Category: Personal Finance

Tax implications of capital losses…..

Posted on by Evan in Investing, Personal Finance, Taxes

They say that you learn something everyday and thankfully I came across this article this evening because otherwise this may have been the exception. 

In the Washington Post a reader wrote and posed the question, “Is it time to sell some beaten-down holdings for tax reasons, and how do I decide which ones?”

The reader is alluding to a rule which allows an investor to write realized capital losses against capital gains to offset tax liability.  Here are a few provisions in this rule that I DID NOT know until reading the experts’ responses (which can be viewed at these two links: 1 & 2):

-Capital losses may only be used to offset any and all capital gains in the given year + up to $3,000 of ordinary income.

-Capital losses may used to offset current & future capital gains.  Therefore, if an investor incurs $5,000 in capital losses in a given year and only has $1,000 in capital gains they may use $3,000 to offset ordinary income tax liability and $1,000 of future capital gains.

-Keep in mind the “wash rule” which prevents investors from claiming the loss if the same security is repurchased within 30 days of the sale date in which the loss was realized.

ROI on a 2nd home?

Posted on by Evan in General Mortgage Info., Home Purchase, Housing & Real Estate, Investing, Personal Finance

Brent Arends wrote this interesting article for WSJ.com money last week.  In his article he took a very objective approach to measuring the cost and investment value of owning a second home. 

Among his comments that I found useful was his commentary on how costs associated with owning a second property typically exceed the owner’s original expectations.  He estimates that after-tax annual expenditures associated with owning a second home can run as high as 9% of the homes value (assuming an 80% mortgage + property taxes, etc.).  This is probably a good tool for prospective second homebuyers to take into account.

However, I thought he totally missed the boat on the subjective value a family can gain by having a common place to build memories during family vacations, holiday excursions, and much more.  My wife was able to spend her summers and Thanksgivings up in the San Juan Islands at a home her family has owned for years.  The memories and stories she recalls are priceless. 

I think it is important to conservatively calculate the financial impact owning a second home will have on a families budget but my guess is that the long-term equity appreciation and memory building will out way the costs!

American’s are working deeper and deeper into their lives.

Posted on by Evan in For Professionals, Investing, Miscellaneous, Personal Finance

I came across this article in the Huffington Post and was reminded that the virtue of “delaying gratification” coupled with compound interest can make a big difference when it comes time to decide whether or not a person can retire.

According to this article more and more American’s are having to work past the age when we’ve gotten to retire in the past.  My guess is that this trend will continue into the future especially if/ when the Federal Government is forced to alter or eliminate entitlement programs.

What can you do to avoid having to work into your 70s?  Work with competent financial advisors (including mortgage professionals) who can help you plan. 

 

Capital Gains Exclusion for Sale of Primary Residence

Posted on by Evan in For Professionals, Housing & Real Estate, Personal Finance, Taxes

One of the best tax breaks available to homeowners is the capital gains exclusion on the sale of a primary residence.  This important tax benefit is fairly simple yet often misunderstood so I thought I would provide a summary of what the average homeowner should know about.

What is the capital gains exclusion?

The tax code allows home sellers to exclude the first $250,000 for individuals ($500,000 for joint filers) from any capital gain tax liability.

How is a capital gain calculated?

Simply put, a capital gain is equal to the difference between the price a home seller paid for a home and what they sold it for.  For example, a home that was bought for $300,000 and sold for $400,000 would have a $100,000 capital gain.

There are additional items which can go into this calculation such as improvements made to the property during the term of ownership, closing costs, real estate commissions, etc.

Are there any conditions which must be met to qualify for the exclusion?

Yes, a home seller must have lived in the subject property as their primary residence for at least 2 years of the previous 5 years from the date of sale.  For example, if a home seller closes on their home on January 1, 2008 and realizes a $250,000 gain, they must be able to prove that they lived in the property for at least 24 months during the time-frame January 1, 2003-January 1, 2008 in order to qualify for the exclusion.

The tax code only allows tax filers to take advantage of this exclusion once every two years.  For home sales after 2008, there are some additional provisions that impact homeowner’s who used a home as a primary residence AND a rental property within the 5 years of the date of sale.  It is best to check with a tax professional in these instances.

Does a home seller need to “reinvest” the capital gain into a new home in order to qualify for the exclusion?

NO!  This is a commonly held myth that many homeowners believe is the case.  This myth is rooted in the previous tax code which allowed home sellers to exclude their capital gains from tax liability so long as the gain was reinvested into a new home.  This rule was changed with the Taxpayer Relief Act of 1997.  Now homeowners may do whatever they please with their gains.

Can a capital loss from the sale of a primary residence be deducted from a home seller’s taxable income?

Unfortunately not.

Where can I get more information on this topic?

For complete details on this topic I would recommend downloading and reading the IRS publication 523 which deals with selling your home.  You may download this document by clicking this link.

Was this post helpful & informational for you?  Did you find any facts in the article which were incorrect?  Either way please write a comment below so that I can continue to expand “My Mind”.

6 Tasks to Triumph in Tough Economic Times

Posted on by Evan in Debt, Investing, Miscellaneous, Personal Finance

My colleagues Tony & Jared of Equity Design @ Mortgage Trust recently wrote this excellent posting on their blog about 6 things we can all do to overcome these tough economic conditions. 

Among my favorite- dust off the bike and ride to work which is something I’ve done over the past few weeks!  Thanks Tony and Jared!

Here's a picture of my SWEET bike!
Here's a picture of my SWEET bike!

Multiple inquiries on credit are not as bad as you think

Posted on by Evan in Credit, General Mortgage Info., Mortgage Qualification, Personal Finance

Often times our customers are hesitant to grant us permission to access a new credit report for them because of concerns that it will hurt their credit score.  The problem with not reviewing a client’s credit history and credit score is that we end up proposing mortgage options that may change once we do pull a credit report.  When we’re unable to deliver on our proposal it is not only frustrating for our clients but also ourselves because we try to take great care of our reputation.

 

I came across an article on Inman News by Dian Hymer in which she helps explain why for most people allowing multiple lenders to pull a credit report WILL NOT impact their credit score to the point where it will adversely impact the terms they are receiving on the loan.

 

Among her points that I like:

  • “The FICO credit-scoring model ignores all mortgage inquiries made within the last 30 days, so they will have no impact on your score.”
  • The number of new inquiries is counted towards the “new credit” factor in determining your credit score.  The “new credit” factor makes up ONLY 10% of the equation. 

 

You may view the article yourself by visiting this link.

Roth 401K: Tax Me Now

Posted on by Evan in Investing, Personal Finance, Taxes

Our company recently changed 401K providers which offered me the opportunity to evaluate not only the standard 401K but also the Roth 401K.  I had read about the Roth 401K back in December of 2007 and was pleased to see that these options were beginning to work their way into employers’ offerings. 

It also created a new decision that I had not encountered before.  Do I invest my 401K contributions into a standard 401K and take the immediate benefit of the income tax deduction? or do I allocate my contributions into Roth 401K where I pay income tax on my contributions but am able to access the money tax-free in retirement? 

After talking with my investment advisor (who I highly recommend- let me know if you’d like his information by emailing me) he convinced me to put a portion of my monthly contribution into each so that I would have two buckets to play with when I hit retirement. 

If you’re coming across a similar decision in the future I’d encourage you to read this article which explains the 401k & the Roth provision as well as talk with your financial advisor. 

Don’t forget about fiscal literacy

Posted on by Evan in For Professionals, Housing & Real Estate, Miscellaneous, Personal Finance, The Fed

The NY Times published a good article today outlining the presidential hopeful’s views on financial regulation (click this link to view).  By the sounds of it we can expect greater governmental oversight over the financial markets in the coming years.

It is no surprise that a reaction for greater financial regulation has resulted following the third financial collapse in as many decades.  In the 1980s the savings and loan crisis forced 747 financial institutions to fail.  In the 1990s it was the dot-com bubble that burst wiping out approximately $5,000,000,000,000 ($5 trillion) in market capitalization in only 2 years.  Currently, we find ourselves in the largest credit & housing expansion and downturn in US history (the extent of the housing cycle is creatively displayed in this video by John Burns).

In each instance the pattern of activity tends to be similar.  At first a small group of people begin to acquire an asset (i.e. stock, house, mortgage-security) and that asset class performs extremely well over a short period of time.  Word spreads that this particular asset class is a great investment and more and more people get involved.  So on and so forth until rationality has left the marketplace and folks are buying up the asset left and right without any regard to the actual fundamentals behind the investment.  Along the way enterprising and dishonest salesman find ways to “help” less educated and less sophisticated buyers get into the game.  Around this time is typically when the music stops and those left holding the asset are the ones who lose huge.

To a degree this explains how each of the aforementioned economic bubbles have occurred.  Many people have blamed the period of deregulation in the financial markets from 1970-2000 for allowing so many people to get into financial trouble.  If this is indeed the cause then it would only make sense to have the government tighten down on the financial markets.  It is no surprise then that the two presidential hopefuls are proponents of this approach as is Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. 

Although I do agree with these people that some additional governmental regulation would be helpful (so long as it is actually enforced) I think the greater preventive measure lies in our education system.  For me this period in our history is only partially about lack of government oversight and is more about lack of fiscal literacy among consumers.

The Economist wrote an excellent article about fiscal literacy which I posted on my blog back in April (view it by clicking this link).  My hope is that the presidential nominees will spend time this fall talking about ways to improve our national education system so that in the future consumers will be able to ask informed questions, properly analyze their options, and make quality decisions regarding their financial matters.  Otherwise we may find ourselves in this position again next decade. 

Housing bill alters capital gains exclusion…..

Posted on by Evan in General Mortgage Info., Housing & Financial Legislation, Personal Finance, Taxes

I came across this article in the WSJ today and was surprised to see it.  Embedded in the 700-page housing bill that President Bush signed into law was a change to the way the IRS will allow homeowners to exclude capital gains tax for the sale of a primary residence.

Under the previous rules a homeowner could exclude up to $500,000 ($250,000 for an individual) of a capital gain on the sale of their primary residence so long as they lived in the home for 2 of the previous 5 years from the date of sale.

For example, a couple buys a home in Portland for $375,000 on January 1, 2005.  They live in the property for 3 years as their primary residence.  During their time in this home they also buy a vacation property in Bend for $300,000 on January 1, 2007.    On January 1, 2008 they sell their primary residence in Portland for $500,000 ($125,000 gain) and move into their vacation home in Bend and occupy it as their primary residence.  On January 1, 2009 they sell their home in Bend for $500,000 ($200,000 gain).

Under this scenario the couple would be able to exclude the $125,000 capital gain they incurred on January 1, 2008 when sold their home in Portland as well as the $200,000 capital gain which they incurred when they sold their property in Bend on January 1, 2009.  This is known as “house-hopping”.

Under the new law this will no longer be the case.  Because the home in Bend was allocated for 1 year of “non-qualified use” out of 3 they would only be able to exclude 2/3rds of the $200,000 capital gain from tax.  The remaining 1/3rd would be subject to capital gains tax.

For most Americans this change to the capital gains tax exclusion will not have an impact.  However, for many others this is bad news.

Here is another article from Kiplinger’s that is applicable to this subject.

Details on Tax credit for 1st time home-buyers

Posted on by Evan in General Mortgage Info., Housing & Financial Legislation, Housing & Real Estate, Personal Finance, Taxes

Last week President Bush signed the new housing bill into law.  One of the provisions which was included in this bill to help the ailing housing industry is a tax credit for first time home-buyers.  I wanted to take a quick moment to highlight the details for those of you who will qualify for this credit:

*Who qualifies for this credit? Anyone who buys a home from April 9, 2008-June 30, 2009 who is buying their first home or who had not owned a new home in the previous 3 years from the date of purchase.

*What are the terms of the credit? The credit is actually an interest-free loan worth up to $7,500 for couples filing jointly or $3,750 for those who file individually.  A tax credit is different from a tax deduction in that it actaully reduces your tax liability dollar for dollar (whereas a tax deduction reduces your taxable income which means your tax liability is only reduced by the amount of the deduction times your marginal tax rate).  As an example, if you were expecting a tax refund for $2,500 you’d actually get $10,000 ($7,500 more) with the tax credit.

However, you don’t get to keep this tax credit money for ever.  The IRS will then collect $500 per year ($250 for individuals) for 15 years from your tax refund (or added to your tax bill) to repay the credit.  Although this is kind of drag this is still a great deal.

*How much will this help? It’s difficult to say for sure how much of an impact this will have.  However, if I were a first time home-buyer and didn’t have a down-payment saved up one possibility for me would be for me to borrow $7,500 from a family member or close friend to use towards a down payment (FHA loans only require 3% down so I could buy a $250,000 home and put 3% down with this tax credit) and then pay back the loan when my tax refund became available.

I referenced this article as well as other resources for my information.  See also-http://www.federalhousingtaxcredit.com/ & http://online.wsj.com/article/SB121885474988146639.html?mod=residential_real_estate