Earlier this week, the U.S. Department of Housing and Urban Development (HUD) released the new FHA loan limits for California, allowing consumers to calculate the new conforming loan limit for Freddie Mac and Freddie Mae, as part of the initial steps taken since President Bush signed the national economic stimulus package last month.
The multi-faceted stimulus package includes a temporary increase of the conforming loan from $417,000 to as high as $729,750* and a temporary increase of the FHA loan from $362,750 to as high as $729,750* through December 31, 2008.
All told, 14 California counties saw their loan limits for FHA, Fannie Mae and Freddie Mac increased to the $729,750 cap. Most were in the San Francisco Bay Area or other parts of Northern California (Alameda, Contra Costa, Marin, Monterey, Napa, San Francisco, San Mateo, Santa Cruz and Santa Clara). The Sacramento area saw its loan limits increase to $580,000. Click here to access details on FHA limit increases for all California counties.
So what does this mean for consumers?
This step is designed to provide economic stability to communities in California and give hundreds of thousands of homeowners and homebuyers throughout the country, a safer, more affordable mortgage alternative. Through this increase, consumers may now obtain less expensive loans, thus reducing their monthly payment, improving homeownership affordability and increasing buyers’ purchasing power.
Is it the best time to buy?
According to a CNN article released earlier this week entitled, “Housing: Best time to buy in four years,” “It may be the best time to buy a house in more than four years. Home prices have dropped so quickly and so far that valuations – the difference between what a home should cost and its actual price – are the lowest they’ve been since 2004.”
Though an exciting turn of events for the real estate market, the key to remember is that the higher loan limits are temporary and are expected to expire at the end of 2008.
If you are considering entering the real estate market, “your best opportunity in more than four years” may have arrived. Please call me today so we may see how the increase in loan limits could improve your opportunities in today’s market.
Tuesday, November 25, 2008
The 411 on the Emergency Economic Stabilization Act of 2008
The 411 on the Emergency Economic Stabilization Act of 2008
A layman’s guide to what it means for consumers and how it may benefit home buyers and sellers
President Bush recently signed into law a far-reaching, $700 billion legislation known as the Emergency Economic Stabilization Act of 2008. Originally dubbed by the media as the “Bailout Bill,” the legislation is designed to unlock credit markets and restore confidence in the nation’s banking system. The measure authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators’ power to suspend asset-valuing rules that many companies blame for fueling a financial crisis.
As CNNMoney.com’s October 4, 2008 articled entitled Bailout: Will it work? reported, “The goal is to unfreeze the credit markets. Financial institutions have become paralyzed with fear and though they have plenty of cash on hand, they’ve been hoarding it. Without this intra-bank lending, businesses are having trouble getting the financing they need even for daily operations, much less loans for longer-term projects.”
I know the question we are all asking ourselves right now is how is this going to affect all of us. How will it affect our retirements? How will it affect the mortgage crisis? The answers to these and other questions will only be answered over time but what I can tell you is that this legislation is a step towards stabilizing our market. The main goals of the new act are to:
- Shine a new light of scrutiny and accountability on Wall Street including a curb on executive pay for companies selling assets or buying insurance from Uncle Sam. According to CNNMoney.com’s October 4, 2008 Bailout 101: What new law says, “For example, any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate.” That article further reported, “The bailout plan also underlines the Securities and Exchange Commission's power to change accounting rules on how banks and Wall Street firms value securities, and directs the agency to study the issue.”
- Allow financial institutions sell their troubled assets, mostly mortgage related to the government. According to the CNNMoney.com article, “It would allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.” It is believed that as a result of passing this act banks will no longer be afraid to lend to each other, thereby making loans more available.
- Provide support for taxpayers. According to the CNNMoney.com Bailout 101 article, there are a number of provisions that will protect taxpayers. “One will direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury would be allowed to take ownership stakes in participating companies.”
- Better oversight through two committees that will be set up. The CNNMoney.com Bailout 101 articled reported, “A Financial Stability Board would include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary. A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.”
- Encourage Lenders to Mitigate Foreclosures. The CNNMoney.com Bailout 101 article also reported, “The new law calls on federal agencies to encourage loan servicers to modify mortgages by a number of means—including reducing the principal or interest rate. It also extends a temporary provision that exempts from federal income tax any debt forgiven by a bank to a borrower in a foreclosure.”
- Provide tax breaks for the middle class. The CNNMoney.com Bailout 101 article explained the three key tax elements as follows, “It extends a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels. The law also continues a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns. In addition, the bill includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called ‘income tax for the wealthy’.”
So how long will it take for these anticipated benefits to be seen on the proverbial Main Street? President Bush noted in his public address immediately following the bill’s passage that it “will take some time for this legislation to have a full impact on the economy.”
What the New Act May Mean For Home Buyers and Sellers
I agree with the National Association of Realtors’ stance that the passing of the Emergency Economic Stabilization Act of 2008 is a positive move for our economy, particularly the housing sector which represents 20 percent of the nation’s gross domestic product (GDP). The health of the nation’s housing market is critical to the financial well being of every household in the country.
According to USA Today’s October 6, 2008 article entitled For bailout to work, housing market needs to mend, “Housing is a critical component to the U.S. economy and by extension the availability of credit. Roughly one in eight U.S. jobs depends on housing directly or indirectly — from construction workers to bank loan officers to big brokers on Wall Street. A turnaround in housing prices would boost confidence in the wider economy and, experts hope, goad banks into lending again.”
The government’s resolve to take action that is focused on fixing the credit crisis is to be commended, particularly because these major moves to add greater liquidity to the market should have a beneficial effect on home buyers and sellers and the real estate industry as well which should ultimately benefit other areas of our nation’s economy.
As we have seen in prior challenging financial cycles, consumers often invest in tangible assets like real estate during times of economic uncertainty. We expect this may be the case in the months ahead, as consumers look to buy homes for all the lifestyle reasons that prompt people to buy (i.e. marriage, births, divorce, death, retirement, etc.).
According to NAR, home prices appreciated at a compound annual growth rate of 6.2% between 1972 and year-end 2007, a period that included four economic recessions. Over the long-term, real estate has typically proven to be a good investment. The current credit crunch is different than previous shocks to the financial system so making predictions about demand for housing is difficult.
I believe the Emergency Economic Stabilization Act of 2008 is a positive step forward. No, it isn’t an overnight answer but I believe that this legislation is pointing us in the right direction and will put us on the right path towards long-term economic growth and prosperity.
In view of this new act, now may be the best time to buy, thanks to a number of important factors that are characterizing our current market:
Interest rates remain attractive
Mortgage money should become more easily accessible to qualified consumers
Inventory is plentiful
Many sellers are motivated
The economic stimulus package is allowing you a limited opportunity to purchase more house for your money than you may have been able to buy in the recent past
A home is still the place where you live and plant your roots
As you can see, home buyers may have an incredible opportunity right now. But this type of market may not last forever and if you intend to buy a home, now may be your time to enter or re-enter the real estate market.
If you are ready to make an informed and educated decision about real estate, please contact me today. I would be happy to help you find the opportunities in today's market
A layman’s guide to what it means for consumers and how it may benefit home buyers and sellers
President Bush recently signed into law a far-reaching, $700 billion legislation known as the Emergency Economic Stabilization Act of 2008. Originally dubbed by the media as the “Bailout Bill,” the legislation is designed to unlock credit markets and restore confidence in the nation’s banking system. The measure authorizes the government to buy troubled assets from financial institutions reeling from record home foreclosures. The bill contains $149 billion in tax breaks and affirms regulators’ power to suspend asset-valuing rules that many companies blame for fueling a financial crisis.
As CNNMoney.com’s October 4, 2008 articled entitled Bailout: Will it work? reported, “The goal is to unfreeze the credit markets. Financial institutions have become paralyzed with fear and though they have plenty of cash on hand, they’ve been hoarding it. Without this intra-bank lending, businesses are having trouble getting the financing they need even for daily operations, much less loans for longer-term projects.”
I know the question we are all asking ourselves right now is how is this going to affect all of us. How will it affect our retirements? How will it affect the mortgage crisis? The answers to these and other questions will only be answered over time but what I can tell you is that this legislation is a step towards stabilizing our market. The main goals of the new act are to:
- Shine a new light of scrutiny and accountability on Wall Street including a curb on executive pay for companies selling assets or buying insurance from Uncle Sam. According to CNNMoney.com’s October 4, 2008 Bailout 101: What new law says, “For example, any bonus or incentive paid to a senior executive officer for targets met would have to be repaid if it's later proven that earnings or profit statements were inaccurate.” That article further reported, “The bailout plan also underlines the Securities and Exchange Commission's power to change accounting rules on how banks and Wall Street firms value securities, and directs the agency to study the issue.”
- Allow financial institutions sell their troubled assets, mostly mortgage related to the government. According to the CNNMoney.com article, “It would allow the Treasury access to the $700 billion in stages, with $250 billion being made available immediately.” It is believed that as a result of passing this act banks will no longer be afraid to lend to each other, thereby making loans more available.
- Provide support for taxpayers. According to the CNNMoney.com Bailout 101 article, there are a number of provisions that will protect taxpayers. “One will direct the president to propose a bill requiring the financial industry to reimburse taxpayers for any net losses from the program after five years. And the Treasury would be allowed to take ownership stakes in participating companies.”
- Better oversight through two committees that will be set up. The CNNMoney.com Bailout 101 articled reported, “A Financial Stability Board would include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary. A congressional oversight panel, to which the Financial Stability Board would report, would have five members appointed by House and Senate leadership from both parties.”
- Encourage Lenders to Mitigate Foreclosures. The CNNMoney.com Bailout 101 article also reported, “The new law calls on federal agencies to encourage loan servicers to modify mortgages by a number of means—including reducing the principal or interest rate. It also extends a temporary provision that exempts from federal income tax any debt forgiven by a bank to a borrower in a foreclosure.”
- Provide tax breaks for the middle class. The CNNMoney.com Bailout 101 article explained the three key tax elements as follows, “It extends a number of renewable energy tax breaks for individuals and businesses, including a deduction for the purchase of solar panels. The law also continues a host of other expiring tax breaks. Among them: the research and development credit for businesses and the credit that allows individuals to deduct state and local sales taxes on their federal returns. In addition, the bill includes relief for another year from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called ‘income tax for the wealthy’.”
So how long will it take for these anticipated benefits to be seen on the proverbial Main Street? President Bush noted in his public address immediately following the bill’s passage that it “will take some time for this legislation to have a full impact on the economy.”
What the New Act May Mean For Home Buyers and Sellers
I agree with the National Association of Realtors’ stance that the passing of the Emergency Economic Stabilization Act of 2008 is a positive move for our economy, particularly the housing sector which represents 20 percent of the nation’s gross domestic product (GDP). The health of the nation’s housing market is critical to the financial well being of every household in the country.
According to USA Today’s October 6, 2008 article entitled For bailout to work, housing market needs to mend, “Housing is a critical component to the U.S. economy and by extension the availability of credit. Roughly one in eight U.S. jobs depends on housing directly or indirectly — from construction workers to bank loan officers to big brokers on Wall Street. A turnaround in housing prices would boost confidence in the wider economy and, experts hope, goad banks into lending again.”
The government’s resolve to take action that is focused on fixing the credit crisis is to be commended, particularly because these major moves to add greater liquidity to the market should have a beneficial effect on home buyers and sellers and the real estate industry as well which should ultimately benefit other areas of our nation’s economy.
As we have seen in prior challenging financial cycles, consumers often invest in tangible assets like real estate during times of economic uncertainty. We expect this may be the case in the months ahead, as consumers look to buy homes for all the lifestyle reasons that prompt people to buy (i.e. marriage, births, divorce, death, retirement, etc.).
According to NAR, home prices appreciated at a compound annual growth rate of 6.2% between 1972 and year-end 2007, a period that included four economic recessions. Over the long-term, real estate has typically proven to be a good investment. The current credit crunch is different than previous shocks to the financial system so making predictions about demand for housing is difficult.
I believe the Emergency Economic Stabilization Act of 2008 is a positive step forward. No, it isn’t an overnight answer but I believe that this legislation is pointing us in the right direction and will put us on the right path towards long-term economic growth and prosperity.
In view of this new act, now may be the best time to buy, thanks to a number of important factors that are characterizing our current market:
Interest rates remain attractive
Mortgage money should become more easily accessible to qualified consumers
Inventory is plentiful
Many sellers are motivated
The economic stimulus package is allowing you a limited opportunity to purchase more house for your money than you may have been able to buy in the recent past
A home is still the place where you live and plant your roots
As you can see, home buyers may have an incredible opportunity right now. But this type of market may not last forever and if you intend to buy a home, now may be your time to enter or re-enter the real estate market.
If you are ready to make an informed and educated decision about real estate, please contact me today. I would be happy to help you find the opportunities in today's market
Amendment to IRC §121 May Reduce the $250,000/$500,000 Exclusion
Selling a Principal Residence Formerly Used for Investment Purposes?
Amendment to IRC §121 May Reduce the $250,000/$500,000 Exclusion
Internal Revenue Code (“IRC”) §121 allows taxpayers selling a principal residence to exclude $250,000 of gain from taxation (or, $500,000 for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC §1031.
While the rules for excluding gain from taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the §121 capital gains exclusion and the §1031 capital gains deferral. However, Rev. Proc. 2005-14 only addresses situations wherein the property being sold is investment property formerly used as a principal residence; it does not address how to apply §121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of §121. Specifically, IRC §121 has been amended, effective January 1, 2009. Again, the amendment only affects taxpayers who are selling a principal residence (“qualified use”), which they formerly used for investment (“non-qualified use”). The central point of the §121 amendment is that these taxpayers are not entitled to the full §121 exclusion because the prior investment use is considered “non-qualified” use and any gain allocated to the period of non-qualified use may not be excluded under §121.
How to determine the amount of gain that is not eligible for exclusion
The period of non-qualified use (period not used as a principal residence) must be divided by the total years of ownership to determine the amount of the gain that is not eligible for exclusion under §121.
Any period of non-qualified use before January 1, 2009 should not be included in the calculation. And, depreciation should also be excluded from the calculation and is simply taxed at the applicable recapture rate.
Summary of the rules under §121 amendment
Sale of residence that was formerly investment property – the taxpayer is entitled to only a prorated portion of the $250,000/$500,000 exclusion.
Non-qualified use prior to January 1, 2009 is disregarded, except for purposes of meeting the 5 year rule under HR 4520, if applicable1
Gain resulting from depreciation is taxed and is disregarded for purposes of determining the prorated amount of the exclusion
The application of the amendment is illustrated by the following examples:
Example 1: Taxpayer acquires an investment property, rents it for 3 years and then occupies it for 5 years as his principal residence (no use prior to 2009) before selling it and realizing $350,000 of gain of which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from the calculation. The remaining $310,000 is subject to the prorata calculation as follows:
3 (years of non-qualified use) = 3 (37.5%) x $310,000=$116,250
8 (years total ownership) 8
Thus $116,250 is not eligible for exclusion and is taxed at the applicable capital gains rate. $40,000 of gain is from depreciation and is taxed at the applicable recapture rate. The remaining gain of $193,750 may be excluded from taxation under §121.
Example 2: Taxpayer acquires an investment property in 2007, rents it until 2010, and then occupies it for three years as his principal residence before selling it in 2013, realizing $400,000 of gain. The two years prior to January 1, 2009 are disregarded (but included for determining the five year period).
1 year non-qualified use (disregard 2007, 2008) = 1 (16.66%) x $400,000=$66,640
6 years of total ownership 6
Thus, $66,640 is not eligible for exclusion and is taxed at the applicable capital gains rate. $250,000 of the remaining gain may be excluded under §121, with the balance of the gain, $83,360 taxed at the applicable capital gains rate. In sum, $250,000 is not taxed and $150,000 is taxed.
Taxpayers selling a principal residence after January 1, 2009, which was formerly used as an investment/rental property should consult with their tax or legal advisors regarding the application of the amendment to §121 to their particular situation.
1 If property was originally acquired as part of a 1031 exchange, H.R. 4520 mandates that the property must be owned by the taxpayer for at least 5 years in order to get the §121 exclusion (note: this is in addition to having lived in the property for 2 of the preceding 5 years
Amendment to IRC §121 May Reduce the $250,000/$500,000 Exclusion
Internal Revenue Code (“IRC”) §121 allows taxpayers selling a principal residence to exclude $250,000 of gain from taxation (or, $500,000 for married taxpayers, filing jointly) as long as they have lived in the residence for 2 out of the preceding 5 years.
Alternatively, for taxpayers selling investment/rental property, while they may not exclude gain from taxation, they can nonetheless defer payment of taxes by completing their disposition as an exchange under IRC §1031.
While the rules for excluding gain from taxation or deferring payment of taxation may seem fairly straightforward under the above code sections, they become more complicated if the property was used as both a principal residence and for investment/rental purposes.
Fortunately, in February of 2005, the IRS issued Revenue Procedure 2005-14 clarifying that taxpayers are entitled to take advantage of both the §121 capital gains exclusion and the §1031 capital gains deferral. However, Rev. Proc. 2005-14 only addresses situations wherein the property being sold is investment property formerly used as a principal residence; it does not address how to apply §121 to situations when the property being sold is a principal residence formerly used for investment purposes.
Now, pursuant to the Housing Assistance Tax Act of 2008, taxpayers selling a principal residence formerly used for investment purposes, have specific guidance on the application of §121. Specifically, IRC §121 has been amended, effective January 1, 2009. Again, the amendment only affects taxpayers who are selling a principal residence (“qualified use”), which they formerly used for investment (“non-qualified use”). The central point of the §121 amendment is that these taxpayers are not entitled to the full §121 exclusion because the prior investment use is considered “non-qualified” use and any gain allocated to the period of non-qualified use may not be excluded under §121.
How to determine the amount of gain that is not eligible for exclusion
The period of non-qualified use (period not used as a principal residence) must be divided by the total years of ownership to determine the amount of the gain that is not eligible for exclusion under §121.
Any period of non-qualified use before January 1, 2009 should not be included in the calculation. And, depreciation should also be excluded from the calculation and is simply taxed at the applicable recapture rate.
Summary of the rules under §121 amendment
Sale of residence that was formerly investment property – the taxpayer is entitled to only a prorated portion of the $250,000/$500,000 exclusion.
Non-qualified use prior to January 1, 2009 is disregarded, except for purposes of meeting the 5 year rule under HR 4520, if applicable1
Gain resulting from depreciation is taxed and is disregarded for purposes of determining the prorated amount of the exclusion
The application of the amendment is illustrated by the following examples:
Example 1: Taxpayer acquires an investment property, rents it for 3 years and then occupies it for 5 years as his principal residence (no use prior to 2009) before selling it and realizing $350,000 of gain of which $40,000 is from depreciation deductions.
$40,000 of gain is depreciation and is excluded from the calculation. The remaining $310,000 is subject to the prorata calculation as follows:
3 (years of non-qualified use) = 3 (37.5%) x $310,000=$116,250
8 (years total ownership) 8
Thus $116,250 is not eligible for exclusion and is taxed at the applicable capital gains rate. $40,000 of gain is from depreciation and is taxed at the applicable recapture rate. The remaining gain of $193,750 may be excluded from taxation under §121.
Example 2: Taxpayer acquires an investment property in 2007, rents it until 2010, and then occupies it for three years as his principal residence before selling it in 2013, realizing $400,000 of gain. The two years prior to January 1, 2009 are disregarded (but included for determining the five year period).
1 year non-qualified use (disregard 2007, 2008) = 1 (16.66%) x $400,000=$66,640
6 years of total ownership 6
Thus, $66,640 is not eligible for exclusion and is taxed at the applicable capital gains rate. $250,000 of the remaining gain may be excluded under §121, with the balance of the gain, $83,360 taxed at the applicable capital gains rate. In sum, $250,000 is not taxed and $150,000 is taxed.
Taxpayers selling a principal residence after January 1, 2009, which was formerly used as an investment/rental property should consult with their tax or legal advisors regarding the application of the amendment to §121 to their particular situation.
1 If property was originally acquired as part of a 1031 exchange, H.R. 4520 mandates that the property must be owned by the taxpayer for at least 5 years in order to get the §121 exclusion (note: this is in addition to having lived in the property for 2 of the preceding 5 years
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