Tuesday, December 11, 2012

Online House Hunting: Things You Should Watch Out For

"Once upon a time, house hunting meant perusing local newspapers and being led through properties by a real-estate agent. Nowadays, most home buyers head straight to their computers: A record 90% searched online this year, up from 65% a decade ago, according to the National Association of Realtors. Trouble is, homes listed for sale online aren’t always actually available."

The best advise for house hunting online is to use  the Multiple Listing Service (MLS) for your area. For the West Michigan area the MLS is Southwestern Michigan Regional Information Center or SWMRIC. This is the most accurate and up to date site you can use to search for a home. If you have an agent, your agents website would also be a good place to look since most agents sites pull the information directly from the MLS. If you do not use the MLS and try third-party sites such as Trulia and Zillow you may run into a few frustrating issues.

One issue you many in counter using a third-party listing site is old, outdated information. You may find listing showing up as active when in fact they are no longer available. This can be caused by sites not being updated or Realtors not updating their listings on third party sites. Avoid wasting your time reviewing homes that are no longer for sale by using the MLS or a site that uses an IDX (Internet Data Exchange) like Broker Reciprocity.

Another issue is that some of these third-party sites offer estimated pricing for homes. Buyer and Seller see this as a way to figure out what to offer or ask for in buying/selling a home but these numbers can be greatly misleading and create confusion. The suggested prices on some third-party sites are not accurate "Trulia and Zillow, for instance, say they pull these prices from county recorders’ offices and from regional firms in the U.S. that track sales data. Yet, a refinance, for instance, may appear as a sales transaction if a county mistakenly registers it as such; in that case, the mortgage amount the homeowner received sometimes significantly less than the value of the home  can be is listed online as a previous sales price.  It is best to consult a local real estate agents or consider having their home appraised to get a more accurate valuation if considering selling."

Some sites also feature days on the market counter to tell you how long the home has been for sale. This information can also have inaccuracies. "On some sites, the number of on-sale days are counted from the day when the posting went live on that site — which could be days or weeks after it first hit the market. Separately, a property that’s been listed online for months can get removed only to reappear a few weeks later as a newly for-sale property.  (It can also happen if a new listing agent takes over.) Such errors can have huge ramifications for buyers. They’re more likely to make lowball offers on homes that have been languishing on the market for months, while they’re more likely to be aggressive with a property that’s just come on the market. In the latter case, the buyer may put a full-price offer on it."

It is best practice to contact a local real estate agent. For more information on buying or selling a waterfront home contact the Andrea Crossman Group by calling 616-355-6387. Happy house hunting!



Some excerpts from article on Wall Street Journal Market Watch

Tuesday, October 16, 2012

Repeat home buyers fuel housing recovery

(MoneyWatch) Across most of the country, home prices remain affordable and rents continue to rise. And while today's investors are helping the housing recovery, they're not completely responsible. Data from the National Association of Realtors (NAR) suggests that traditional repeat buyers are driving today's market.

"Though housing markets are changing across the nation, investors are still seeing great opportunities. Hundreds of thousands of foreclosures and short sales are coming to market and rents are continuing to improve in most markets, creating a positive environment for the nation's 2.81 million residential real estate investors," Joshua Dorkin, founder and CEO of BiggerPockets.com, said in a press release.

According to the survey, one out of eight -- or 28.1 million Americans -- either consider themselves to be residential real estate investors or own residential investment properties today, according to the survey. That high number is not surprising when you consider many homeowners are renting out properties they'd rather sell.

NAR data shows investors accounted for an average 22 percent of the market share from 2003 to 2011.

There are perks to investors taking an active interest in today's real estate market. With millions of Americans actively investing in real estate, billions of dollars are being poured into repairs. The results of the survey reveal that real estate investors are spending more than the Department of Housing and Urban Development (HUD) to rehabilitate neighborhoods.

At a median expenditure of $7,500 per property owned, investors are spending a total of $9.2 billion per year to repair the damage caused by foreclosures. By comparison, Congress has authorized a total of about $7 billion for the Neighborhood Stabilization Program over the past four years.

Investor activity has benefited the housing market, but there's a downside too. "Investors have been largely purchasing with all-cash, which puts first-time buyers at a significant disadvantage," Walter Molony, a NAR spokesman, said in an e-mail. "Both investors and entry-level buyers have been focused on low price ranges, with investors winning the deals since they don't have a need for financing."

So while the BiggerPockets.com/Memphis Invest survey shows investors planning to continue purchasing and rehabbing property, NAR data shows the overall investor market share is on the decline. The drop started in March, and since April investor market share has averaged 18 percent -- below its long-time average of 22 percent.

Investors certainly help fuel the housing recovery, but NAR data shows they aren't the driving force. "First-time homebuyers are also below their long-term average with housing shortages in the low price ranges and a headwind of tight credit," notes Molony. "At present, the market is being driven by an increase in traditional repeat buyers."

Click here for full article

Thursday, October 11, 2012

Home Prices on the Rebound in West Michigan

Home prices across the country are rebounding nationally and in West Michigan according to new real estate numbers.

As the situation stands now, buyers may have to act fast because housing inventories are abnormally low. The Grand Rapids Association of Realtors says it’s lower than they’ve seen in seven or eight years.

Mari Anne Nelson of Novi is looking to buy a condo in Grand Rapids. “I’m just very impressed with the quality and location,” says Nelson.

She’s carefully weighing their options at the Fitzgerald downtown with Keller and Williams Realtors.

“I don’t think it’s any kind of you can’t keep up but, if you like it you’d better act upon it because it might not be there,” says Mari Anne Nelson.

“Today, there is not as much on the market and there is a sense of urgency because there are a lot of buyers looking at fewer homes,” says Julie Rietberg, CEO of the Grand Rapids Association of Realtors.

As supply dwindles, prices are increasing. A study by S&P Case-Shiller National reports that in the United States in July, prices rose by 1.6 percent compared to the same time last year. “These are levels we haven’t seen since pre-2005,” says Rietberg.

West Michigan reflects that increase in prices. According to the Grand Rapids Association of Realtors, the average home sale price in August of 2011 was more than $125,000. This August 2012, prices increased to an average of $141,000.

Year-to-date numbers show last year, Grand Rapids was at an average home price of more than $121,000, this year the prices are at an average of $133,000 year-to-date.

“Home sales are up almost 20% from a year ago this time. And with an increase in sales, we’re seeing the prices up almost 10% as well, which is obviously a great improvement,” says Meg Dunn, Vice President of Mortgage Sales for Lake Michigan Credit Union.

She says her company’s mortgages are moving quickly as the economy improves and interest rates remain low. “Our results here have been more dramatic and our volume is up 78% from a year ago last time, so well above what we’re seeing in the marketplace,” says Dunn.

Low interest rates are fueling eve more buyers like Mari Anne. She says, “Trying to find the best location for what we want, accessibility downtown.”

Dunn says she expects the low interest rates to continue for quite some time.
For full article click here.

Wednesday, October 10, 2012

Vacation home market picks up in Michigan

Michigan vacation home  sales are rising as an influx of Southerners and East Coasters competes with Midwestern buyers for properties after awakening to the lure of summering in the Great Lakes State.
This is the second straight year that real estate agents in the northern Lower Peninsula have reported improved second home sales.
Industry players said a slowly recovering Michigan economy, the state's marketing campaign and glowing media reports about the area have lit a fire under the vacation-home market stretching from Manistee to Mackinaw City. It comes as National Association of Realtors Chief Economist Lawrence Yun predicts a nationwide uptick in vacation home sales.
Sales representatives said in 2011 that areas like the northeast counties atop Michigan's Lower Peninsula still reeled from foreclosures and dropping prices. This year, prices are slow to rise because homeowners and Realtors in Traverse City, Charlevoix and other parts scattered around Michigan's "little finger" on Lake Michigan are still clearing homes and condominiums with depressed prices.
Carla Houle and her husband John Libbe just bought a four-bedroom house called Chimney Ridge in the Homestead for about a half-million dollars — down from its asking price of nearly $900,000 four years ago. The 2,300-square-foot, open-plan house is tucked into the woods and has a view of Glen Lake a few miles away.
"Interest rates were down; the house price was down; it was just a good time," said Houle, a Xerox sales executive, whose husband Libbe helps run a family-owned local construction company.
Interest rates are at record lows, helping to boost home sales — though lending conditions have tightened. Freddie Mac reported Thursday that 30-year, fixed-rate mortgages this week averaged 3.4 percent.
About 20 miles to the southeast on the eastern shore of Sutton's Bay, Texans Craig Chick and Kate Wessels Doner are packing up for the Lone Star State again after enjoying the summer life on the Leelanau Peninsula. They bought a cottage with some out-buildings "pretty close to the market low" in June 2011, Chick said.
The couple, parents of two, already have enhanced the place with a stone beachfront patio and other improvements.
National media attention also has helped. ABC's "Good Morning America" chose the Sleeping Bear Dunes on Lake Michigan as "the most beautiful place in America." And TV chef Mario Batali, a Sutton's Bay resident, sings the area's praises.
Traverse City has a higher national profile in part because of the rise of Michael Moore's annual film festival, which this year attracted an appearance by actress Susan Sarandon.
Last year, vacation home sales nationwide increased 7 percent from the year before, while the average price fell 19 percent to $121,300, according to a National Association of Realtors survey. More precise vacation home sales aren't kept because buyers don't identify in a real estate sale how they will use the property.
All-cash purchases continue to play a prominent role up north. The stock market  rebound is giving families with plenty of money a chance to scoop up second homes, NAR's Yun said.
"There's always cash available out there; this is America," Platt said. "And based on the hysterics of the last five years, people with money keep watching, and they get to the point where they say, 'Prices aren't going to get much lower.' And that is now."


From The Detroit News: http://www.detroitnews.com/article/20121002/BIZ/210020353#ixzz28tpm5Q7R

Monday, October 8, 2012

Thirty-year mortgage rate drops to another record low

 Average rates on fixed mortgages fell again to record lows, giving would-be buyers more incentive to brave the housing market.
Mortgage buyer Freddie Mac says the average rate on the 30-year loan fell to 3.56%. That's down from 3.62% last week and the lowest since long-term mortgages began in the 1950s.
The average rate on the 15-year mortgage, a popular refinancing option, dipped to 2.86%, below last week's previous record of 2.89%.
The rate on the 30-year loan has fallen to or matched record low levels in 11 of the past 12 weeks.
Cheaper mortgages have contributed to a modest housing recovery this year. Home sales were up in May from the same month last year. Home prices are rising in most markets. And homebuilders are starting more projects and spending at a faster pace.
Low mortgage rates could also provide some help to the economy if more people refinance. When people refinance at lower rates, they pay less interest on their loans and have more money to spend. Many homeowners use the savings on renovations, furniture, appliances and other improvements, which help drive growth.

Still, the pace of home sales remains well below healthy levels. Many people are still having difficulty qualifying for home loans or can't afford larger down payments required by banks.
And the sluggish job market could deter some from making a purchase this year.
U.S. employers added only 80,000 jobs in June, a third straight month of weak hiring. The unemployment rate was unchanged at 8.2%, the government reported last week.
Slower job creation has caused consumers to pull back on spending.
Mortgage rates have been dropping because they tend to track the yield on the 10-year Treasury note. A weaker U.S. economy and uncertainty about how Europe will resolve its debt crisis have led investors to buy more Treasury securities, which are considered safe investments. As demand for Treasurys increase, the yield falls.
To calculate average rates, Freddie Mac surveys lenders across the country on Monday through Wednesday of each week.
The average does not include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1% of the loan amount.
The average fee for 30-year loans was 0.7 point, down from 0.8 point last week. The fee for 15-year loans also was 0.7 point, unchanged from the previous week.
The average rate on one-year adjustable rate mortgages rose to 2.69% from 2.68% last week. The fee for one-year adjustable rate loans slipped to 0.4 point, down from 0.5 point.
The average rate on five-year adjustable rate mortgages dropped to 2.74% from 2.79% last week. The fee was unchanged at 0.6 point.

Survey Shows Americans Are Increasingly Confident about Homeownership


Signs of growing confidence are widespread, according to the national survey. For instance:
• 69 percent believe that real estate is a good investment despite the market volatility of the past few years, up 6 percentage points from the first-quarter 2012 survey and 17 percentage points from first quarter 2011.
• 72 percent expressed confidence that the real estate market and property values will improve during the next two years, including a 6-point jump among those “very confident” or “confident” vs. the first quarter 2012, and a 14-point gain in this subset over first quarter 2011.
• Nearly two-thirds (64 percent) of respondents have a favorable perception of the U.S. housing market, up from 60 percent in first quarter 2012 and 52 percent in first quarter 2011).
“The American Dream is clearly on the mend,” says Earl Lee, president, Prudential Real Estate. “Americans are feeling better about homeownership and the ongoing recovery taking place in residential real estate. Many are increasingly optimistic about their personal circumstances and, with housing affordability near all-time highs, they want to act on the opportunity.”
Factors driving homeownership
Homeownership remains the central component to the American Dream, as 78 percent of respondents said owning a home was still “very important” – the same percentage reported in the first-quarter 2012 study. A full 98 percent said homeownership was at least somewhat important.
In addition, with interest rates at historically low levels, 96 percent of respondents at least “somewhat agree” that now is a great time to buy a home – the same percentage reported in the first-quarter 2012 study.
More than the financial reasons to buy a home, respondents placed higher priority on the emotional reasons for homeownership. “Control over living space,” “more space for family,” “safer neighborhood” and “good place to raise a family” rated higher than “a good investment,” “financial security” and “tax benefits.”
“Normalcy is returning to the U.S. real estate market and more people are buying homes for traditional reasons – to raise a family, feel secure and build a future,” says Lee. “Every last emotion is rolled up into owning a home – it’s where life happens – so it’s no surprise that the emotional side outweighs financial reasons for owning a home among respondents.”
Caution remains
The survey also shows that consumers remain cautious about the real estate market and process, as a full 30 percent “strongly agree” that the housing crisis reminds them to be more careful about buying or selling a home; up two percentage points from the first-quarter 2012 survey. In addition:
• Nearly two-thirds (65 percent) of respondents indicated that financing or getting a mortgage is more challenging than it was before the market crisis, which is up from 58% in the first-quarter 2012 survey.
• Among those considering a real estate transaction, 39 percent expressed concern they won’t be able to sell their current home, up 11 points from the first-quarter 2012 survey and 10 points from first quarter 2011.
• Given the dynamics and challenges of today’s real estate market, nearly three out of four (74 percent) respondents think it is more important than ever to work with a good real estate agent for the best success in buying or selling a home (up from 71 percent in first-quarter 2012 and 67 percent in first quarter 2011).
“Real estate markets are improving around the country and consumers face many choices,” concludes Lee. “Consumers should seek out a real estate professional who can help them make the best choices to suit their needs.”


For full article click here

Tuesday, September 11, 2012

50 Best Yachting Towns: Muskegon ranks 23rd on national list from Yachting magazine

MUSKEGON, MI – Muskegon was named the 23rd “best yachting town” by Yachting magazine in a list of the 50 top yachting destinations in the nation.
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One of the nation’s oldest and most respected recreational boating publications ranked Muskegon the second best yachting town in Michigan, just below Harbor Springs at 20 and third best on the Great Lakes, which was led by tiny Bayfield, Wis., on Lake Superior.
In its September edition, Yachting wrote, “Muskegon is adjacent to Lake Michigan on the west and Muskegon Lake to the north. The 10 marinas here boast upwards of 3,000 slips.”
As impressive as Muskegon’s 23rd ranking in the magazine’s 2012 list is, the port communities that were ranked below Muskegon are revealing. Yachting magazine in its online article of the best yachting towns did not indicate how it came up with the list or what criteria were used.
However, Muskegon ranked above South Haven (44) and Traverse City (48) the other Michigan ports on the Yachting list. It also was listed above Nantucket, Mass. (25), Newport, R.I. (28), San Diego (39), San Francisco (40) and St. Augustine, Fla. (45).
Yachting certainly did not discriminate against smaller, out-of-the-way ports. Although the top 10 included Amelia Island, Fla. and Annapolis, Md., it also had Bayfield at No. 6. The No. 1 yachting town in America is Beaufort, N.C., the magazine said.
Located on Lake Superior at the mouth of the Chequamegon Bay, Bayfield is a community of 600 year-round inhabitants. Known as a port with a New England-feel, Yachting praised the fishing and sailing in Bayfield.
In Muskegon, it was all about the beaches.
“Known for some of the best beaches in Michigan, Pere Marquette beach is the crown gem of this town,” Yachting’s article reads. “Its natural white sand beach and cool clear water has attracted many professional beach volleyball tournaments. The immaculate condition of the beach has earned it a spot on the Clean Beaches Council’s ‘certified clean beaches’ list.”
The short write-up that was part of the magazine’s cover story for this month concludes: “Michigan’s Adventure Amusement Park is a popular local attraction for younger people.”
Yachting magazine was founded in 1907 and is published from Middletown, R.I. It has a circulation of 120,000 for its printed magazine and an active online presence.
The upscale publication that is known for its advertisements for million-dollar motoryachts for sale, covers the boating scene from yacht reviews, maritime technology, exotic charters, current events and the history of the sport, according to the magazine.

Thursday, August 30, 2012

Housing Passes a Milestone

The housing market has turned—at last.

The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing.

Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. "We finally saw some rising home prices," S&P's David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.


The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing, according to David Wessel on The News Hub. (Photo: Bloomberg News)

Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months' worth despite all the foreclosed homes that lenders own. The fraction of homes that are vacant is at its lowest level since 2006.

The reduced inventory of unsold homes is key, says Mark Fleming, chief economist at CoreLogic, a housing data-analysis firm. For the past couple of years, house prices have risen in the spring and then slumped; the declining supply of houses for sale is reason to believe that won't happen again this year, he says.

Builders began work on 26% more single-family homes in May 2012 than the depressed levels of May 2011. The stock of unsold newly built homes is back to 2005 levels. In each of the past four quarters, housing construction has added to economic growth. In the first quarter, it accounted for 0.4 percentage points of the meager 1.9% growth rate.

"Even with the overall economy slowing," Wells Fargo Securities economists said, cautiously, in a note to clients, "the budding recovery in the housing market appears to be gradually gaining momentum."

Economists aren't always right, but on this at least they agree: A new Wall Street Journal survey of forecasters found 44 believe the housing market has reached its bottom; only three don't. (The full results of the Journal's July survey will be released at 2pm ET)

Housing is still far from healthy despite the Federal Reserve's efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac's latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. Americans' equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction slowly.

Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. "A little tail wind is a lot better than a headwind," says economist Chip Case, the "Case" in Case-Shiller.

From here on, housing is unlikely to drag the U.S. economy down further. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. "Manufacturing had led growth and construction had lagged," JPMorgan Chase economists said last week."Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life."

Plenty could go wrong. The biggest threat is a large shadow inventory of unsold homes, homes which owners won't put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get worse. Or overly zealous regulators or a post-election change in government policy could unsettle mortgage lenders or home buyers.

But the housing bust is over.


For full article click here

Tuesday, August 7, 2012

The 3.8% Tax: Real Estate Scenarios & Examples


Beginning January 1, 2013, a new 3.8 percent tax on some investment income

will take effect. Since this new tax will affect some real estate transactions, it is

important for REALTORS® to clearly understand the tax and how it could impact

your clients. It’s a complicated tax, so you won’t be able to predict how it will

affect every buyer or seller.



To get you up to speed about this new tax legislation, the NATIONAL

ASSOCIATION OF REALTORS® has developed this informational brochure.

On the following pages, you’ll read examples of different scenarios in which

this new tax — passed by Congress in 2010 with the intent of generating

an estimated $210 billion to help fund President Barack Obama’s health care

and Medicare overhaul plans — could be relevant to your clients.



Understand that this tax WILL NOT be imposed on all real estate transactions,

a common misconception. Rather, when the legislation becomes eff ective in 2013,

it may impose a 3.8% tax on some (but not all) income from interest, dividends,

rents (less expenses) and capital gains (less capital losses). Th e tax will fall only

on individuals with an adjusted gross income (AGI) above $200,000 and couples

fi ling a joint return with more than $250,000 AGI.

 New tax rate: 0.038%

Applies to:

·         Individuals with adjusted gross income (AGI) above $200,000

·         Couples filing a joint return with more than $250,000 AGI

Types of Income: Interest, dividends, rents (less expenses), capital gains

(less capital losses)

Formula: The new tax applies to the LESSER of

·         Investment income amount

·         Excess of AGI over the $200,000 or $250,000 amount

Example 1: Capital Gain: Sale of a Principal Residence

John and Mary sold their principal residence and realized a gain of $525,000. They have $325,000 Adjusted Gross Income (before adding taxable gain).

The tax applies as follows:

AGI Before Taxable Gain                                          $325,000

Gain on Sale of Residence                                          $525,000

Taxable Gain (Added to AGI)                                   $25,000 ($525,000 – $500,000)

New AGI                                                                    $350,000 ($325,000 + $25,000 taxable gain)

Excess of AGI over $250,000                                     $100,000 ($350,000 – $250,000)

Lesser Amount (Taxable)                                            $25,000 (Taxable gain)

Tax Due                                                                     $950 ($25,000 x 0.038)

NOTE: In this example, only $10,000 of their capital gain is subject to the 3.8% tax. If their gain had been smaller (less than $110,000), they would not pay the 3.8% tax because their AGI would be less than $250,000.

 Example 2: Capital Gain: Sale of a Non-Real Estate Asset

Barry and Michelle inherited stocks and bonds that they have decided to liquidate. The sale of these assets generates a capital gain of $120,000. Their AGI before the gain is $140,000.

The tax applies as follows:

AGI Before Capital Gain                                            $140,000

Gain on Sale of Stocks and Bonds                             $120,000

New AGI                                                                    $260,000

Excess of AGI over $250,000                                    $10,000 ($260,000 – $250,000)

Lesser Amount (Taxable)                                            $10,000 (AGI excess)

Tax Due                                                                     $380 ($10,000 x 0.038)

NOTE: In this example, only $10,000 of their capital gain is subject to the 3.8% tax. If their gain had been smaller (less than $110,000), they would not pay the 3.8% tax because their AGI would be less than $250,000.

 Example 3: Capital Gains, Interest and Dividends: Securities

Harry and Sally have substantial income from their securities investments. Their AGI before including that income is $190,000. Their investment income is listed below.

The tax applies as follows:

Interest Income (Bonds, CDs)                                    $60,000

Dividend Income                                                        $75,000

Capital Gains                                                              $10,000

Total Investment Income                                            $145,000

New AGI                                                                    $335,000 ($190,000 + $145,000)

Excess of AGI over $250,000                                     $85,000 ($335,000 – $250,000)

Lesser Amount (Taxable)                                            $85,000 (AGI excess)

Tax Due                                                                     $3,230 ($85,000 x 0.038)

 Example 4 Rental Income: Income Sources Including Real Estate Investment Income

Hank has a “day job” from which he earns $85,000 a year. He owns several small apartment units and receives gross rents of $130,000. He also has expenses related to that income.

The tax applies as follows:

AGI Before Rents                                                      $85,000

Gross Rents                                                                 $130,000

Expenses (Including depreciation and debt service)  $110,000

Net Rents                                                                    $20,000

New AGI                                                                    $105,000 ($85,000 + net rents)

Excess of AGI over $200,000                                     $0

Lesser Amount (Taxable                                             $0

Tax Due                                                                     $0

NOTE: Even though Hank’s combined gross rents and day job earnings exceed $200,000, he will not be subject to the 3.8% tax because investment income includes NET, not gross, rents. Capital Gains, Interest and

 Example 5: Rental Income: Rental Income as Sole Source of Earnings –Real Estate Trade or Business

Henrietta’s sole livelihood is derived from owning and operating commercial buildings. Thus, these assets are treated as business property and not as investment property. Her income stream is outlined below.

The tax applies as follows:

Gross Rent                                                                  $750,000

Expenses (Including depreciation and debt service)  $520,000

Net Rents                                                                    $230,000

New AGI (Net rental income)                                    $230,000

Excess of AGI over $200,000                                     $30,000

Lesser Amount (Taxable)                                            $0 (No investment income)

Tax Due                                                                     $0

Henrietta’s rental income is from a trade or business so it is NOT treated as investment income. Thus, she is NOT subject to the 3.8% investment income tax.

NOTE: The health care bill created a separate tax for high wage and self-employment business income. Thus, Henrietta IS subject to the new 0.9% (0.009) tax on earned income, because some portion of the net rents represents her compensation for operating the commercial buildings. See additional background below.

For this example, assume that the total net rents are her sole compensation. The tax

on this earned income would be as follows:

AGI                                                                             $230,000

Excess of AGI over $200,000                                     $30,000

Tax Due                                                                       $270 ($30,000 x .009)

NOTE: Depending on how Henrietta has organized her business (S Corp, LLC or sole proprietor), she might be able, for example, to pay herself $175,000, leaving the remaining $55,000 in the business in anticipation of making improvements the following year. In that case, because her AGI of $175,000 is less than $200,000, she will owe neither the unearned income tax (3.8%) nor the earned income tax (0.9%).

Example 6: Sale of a Second Home with No Rental Use (or no more than 14 days rental)

The Bridgers own a vacation home that they purchased for $275,000. They have never rented it to others. They sell it for $335,000. In the year of sale they also have earned income from other sources of $225,000.

The tax applies as follows:

Gain on Sale of Vacation Home                                  $60,000 ($335,000 – $275,000)

Income from Other Sources                                        $225,000

New AGI                                                                    $285,000 ($60,000 + $225,000)

Excess of AGI over $250,000                                     $35,000 ($285,000 – $250,000)

Capital Gain                                                                $60,000

Lesser Amount (Taxable)                                            $35,000 (AGI excess)

Tax Due                                                                     $1,330 ($35,000 x 0.038)

 NOTE: If the Bridgers rent the home for 14 or fewer days in the course of a year, the rental income is non-taxable and the results in the year of sale will be the same as shown above. If the rental period exceeds 14 days in any year, then the rental income (less expenses) will be taxable and AGI would include not only the capital gain, but also some amount that is depreciation recapture. (See next example.)

NOTE: If the second residence is SOLELY a rental property, it is treated as an investment property. See examples 7 and 8.

 Example 7: Sale of an Inherited Investment Property (Residential or Commercial)

In 2010, Ethan inherited a four-plex investment property from his great aunt. She had used it for many years as an investment rental property in San Francisco. At the time of her death, the adjusted basis of the property was $10,000. During her period of ownership, she had taken $240,000 of depreciation deductions on it. Its fair market value was $900,000 when she died. Because there was no estate tax for 2010 and because carryover basis was in effect, Ethan’s basis in the inherited property is also $10,000. The prior depreciation allowances carry over to him, as well. He continues to use the property as an investment rental property.

Ethan later sells the property for $1.2 million. He is single and reports Schedule C self-employment income of $180,000.

The tax applies as follows:

Gain on Sale                                                                $1,190,000 ($1.2 million – $10,000)

Depreciation Recapture                                              $240,000 (From great aunt)

Depreciation Recapture                                              $2,200 (Ethan — approximate)

Total Gain                                                                   $1,432,200 ($1.19 million + total depreciation recapture)

Schedule C Income                                                     $180,000

New AGI                                                                    $1,612,200 (Gain + Schedule C)

Excess over $200,000                                                 $1,412,200

Lesser Amount (Taxable                                             $1,412,200 (AGI excess)

Tax Due                                                                     $53,664 ($1,412,200 x 0.038)

NOTE: If Ethan had inherited the property in a year when stepped-up basis was in effect, his basis would have been $900,000. The capital gain in this example would have been only $300,000. Ethan would not have been responsible for his great aunt’s depreciation recapture amount. His own depreciation recapture amount would have been based on depreciation allowances claimed on a basis of $900,000 rather than $10,000. Thus, while he would still have been liable for the 3.8% tax, the amount of tax would be substantially smaller.

 Example 8: Purchase and Sale of Investment Property (Residential or Commercial)

Ethan has purchased an investment property for $900,000. During his period of ownership, he takes $230,000 in depreciation deductions. He has also made some improvements to the property. At the time of sale, his adjusted basis in the property is $760,000. He subsequently sells the property for $1.2 million. In the year of sale, he is single and reports self-employment income of $315,000.

The tax applies as follows:

Gain on Sale                                                                $440,000 ($1.2 million less adjusted basis of $760,000)

Depreciation Recapture                                              $230,000

Total Gain                                                                   $670,000 (Gain on sale plus depreciation recapture)

Schedule C Income                                                     $315,000

New AGI                                                                    $985,000 ($315,000 + $670,000)

Excess AGI over $200,000                                         $785,000 ($985,000 – $200,000)

Lesser Amount (Taxable)                                            $670,000 (Capital gain)

Tax Due                                                                     $25,460 ($670,000 x 0.038)

 NOTE: The statute provides no guidance as to whether Ethan can defer the 3.8% tax by entering into a like-kind exchange when he sells the property. This question may be addressed in regulations at a later time, but for the present is not resolved.

 Additional Information

This new tax was never introduced, discussed or reviewed until just hours before the fi nal debate on the massive health care legislation began. That legislation was enacted on March 23, 2010, more than a year after the health care debate began. This new tax was put forward after Congress was unable to agree on changes to current law that were sufficient to pay for the proposed changes to the Medicare program and increased subsidies to individuals and businesses.

The new tax raises more than $210 billion (over 10 years), representing more than half of the total new expenditures in the health care reform package. NAR expressed its strongest possible objections, but the legislation passed on a largely party line vote.

The new tax is sometimes called a “Medicare tax” because the proceeds from it are to be dedicated to the Medicare Trust Fund. Th at Fund will run dry in only a few more years, so this tax is a means of extending its life.

A second new tax, also dedicated to Medicare funding, is imposed on the so-called “earned” income of higher income individuals. This earned income tax has a much lower rate of 0.9% (0.009). Like the tax described in this brochure, this additional or alternative tax is based on adjusted gross income thresholds of $200,000 for an individual and $250,000 on a joint return. Like the 3.8% tax, this 0.9% tax is imposed only on the excess of earned income above the threshold amounts. An example and some analysis of this tax is presented in Example 5 of this brochure.

Another way of thinking about these new taxes is to think of the 3.8% tax as being imposed on a portion of the money that you make on your money — your capital (sometimes referred to as “unearned income”). The 0.9% tax is imposed on a portion of the money you make on your labor — your salary, wages, commission and similar income related to earning a livelihood.


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