HOME SALE
You may need to consider selling your personal residence and purchasing a new home. The accumulated equity in your present residence represents a non income-producing asset and could be more effectively utilized in alternate investments.
We understand that a home is more than just an investment and that any move must consider your feelings as to location, neighborhood and alternate housing facilities. From an investment standpoint, however, sometimes a move will afford you the opportunity to more effectively utilize equity you have accumulated.
Our long-term cash flow table can illustrate the net after-tax benefit of selling your home and purchasing a new less expensive one. Note that the net sales proceeds from your residence should be substantial enough to meet the down payment on a new home and still have funds remaining for investment. Thus, you will have the potential to create two equity bases – that of leveraged equity in your home and alternate investments.
High-End Homeowners and the Home Sale Gain Exclusion
Currently, a home sale gain exclusion of up to $500,000 is available for a married couple filing jointly ($250,000 for other taxpayers). The current law, however, does not treat high-end homeowners as generously as the old replacement residence / rollover rules did. Under the old law, all of the appreciation from the home being sold was generally deferred as long as the other rollover rules were met. But under the current rules, owners of high-end homes and even middle income taxpayers whose home values have appreciated significantly—even exponentially—over many years and especially during the recent real estate run-up, may find themselves stuck with gain exceeding the $500,000 threshold.
While excess gain is taxable at only a 15% rate (that is, at least until the end of 2010 because of recent legislation), and that does provide some degree of relief, the fact remains that some taxpayers are still faced with a hefty tax bill. However, homeowners in these circumstances might be able to mitigate their tax burden by offsetting the excess capital gains from the home sale with capital losses. One source of capital losses may be stocks that have dropped in value. If the client has recently sustained significant losses in the stock market, now may be the time to seriously consider realizing those losses and using them to the client’s best advantage.
HOME PURCHASE
Well before the actual process of making a bid on a house, you should explore the availability and set priorities. Before you actually begin shopping, you should have a fairly good idea of what you want, need and can afford.
The location of the home is very important: is it convenient to work, school and recreation? Is the general neighborhood declining or improving? How heavy are property taxes? Are there crime or pollution problems? How good is the local school district?
The cost of the house does not only include the down payment and monthly mortgage payments; there are additional costs that you must weigh in estimating the maximum amount of mortgage you are able to carry. Total monthly housing costs typically should not exceed 30% of your net income. An estimate of the monthly outlay required to carry a house must include the following basic expenses:
· Mortgage cost
· Maintenance & repairs
· Homeowner’s insurance
· Property tax
We provide a table, Home Purchase Analysis, to estimate annual costs involved with homes of differing costs or down payments. This table provides housing expenses for the Long-term Cash Flow table, a 20-year spreadsheet.
Interest expense - deductibility
If you own raw land, it produces investment interest expense. Until you break ground for building a second residence, you can treat the raw land as an investment property. The interest you pay on the note related to this investment can be treated as investment interest expense, which can be deducted to the extent that you have investment income from dividends and other sources. Your stocks and bonds can be used to generate such investment income.
