P h i l l i p H . L a nd e
A B R , A S P , C D PE , C R S
4 S A L E B Y D IVO RC E Divorce & Real Estate June 2016
The Importance of Basis
DID YOU KNOW FREE Credit Reports Many times, divorcing clients will provide their attorneys with a list of their existing debt, however, the safest way to make sure no debt is overlooked, it is advisable to obtain independent credit reports for both divorcing parties. In 2003, Congress passed the Fair and Accurate Credit Transaction Act as a way to address identity theft. FACTA is an addendum to the Fair Credit Report Act. Under the FACTA, consumers have the right to request one free copy of their credit report from all three bureaus: Experian, Equifax and TransUnion.
With the real estate market continuing to improve and divorcing clients selling their marital home, it may be an important time to review the importance of Basis in selling real estate. The basis of the property is usually the cost. The cost is the amount paid in cash, debt obligations, other property, or services as well as significant property improvements made to the property. Often times overlooked for inclusion of the basis is any ‘special assessments’ paid by owners who are selling condominiums, townhomes, etc. In addition to the cost of the property, certain other fees and expenses become part of your cost basis as well.
Real Estate Taxes. If you pay real estate taxes the seller owed on the real property purchased and the seller did not reimburse you, treat those taxes as part of your basis, not property taxes paid. If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of the purchase. Do not include this amount in the basis of the property. If the seller is not reimbursed, this amount must be reduced from the basis.
Settlement Costs: Your basis includes the settlement fees and closing costs for buying the property. You cannot include in your basis the fees and costs for getting a loan on the property. A fee for buying property is a cost that must be paid even if the property was purchased with cash. Settlement costs do not include amounts placed in escrow for the future payments of items such as taxes and insurance.
Congress also created a website where consumers can order all three reports in one place: www.annualcreditreport.com Tip: Advise clients to maybe pull one bureau every 3-4 months as a way to monitor their credit for free on a constant basis.
Phillip H. Lande RE/MAX Legends Group/ Atlas Group Direct: 317.863.2356 plande@atlasrealty.com www.remax-atlasgroup.com
P P age age 22
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Buying a New Home with Cash 90 Day Rule—Good or Bad Idea?
Believe it or not, many people are buying homes with cash these days – especially in divorce cases. However, they need to understand the ‘90 Day Rule’ and it’s important that we understand the rule as well so we can advise them accordingly. The IRS gives you a 90 day window to put a mortgage on your property and gain the tax benefits associated with ‘acquisition indebtedness.’ Any mortgage this is used to buy, build, or improve a primary or vacation home qualifies for ‘acquisition indebtedness. Any mortgage used for any other purpose is considered ‘home equity indebtedness’. If you do not put a mortgage on your property within 90
days of acquisition, any future mortgage that is not used specifically for home improvements will be considered ‘home equity indebtedness. This means that:
You will not be able to deduct any of the interest at all if you are subject to the Alternative Minimum Tax (AMT).
You will only be able to deduct the interest on up to $100,000 of the mortgage balance if you are not subject to the AMT.
On the other hand, if you do put a mortgage on the property within 90 days of acquisition:
You can use the funds for any purpose you want.
You can deduct the interest on up to $1,000,000 of the mortgage balance regardless of whether or not you are subject to the AMT.
If you have divorcing clients who are contemplating purchasing a new home with cash and thinking of pulling their cash back out at a later date, please have them call me to discuss the 90 Day Rule to avoid potential tax consequences as well as avoiding a ‘Cash Out Refinance” at potential higher rates.
www.remax-atlasgroup.com
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CoreLogic Q1 2016 Homeowner Equity Report www.corelogic.com More than 1 million homeowners have escaped the negative equity trap over the past year. If home values rise another 5% uniformly across the U.S., the number of underwater borrowers will fall by another 1 million during the next year.
Net Monthly Benefits of Purchasing a Home Owning a home over time has proved to be a strong contributor to building wealth—here’s why:
Factors as follows: Mortgage interest @ 4.5%, loan to value of 80%, rent is calculated at 6% of value, real estate taxes @ 2% of value, maintenance is .5% of value, insurance is $2.90 per $1,000 of mortgage amount and marginal tax bracket used is 30%. “Costs” equal monthly interest expense + insurance + maintenance + property taxes. Net Monthly benefit = appreciation + shelter value/rent saved + tax savings—costs. First and foremost, a home is a place to live. Over time, it’s also proved to be the single largest contributor to building wealth but still, that’s the gravy. One has to be prepared to make the payments that they sign up for as things like appreciation aren’t realized until the property is sold. However, other benefits such as tax deductions and of course, the fact that you’re paying your own mortgage rather than your landlord’s is the best thing of all. Perusing the chart above evidences the value of owning real estate over time and clearly, getting paid to own vs. paying to rent is the clear winner at the end of the day. When advising divorcing clients on their housing options post-divorce, it’s important to understand the long term financial benefits as well. With so many new options available including the new low-down-payment options combined with the financial and tax benefits when comparing the option of renting vs. owning—please don’t hesitate to contact me directly for a detailed analysis of the options available for your clients.
www.remax-atlasgroup.com
Phillip H. Lande ABR, ASP, CDPE, CRS RE/MAX Legends Group/ Atlas Group 5645 Castle Creek Pkwy N Indianapolis, IN 46250 www.remax-atlasgroup.com plande@atlasrealty.com Direct: 317.863.2356
As professional real estate agents specializing in helping divorcing couples, we are here to help both parties involved through a smooth yet emotionally difficult process when they need to sell the marital home and purchase new homes moving forward. As a member of your professional divorce team, our goal is to: 1. Help clients understand the legal and tax aspects of divorce in regards to the sale of the marital home and other real estate. 2. Offer alternatives to the usual mistrust and the emotional responses as a result of dividing real estate assets. 3. Work with both parties together to help them save and make money now and down the road with regards to real estate. 4. Work with both parties, not just one, in selling the marital home for the best price. Please don’t hesitate to call us if we can be of service to you and your divorcing clients!
R E A L E S TAT E
S T R AT E G I E S FOR DIVORCING COUPLES
With the divorce rate stable at fifty percent and home ownership at sixty-two percent, there are a lot of families who need professional guidance as they navigate what to do with their home. For most people their home is the largest asset they own, so the decision must be carefully thought out and analyzed. Now more than ever a full time local Realtor must provide professional guidance. This is not the time to take the real estate advice of family, friends or other professionals. While your legal adviser or family member who lives in another state means well, real estate still remains local, particularly with our mercurial national market. The sale of the marital home is not an isolated decision. There are short and long term financial, emotional and tax consequences. A Realtor, preferably one who specializes in divorce, can offer the best guidance regarding the marital home. They must understand that they will work in tandem with other professionals for the best customized outcome. The goal should be a client that has their individual needs met and is making informed decisions from a knowledgeable place. This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Not a commitment to lend. Copyright 2016 All Rights Divorce Lending Association, LLC The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.