Understanding Capital Gain in Real Estate

When you sell a stock, you owe taxes on your gain — the difference between what you paid for the stock and what you sold it for. The same holds true when selling a home (or a second home), but there are some special considerations.

How to Calculate Gain

In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate, follow these steps:

1. Purchase price: _______________________

The purchase price of the home is the sale price, not the amount of money you actually contributed at closing.

2. Total adjustments: _______________________

To calculate this, add the following:

  • Cost of the purchase — including transfer fees, attorney fees, and inspections, but not points you paid on your mortgage.
  • Cost of sale — including inspections, attorney fees, real estate commission, and money you spent to fix up your home just prior to sale.
  • Cost of improvements — including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.

3. Your home’s adjusted cost basis: _______________________

The total of your purchase price and adjustments is the adjusted cost basis of your home.

4. Your capital gain: _______________________

Subtract the adjusted cost basis from the amount your home sells for to get your capital gain.

A Special Real Estate Exemption for Capital Gains

Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:

  • You have lived in the home as your principal residence for two out of the last five years.
  • You have not sold or exchanged another home during the two years preceding the sale.
  • You meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency.

Source: National Association of REALTORS®

Facebooktwittergoogle_pluslinkedin

Does Moving Up Make Sense?

These questions will help you decide whether you’re ready for a home that’s larger or in a more desirable location. If you answer yes to most of the questions, it’s a sign that you may be ready to move.

  1. Have you built substantial equity in your current home? Look at your annual mortgage statement or call your lender to find out. Usually, you don’t build up much equity in the first few years of your mortgage, as monthly payments are mostly interest, but if you’ve owned your home for five or more years, you may have significant, unrealized gains.
  2. Has your income or financial situation improved? If you’re making more money, you may be able to afford higher mortgage payments and cover the costs of moving.
  3. Have you outgrown your neighborhood? The neighborhood you pick for your first home might not be the same neighborhood you want to settle down in for good. For example, you may have realized that you’d like to be closer to your job or live in a better school district.
  4. Are there reasons why you can’t remodel or add on? Sometimes you can create a bigger home by adding a new room or building up. But if your property isn’t large enough, your municipality doesn’t allow it, or you’re simply not interested in remodeling, then moving to a bigger home may be your best option.
  5. Are you comfortable moving in the current housing market? If your market is hot, your home may sell quickly and for top dollar, but the home you buy also will be more expensive. If your market is slow, finding a buyer may take longer, but you’ll have more selection and better pricing as you seek your new home.
  6. Are interest rates attractive? A low rate not only helps you buy a larger home, but also makes it easier to find a buyer.

Source: National Association of REALTORS®

Facebooktwittergoogle_pluslinkedin

7 Reasons to Own Your Home

  1. Tax breaks. The U.S. Tax Code lets you deduct the interest you pay on your mortgage, your property taxes, as well as some of the costs involved in buying your home.
  2. Appreciation. Real estate has long-term, stable growth in value. While year-to-year fluctuations are normal, median existing-home sale prices have increased on average 6.5 percent each year from 1972 through 2005, and increased 88.5 percent over the last 10 years, according to the NATIONAL ASSOCIATION OF REALTORS®. In addition, the number of U.S. households is expected to rise 15 percent over the next decade, creating continued high demand for housing.
  3. Equity. Money paid for rent is money that you’ll never see again, but mortgage payments let you build equity ownership interest in your home.
  4. Savings. Building equity in your home is a ready-made savings plan. And when you sell, you can generally take up to $250,000 ($500,000 for a married couple) as gain without owing any federal income tax.
  5. Predictability. Unlike rent, your fixed-mortgage payments don’t rise over the years so your housing costs may actually decline as you own the home longer. However, keep in mind that property taxes and insurance costs will increase.
  6. Freedom. The home is yours. You can decorate any way you want and benefit from your investment for as long as you own the home.
  7. Stability. Remaining in one neighborhood for several years gives you a chance to participate in community activities, lets you and your family establish lasting friendships, and offers your children the benefit of educational continuity.

Source: National Association of REALTORS®

Facebooktwittergoogle_pluslinkedin

What a Home Inspection Should Cover

Home inspections will vary depending on the type of property you are purchasing. A large historic home, for example, will require a more specialized inspection than a small condominium. However, the following are the basic elements that a home inspector will check. You can also use this list to help you evaluate properties you might purchase.

For more information, try the virtual home inspection at www.ASHI.org, the Web site of the American Society of Home Inspectors.

Structure: A home’s skeleton impacts how the property stands up to weather, gravity, and the earth. Structural components, including the foundation and the framing, should be inspected.

Exterior: The inspector should look at sidewalks, driveways, steps, windows, and doors. A home’s siding, trim, and surface drainage also are part of an exterior inspection.

  • Doors and windows
  • Siding (brick, stone, stucco, vinyl, wood, etc.)
  • Driveways/sidewalks
  • Attached porches, decks, and balconies

Roofing: A well-maintained roof protects you from rain, snow, and other forces of nature. Take note of the roof’s age, conditions of flashing, roof draining systems (pooling water), buckled shingles, loose gutters and downspouts, skylight, and chimneys.

Plumbing: Thoroughly examine the water supply and drainage systems, water heating equipment, and fuel storage systems. Drainage pumps and sump pumps also fall under this category. Poor water pressure, banging pipes, rust spots, or corrosion can indicate problems.

Electrical: Safe electrical wiring is essential. Look for the condition of service entrance wires, service panels, breakers and fuses, and disconnects. Also take note of the number of outlets in each room.

Heating: The home’s heating system, vent system, flues, and chimneys should be inspected. Look for age of water heater, whether the size is adequate for the house, speed of recovery, and energy rating.

Air Conditioning: Your inspector should describe your home cooling system, its energy source, and inspect the central and through-wall cooling equipment. Consider the age and energy rating of the system.

Interiors: An inspection of the inside of the home can reveal plumbing leaks, insect damage, rot, construction defects, and other issues. An inspector should take a close look at:

  • Walls, ceilings and floors
  • Steps, stairways, and railings
  • Countertops and cabinets
  • Garage doors and garage door systems

Ventilation/insulation: To prevent energy loss, check for adequate insulation and ventilation in the attic and in unfinished areas such as crawlspaces. Also look for proper, secured insulation in walls. Insulation should be appropriate for the climate. Excess moisture in the home can lead to mold and water damage.

Fireplaces: They’re charming, but they could be dangerous if not properly installed. Inspectors should examine the system, including the vent and flue, and describe solid fuel burning appliances.

Source: American Society of Home Inspectors

Facebooktwittergoogle_pluslinkedin

Real Estate Careers on the Rise

More people are securing careers in real estate as the housing market shows signs of improving. Many REALTOR® Associations are reporting an increase in membership applications. The picture of just how many people are making the move into real estate is still unclear at this point.

The real estate industry lost a number of real estate professionals over the last four to five years, because there were not enough sales to support them. Many have remained in the business, but on a part time basis. They’ve been forced to take another job, just to make ends meet. As the market continues to improve, many of these folks will return to the business full time.

If you are considering a career in real estate or returning to the business, then check us out at www.TopofKnox.com.

Facebooktwittergoogle_pluslinkedin

Your Property Wish List

What does your future home look like? Where is it located? As you hunt down your dream home, consult this list to evaluate properties and keep your priorities top of mind.

Neighborhoods

What neighborhoods do you prefer?

Schools

What school systems do you want to be near?

Transportation

How close must the home be to these amenities:

  • Public transportation
  • Airport
  • Expressway
  • Neighborhood shopping
  • Schools
  • Other

Home Style

  • What architectural style(s) of homes do you prefer?
  • Do you want to buy a home, condominium, or townhome?
  • Would you like a one-story or two-story home?
  • How many bedrooms must your new home have?
  • How many bathrooms must your new home have?

Home Condition

  • Do you prefer a new home or an existing home?
  • If you’re looking for an existing home, how old of a home would you consider?
  • How much repair or renovation would you be willing to do?
  • Do you have special needs that your home must meet?

Home Features

Please circle one of the choices: Must Have, Would Like, Willing to Compromise, Not Important

Front YardMust HaveWould LikeWilling to CompromiseNot Important
Back yardMust HaveWould LikeWilling to CompromiseNot Important
Garage ( __ cars)Must HaveWould LikeWilling to CompromiseNot Important
Patio/DeckMust HaveWould LikeWilling to CompromiseNot Important
PoolMust HaveWould LikeWilling to CompromiseNot Important
Family roomMust HaveWould LikeWilling to CompromiseNot Important
Formal living roomMust HaveWould LikeWilling to CompromiseNot Important
Formal dining roomMust HaveWould LikeWilling to CompromiseNot Important
Eat-in kitchenMust HaveWould LikeWilling to CompromiseNot Important
Laundry roomMust HaveWould LikeWilling to CompromiseNot Important
Finished basementMust HaveWould LikeWilling to CompromiseNot Important
AtticMust HaveWould LikeWilling to CompromiseNot Important
FireplaceMust HaveWould LikeWilling to CompromiseNot Important
Spa in bathMust HaveWould LikeWilling to CompromiseNot Important
Air conditioningMust HaveWould LikeWilling to CompromiseNot Important
Wall-to-wall carpetMust HaveWould LikeWilling to CompromiseNot Important
Wood floorsMust HaveWould LikeWilling to CompromiseNot Important
Great viewMust HaveWould LikeWilling to CompromiseNot Important

Other notes:

Source: National Association of REALTOR®

Facebooktwittergoogle_pluslinkedin

What’s a Home Warranty?

What’s a Home Warranty?

A home warranty is a service contract, normally for one year, which helps protect home owners against the cost of unexpected covered repairs or replacement on their major systems and appliances that break down due to normal wear and tear. Coverage is for systems and appliances in good working order at the start of the contract.

Check your home warranty policy to see which of the following items are covered. Also find out if the policy covers the full replacement cost of an item.

  • Plumbing
  • Electrical systems
  • Furnace
  • Water heater
  • Heating ducts
  • Water pump
  • Dishwasher
  • Garbage disposal
  • Stove/cooktop/ovens
  • Microwave
  • Refrigerator
  • Washer/dryer
  • Swimming pool (may be optional)

Source: American Home Shield, www.ahswarranty.com, REALTOR® Benefits Partner

Facebooktwittergoogle_pluslinkedin

How to Improve the Odds of an Offer

  1. Price it right. Set a price at the lower end of your property’s realistic price range.
  2. Prepare for visitors. Get your house market ready at least two weeks before you begin showing it.
  3. Be flexible about showings. It’s often disruptive to have a house ready to show at the spur of the moment. But the more amenable you can be about letting people see your home, the sooner you’ll find a buyer.
  4. Anticipate the offers. Decide in advance what price and terms you’ll find acceptable.
  5. Don’t refuse to drop the price. If your home has been on the market for more than 30 days without an offer, you should be prepared to at least consider lowering your asking price.

Source: National Association of REALTORS®

Facebooktwittergoogle_pluslinkedin

10 Ways to Prepare for Homeownership

  1. Decide what you can afford. Generally, you can afford a home equal in value to between two and three times your gross income.
  2. Develop your home wish list. Then, prioritize the features on your list.
  3. Select where you want to live. Compile a list of three or four neighborhoods you’d like to live in, taking into account items such as schools, recreational facilities, area expansion plans, and safety.
  4. Start saving. Do you have enough money saved to qualify for a mortgage and cover your down payment? Ideally, you should have 20 percent of the purchase price saved as a down payment. Also, don’t forget to factor in closing costs. Closing costs — including taxes, attorney’s fee, and transfer fees — average between 2 and 7 percent of the home price.
  5. Get your credit in order. Obtain a copy of your credit report to make sure it is accurate and to correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments.
  6. Determine your mortgage qualifications. How large of mortgage do you qualify for? Also, explore different loan options — such as 30-year or 15-year fixed mortgages or ARMs — and decide what’s best for you.
  7. Get preapproved. Organize all the documentation a lender will need to preapprove you for a loan. You might need W-2 forms, copies of at least one pay stub, account numbers, and copies of two to four months of bank or credit union statements.
  8. Weigh other sources of help with a down payment. Do you qualify for any special mortgage or down payment assistance programs? Check with your state and local government on down payment assistance programs for first-time buyers. Or, if you have an IRA account, you can use the money you’ve saved to buy your fist home without paying a penalty for early withdrawal.
  9. Calculate the costs of homeownership. This should include property taxes, insurance, maintenance and utilities, and association fees, if applicable.
  10. Contact a REALTOR®. Find an experienced REALTOR® who can help guide you through the process.

Source: National Association of REALTORS®

Facebooktwittergoogle_pluslinkedin

8 Reasons Why You Should Work With a REALTOR®

Not all real estate practitioners are REALTORS®. The term REALTOR® is a registered trademark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION of REALTORS® and subscribes to its strict Code of Ethics. Here’s why it pays to work with a REALTOR®.

 

  1. Navigate a complicated process. Buying or selling a home usually requires disclosure forms, inspection reports, mortgage documents, insurance policies, deeds, and multipage settlement statements. A knowledgeable expert will help you prepare the best deal, and avoid delays or costly mistakes.

 

  1. Information and opinions. REALTORS® can provide local community information on utilities, zoning, schools, and more. They’ll also be able to provide objective information about each property. A professional will be able to help you answer these two important questions: Will the property provide the environment I want for a home or investment? Second, will the property have resale value when I am ready to sell?

 

  1. Help finding the best property out there. Sometimes the property you are seeking is available but not actively advertised in the market, and it will take some investigation by your REALTOR® to find all available properties.

 

  1. Negotiating skills. There are many negotiating factors, including but not limited to price, financing, terms, date of possession, and inclusion or exclusion of repairs, furnishings, or equipment. In addition, the purchase agreement should provide a period of time for you to complete appropriate inspections and investigations of the property before you are bound to complete the purchase. Your agent can advise you as to which investigations and inspections are recommended or required.

 

  1. Property marketing power. Real estate doesn’t sell due to advertising alone. In fact, a large share of real estate sales comes as the result of a practitioner’s contacts through previous clients, referrals, friends, and family. When a property is marketed with the help of a REALTOR®, you do not have to allow strangers into your home. Your REALTOR® will generally prescreen and accompany qualified prospects through your property.

 

  1. Someone who speaks the language. If you don’t know a CMA from a PUD, you can understand why it’s important to work with a professional who is immersed in the industry and knows the real estate language.

 

  1. Experience. Most people buy and sell only a few homes in a lifetime, usually with quite a few years in between each purchase. Even if you have done it before, laws and regulations change. REALTORS®, on the other hand, handle hundreds of real estate transactions over the course of their career. Having an expert on your side is critical.

 

  1. Objective voice. A home often symbolizes family, rest, and security — it’s not just four walls and a roof. Because of this, homebuying and selling can be an emotional undertaking. And for most people, a home is the biggest purchase they’ll every make. Having a concerned, but objective, third party helps you stay focused on both the emotional and financial issues most important to you.

Source: National Association of REALTORS®

Facebooktwittergoogle_pluslinkedin