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Heather Foreman

How to Avoid Capital Gains Tax on a Home Sale

April 18, 2024 by Heather Foreman

By: Jeffrey Steele

Published: March 1, 2024

When your home value goes through the roof, you may end up with capital gains when you sell. Here are tips to limit tax liability.

Most homeowners aim for a substantial increase in home value – and many are achieving it when they sell their primary home. But that increase can come with a thorny issue: capital gains tax when they file their tax returns after selling. If you’re in that situation or anticipating it, you can take advantage of a number of strategies to pay lower capital gains tax on real estate.

Understanding the Capital Gains Problem

Many homeowners who purchased their homes long ago have seen huge gains in the value of their residences. When they ultimately sell their houses, the gain may extend beyond the federal tax law’s maximum exclusion amounts on capital gains of $250,000 for single filers and $500,000 for married couples. That can leave the sellers on the hook for a large capital gains tax on the sale.

“The problem is that in 1997, when the maximum exclusion levels were added to the tax code, they were not indexed to inflation,” says Evan Liddiard, CPA, director of federal tax policy for the National Association of REALTORS®. So, the amounts we see today are still the same as they were in 1997, when these were big numbers and virtually no one went over them. Today, because of inflation, a $250,000 or $500,000 gains of much more than $250,000 or $500,000 are not uncommon, so many people go over, especially in higher-priced markets.”

Take the Tests to See if You Qualify for Exclusions

To qualify for the exclusions, you must satisfy tests that you’ve lived in your house for at least two of the last five years and have owned it for at least two of the last five years, says Jack McGuff IV, owner of McGuff Financial, based in Pearland, Texas. If you don’t meet these requirements and haven’t yet sold your home, you might consider delaying a home sale until you’ve satisfied the necessary use and ownership tests, he adds.

If you rented out your primary residence for a period before a sale, however, you may lose a portion or all of the exclusion, McGuff continues. That’s because the property would be considered a rental property for tax purposes.

How Cost Basis Factors into Capital Gains Tax

You can think of cost basis in real estate as the total cost of buying the property. Consider it as a baseline, says Quicken Loans: When you sell the property, the cost basis is subtracted from the net sales price to determine capital gains tax liability. That’s why you should document the cost basis of your home over time.

To calculate the cost basis of their homes, owners typically start with the purchase price. The cost basis rarely stays the same over time, and once it’s changed, it becomes the adjusted basis. Several factors can increase or decrease the adjusted basis, says McGuff.

Increases in adjusted basis can result from:

  • The cost of additions and improvements to the house
  • Money spent to restore the property after damages or loss
  • Legal fees incurred in relation to the property

Decreases in adjusted basis can result from:

  • Receipt of insurance payments due to a casualty loss or theft
  • Tax credits for home energy improvements

If you sold your primary home last year, there’s little you can do to avoid capital gains tax liability when you file taxes this April, Liddiard says. “If [a homeowner] sold their house and had a gain over the exclusion amount, they’re going to pay taxes. If they have some capital losses pending, these might offset the gains if they took the losses in the same year. But most people are not walking around with huge unrealized capital losses.”

Capital Gains Tax Strategies for Those Planning to Sell in 2024

If you’re planning to sell your home in 2024 and believe you may have a large enough gain to trigger a capital gains liability, you can consider these three strategies:

Tax Loss Harvesting

This involves the sale of securities at a loss to offset capital gains taxes owed on profits, says Paul Miller, CPA, founder of Miller & Company, an accounting firm based in Queens, N.Y. “Of course, any harvested losses from previous years that have not been offset by gains will be applied against the current year gain,” McGuff says. “This highlights the importance of regular tax-loss harvesting in your after-tax nonretirement investment accounts throughout the year.”

Contribution to a Traditional IRA

Another option would be to contribute to a traditional IRA to reduce taxable income, subject to contribution limits and deductibility phaseouts, says McGuff. “If an individual is part of a high-deductible health care plan, making a contribution into their health savings account would also reduce taxable income.”

Donation to a Qualified Charitable Organization

Charitably inclined individuals might consider donating cash or appreciated property to a qualified charitable organization, potentially providing a tax deduction to help offset that tax year’s taxable income. Deductibility depends on the type of charity and is also subject to a percentage of the taxpayer’s adjusted gross income. “Any unused charitable contributions can be carried forward for five years,” McGuff says. “Unfortunately, many taxpayers are forced to bite the bullet if they have not utilized any of these strategies in a timely fashion.”

Consider Tax Changes for 2024 Tax Year

If you’re planning to sell your home, consider tax changes initiated for tax year 2024, McGuff says. For example, the Qualified Charitable Distribution cap has been indexed for inflation and now stands at $105,000. This change permits owners of IRAs who are 70 and a half or older to transfer up to $105,000 in 2024 from their IRAs directly to a qualified charity and avoid income tax on those amounts. “These amounts will count toward the required minimum distribution for the respective tax year,” McGuff says.

In addition, the elective deferral limit for 401(k), 403(b), 457(b), and Roth 401(k) plans now stands at $23,000, with a catch-up contribution of $7,500 permitted for those 50 and older. IRA contribution limits have increased from $6,500 to $7,000 for 2024 with a $1,000 catch-up contribution for those 50 and older. Deductible contribution limits to health savings accounts have also increased from $3,850 to $4,150 for singles, and from $7,750 to $8,300 for families. HSA holders 55 and older can contribute an extra $1,000 to their HSAs.

Also in 2024, the IRS increased the standard deduction by $1,500, to $29,200, for married couples filing jointly, plus $1,550 for each spouse 65 and older. The standard deduction is now $14,600 for single filers and $16,550 for singles 65 and older, McGuff says.

Liddiard explains that NAR and other stakeholders are supporting raising the maximum exclusion levels by backing the More Homes on the Market Act, introduced in the House in September 2022. The bill would double the tax exclusion on the gain from sale of a principal residence and require future annual inflation adjustments to the amount. “It’s an uphill battle to get that passed, because the problem is not as serious in all parts of the country,” he says.

For now, if you’ve experienced a significant increase in the value of your primary home and plan on selling, develop a capital gains strategy as soon as possible before selling your home. And be sure to track changes in your adjusted cost basis. Depending on the amount involved, you might also consider hiring a tax advisor.

Filed Under: Uncategorized

7 Reasons Buying is Better than Renting

August 23, 2022 by Heather Foreman

There is a consistent argument between whether buying a home or renting one is better for someone in today’s market. While there will always be advantages and disadvantages to both sides, this article focuses on the advantages of owning a home, and how it is better than renting property.

There are several reasons that buying could be better for you than renting a home, and it is very important to consider your personal situation and what you are looking for primarily in a home. This list contains seven of the greatest benefits to owning a home for a variety of situations.

7 Reasons Buying is Better than Renting

1. Overall, Buying is Better Money

To start with, buying a home is cheaper than renting property long-term. Mortgages are set at the time of signing and monthly payments do not increase over time, whereas many landlords will actively increase their rent with the lease renewal (which can be ever 6-12 months). And even then, many landlords are paying a mortgage on their property and renting said property for a higher rent price in order to make a profit. Similarly, owning a home provides homeowner’s with particular tax advantages that give more money back to homeowner’s in their tax return.

With the purchase of a home, long term equity is established. One of the greatest perks of owning your own home is that the regularity of your mortgage payments can greatly improve your credit stability and credit score. Similarly, you can borrow against the value of your home in order to take out a loan or start a credit line for bigger purchases, like starting a business, buying a car, or paying for college.

2. Power for Person-ability

Many renters struggle with finding person-ability or a sense of home since many landlords greatly limit the renter’s decoration. With owning a home, you can paint, wallpaper, or decorate the interior and exterior of the house with greater freedom and abilities.

With the power to personalize the home, owners also have the ability to renovate or reconstruct their home, and those additions would not be assets for another person’s property. Added security rails or a fence would be entirely the owner’s financial responsibility, but it would also add value to their property, and owners can enjoy the additions to their property for as long as they own the home.

3. Safer Neighborhoods

With homes, owners experience less neighbors than they would within an apartment complex. And with less neighbors and less connected walls to your personal home, there is more privacy to a home than an apartment. Owners no longer worry about whether the baby crying is going to wake up the whole floor, or if the neighbors can hear their personal disagreements.

Renters have to deal with maintenance, landlords, and apartment security inspecting or searching their home, but owners do not experience these kinds of inspections. With a sense of privacy also comes a sense a safety. Owners have an easier time installing safety systems, alarms, and locks.

4. Better for Childcare

Children have a huge amount of benefits from the stability of a single home in childhood. A stable home environment has been linked to better grades and testing, stronger interpersonal relationships, and higher rates of long-term employment. With homeowners, many children find long-lasting friendships with other children in the neighborhood, have a greater sense of place and know where their home is in relation to their surroundings, know where their school is in relation to their home, and are able to feel more secure about the world around them.

While owning a home is better for children to learn and explore themselves and the world around them, owning a home is also easier for parents trying to raise children. With a home, it is easier to put in a washer/dryer and have access to in-home laundry than it is with a rental or apartment. It is easier to establish a routine and to teach children home care like cooking or cleaning in a larger space.

Having a backyard also allows for children to play outside in a safe environment with less worries about whether others will also be present in said backyard.

5. Pet Freedoms

Landlords are afraid of pet damage, and therefore, pet fees are extraordinary when added to existing rent fees and move in fees. Along with a pet deposit and typically a monthly fee, many landlords add additional fees and additional services to the cleaning of spaces after move out, and some even add additional fees for stocking or providing doggy bags or spaces for their tenants. Even then, neighbors often will complain of any pet noise like whining or barking.

Buying a home allows for pet owners to avoid those additional fees, as well as to have outdoor space to build a fence or enclosure for their pet to play outdoors, and have a space for their pets to relieve themselves outdoors without any fees or penalties.

6. Entrepreneur Opportunities

Whether you want to start an at-home daycare, or if you’ve always dreamed of having your own candle company, you can start that company in your own home. Since many rental properties are already the location of a business, it is very hard to get a business licensed for a rental property location. However, owning your own home allows for greater freedoms when it comes to using your space to start up a company on the premises, as well as greater space for potential clients to park if needed.

7. Community

Homeowners typically stay in their homes longer than renters stay in an apartment, and with the length that owners stay comes a stable neighborhood community. Its easier to make friends, and grow a community that helps each other out during holidays or hard times.

Children attach heavily to their community, and friends within the neighborhood are an incredible way for kids to connect to their neighbors, as well as learn sociability skills. Similarly, adults find friends, and often happiness when they begin to connect to and help their neighbors. Studies have linked greater levels of content and happiness with stronger community and neighborhood connections.

There are a number of reasons to own a home, but that doesn’t always mean it’s right for you. If you are thinking about buying a home, you’ll want to be sure you have enough saved up for a down payment and an emergency fund and that you’re committed to owning the home for at least a few years. Owning a home has so many benefits, and there are a wide variety of programs designed to help Americans finance and purchase a home, whether as a first time home buyer, or someone buying a home again. Look into your local government for any programs or grants for home buyers.

If you’re most interested in flexibility and don’t want the responsibilities that come with home-ownership, renting may be better for you right now. Still, you should keep the advantages of owning in mind as there may be a time later in life when it makes sense for you to buy a home.

Filed Under: Uncategorized

Homeowners’ Insurance

April 11, 2022 by Heather Foreman

Buying a home is a big purchase, making it especially important to protect your financial investment. Homeowners’ insurance is the best way to mitigate the financial losses occurring after the unthinkable happens. But to make sure you’re getting the policy that works best for you, take the time to learn about what makes up an insurance policy, what the various terms in a policy mean, as well as what is generally covered in a homeowners’ insurance policy.

First things first, what is homeowners’ insurance?

Homeowners’ insurance, or home insurance, is a coverage policy that when purchased provides the homeowner protection across a variety of situations. While the specifics of what is covered is dependent on the policy you purchase, policies will typically include dwelling, personal property, as well as liability coverage.

At times, you might see home insurance policies referenced as HO-1 through HO-8, which are common labels for the different levels of policies and coverage. HO-3 is considered the most common type of homeowners’ insurance, and will generally provide suitable coverage for most people, with HO-8 being the most comprehensive coverage. However, when searching for your policy it is important to review the different levels of coverage and decide which is best for your needs and situation.

What type of coverage may be included in your policy?

While you should always read your policy to confirm the specifics of your coverage, it’s good to have an idea of what kind of protection options are available when you are shopping for a policy. The types of coverage that are considered standard are:

Dwelling Coverage

This type of coverage is to protect the physical structure of your home, normally in instances such as fire, lightning or wind damage. Keep in mind this coverage pertains to structures that are attached to your home, and therefore a detached garage or shed may not be covered.

Personal Property Coverage…

…for personal property is extended to your belongings (which may include clothing, electronics and furniture) in the event that they are lost or damaged. At times this type of coverage may apply even if the item is not on your property, such as items kept in a storage unit.

With this kind of protection, it’s possible you may see references to reimbursement of actual cash value or replacement cost coverage.

Actual cash value is the cost of replacing your belongings with depreciation of value being taken into consideration. Replacement cost coverage covers the expense of buying items of the same type (and with that, same quality) when you make your claim.

Liability Protection

With liability protection, you may receive coverage if you or a family member are sued for damages or injury, such as someone being injured in your home and finding you at fault. Liability protection can offer some coverage for the legal fees incurred after being found legally responsible.

Medical Protection

Also sometimes referred to as guest medical protection, this coverage extends to the medical expenses incurred if someone is injured on your property.

So how much does homeowners’ insurance cost?

The cost of your policy is going to be based on a lot of things including but not limited to: your deductible (or amount you have to pay out of pocket for claims), location of your home (based on risk factors specific to that region), materials your home is made out of, as well as the age of your home.

Make sure that when shopping for any type of insurance you receive multiple quotes and read the coverage details carefully to determine the best option for you.

While it’s not a requirement to have a policy providing coverage for your home in Nevada, keep in mind that some mortgage lenders may require the purchase of a policy as a condition for extending the loan. For this reason, and to educate consumers, the Nevada Department of Business and Industry (Division of Insurance) has provided a comprehensive guide to home insurance.

Filed Under: Uncategorized

Buying a Home: Preparing Financially

March 26, 2022 by Heather Foreman

Buying a home is a big financial investment, making it incredibly important to get your finances organized before even starting the house hunting process. But, with so many things to do when preparing to buy a home, where do you even start?

These helpful hints will give you a basic guide to the financial preparation needed before buying a home.

Check your Credit Report

Credit scores are impactful, which is why it’s always important to check your credit report. Interest rates on your mortgage, whether you stand to be prequalified or get preapproved, as well as the amount you are loaned, are all heavily influenced by credit score.

While your credit score may reflect differently depending on the company generating it, you are entitled to one free credit report from the three major credit reporting companies, Equifax, Experian and TransUnion once per year using the federally approved site, AnnualCreditReport.com.

Keep in mind that most mortgage lenders use FICO® scores for lender reliability.

Check your credit report very carefully to make sure there are no errors, or cards listed that you don’t recognize. The U.S Department of Housing and Urban Development (HUD) has counselors available to help you obtain a credit report and review it for errors.

Determine Your Monthly Spending…

There are a lot of costs involved with buying a house, so it is important to have a clear understanding of how much you can put as a down payment, feasibly pay for your monthly mortgage payment, as well as accounting for closing costs.

It’s recommended to review your spending over a period of months to have a strong frame of reference on what your budget looks like to take into consideration how different housing options will fit in with your budget.

…And Use This Information to Help You Determine Your Budget

Your monthly payment after buying a home will include various things – including property taxes, interest, mortgage principal, as well as any insurance such as homeowner or mortgage insurances. These are in addition to utilities paid or potential Homeowners Association (HOA) dues.

Having a clear understanding of your monthly budget will help you take into consideration the affordability of different homes, allowing you to confidently pick a home within your budget.

Gather Your Financial Information and Explore Your Options

Remember that you have options when it comes to finding a lender, so it is good to shop around for a mortgage. Make sure that you understand the different type of loan options and the three components that make one: loan term, Interest rate type, and loan type.

Are you a veteran? Make sure to take advantage of the VA’s Home Loan Guarantee Program.

To make sure that you have all the information you need available when you find the right lender, have an application packet ready. This typically includes W-2 information for the past two or more years, bank statements and other documentation. The Consumer Financial Protection Bureau offers a comprehensive list of documents you should have ready, helping your application process go as quickly as possible.

While there’s a lot to keep in mind when it comes to buying a home and how it impacts you financially, by taking the initial steps in examining your finances and budget you’ll be starting off your search for a new house in the best position possible.

To help you organize the steps you’ve taken in preparing financially, consider using this checklist to keep track of the entire financial preparation process.

Filed Under: Uncategorized

5 Tips on Searching for Your First Home

March 8, 2022 by Heather Foreman

While preparing to buy your first home is exciting, it can easily begin to feel overwhelming once first-time homebuyers begin house hunting.

Here are 5 tips to help you in your search for your dream home.

1. Get Pre-Approved for a Mortgage

Applying for pre-approval for a mortgage is a good thing to do once you begin your house hunt. It’s important to know that preapproval is different from pre-qualification – the main difference being that while being pre-qualified for a mortgage estimates the amount you may be loaned, a preapproval letter will provide an exact amount that you will be loaned.

This will be very helpful in making sure that you can find a great home while making sure that it stays within your budget. Keep in mind that pre-approvals are typically valid periods of up to 90 days, so make sure to check with your lender to verify how long you’re pre-approved for.

2. Give Yourself Time to Shop

It can be easy to want to pick a house right away – especially if your initial search for a home hasn’t yielded many results. But while you may be eager to secure a home, buying a home is a long-term investment, making it so important that you invest in the right home for your situation.

When searching for your first home, keep the big picture in mind – maybe there’s a house you’d be willing to settle for now, but will it fit in with your plans in 10 -15 years?

Consider the goals you have, and how the home fits in with them.

3. Determine and Identify Your Wants vs. Needs

If you close your eyes and picture your dream home, what do you see? Maybe you imagine the idyllic white picket fence and single-family suburban home, or maybe you imagine a quaint cottage far removed from the bustle of city life.

Whatever your perfect home might look like when imagined, it’s important to keep in mind that it may not look like the house that ends up being perfect for you.

Take the time to write down everything you hope to find in a home. From this list, identify not just the characteristics that are most important to you, but also areas that you may be willing to compromise on. Doing so will widen the scope of your search and make it more likely that you’ll find a great home.

4. Work With a Realtor

Making sure that you work with a realtor is the smartest way to navigate your journey in buying your first home. Your realtor will know the market better than anyone and will have access to listings you may not have found when searching online.

Discuss the list you’ve made of your wants and needs in your home, and let your realtor know if you’ve already gotten pre-approval or pre-qualified for a mortgage. Your realtor will work with you in making sure you find a home you’ll love – within your budget.

5. Check out Resources for First-Time Homebuyers

There’s a ton of resources available for first time homebuyers, and it’s a wise choice to take advantage of them. The U.S. Department of Housing and Urban Development (HUD) provides helpful information on homeowner education, including HUD approved pre-purchase counseling services, information for owning a home, as well as providing homeownership assistance.

Using these tips you’ll be prepared to search for and land your first home. Congratulations on making the decision to become a first-time homebuyer and happy hunting!

Filed Under: Uncategorized

What You Need to Know About Buyer Love Letters to Home Sellers

October 20, 2021 by Heather Foreman

By: Lynn Ettinger

Did you hear the one about the dog who wrote a love letter? Not to his owner, but to a home seller. Well, actually the dog’s owner wrote the letter in Buddy’s voice, describing how wag-worthy the house was and how much he craved a game of fetch in the backyard. 

Doggie ghostwriting, which happened IRL, is just one example of how home buyers are using creativity to try to get their offer accepted. It sounds harmless enough. But buyer letters to home sellers can unintentionally create Fair Housing Act discrimination and risks for buyers, sellers, and their agents.

How Love Letters to Home Sellers Work

“A love letter is any communication from the buyer to the seller where the buyer is trying to set themselves apart,” says Deanne Rymarowicz, associate counsel at the National Association of REALTORS®. “ It could be an email, a Facebook post, a photo. Some buyers send elaborate packages with videos and letters. The communication has the intent of ‘pick me, and here’s why.’” 

Buyers who write the letters typically send them to the listing agents, along with their offers, says Paul Knighton, CEO and cofounder of MORE Realty in Tigard, Ore. “They ask, ‘Would you please pass this along to the sellers?’ They’re trying to do what they can to get their offer accepted, especially in a competitive market.”

Letters Can Risk Violating Fair Housing Act

While these love letters may seem harmless enough, they can create a problem if buyers accidentally reveal information in one or more of the seven areas protected by the Fair Housing Act, Rymarowicz explains. Those areas are race, color, religion, sex, disability, familial status, or national origin. “Buyers could say something like, ‘this is down the street from our temple,’ or ‘the hallways are wide enough to accommodate my wheelchair.’ Anything that provides personal information related to one of the prohibited bases for discrimination could result in a violation if a seller makes a decision based on that information.” 

Do Love Letters to Home Sellers Work?

In addition to creating potential risk, love letters to sellers aren’t all that effective, Knighton says. A case in point: Several years ago, one of his clients got 14 offers overnight, ranging from $219,000 to $250,000. “A person who offered $225,000 wanted to send a love letter. I said to him, ‘You’re writing an offer that’s $25,000 under the highest offer. A letter’s not going to help.’ He wrote it anyway, but the seller didn’t even read it and took the higher offer. The offer needs to stand on its own.” 

Beyond ignoring the letters, some sellers may be completely turned off, Rymarowicz says. “They may think, ‘This is a financial transaction.’” 

Even the circumstances can suggest Fair House Act discrimination, she explains. Say that an offer with a love letter got the house but was less attractive than an offer without a letter. “If the losing buyer doesn’t share characteristics of the seller and the winning buyer does, you could potentially have a situation. If sellers accept love letters, it’s more important that they document the basis of their decision when selecting a winning offer.”

Tips to Avoid Violating the Fair Housing Act

Here are five tips to avoid risk of violating the Fair Housing Act:

  1. Keep the contract in mind: Knighton says real estate pros at his firm talk to buyers and sellers about contract boundaries. “We say, ‘Please don’t communicate with the other party, because we are in contract negotiations and need to manage time frames.’”  
  2. Focus on objective information: Find ways to differentiate yourself on objective terms. And talk to the agent about how to improve the substance of your offer, Rymarowicz advises. “Can you make a larger earnest money deposit? Can you give them a longer closing date?” 
  3. Proceed with caution: The NAR discourages buyer letters to home sellers and advises caution, according to Rymarowicz. 
  4. Talk to your agent: Don’t be surprised if your real estate agent brings up the subject. “If you’re the seller, the listing agent may talk to you about the potential for Fair Housing violations. They may ask if you want to accept the risks,” Rymarowicz says. If the agent doesn’t raise the subject of buyer letters, the buyer or seller can do so. 
  5. Know your state law: Oregon passed a law governing how letters to home sellers are used. “Effective January 2022, a seller’s agent must reject any communication from a buyer other than customary documents,” Knighton says.

Even if a buyer letter to a seller focuses on the property and not the buyer, there’s little to be gained, Knighton says. “There’s risk, but the reward isn’t there. Instead, focus on writing a really strong offer. That’s what has to stand out.”   

https://www.houselogic.com for more articles like this.

Copyright 2021 NATIONAL ASSOCIATION OF REALTORS®

Filed Under: Uncategorized

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