEME…WHAT ABOUT RENTAL PROPERTY?

Most of our customers are not real estate investors. They use this tax savings tool as they move through their life growing a family and later getting smaller as their families mature and move on. During the “good times of rapid appreciation” prior to the recession, many of my clients would “buy up” over time and take advantage of this exemption over and over again. Remember that this is an EMEMPTION and not a deferral. You don’t have to account for that accrued gain afterward like you do in a tax deferred exchange.

Those same people would many times also own rental property and would creatively attempt to move into their rental property taking advantage of the holding period and then excluding ALL of the gain (not only the gain while they lived in the property as well as the gain while it was used as an investment property).  Pretty great ideas!!!! In addition, because of depreciation the gains in the investment part would generally accrue faster and thus a pretty good bang for their tax savings buck if they could pull it off!


WHAT IS TOO GOOD TO BE TRUE IS GENERALLY TOO GOOD TO BE TRUE…ALONG COMES CONGRESS…

Over a period of time, the Congress modified Section 121 (the residence exemption rule) to limit those strategies. The initial rule eliminated the exemption to apply to any gains attributable to depreciation taken on the property when it wasn’t being used as a primary residence. This came into effect on May 6th, 1997 when the original exclusion rule came into effect. So even if you have a blended property and you meet the two year residence rule, that portion of the capital gains that is attributable to depreciation taken will be subject to recapture at generally 25% rates. However, one must read on.


IN 2008, CONGRESS PASSED FURTHER LIMITATIONS…HOUSING ASSISTANCE TAX ACT OF 2008...

So we have to read what happened above and understand that in 2008 Congress further limited the use of this wonderful exemption (in Section 121(b)(4)) specified that the exemption is only available when we have the property ACTUALLY used as a primary residence. The date of that Act is January 1st, 2009.

So this is interesting. The Congress deemed all gains are occurring pro-rata during the whole period of ownership whether owner occupied or not. Periods when the property is owner occupied are “qualifying”. Periods when used for investment are “non-qualifying”. Non-qualifying gains are not exempt!

This is where it can get complicated and this is where it is best to consult with your local attorney.

Happy Investing!

Today's blog courtesy of Ed McFerran, McFerran & Burns

Capital Gains Tax

There are two ways for property owners to defer capital gains tax: either through a 1031 tax exchange or by offering seller financing. I have blogged extensively about both of these approaches, and a search of this blog site will bring up these posts. But today, I want to focus on capital gains tax.

Wikipedia defines capital gains tax (CGT) as a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.

In the United States, with certain exceptions, individuals and corporations pay income tax on the net total of all their capital gains. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The tax rate for individuals on "long-term capital gains", which are gains on assets that have been held for over one year before being sold, is lower than the ordinary income tax rate.

The tax rate on most capital gains is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if the homeowners are in the 10% or 15% ordinary income tax brackets. However, a 20% rate on net capital gain applies in tax years 2013 and later to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($406,750 for single; $457,600 for married filing jointly or qualifying widow(er); $432,200 for head of household, and $228,800 for married filing separately).

There are a few other exceptions where capital gains may be taxed at rates greater than 15%:

1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate. 1250 property is generally defined as improved commercial real estate and is real property subject to a depreciation deduction on the taxpayer's return.

Homeowners are allowed an exemption of $250,000 in profits on the sale of a primary residence if the owner is single, $500,000 if a married couple.

Taxpayers may be able to defer, reduce, or avoid capital gains taxes using the following strategies:

• Tax may be waived if the asset is given to a charity.
• Tax may be deferred if the taxpayer sells the asset but receives payment from the buyer over a period of years. However, the taxpayer bears the risk of a default by the buyer during that period.
• In certain transactions, the basis (original cost) of the asset is changed. In the U.S., the basis for an inherited asset becomes its value at the time of the inheritance.
• Tax may be deferred if the seller of an asset puts the funds into the purchase of a "like-kind" asset. In the U.S., this is called a 1031 exchange and is now generally available only for business-related real estate and tangible property.

Additional information on capital gains and losses is available in IRS Publication 550, Investment Income and Expenses, and Publication 544, Sales and Other Dispositions of Assets. If you sell your main home, refer to Topics 701 and 703, and Publication 523, Selling Your Home. 

Happy Investing!

Real Estate Improvement Tips

Here are a few good real estate links for my loyal blog followers:

Tax time is here. What are the Top 6 Legal Tips of 2013? This link also helps you Avoid the 5 Most Common Scams.

Here are some ideas for Budget Home Makeover Tips.


And finally, here are some Clever Uses for Common Household Items.


Happy Investing!