Tuesday, October 31, 2023

Discover how to go from stress to success with your home move



Navigating a real estate transaction, which often involves substantial financial investments and emotional considerations, can understandably induce stress. To streamline this process, adopt these effective strategies that promote a smoother journey.

Begin by clearly outlining your primary motivations for either buying or selling a property. By eliminating distractions and maintaining a focused perspective, you can mitigate potential anxieties. For instance, if your primary goal is to secure more space for your family, evaluating properties without this essential feature becomes a straightforward decision.

Whenever feasible, allocate ample time to prevent hasty decisions or setting unrealistic deadlines. While external factors like a sudden job relocation or a booming market might necessitate swift responses, it's crucial to differentiate between preparedness for action and arbitrarily shortened time frames.

Remember, orchestrating a successful transaction requires coordination with other involved parties such as title and mortgage companies, appraisers, surveyors, inspectors and possibly, attorneys. The ability to expedite your actions doesn't necessarily imply that others can adhere to such accelerated timelines.

Anticipate encountering a few unexpected things during your home buying or selling journey. Recognizing the potential for sudden surprises can alleviate some of the pressure when they arise. When challenges do surface, counterbalance these concerns by reminding yourself of the favorable aspects associated with relocating, such as a home more conducive to your current lifestyle, a more convenient location, or other opportunities.

The ultimate strategy to alleviate stress when engaging in real estate transactions lies in partnering with a seasoned REALTOR� who possesses the expertise to navigate you through each step of the process, thereby facilitating the realization of your real estate aspirations.

For more information, download our Buyers Guide.

Tuesday, October 24, 2023

The Net Worth Advantage: Homeowners vs. Renters



The decision to rent or own a home is not just about having a place to live; it also has significant implications for your financial future. One key aspect that often comes into play is net worth ... the value of your assets minus your liabilities. Numerous studies and statistics highlight a compelling trend: homeowners tend to have higher net worth compared to renters.

The numbers according to the Federal Reserve's Survey of Consumer Finances confirms the belief that homeownership has long been associated with wealth accumulation.  The median net worth of homeowners is 40 times higher than that of renters. This discrepancy can be attributed to several factors that favor homeowners, including equity buildup, property appreciation, and forced savings through mortgage payments.

Homeownership allows individuals to build equity over time, which is the difference between the home's market value and the remaining mortgage balance. Every mortgage payment with amortizing loans contributes to this equity, leading to a gradual increase in homeowners' net worth. On the contrary, renters do not benefit from this form of forced savings, as their monthly rent does not result in any ownership stake.

Historically, real estate has proven to be a valuable investment, with properties appreciating in value over the long term. Homeowners enjoy the potential for capital appreciation, which can significantly boost their net worth. In contrast, renters do not participate in the appreciation of the property they live in and miss out on this wealth-building opportunity.

Homeownership also comes with tax benefits, such as deductions for mortgage interest and property taxes but with such a high portion of taxpayers electing to take the standard deduction, the more important tax benefit is the capital gains exclusion. 

Homeowners can exclude up to $250,000 of the gain on their principal residence if single and up

to $500,000 if married filing jointly. During the five-year period ending on the date of the sale, the

taxpayer must have owned and lived in the home for at least two of the past five years.

These advantages contribute to lowering the overall cost of homeownership and increasing the financial cushion for homeowners.

Owning a home can have positive implications for retirement readiness. As homeowners pay down their mortgages, they are essentially building a valuable asset that can be leveraged in retirement. Borrowing against one's home is not a taxable event.  The proceeds could be used for any reason.  Furthermore, owning a home outright eliminates the need for monthly rent payments during retirement, providing greater financial security.

Additional sources to support the claim that homeownership has net worth advantages include:

  • The National Association of Realtors regularly releases reports that analyze the financial benefits of homeownership, including equity accumulation and property appreciation.
  • The Case-Shiller Home Price Index tracks changes in the value of residential real estate, offering insights into property appreciation trends over time.
  • U.S. Census Bureau data offers a broader perspective on homeownership rates, wealth distribution, and their impact on net worth.

The numbers speak for themselves ... homeowners tend to enjoy a higher net worth compared to renters. The combination of equity building, property appreciation, tax advantages, and retirement preparedness contribute to this financial advantage. While individual circumstances vary, it's clear that homeownership offers a pathway to building wealth and securing a more robust financial future.

For more information, download our Homeowners Tax Guide.

Tuesday, October 17, 2023

The Danger of Do-It-Yourself Divorce



Ken & Barbie have been married 20 years and have owned their current home for over 10 years. Without the benefit of legal or tax advice, they decide to divorce with Ken taking his retirement and Barbie taking the equity in the home which are equal in value.

It appears to be equitable until a year later when Barbie decides to sell the home.  It sells for the same market value at the time of the divorce but now Barbie pays all the sales costs.  The unpaid balance on the home was much larger than normal because it had been refinanced for $750,000 two years earlier.

When Ken gave Barbie his equity in the house, he also gave her his tax liability in the home.  Barbie has a substantial capital gain because the home was purchased for a much lower price ten years earlier.  Capital gain is calculated by taking the sales price less sales costs, plus capital improvements made, less the purchase price.

Since she is single, she has a $250,000 exclusion and the balance of the gain of $456,750 will be taxable as long-term capital gains.  Let's assume her rate is 15%, Barbie would owe $68,513 in capital gains taxes.

When calculating Barbie's net proceeds from this sale and accounting for the sales costs, mortgage balance, and federal taxes due, she only realizes $88,487 in this example while Ken walked away from the divorce with the full value of his retirement account of $225,000.

It doesn't appear to have been an equitable settlement.  Contributing to this inequity was an apparent misunderstanding of how taxes are calculated and that the expenses incurred with the sale of the home as a single person would be borne solely by herself.

No gain or loss is recognizable on the transfer of the residence if related to the end of a marriage.  It is treated as a gift with no gift tax due if the transfer is within two years prior to the divorce or one year following.  There is no change in basis; it is carried over to the gifted party.

A marriage is a legal arrangement and divorcing deserves the benefit of expert advice.  An attorney who is familiar with potential tax consequences could have advised his/her client about the potential tax consequences and possibly suggested a more equitable division of assets.

This example is used to show you how it can appear to be an easy solution to dividing the assets.  In an emotional state, one person could agree to something that could be costly later. 

 

Division of Assets

 

Home's Market Value at time of Divorce

$975,000

Unpaid Balance at time of Divorce

$750,000

Equity in Home at time of Divorce

$225,000

Ken's Retirement Value at time of Divorce

$225,000

Computation of Tax

 

Subsequent Sales Price by Barbie

$975,000

Less Sales Costs

$68,000

Less Basis (the home was refinance several times with cash out)

$200,00

Capital Gain

$706,750

Less Section 121 Exclusion for single person

$250,000

Remaining Taxable Gain

$456,750

Tax Due at 15%

$68,513

Computation of Proceeds

 

Sales Price

$975,000

Less Sales Costs

$68,000

Less Mortgage Balance

$750,000

Less Federal Income Tax Due

$68,513

Net Proceeds

$88,487


Tuesday, October 10, 2023

Exploring Down Payment Sources for First-Time Homebuyers



Aspiring homeowners can overcome the challenge of saving for a down payment by taking advantage of various sources of assistance.  Discover a variety of down payment sources available to first-time homebuyers, from family gifts and retirement account withdrawals to tax refunds and down payment assistance programs, empowering them to achieve their dream of homeownership. 

Implementing effective savings strategies is paramount for first-time homebuyers. Setting a budget, reducing unnecessary expenses, and establishing an automated savings plan can accelerate down payment savings. In addition, consistently monitoring spending habits and making adjustments can help maximize savings potential. Saving for a down payment takes time and there may be some other alternatives available to you.

One possible source of down payment funds is a generous gift from family members. Through the annual gift tax exclusion, individuals can receive up to $17,000 per year from each family member without incurring gift tax obligations. This can significantly contribute to a first-time homebuyer's down payment, making homeownership more attainable.

For instance, a husband and wife can each gift $17,000 to their child and the child's spouse to make a total of $68,000.  This is a substantial amount that may allow the borrower to avoid PMI. If the child is going to be the heir ultimately, should the parents not currently need the money, it allows them to see the enjoyment of the gift now.

First-time homebuyers who have been diligently saving in their retirement accounts may have the option to tap into their 401(k) or IRA funds for their down payment. Certain retirement plans allow penalty-free withdrawals for qualified home purchases. However, it's crucial to consider the long-term impact on retirement savings and potential tax implications. Consulting with a financial or tax advisor is recommended to understand the specifics and make an informed decision.

Buyers with permanent life insurance policies may have accumulated cash value over time. This cash value can be accessed and used towards a down payment. However, it's important to evaluate the impact on the policy's death benefit and to consider the long-term implications before making any decisions. Consulting with an insurance professional is advisable to fully understand the terms and consequences associated with tapping into life insurance cash value.

Tax refunds can provide a boost to first-time homebuyers' down payment savings. By planning ahead and adjusting tax withholdings, individuals can aim to receive a substantial refund at tax time, which can then be allocated toward the down payment.

Many governments, employers, and non-profit organizations offer down payment assistance programs to support first-time homebuyers. These programs can provide grants, loans, or matching funds to help bridge the gap between savings and the required down payment amount. Eligibility criteria and program specifics vary, so researching and exploring available options in your area is essential. Working with a knowledgeable real estate agent or loan officer can help identify suitable programs and navigate the application process effectively.

Silent second programs are offered by certain local governments or housing authorities. These programs provide a second loan, often at a low or zero-interest rate, to supplement the homebuyer's down payment. The loan is "silent" because no monthly payments are typically required. However, repayment may be required when the home is sold or refinanced. Understanding the terms and conditions of such programs is crucial to ensure compliance and avoid unexpected financial obligations.

In recent years, crowdfunding has gained popularity to raise funds for various purposes, including down payments. Dedicated platforms allow individuals to create campaigns and seek contributions from family, friends, and even strangers who support their homeownership journey. While crowdfunding can be a viable option, it's vital to carefully read platform policies, consider potential tax implications, and approach the process with transparency and integrity. 

First-time homebuyers have multiple options when it comes to down payment sources. From receiving family gifts and utilizing retirement savings to exploring down payment assistance programs and implementing effective savings strategies, aspiring homeowners can find ways to turn their dreams of homeownership into a reality.

By understanding the available resources and seeking professional guidance, first-time buyers can navigate the path to homeownership with greater confidence and financial stability.  Your real estate professional can be very helpful in guiding you through which programs may be available.  They can guide you to a lender who specializes in down payment assistance and other special programs.

For more information, download the Buyers Guide.