Capital Gains Tax
Contributed Article : Capital Gains Tax
Capital gains taxes normally apply to any gain, whether short term or long term, which realized on an investment, as an alternative to taxing this gain as income. But capital gains taxes on sales of real estate have a variety of loopholes which allow a real estate owner to win big by avoiding capital gains and income tax entirely. The 1031 Exchange and the Taxpayer Relief Act of 1997 both provide real estate owners with the ability to defer or exempt all capital gains from the sale of real estate from taxation. Another critical area where capital gains taxes come into play for residential real estate owners and buyers is in the liquidation of investment accounts to raise cash to make a down payment on a mortgage, for which Pledged Asset Mortgage programs are available. Finally, capital gains taxes come into play for homeowners whose income is largely made up of investment returns or other passive income, who might be required to liquidate assets and pay short term capital gains tax in order to make larger principal and interest or interest only mortgage payments on jumbo loans and super jumbo mortgages, for whom Deferred Interest, or Negative Amortization mortgages are a popular choice for minimizing short term capital capital gains tax exposure.
1031 Exchanges, which are known as "like kind" exchanges or " like property" exchanges, allow sellers to defer the tax on capital gains made from the sale of real estate, whether agricultural, commercial, or residential, so long as they identify what they will be purchasing in exchange within 45 days of the sale and 180 days to make the exchange. While 1031 like-kind exchanges are of course subject to conditions, most of them can be met readily. The one major exception is that the taxpayer generally cannot receive any cash from the sale of the property. All proceeds of the sale must be placed directly into the hands of a qualified intermediary. Also, 1031 like property exchanges hold that capital gains tax can only be deferred on properties which were held for investment or business purposes, thereby excluding your personal primary residence or non-rental vacation homes. Capital Gains taxes can be deferred through 1031 exchange indefinitely, and while it may sound morose, when you die you see a step up in basis which eliminates the tax burden entirely. Death and taxes CAN be mutually exclusive.
For personal property, such as your primary residence or non-rental vacation homes, capital gains tax can be avoided entirely under the terms of Taxpayer Relief Act of 1997, of course subject to conditions. Before this act, avoiding capital gains taxes on the sale of your primary residence required you to reinvest the proceeds in another primary residence of greater value within two years of the sale (known as a rollover), otherwise the capital gains were taxable. But the Taxpayer Relief Act, a rather progressive bit of tax law if there ever was one, allows a married couple to make $500000 in profit from the sale of a property every two years, regardless of what you do with the money afterwards. Single persons can make up to $250,000 per sale once every two years. And because the IRS only requires that you maintain residency in the property you are selling for a collective 2 of the previous five years, many rented vacation homes qualify for capital gains tax exemption under the IRS use and ownership regulations. And there is no limit on the number of times you can take advantage of this loophole.
Calculating gains and losses and exclusion amount for either program is the province of your CPA, and we recommend seeking personal tax advice prior to putting your property up for sale. While we do provide financing for sellers seeking to perform 1031 exchanges and to residential sellers who wish to have streamlined financing option available to their buyers to expedite their sales process, the contents of this article are for informational purposes only as we do not dispense tax advice.
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Other Info on Capital Gains Tax:
Not necessarily the Opinion of R1
Capital Gains Tax is a tax paid on the profit from the sale of any investment or real estate.
The rate that you are taxed can depend on many factors including the length of time that you have owned the property (or investment). The longer you have the property the lower the tax rate on the gains.
Even with prior experience its important to seek the advice of a professional who deals with capital gains taxes. The last thing you need is an expensive mistake.
There are several strategies for deferring the taxes on capital gains, including a 1031 exchange.
Or if you prefer, call for a personal referral to a reputable CPA in your area.
Primary residences may be exempt from a capital gains tax if it meets certain criteria
Contact your personal tax advisor or CPA for additional information about capital gains taxes.
You can receive an exemption on capital gains if you have lived in the home as your primary residence for 2 years. You can be exempt for $250,000 if you are single, and $500,000 if you are married.
By holding a property for over a year, you can sell it and treat the profit as a long term capital gain. This could reduce your tax liability from 33% to 15%. See your tax professional for complete details on your situation.
With the Taxpayer Relief Act of 1997, married tax payers, who file jointly, get to keep $500,000 in profit on the sale of a home. The law applies to the sale of a personal residence after May 6, 1997, and allows the exclusion to be claimed once every 2 years.
The Taxpayer Relief Act of 1997 does not mean to the homeowner that you must have lived in the home for all 720 days out of 1800 days (2 out of 5 years). So long as the home is considered your primary residence, despite brief vacancies due to travel, you may still claim the tax break. If you have to leave for an extended period of time, say 2 years on a relief mission for a non-profit organization, as long as you sell within 5 years and have met the 720 day requirement you are okay.
Many investors will use a 1031 exchange as a way of avoiding Capital Gains Tax.
The 1031 Exchange allows you to rollover the equity from your investment property to the new property avoiding any tax penalties.
Mortgage Loan Process - The first step in applying for a home loan is to find a broker or lender and complete a mortgage application for approval.
In a purchase of a home, there is approximately thirteen entities who play a part in the loan and purchase transaction. Realtors, escrow agents, lending underwriters, processors, etc. all play a part in helping a borrower and buyer through the process of acquiring the purchase.
When applying for a loan to purchase or refinance a home, a mortgage broker will be able to offer the most choices of loan programs. As a part of the application process the broker will search the many lender programs he has available and help you choose the one that best suits your needs and financial goals.
Homeowners Association - An organization of homeowners residing within a particular development whose major purpose is to maintain and provide community facilities and services for the common enjoyment of the residents.
Home Owners Assocciations often have a annual or monthly fee that must be paid. This fee is also considered when calculating your total monthly housing expense, your debt to income ratio and other factors for a loan approval. Home Owners Assocciation fees can vary greatly from a $100 a year to $100 per month.
A community with a homeowners association is also referred to as a deed restricted community. Deed restrictions are put into place to help maintain the quality of the neighborhood. Common restrictions are color/type of fence, lawn care and exterior color of the house to name a few.
In some cases, HOAs will negotiate a lower fee for it's members for garbage pick up, cable TV, or some other utility.
An HOA will often provide benefits such as a clubhouse, a community swimming pool or park, maintenance and lawn care.
If the property that you are buying is under the jurisdiction of a Homeowner's Association, the mortgage lender may want to review a copy of the CC&Rs of the association. CC&Rs stand for Convenants, Conditions and Restrictions.
HOAs can be good news or bad news depending upon your individual situation and preferences. In general, the regulations are designed to maintain a certain level of appearance and neighborhood "feel." Examples would be regulations regarding maintenance of yard, parking of recreational vehicles in the yard, approval of any exterior additions to home, etc. Some can be a bit too much but, in general, they do help maintain property values. On the other hand, if you do want to park your RV in your driveway and have a pool in your front yard, barking dog tied up outside all day, or just don't want anyone telling you how you may use your property, do avoid developments with an HOA. In any event, always ask for and read the regulations before even considering making an offer on a homw. Ask questions of the HOA president, look at their financial status, talk to other residents if possible.
Home Owner Associations decide whether one can buy into the development. Condominium and Cooperative buyers must be approved by the HOA before they can purchase any unit in the development. Approval is contingent upon the applicants' incomes and number of occupants, among other criteria.
You must ask yourself if you really want to be part of an association. There are usually rules a regulations that you have to abide by. Ask yourself if you can live with these rules and not have any problems.
Most condominiums do not require preapproval of the purchaser whereas cooperatives almost always do.
Who is Eligible for a First Time Buyer Loan? - Who is Eligible for a First Time Buyer Loan?
First time home buyer programs are designed to help borrowers who may not have enough money to pay the full cost of the down payment or the closing costs on a mortgage. These programs make obtaining a mortgage more cost effective. There are even programs specifically for residents of each state. First time home buyer programs are available to those who have not owned a home for the past three years.
A large amount of first time home buyer programs are FHA. Be prepared to spend a few hours in class so you can get a certificate stating your eligable.
Some First Time Buyers Programs require as little as 3% down.
Many other first time home buyer programs require that you either take a course or do a self study program with a workbook to learn about the responsibilities and financial obligations involved with owning a home. Even if these programs are not required by your lender or broker if is a good idea to do them anyway. Talk to your broker they can get you the information about when the classes are or provide you with a work book. Many of these courses and workbooks are provided through a PMI Company
A first time home buyer is considered somebody who has not owned a home in the last three years.
First time home buyers may also have other advantages such as discounted transfer tax. Check your local and state regulations to see what benefits you may qualify for, make sure your mortgage professional is aware that you are a first time home buyer.
Some of the advantages define a first time home buyer as a borrower who has not owned a home in the past three years, others require that the borrower has never had any interest in any property.
Some local First Time Home Buyer programs offer down payment assistance. To be eligible, applicants' household incomes must not exceed an amount set by the program administrators. These income limits are usually calculated by multiplying the Area Median Income with a percentage (e. g. 110% of the AMI). The program administrator may place a lien on the home to prevent the homeowner selling the property for profit shortly after settlement. Such liens usually dissipate after 5 to 10 years.
You may find that there are some mortgage loan programs, usually ones that the lender has a higher perception of risk, that are not available to first time home buyers.
Generally the programs will have a step by step guide to get you thru the process of home ownership.
The Loan Process (Start to Finish) - The Loan Process begins with an initial consultation between the borrower and the broker. During the first conversation, it is extremely important for the borrower to discuss what they hope to accomplish with their new investment in real estate. It is then the duty of the broker to best determine how to accomplish that goal, with the current qualifications of the borrower. Unfortunately, borrowers often end up in the wrong mortgage product because their lack of communicating what they truly intend to do. Borrowers also must remember to be upfront and truthful with their broker from the start. Remember, the broker acts as the borrowers representative and structures the loan for presentation to underwriting. They will help their borrower around any weaknesses they may not want to disclose to underwriting. From the conversation the broker will take a written loan application....
After taking a complete application, one of the very first things that the loan agent must do is access the applicant's credit report. A competent mortgage professional will examine not only the credit scores but do a line by line analysis of the report and highlight any information that could be considered derogatory. Once the report has been examined the Loan Officer will review it with the applicant and get their response to any derogatory information.
After all of the documentation is collected we will send your loan package to underwriting for evaluation. Underwriting will then decide if the proper information has been sent or if they want to see additional information to make a final determination for the mortgage.
From the time the application was taken the broker has 3 days to send you RESPA compliance forms.
An appraisal will be ordered as to support the value of the property. The loan is based off the overall value of the property and is crucial to get the appraisal done right away. Typical time for appraisal vary from area to area depending on demand and market condiions.
After deciding on the loan program, the applicant must supply the necessary income and assets documents (W2's, paystubs, bank statements, etc.) as required by the chosen loan program. Because these documents are essential to the underwriting process, the application package cannot be submitted without them. Therefore, it is important that the applicant present them without delay.
Disclaimer: The opinions expressed in the Contributed Articles section of this website may have been contributed by independent third parties and are not necessarily those of Envision Lending Group / Refinance One. Any enquiries regarding the content of these articlees should be directed at (212)537-6026.
