Roger

The 3.8% Tax Is Not a Real Estate Transfer Tax

 

By Robert Freedman, Senior Editor, REALTOR® Magazine

 

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

 

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

 

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.

 

Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

 

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

 

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

 

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

 

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8%  = $950.

 

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

 

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

 

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

Did you know this week we’re going to see another Black Friday? No, don’t run out and pick up that weed whacker you’ve always wanted, it’s not that kind of Black Friday. This week is actually going to be the deadline for states joining the settlement with the nation’s top five mortgage servicers. This is of course referring to the “documentation errors in foreclosure processing.” They wanted to call it what it actually is, the “big mortgage companies royally ripped off the American people without even bothering to cover their corpses” but that didn’t go over so well when trying to negotiate a settlement.

But luckily for someone (I’m not exactly sure who) a settlement has been reached and if anyone wants to get in on it, this Friday is the deadline. So who’s in and who’s out at this point?

Well, two states have come out strongly against the settlement (the “we don’t really blame you for robo-signing and illegally evicting the powerless or unemployed from their homes” settlement) because they feel the solutions don’t work and the servicers are getting off too easy: California and Delaware.

If California really holds out the servicers could still be sued for nearly a fifth of all foreclosures done. That’s some massive exposure. But in the end, who is this really going to help? I mean, the Department of Justice claims that any money recovered from the servicers (around $25 billion with a big B) would make its way into the mortgage relief programs.

If you believe that, I’ve got a bridge to sell you. Of course, you’ll need to find a mortgage for it and that might be tough.

The decline in the market share of foreclosure-related home sales is partially explained by various hurdles to the efficient conclusion of the foreclosures process, but “even with the hurdles to selling foreclosures, foreclosure sales continue to represent a historical high percentage of all sales,” says RealtyTrac. Foreclosures’ shrinking share could also be caused by declining mortgage delinquencies, which have been dropping relatively quickly in California, according to the Mortgage Bankers Association.  In California, the share of foreclosure related sales was 44% in the third quarter. California has one of the most efficient foreclosure recycling processes in the nation, so temporary supply constraints are not that big of an issue as, for example, they may be in Florida.  Strong demand may be stabilizing the average sales price of home in foreclosure, too, which was up 1% from the previous quarter and down just 3% for  the third quarter in 2010. The reported average discount for foreclosed properties relative to regular homes was 34% — but I wouldn’t read too much into these numbers because they are not quality adjusted.  Still, declining mortgage delinquencies and strong demand for foreclosure product could mean that an effective resolution may be coming for the foreclosure business — and what’s lurking in the shadows.”

Normally, debt that is forgiven or canceled by a lender in a foreclosure or short sale must be included as income on tax returns and is taxable. However, the Mortgage Forgiveness Debt Relief Act of 2007 excluded the reporting of up to $1 million in canceled debt on a primary residence for tax purposes. But not for long.  Local real estate agents report no frenzy of calls or uptick in clients wanting to carry out short sales. Scott Tobias, president of the Bakersfield Association of Realtors, told The Californian last week that “I think, basically, homeowners don’t know about” the tax relief expiring on Dec. 31, 2012.  With nearly half of all Bakersfield mortgages underwater, it’s essential for people to know of the upcoming tax break expiration, especially considering that it can take months to close a short sale.  The housing market is nowhere near recovery; Congress ought to extend the tax relief. But no one should rely on Congress to act. It’s imperative for underwater homeowners to understand their options and be informed about the looming tax deadline.

 

The number of California homes entering foreclosure in the fourth quarter fell 11.9% from the same period in 2010 to the second-lowest level over the last four years, said DataQuick, a real estate information firm in San Diego. A total of 61,517 notices of default, which are filed to initiate foreclosures, were recorded on California properties during the fourth quarter. That was a 13.7% drop from the third quarter of 2011.  Some economists say California and other states will probably see an increase in foreclosure actions as banks deal more aggressively with seriously delinquent mortgages. That increase probably will push home prices lower.  Default notice filings fell sharply in December, particularly those involving loans from Bank of America and Bank of New York Mellon, and helped drag down the overall quarterly numbers. Average daily filings on behalf of Bank of New York Mellon dropped 75% from November to December; filings on behalf of Bank of America dropped 50%, Wells Fargo 20% and JPMorgan  Chase 13%, DataQuick said Tuesday.  The number of homes taken back through the foreclosure process also fell, by 11.8% from a year earlier to 31,260.

The majority of the loans entering the foreclosure process in the fourth quarter were made in 2005 to 2007, when poor lending practices by major institutions were rampant.  Californian homeowners were a median nine months behind on their payments when they received a notice of default from their lender. Among the state’s largest counties, mortgages in San Francisco, Marin and San Mateo counties were the least likely to go into foreclosure. Homes were most likely to enter the foreclosure process in Sacramento, San Joaquin and Stanislaus counties, according to DataQuick.  In Southern California, the number of default notices filed on properties fell 10.2% from a year earlier, and the number of homes taken back by banks fell 11%. Many foreclosures were delayed in 2011 as banks worked through issues surrounding mortgage servicing and foreclosure. Settlement negotiations among attorneys general, federal agencies and the mortgage industry over foreclosure and mortgage servicing abuses dragged on through most of last year.

Analysts attributed the delays to the uncertainty over the outcome of those talks. If a deal is struck among the parties and new foreclosure processes by banks are put in place, some analysts say the foreclosure machinery could ramp up again. Those negotiations continue to inch forward but could still fall apart. State attorneys general have received drafts of the deal with the banks, a $25-billion settlement that would overhaul foreclosure and mortgage servicing practices, according to two people familiar with the negotiations who aren’t authorized to speak publicly.  A key component to any strong deal would be California’s participation. State Atty. Gen. Kamala D. Harris, who must make that decision for the Golden State, has not said whether she will sign on. Harris walked away from talks with the banks last year, saying they were asking for too much release from liability, but since then certain provisions have been added to the deal with the aim of getting her back to the table. Yesterday the Center for Responsible Lending gave the proposed $25-billion deal a tentative thumbs up, calling it “an important step forward in addressing foreclosure abuses.” The nonpartisan advocacy group noted that the deal would “provide an important template for ways banks can use principal reduction to reduce unnecessary foreclosures and put the country back on a path to economic recovery.”

The string of sovereign debt downgrades in recent months could be just the beginning. The US, Europe—even Germany—could face further ratings cuts over the next three years, according to a lengthy analysis this week by Citigroup.  The European Union got a slight reprieve late Friday as Standard & Poor’s backed its triple-A/A-1+ rating on the EU.  It had been under review and at risk of a downgrade. The outlook remains “negative.”  In announcing its decision, S&P said the EU “benefits from multiple layers of debt-service protection sufficient to offset the current deterioration we see in member states’ creditworthiness.” The US is at the top of Citi’s list for possible downgrades because its debt and deficit troubles are unlikely to be resolved with the political infighting in Washington.  Some of the other usual suspects also are on Citi’s list – the European peripheral nations in particular such as Greece and Spain.  But even mighty Germany, seen as the continent’s most secure economy, could face a downgrade as the sovereign debt crisis escalates and a European recession spreads through the region. “We expect a string of further ratings downgrades for advanced-economy sovereign debt, and do not expect any ratings upgrades,” Citi analysts Michael Saunders and Mark Schofield wrote.  That includes American debt, which Standard & Poor’s downgraded in August in a move that set off a more than 600-point one-day selloff in the Dow industrials.

Citi said it is keeping its outlook unchanged on US debt in the near term but sees trouble looming for the American rating over the next two to three years.  Indeed, the list of potential downgrades is ominous and serves as a reminder that while the US equity markets seem conveniently to have forgotten about the world’s debt troubles, some stern and punitive reminders are on the way.  Further downgrades for the US, and the initial downgrade for Germany, could be a few years away.  But in the next six months, the ratings agencies are likely again to start rattling their sabers, starting with the declaration of a Greek default that is approaching a near-certainty in March.  In fact, in the next six months, Citi expects Moody’s to cut ratings for Italy, Spain, Portugal and Greece, with the nascent recovery in Ireland allowing it to be the only one of the “PIIGS” nations to escape the downgrade scalpel.  Additionally, France and Austria are deemed likely for a “negative outlook,” while Greece will be placed into either “selective default” or “outright default.”  Going out further, the next two to three years are likely to see downgrades not only to the US but also to Japan, France, Italy, Spain, Austria, Belgium, Finland, the Netherlands and Portugal.

The National Association of Realtors said Friday that sales increased 5% last month to a seasonally adjusted annual rate of 4.61 million, the best level since January 2011 and the third straight monthly increase for sales. For the year, sales totaled only 4.26 million. While that’s up from 4.19 million the previous year, it’s below the 6 million that economists equate with healthy housing markets.  Sales are increasing at a time when the market is flashing other positive signs. Mortgage rates are at record-low levels. Homebuilders have grown slightly less pessimistic because more people are saying they might be open to buying a home this year. Home construction picked up in the final quarter of 2011The median sales price rose 2.3% to $164,500 in December. 2011. Still the housing market has a long way to go before it is fully recovered from the housing bust four years ago. In the last four years, home sales have slumped under the weight of foreclosures, tighter credit and falling prices. Fewer first-time buyers, who are critical to a housing recovery, are in the market for a home. Purchases by that group fell last month to make up only 31% of sales. That’s down from 35% in November. In healthy markets, first-time buyers make up at least 40%.  At the same time, homes at risk of foreclosure made up a third of all sales last month. In healthy markets, they comprise 10% of sales.

Investors are increasingly buying homes priced under $100,000. Still, Sales rose across the country in December. They increased on a seasonal basis by more than 10% in the Northeast, 8.3% in the Midwest, 2.9% in the South and 2.6% in the West.  The glut of unsold homes declined to 2.38 million homes. At last month’s sales pace, it would take nearly 7 months to clear those homes. Analysts say a healthy supply can be cleared in about six Months.

Americans are cutting their debt faster than other countries and could already be halfway through the deleveraging process, setting the stage for the nation’s economic recovery, says a new report from McKinsey Global Institute.  However, even when U.S. consumers finish deleveraging, they probably won’t be as powerful an engine of global growth as they were before the crisis, warns the report.  According to McKinsey analysts, deleveraging happens in two stages: First, the private sector reduces debt, while economic growth is negative or minimal and government debt rises; then, growth rebounds and supports gradual government deleveraging.  “Somewhat surprisingly, given the amount of concern over the U.S. economy, we find that the United States is furthest along in private-sector debt reduction and closest to beginning the second phase of deleveraging,” says the report.  “The remaining obstacles for its return to growth are its unsettled housing market and its failure to lay out a credible medium-term plan for public debt reduction,” concludes the report.

Since the financial crisis, U.S. household debt has fallen by $584 billion, or 15 percentage points relative to disposable income, which is more than in any other country.  At this pace, Americans could reach sustainable debt levels by the middle of 2013.  The report also found that since the 2008-2009 financial crisis the world’s ten largest developed economies have seen their total debt increase, primarily due to growing government debt.  The U.S., South Korea and Australia are the only countries that have seen a decline in the ratio of total debt to GDP during that time period.  Moreover, the United Kingdom and Spain are deleveraging at a much slower pace, and it could take another decade until their private-sector debt returns to the pre-bubble levels.  In the United States, most of the private-sector deleveraging has happened in the financial sector, where debt relative to GDP had declined to $6.1 trillion from $8 trillion, levels not seen since 2000.

Tahoe Donner Web Cams

Wondering what’s going on Tahoe Donner? Now you can see first hand with Tahoe Donner’s Web Cams! Tahoe Donner provides live web cams for: Cross Country, Snowplay Area, Downhill Ski Area Snowbird Lift, Downhill Ski Area Lodge Patio, Golf Course, and Beach Club Marina. Click on the link to view Tahoe Donner Web Cam

The Martis Camp Ski shuttle is also up and running this year. We’ll transport you from your Martis Camp home to the Yurt where you can step into your skis and hop on the Martis Camp Express to the top of Lookout Mountain. Alternatively, explore our private, groomed trails perfect for all levels of Nordic skiing and snowshoeing-with equipment and instruction available.

While you’re out enjoying the snow or relaxing by the fire, our 8,000 square-foot Ski Lodge is well underway and scheduled to be open next season. As enjoyable as breakfast, lunch and the après-ski experiences are at the Yurt now, it’s exciting to envision the same by the Ski Lodge’s dramatic fire place or outdoor terrace overlooking the Washoe run next season.

However your family chooses to enjoy winter in Tahoe, Martis Camp is firmly committed making it a surpassing experience that will be part of your legacy for years to come.

To get a head start in fulfilling those dreams, we are proud announce a unique opportunity to purchase a built Cabin from this previously sold out collection. At 3,250 square feet, and fully furnished and ready to move in, this home is ideally located near the Camp Lodge including dining, spa and fitness area.  Designed by Walton Architects + Engineering and built by Morrison Construction, this spectacular 4 bedroom, 4.5 bath family retreat is offered at $3,485,000 with furnishings included. With ten sales already in 2012, families are embracing Martis Camp as enthusiastically as ever, so call Roger today to discover how 2012 can become your best year in Tahoe.