The Pending Home Sales Index,* a forward-looking indicator, rose 2.1 percent to 90.8, based on contracts signed in February, from 88.9 in January. The index is 8.2 percent below 98.9 recorded in February 2010. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, says it’s important to look at the broader trend. “Month-to-month movements can be instructive, but in this uneven recovery it’s important to look at the longer term performance,” he said. “Pending home sales have trended up very nicely since bottoming out last June, even with periodic monthly declines. Contract activity is now 20 percent above the low point immediately following expiration of the home buyer tax credit.”
Yun notes there could have been some weather impact in the February data. “All of the regions saw gains except for the Northeast, where unusually bad winter weather may have curtailed some shopping and contract activity.”
The PHSI in the Northeast fell 10.9 percent to 65.5 in February and is 18.4 percent below a year ago. In the Midwest the index rose 4.0 percent in February to 81.1 but is 15.9 percent below February 2010. Pending home sales in the South increased 2.7 percent to an index of 100.3 but are 5.3 percent below a year ago. In the West the index rose 7.0 percent to 105.6 and is 0.6 percent higher than February 2010.
“We may not see notable gains in existing-home sales in the near term, but they’re expected to rise 5 to 10 percent this year with the economic recovery, job creation and excellent affordability conditions providing confidence to buyers who’ve been on the sidelines,” Yun said.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
*The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.
Each February, NAR Research conducts a normal review of PHSI seasonal adjustment factors and fine-tunes monthly data for the past three years; revisions are posted in the Research area of Realtor.org.
NOTE: Existing-home sales for March will be reported April 20 and the next Pending Home Sales Index will be released April 28; release times are 10:00 a.m. EDT
Thursday, March 31, 2011
Monday, March 21, 2011
Competing with Distressed properties can be challenging.
Foreclosures and short sales, collectively known as distressed properties, have accounted for anywhere from 35 to 48 percent of home sales in the metropolitan Chicago real estate market over the last year, according to RE/MAX. As a result, distressed homes now represent a huge source of potential competition for those who want to sell their home for more traditional reasons.
“The sheer number of distressed properties and the low list prices that many of those homes carry can be a bit intimidating for other sellers,” said Jim Merrion, regional director of the RE/MAX Northern Illinois real estate network, “but the fact is that non-distressed homes still outsell their distressed competition. Sellers must be flexible in today’s market, but with the help of a good agent, they still can be successful.”
How large a role distressed properties play in the local home market can vary substantially
Tim Winfrey of RE/MAX Associates West in Bartlett, Ill., reports that while distressed homes can constitute as much as 70 to 80 percent of the inventory in some communities that percentage drops to 40 percent or less in others he serves.
Though most common in the entry-level segment of the market, distressed properties can be found in all price ranges, even homes priced at $1 million or more, according to Julie Brown of RE/MAX Experts in Buffalo Grove, Ill.
Whatever the price of the properties they are considering, buyers tend to be either extremely interested in distressed properties or avoid them almost entirely, according to Brown.
“Some buyers, especially first time buyers, focus exclusively on distressed properties. They feel those homes will give them the best possible value, but the reality is that many non-distressed homes are priced quite aggressively and are in excellent condition as well,” she said.
While many distressed properties do offer good value, they may no longer be the bargains they once were, according to Connie Scott of RE/MAX At Home in Rolling Meadows, Ill., who says that a year ago it was not uncommon to find foreclosures selling for 20 or 30 percent less than other comparable homes in the same area.
“That spread has tightened up considerably in the last year,” she said, estimating that it is down to 10 percent or even less in at least some cases.
Winfrey said that he may recommend pricing a home in very good condition 15 to 20 percent higher than nearby distressed properties, but that can change as properties come on and off the market.
“You have to be willing to constantly readjust your pricing strategy in this market because while there may have been limited competition when a property is first listed, that can change rapidly,” he said, especially when a bank decides put a group of foreclosed homes on the market.
Understanding which distressed homes constitute actual competition and which do not is vital for sellers and their agents, in part because not all sellers have the flexibility to drop the price of their home to compete with distressed homes.
Winfrey said he usually doesn’t view short sales as major competition for his non-distressed listings because many buyers are put off by the fact that it can take six months or more to complete a short sale.
“Short sales are primarily of interest to investors because they have flexibility. On the other hand, the typical family that needs to move in three or four months doesn’t want to deal with the uncertainty that is part and parcel of purchasing a short sale,” he said.
Broadly speaking, any similar home within a mile radius of a listing should be viewed as potential competition, according to Erica McClain of RE/MAX Vision 212 in Chicago. “But at the same time, you have to evaluate each competitive property based on its condition and specific location,” she said. Plus, “bank-owned homes often sell so quickly that they aren’t much competition.”
McClain noted that many sellers are reluctant to compare their home to distressed properties, but doing so is essential in the current market.
“As recently as six months ago, most foreclosed homes were not in good condition, but that is changing as the institutions that own those homes realize how fixing them up will get them sold faster and at a better price,” she reported. “I recently saw three or four foreclosures with new appliances, new carpeting and fresh paint, which makes them very competitive with comparable non-distressed homes.”
Should that become a broad trend, it could put more pressure on sellers to make the home they are selling look and function at its best.
Julie Brown said that in and around Buffalo Grove, a non-distressed home that is freshly painted with new carpeting, minor updating and staging will sell more quickly and possibly at a better price.
Still, Brown stresses that to sell successfully, you need to have both the best house and the best price.
“There’s no doubt that many buyers, especially first-time buyers, can get mesmerized by the prettiest home,” said Connie Scott. But beyond appearance, the other strategy she uses in competing with distressed homes is to make sure buyers know why her listing is a good value.
“I find as many examples as I can of comparable properties that have sold recently so that buyers understand why our listing is priced where it is. I also want to make sure buyers know how well our listing has been maintained because foreclosures can’t offer that kind of assurance,” she said.
The bottom line for sellers, according to Winfrey is that the more competition you face, particularly from distressed properties, the more aggressive the approach you have to take.
“What I find is that in the current market, those who would like to sell but don’t have to do so, end up not selling, while those who are willing to price their home competitively will sell,” he observed. “When sellers feel they have to get a certain price for their home, it makes selling more difficult.”
“The sheer number of distressed properties and the low list prices that many of those homes carry can be a bit intimidating for other sellers,” said Jim Merrion, regional director of the RE/MAX Northern Illinois real estate network, “but the fact is that non-distressed homes still outsell their distressed competition. Sellers must be flexible in today’s market, but with the help of a good agent, they still can be successful.”
How large a role distressed properties play in the local home market can vary substantially
Tim Winfrey of RE/MAX Associates West in Bartlett, Ill., reports that while distressed homes can constitute as much as 70 to 80 percent of the inventory in some communities that percentage drops to 40 percent or less in others he serves.
Though most common in the entry-level segment of the market, distressed properties can be found in all price ranges, even homes priced at $1 million or more, according to Julie Brown of RE/MAX Experts in Buffalo Grove, Ill.
Whatever the price of the properties they are considering, buyers tend to be either extremely interested in distressed properties or avoid them almost entirely, according to Brown.
“Some buyers, especially first time buyers, focus exclusively on distressed properties. They feel those homes will give them the best possible value, but the reality is that many non-distressed homes are priced quite aggressively and are in excellent condition as well,” she said.
While many distressed properties do offer good value, they may no longer be the bargains they once were, according to Connie Scott of RE/MAX At Home in Rolling Meadows, Ill., who says that a year ago it was not uncommon to find foreclosures selling for 20 or 30 percent less than other comparable homes in the same area.
“That spread has tightened up considerably in the last year,” she said, estimating that it is down to 10 percent or even less in at least some cases.
Winfrey said that he may recommend pricing a home in very good condition 15 to 20 percent higher than nearby distressed properties, but that can change as properties come on and off the market.
“You have to be willing to constantly readjust your pricing strategy in this market because while there may have been limited competition when a property is first listed, that can change rapidly,” he said, especially when a bank decides put a group of foreclosed homes on the market.
Understanding which distressed homes constitute actual competition and which do not is vital for sellers and their agents, in part because not all sellers have the flexibility to drop the price of their home to compete with distressed homes.
Winfrey said he usually doesn’t view short sales as major competition for his non-distressed listings because many buyers are put off by the fact that it can take six months or more to complete a short sale.
“Short sales are primarily of interest to investors because they have flexibility. On the other hand, the typical family that needs to move in three or four months doesn’t want to deal with the uncertainty that is part and parcel of purchasing a short sale,” he said.
Broadly speaking, any similar home within a mile radius of a listing should be viewed as potential competition, according to Erica McClain of RE/MAX Vision 212 in Chicago. “But at the same time, you have to evaluate each competitive property based on its condition and specific location,” she said. Plus, “bank-owned homes often sell so quickly that they aren’t much competition.”
McClain noted that many sellers are reluctant to compare their home to distressed properties, but doing so is essential in the current market.
“As recently as six months ago, most foreclosed homes were not in good condition, but that is changing as the institutions that own those homes realize how fixing them up will get them sold faster and at a better price,” she reported. “I recently saw three or four foreclosures with new appliances, new carpeting and fresh paint, which makes them very competitive with comparable non-distressed homes.”
Should that become a broad trend, it could put more pressure on sellers to make the home they are selling look and function at its best.
Julie Brown said that in and around Buffalo Grove, a non-distressed home that is freshly painted with new carpeting, minor updating and staging will sell more quickly and possibly at a better price.
Still, Brown stresses that to sell successfully, you need to have both the best house and the best price.
“There’s no doubt that many buyers, especially first-time buyers, can get mesmerized by the prettiest home,” said Connie Scott. But beyond appearance, the other strategy she uses in competing with distressed homes is to make sure buyers know why her listing is a good value.
“I find as many examples as I can of comparable properties that have sold recently so that buyers understand why our listing is priced where it is. I also want to make sure buyers know how well our listing has been maintained because foreclosures can’t offer that kind of assurance,” she said.
The bottom line for sellers, according to Winfrey is that the more competition you face, particularly from distressed properties, the more aggressive the approach you have to take.
“What I find is that in the current market, those who would like to sell but don’t have to do so, end up not selling, while those who are willing to price their home competitively will sell,” he observed. “When sellers feel they have to get a certain price for their home, it makes selling more difficult.”
Friday, March 18, 2011
February Home Sales up 1.3 percent from January in Illinois
February home sales in Illinois rose from January while year-over-year comparisons still reflect an impact from the homebuyer tax credit incentive. The single family market shows signs of stabilization with steady median price gains statewide in the first two months of the year compared to 2009 and 2010 levels.
The median price in February was $128,800, down 4.6 percent from $135,000 for the same month last year. The statewide single family median price reached $129,000, up 1.6 percent from $127,000 in February 2010 and up 2.8 percent from $125,500 in February 2009. The median is a typical market price where half the homes sold for more, half sold for less.
“We are seeing some improvements in the single family market in particular in terms of median prices trending higher and back to more sustainable pre-boom levels,” said REALTOR® Sheryl Grider Whitehurst, ABR, CRB, GRI, president of the Illinois Association of REALTORS® and the Development and Operations Coordinator for Traders Realty in Peoria. “More encouraging jobs signals and warmer weather should bring qualified buyers out from hibernation to grab hold of the low interest rates and high affordability factors in place for the spring market.”
Adds Whitehurst: “Another positive sign is more than half of Illinois counties reported median price increases or no change in February although markets permeated by distressed properties continue to be affected. The predominance of sales in lower priced tiers of the market also is reflected in the median price.”
The median price in February was $128,800, down 4.6 percent from $135,000 for the same month last year. The statewide single family median price reached $129,000, up 1.6 percent from $127,000 in February 2010 and up 2.8 percent from $125,500 in February 2009. The median is a typical market price where half the homes sold for more, half sold for less.
“We are seeing some improvements in the single family market in particular in terms of median prices trending higher and back to more sustainable pre-boom levels,” said REALTOR® Sheryl Grider Whitehurst, ABR, CRB, GRI, president of the Illinois Association of REALTORS® and the Development and Operations Coordinator for Traders Realty in Peoria. “More encouraging jobs signals and warmer weather should bring qualified buyers out from hibernation to grab hold of the low interest rates and high affordability factors in place for the spring market.”
Adds Whitehurst: “Another positive sign is more than half of Illinois counties reported median price increases or no change in February although markets permeated by distressed properties continue to be affected. The predominance of sales in lower priced tiers of the market also is reflected in the median price.”
Wednesday, March 16, 2011
Incorrect Rumors about %3.8 Transfer Tax persist
For the third time in the past six months, NAR is being inundated with questions about a real estate transfer tax enacted as part of the Health Care reforms in 2010. THERE IS NO SUCH TAX. A viral Internet posting is riddled with errors.
The Health Care legislation did create a new tax that would apply to a portion of the gain on the sale of any capital asset (including real estate). That tax will apply ONLY to individuals with more than $200,000 Adjusted Gross Income (AGI) (or $250,000 AGI on a joint return). The tax does not apply to any amount excluded from taxation under the $250,000/$500,000 principal residence rules. The tax is never imposed directly on the full amount of any capital gain.
The tax is computed under a multi-step formula that captures only a portion of any gain and will only affect those with total AGI above the amounts noted above. Links are provided for a Q&A on the tax and to a brochure with examples of the tax.
Here is a Q & A from the National Association of Realtors.
Q-1: Who will be subject to the new taxes imposed in the health legislation?
A: A new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. Another 0.9% tax will apply to the “earned” income of many of these same individuals. Both levies are referred to as “Medicare” taxes. (For a description of the new 0.9% tax, see separate Q&A entitled “New Tax on EARNED INCOME: Wages, Salaries and Commissions.”)
Q-2: Who is a “High Income” Taxpayer?
A: Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)
Q-3: Are the $200,000 and $250,000 thresholds indexed for inflation?
No. Thus, over time, more individuals may become subject to this tax.
Q-4: When does the new 3.8% Medicare tax take effect?
A: The new Medicare tax on unearned income will take effect January 1, 2013.
Q-5: What is “unearned” net investment income?
A. Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses ifthe investor is not an active participant in the business.
The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.) Thus, in the case of rents, the taxable amount would be gross rents minus all expenses (including depreciation) incurred in operating the rental property. So if gross rents were $100,000 with associated expenses of $40,000, net rents of $60,000 ($100,000 minus $40,000) would be included in Adjusted Gross Income (AGI).
Q-6: So the new tax will apply to rents from investment properties that I own?
A: Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation, cost of repairs, property taxes and all other expenses related to the property. AGI includes net income from rent, so if your AGI is above the $200,000/$250,000 thresholds, then the rental income might be subject to the tax. For many investment real estate owners, the net rents will be the same as or similar to the amounts reported on their Schedule E, filed with their Form 1040 Income Tax Return. (For calculations, see Q-8, below. See also Q-9 through Q-12 related to capital gain from sale of principal residence, losses on sale and to vacation homes, below.)
Q-7: Does the tax apply to the yearly appreciation of an asset?
No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax purposes. This rule applies to real estate and all other appreciating capital assets. Net capital gains are taxable only in the year of sale.
Q-8: How is the new 3.8% Medicare tax calculated?
A: The new 3.8% Medicare tax is assessed only when Adjusted Gross Income (AGI) is more than $200,000/$250,000. (See Q-2 above.) AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.
The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount.
For example, if AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.
If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.
Rules of thumb for predicting the application of this tax year to year are not readily determinable, largely because the proportion of net investment income compared to AGI will vary from year to year and from individual to individual.
Q-9: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply?
A: Yes. Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from the income tax. The new 3.8% tax will NOT apply to this excluded amount of the gain.
Q-10: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?
A: The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.
So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.
Q-11: Is rent from a vacation home subject to the 3.8% tax? And what about the gain on sale of a vacation or rental property?
A: The application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented and whether the property is solely for the enjoyment of the owner. If the owner has rented the home out to others, then the 14-day rent exclusion will continue to apply. Thus, if the owner rents the property to others (including family members) for 14 or fewer days, there would be no net investment tax. (Note that no deductions for expenses would be available, as under current law.) If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.
If the vacation home has been used solely for personal enjoyment (i.e., there is no rental income and no associated expenses), then a gain on sale would be treated as net investment income and could be subject to the tax, depending on AGI. Similarly, if the property had generated rents, any net gain on sale could also be included in net investment income. The amount of the tax (if any) would depend on the calculation formula, above in Q-8.
Q-12: My rental property generates a net loss each year. How will those losses be factored into the new tax? And what if I have net capital losses when I sell?
A: Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply if there were any interest or dividends income. (Capital losses reduce capital gains. If losses exceed gains, no more than $3000 of capital losses may reduce other income in any year.)
Note that passive loss limitations will continue to apply to rental income and loss.
Q-13: All of my income is derived from real estate investments that I own and operate myself. Will my rents and gains be subject to the new tax?
A: No. If the ownership and operation of real estate you own is your sole occupation, then those activities are what’s called your “trade or business.” Income derived from a trade or business is not subject to the new 3.8% tax, but could be subject to the 0.9% tax on earned income.
f the owner of rental properties has a “day job,” however, real estate investments are not considered as a trade or business, but are rather considered as investments, even if they are a major source of income. Note that many Realtors engage in business activities are that are the “typical” selling, leasing and brokerage endeavors usually associated with the term “Realtor.” If they also own real estate assets as part of their own personal investment portfolio, the rents from that portfolio could become subject to the new 3.8% tax on net investment income, depending on AGI.
Q-14: Is there a real estate “sales tax” or a transfer tax in the new health care bill?
A: No. There is neither a real estate “sales tax” nor a real estate transfer tax in the bill.
Q-15: Will “High Income Filers” lose any portion of the Mortgage Interest they are allowed to deduct? A: No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.
Q-16: Why is this new tax called a “Medicare tax?”
A: The revenues generated from this tax will be allocated to the Medicare Trust Fund that is part of the Social Security System. That fund is currently on shaky financial footing. The additional revenues generated from the new earned income and unearned income taxes are intended to shore up the Medicare Trust Fund.
Q-17: How will this new tax affect marginal (the highest) tax rates when it is combined with existing law and with the possible expiration of the Bush tax cuts enacted in 2001?
A: Marginal tax rates are the tax rates assessed on the “last” dollars included in taxable income. If the Bush tax cuts are allowed to expire, then the marginal rates for upper income individuals will increase, particularly for capital gains income. The chart below reflects the impact of those changes, presented based on implementation of current law effective dates.
The Health Care legislation did create a new tax that would apply to a portion of the gain on the sale of any capital asset (including real estate). That tax will apply ONLY to individuals with more than $200,000 Adjusted Gross Income (AGI) (or $250,000 AGI on a joint return). The tax does not apply to any amount excluded from taxation under the $250,000/$500,000 principal residence rules. The tax is never imposed directly on the full amount of any capital gain.
The tax is computed under a multi-step formula that captures only a portion of any gain and will only affect those with total AGI above the amounts noted above. Links are provided for a Q&A on the tax and to a brochure with examples of the tax.
Here is a Q & A from the National Association of Realtors.
Q-1: Who will be subject to the new taxes imposed in the health legislation?
A: A new 3.8% tax will apply to the “unearned” income of “High Income” taxpayers. Another 0.9% tax will apply to the “earned” income of many of these same individuals. Both levies are referred to as “Medicare” taxes. (For a description of the new 0.9% tax, see separate Q&A entitled “New Tax on EARNED INCOME: Wages, Salaries and Commissions.”)
Q-2: Who is a “High Income” Taxpayer?
A: Those whose tax filing status is “single” will be subject to the new unearned income taxes if they have Adjusted Gross Income (AGI) of more than $200,000. Married couples filing a joint return with AGI of more than $250,000 will also be subject to the new tax. (The AGI threshold for married filing separate returns is $125,000.)
Q-3: Are the $200,000 and $250,000 thresholds indexed for inflation?
No. Thus, over time, more individuals may become subject to this tax.
Q-4: When does the new 3.8% Medicare tax take effect?
A: The new Medicare tax on unearned income will take effect January 1, 2013.
Q-5: What is “unearned” net investment income?
A. Unearned income is the income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. It also comes from some investments in active businesses ifthe investor is not an active participant in the business.
The portion of unearned income that is subject both to income tax and the new Medicare tax is the amount of income derived from these sources, reduced by any expenses associated with earning that income. (Hence the term “net” investment income.) Thus, in the case of rents, the taxable amount would be gross rents minus all expenses (including depreciation) incurred in operating the rental property. So if gross rents were $100,000 with associated expenses of $40,000, net rents of $60,000 ($100,000 minus $40,000) would be included in Adjusted Gross Income (AGI).
Q-6: So the new tax will apply to rents from investment properties that I own?
A: Maybe. Remember that net investment income includes only net rental income. Thus, gross rents would not be subject to the tax. Rather, gross rents would be reduced (as they are under the income tax) by all allowable expenses, including depreciation, cost of repairs, property taxes and all other expenses related to the property. AGI includes net income from rent, so if your AGI is above the $200,000/$250,000 thresholds, then the rental income might be subject to the tax. For many investment real estate owners, the net rents will be the same as or similar to the amounts reported on their Schedule E, filed with their Form 1040 Income Tax Return. (For calculations, see Q-8, below. See also Q-9 through Q-12 related to capital gain from sale of principal residence, losses on sale and to vacation homes, below.)
Q-7: Does the tax apply to the yearly appreciation of an asset?
No. Capital gains are subject to this new tax only in the year when the asset is sold. The amount of the gain will be measured in the same way that it is for income tax purposes. This rule applies to real estate and all other appreciating capital assets. Net capital gains are taxable only in the year of sale.
Q-8: How is the new 3.8% Medicare tax calculated?
A: The new 3.8% Medicare tax is assessed only when Adjusted Gross Income (AGI) is more than $200,000/$250,000. (See Q-2 above.) AGI includes net income from interest, dividends, rents and capital gains, as well as earned compensation and several additional forms of income presented on a Form 1040 Income Tax Return.
The tax is NOT imposed on the total AGI, nor is it imposed solely on the investment income. Rather, the taxable amount will depend on the operation of a formula. The taxpayer will determine the LESSER of (1) net investment income OR (2) the excess of AGI over the $200,000/$250,000 AGI thresholds. Thus, if net investment income is the smaller amount, then the 3.8% tax is applied only to the net investment income amount. If the excess over the thresholds is the smaller amount, then the 3.8% tax would apply only to the excess amount.
For example, if AGI for a single individual is $275,000, then the excess over $200,000 would be $75,000 ($275,000 minus $200,000). Assume that this individual’s net investment income is $60,000. The new 3.8% tax applies to the smaller amount. In this example, $60,000 of net investment income is less than the $75,000 excess over the threshold. Thus, in this example, the 3.8% tax is applied to the $60,000.
If this single individual had AGI if $275,000 and net investment income of $90,000, then the new tax would be imposed on the smaller amount: the $75,000 of excess over $200,000.
Rules of thumb for predicting the application of this tax year to year are not readily determinable, largely because the proportion of net investment income compared to AGI will vary from year to year and from individual to individual.
Q-9: Will the $250,000/$500,000 exclusion on the sale of a principal residence continue to apply?
A: Yes. Any gain from the sale of a principal residence that is less than $250,000 (individual) or $500,000 (joint return) will continue to be excluded from the income tax. The new 3.8% tax will NOT apply to this excluded amount of the gain.
Q-10: Will the 3.8% tax apply to any part of the gain on the sale of a principal residence?
A: The new Medicare tax would apply only to any gain realized that is more than the $250K/$500K existing primary home exclusion (known as the “taxable gain”), and only if the seller has AGI above the $200K/$250K AGI thresholds.
So, for example, if the taxable gain was $30,000 and a married couple had AGI (which would include the taxable gain) of $180,000, the 3.8% tax would not apply because AGI is less than $250,000. If that same couple had AGI of $290,000, then the application of the 3.8% tax would be subject to the same formula described above. The $30,000taxable gain on the sale would be less than the $40,000 excess above $250,000 AGI, so the $30,000 gain would be subject to the new 3.8% tax.
Q-11: Is rent from a vacation home subject to the 3.8% tax? And what about the gain on sale of a vacation or rental property?
A: The application of the tax will depend on whether the vacation home has been rented out, the period for which it has been rented and whether the property is solely for the enjoyment of the owner. If the owner has rented the home out to others, then the 14-day rent exclusion will continue to apply. Thus, if the owner rents the property to others (including family members) for 14 or fewer days, there would be no net investment tax. (Note that no deductions for expenses would be available, as under current law.) If the home has been rented to others (including family members) for more than 14 days, then the rents (minus related expenses) would be considered as part of net investment income and could, depending on AGI and the calculations described above, be subject to the new tax.
If the vacation home has been used solely for personal enjoyment (i.e., there is no rental income and no associated expenses), then a gain on sale would be treated as net investment income and could be subject to the tax, depending on AGI. Similarly, if the property had generated rents, any net gain on sale could also be included in net investment income. The amount of the tax (if any) would depend on the calculation formula, above in Q-8.
Q-12: My rental property generates a net loss each year. How will those losses be factored into the new tax? And what if I have net capital losses when I sell?
A: Net losses from rents and net capital losses reduce AGI. Thus, the losses themselves would not be subject to the tax. If, after losses, AGI still exceeds the High Income thresholds, the 3.8% tax would still apply if there were any interest or dividends income. (Capital losses reduce capital gains. If losses exceed gains, no more than $3000 of capital losses may reduce other income in any year.)
Note that passive loss limitations will continue to apply to rental income and loss.
Q-13: All of my income is derived from real estate investments that I own and operate myself. Will my rents and gains be subject to the new tax?
A: No. If the ownership and operation of real estate you own is your sole occupation, then those activities are what’s called your “trade or business.” Income derived from a trade or business is not subject to the new 3.8% tax, but could be subject to the 0.9% tax on earned income.
f the owner of rental properties has a “day job,” however, real estate investments are not considered as a trade or business, but are rather considered as investments, even if they are a major source of income. Note that many Realtors engage in business activities are that are the “typical” selling, leasing and brokerage endeavors usually associated with the term “Realtor.” If they also own real estate assets as part of their own personal investment portfolio, the rents from that portfolio could become subject to the new 3.8% tax on net investment income, depending on AGI.
Q-14: Is there a real estate “sales tax” or a transfer tax in the new health care bill?
A: No. There is neither a real estate “sales tax” nor a real estate transfer tax in the bill.
Q-15: Will “High Income Filers” lose any portion of the Mortgage Interest they are allowed to deduct? A: No. The mortgage interest deduction is unchanged. No cap was imposed on any itemized deductions.
Q-16: Why is this new tax called a “Medicare tax?”
A: The revenues generated from this tax will be allocated to the Medicare Trust Fund that is part of the Social Security System. That fund is currently on shaky financial footing. The additional revenues generated from the new earned income and unearned income taxes are intended to shore up the Medicare Trust Fund.
Q-17: How will this new tax affect marginal (the highest) tax rates when it is combined with existing law and with the possible expiration of the Bush tax cuts enacted in 2001?
A: Marginal tax rates are the tax rates assessed on the “last” dollars included in taxable income. If the Bush tax cuts are allowed to expire, then the marginal rates for upper income individuals will increase, particularly for capital gains income. The chart below reflects the impact of those changes, presented based on implementation of current law effective dates.
Thursday, March 10, 2011
Quad City Real Estate Sales stats 2/8/2011-3/10/2011
Active Pending Avg./LP Avg./SP #Sold
Rock Island 163 31 $122,963 $64, 814 14
Moline 179 32 $143,880 $110,140 20
East Moline 124 33 $129,394 $77,154 10
Bettendorf 173 42 $312,457 $229,435 20
Davenport 393 131 $146,394 $102,278 59
SW RI 68 19 $182,177 $156,064 4
Upper RI 47 8 $299,490 $15,750 2
Source: Quad City Area Realtor Association
Here are updated stats from 2/8/2011 -3/10/2011. One very important thing I want everybody to pay attention to is the average list price (LP) versus average sale price (SP). There is a huge gap in what is actually listed and what is actually selling. This is data you must understand if you are going to try to sell your house in this market. It must be priced better than its competition. Even then, the pool of buyers is small. On the positive side, especially if you are a move up buyer, then you can afford to take a hit on your current house because you will be getting a great deal on your move up home. Not only do we have these historically low prices but interest rates are phenomenal. This market represents one of the best opportunities in real estate ever. Please contact me if you have any questions. I can be reached via e-mail tylerfuhr@remax.net , cell 309-314-4305 or by text. Have a great day!
Rock Island 163 31 $122,963 $64, 814 14
Moline 179 32 $143,880 $110,140 20
East Moline 124 33 $129,394 $77,154 10
Bettendorf 173 42 $312,457 $229,435 20
Davenport 393 131 $146,394 $102,278 59
SW RI 68 19 $182,177 $156,064 4
Upper RI 47 8 $299,490 $15,750 2
Source: Quad City Area Realtor Association
Here are updated stats from 2/8/2011 -3/10/2011. One very important thing I want everybody to pay attention to is the average list price (LP) versus average sale price (SP). There is a huge gap in what is actually listed and what is actually selling. This is data you must understand if you are going to try to sell your house in this market. It must be priced better than its competition. Even then, the pool of buyers is small. On the positive side, especially if you are a move up buyer, then you can afford to take a hit on your current house because you will be getting a great deal on your move up home. Not only do we have these historically low prices but interest rates are phenomenal. This market represents one of the best opportunities in real estate ever. Please contact me if you have any questions. I can be reached via e-mail tylerfuhr@remax.net , cell 309-314-4305 or by text. Have a great day!
Home Ownership Essential to Job Growth and Economy, Say Realtors®
Testifying before a Senate panel today, National Association of REALTORS® President Ron Phipps told members of Congress that sustainable home ownership must be the goal when considering future federal housing policies.
“As the leading advocate for home ownership, NAR wants to ensure public policies that promote responsible, sustainable home ownership and that any changes to current programs and incentives don’t jeopardize a housing and economic recovery,” Phipps told the Senate Banking, Housing and Urban Affairs Committee.
Phipps said the housing market is starting to see signs of recovery; however, the real issue facing the nation right now is that many Americans can’t find meaningful work to support their families, and housing is essential to creating jobs.
“Home ownership is a pillar of our economy; our research suggests that home sales in this country generate more than 2.5 million private-sector jobs in an average year. For every two homes sold, a job is created,” Phipps said.
He added that, while housing alone may not pull America out of this stalled economy, hampering its recovery will severely and negatively impact the nation’s recovery.
“Owning a home contributes to the strength of the nation’s economy and is still one of the best ways for individuals to build long-term wealth; therefore, we need public policies that support home ownership. Making it harder for families to afford safe mortgages does not further the goal of a housing or economic recovery,” he said.
Phipps agreed that reforms are required to prevent a recurrence of the housing market meltdown, but raising fees and increasing down payment requirements for well-qualified, creditworthy borrowers places an unnecessary burden on many families, especially those in high-cost urban markets.
“Home buyers need a wide variety of traditionally safe, well-underwritten products with flexible down payment requirements, said Phipps. “Overly stringent requirements will turn away 10 to 15 percent of otherwise qualified buyers who have a demonstrable ability to repay – that’s approximately 500,000 home sales that won’t happen, further delaying the housing and economic recovery.”
“We need to keep housing first on the nation’s public policy agenda to ensure that housing and national economic recoveries are sustained, and that anyone in this country who aspires to own a home and can afford to do so is not denied the opportunity to build their future through home ownership,” Phipps said.
The National Association of REALTORS®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
“As the leading advocate for home ownership, NAR wants to ensure public policies that promote responsible, sustainable home ownership and that any changes to current programs and incentives don’t jeopardize a housing and economic recovery,” Phipps told the Senate Banking, Housing and Urban Affairs Committee.
Phipps said the housing market is starting to see signs of recovery; however, the real issue facing the nation right now is that many Americans can’t find meaningful work to support their families, and housing is essential to creating jobs.
“Home ownership is a pillar of our economy; our research suggests that home sales in this country generate more than 2.5 million private-sector jobs in an average year. For every two homes sold, a job is created,” Phipps said.
He added that, while housing alone may not pull America out of this stalled economy, hampering its recovery will severely and negatively impact the nation’s recovery.
“Owning a home contributes to the strength of the nation’s economy and is still one of the best ways for individuals to build long-term wealth; therefore, we need public policies that support home ownership. Making it harder for families to afford safe mortgages does not further the goal of a housing or economic recovery,” he said.
Phipps agreed that reforms are required to prevent a recurrence of the housing market meltdown, but raising fees and increasing down payment requirements for well-qualified, creditworthy borrowers places an unnecessary burden on many families, especially those in high-cost urban markets.
“Home buyers need a wide variety of traditionally safe, well-underwritten products with flexible down payment requirements, said Phipps. “Overly stringent requirements will turn away 10 to 15 percent of otherwise qualified buyers who have a demonstrable ability to repay – that’s approximately 500,000 home sales that won’t happen, further delaying the housing and economic recovery.”
“We need to keep housing first on the nation’s public policy agenda to ensure that housing and national economic recoveries are sustained, and that anyone in this country who aspires to own a home and can afford to do so is not denied the opportunity to build their future through home ownership,” Phipps said.
The National Association of REALTORS®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
NAR Econimists PODCAST, MARCH 8,2011
NAR Chief Economist Lawrence Yun discusses existing home sales, which have risen in 5 of the last 6 months. Bargain-basement home prices and job creation, among other factors, have begun to lift consumer confidence. However, concerns, such as oil prices, still exist. He also discusses why government backing of mortgages is important for the middle class.
http://www.realtor.org/research/economists_outlook/economists_podcasts/economists_podcast030811?cid=WR03092011:11233&ed_rid=1886409
http://www.realtor.org/research/economists_outlook/economists_podcasts/economists_podcast030811?cid=WR03092011:11233&ed_rid=1886409
Monday, March 7, 2011
Pending Home Sales in January Decline
Washington, DC, February 28, 2011
Pending home sales eased moderately in January for the second straight month, but remain 20.6 percent above the cyclical low last June, according to the National Association of Realtors®.
The Pending Home Sales Index,* a forward-looking indicator, declined 2.8 percent to 88.9 based on contracts signed in January from a downwardly revised 91.5 in December. The index is 1.5 percent below the 90.3 level in January 2010 when a tax credit stimulus was in place. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, points to the broader trend. “The housing market is healing with sales fluctuating at times, depending on the flow of distressed properties coming on the market,” he said.
Pending home sales eased moderately in January for the second straight month, but remain 20.6 percent above the cyclical low last June, according to the National Association of Realtors®.
The Pending Home Sales Index,* a forward-looking indicator, declined 2.8 percent to 88.9 based on contracts signed in January from a downwardly revised 91.5 in December. The index is 1.5 percent below the 90.3 level in January 2010 when a tax credit stimulus was in place. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, points to the broader trend. “The housing market is healing with sales fluctuating at times, depending on the flow of distressed properties coming on the market,” he said.
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