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.
Wednesday, March 16, 2011
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.
Tuesday, February 8, 2011
30 Month Low in Foreclosure Filings for December!
Alas, some positive news in the housing market. Albiet, not great news but news pointing in the right direction. This is according to Realty Trac.
Foreclosure filings were reported on 257,747 U.S. properties in December, a decrease of nearly 2 percent from the previous month and down 26 percent from December 2009 — the biggest annual drop in foreclosure activity since RealtyTrac began publishing its foreclosure report in January 2005 and giving December the lowest monthly total since June 2008.
Illinois posted the fourth biggest state total, with 151,304 properties receiving a foreclosure filing in 2010.
As you can see Illinois was and is one of the worst when it comes to total foreclosures. However, unemployment is steadily going down and economic activity seems to be picking up. I think we are headed for a slow and steady recovery in housing. If you are on the fence about purchasing a home then please give me a call to talk. House values are crawling a long the bottom and interest rates are still low (although creeping up). Take advantage while the time is good because once prices and interest rates start going up you will regret it! Contact me at tylerfuhr@remax.net.
Foreclosure filings were reported on 257,747 U.S. properties in December, a decrease of nearly 2 percent from the previous month and down 26 percent from December 2009 — the biggest annual drop in foreclosure activity since RealtyTrac began publishing its foreclosure report in January 2005 and giving December the lowest monthly total since June 2008.
Illinois posted the fourth biggest state total, with 151,304 properties receiving a foreclosure filing in 2010.
As you can see Illinois was and is one of the worst when it comes to total foreclosures. However, unemployment is steadily going down and economic activity seems to be picking up. I think we are headed for a slow and steady recovery in housing. If you are on the fence about purchasing a home then please give me a call to talk. House values are crawling a long the bottom and interest rates are still low (although creeping up). Take advantage while the time is good because once prices and interest rates start going up you will regret it! Contact me at tylerfuhr@remax.net.
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