MD Anderson Real Estate

Your Tax Smart Real Estate Agent
Welcome to MD Anderson Real Estate Sign in | Help

MD Anderson

  • RENTING YOUR MAIN HOME OUT FOR HUGE TAX BENEFITS? Not so Fast...

    Well, the funny thing about radio ads is that listeners hear what they want to hear. Specifically, the current ads running by "Rent Estate" on conservative radio shows are sure to tell you of the great TAX BENEFITS of keeping your home and renting it out instead of just selling it. And, if that home has any equity in it before you "convert" it from a private residence and into a rental property - the so called TAX BENEFITS turn into potential LOST TAX BENEFITS after just 6 months of rental time... and you have a PERMANENT loss of fantastic home sales rules (tax free selling) if you don't sell that home within 3 years after you moved out as long as you lived in it 2 of the last 5 years.

    Instead, after losing a free sale up to $250,000 of gain if you are single or $500,000 if you are married and filing a joint return -- you will eventually convert that home with equity into a tax favor for the IRS and your state tax authority (if you live in a state that has an income tax). Now, that isn't so smart and sadly, the ads don't have proper disclaimer statements stated to warn you that selling any private residence home with equity is a permanent tax loss once that 3 year mark is passed. Any home owner with equity, especially a high amount of equity should go ahead and list and sell their home to take a permanent tax free sales gain. Or rent it out for a temporary time period at best, though doing so may reduce the value of your home since rental properties do not normally bring as much value at sale as homes never rented out. A stigma applies and a discount value is very possible if you rent your home out before selling it.

    By just listing and selling your main home, the transaction now stays in your own private records if you are under the high tax free limits and is not even stated on the tax returns! And perhaps with all the money this country needs to pay it's future bills, including interest alone on national debt -- taking the sale now of a high equity home makes a lot of tax sense if you wake up in 2016 and find this Section 121 of the IRS code has suddenly been revoked. There are fantastic tax benefits in rental properties both residential and commercial. Residential rental homes are given 27 1/2 years of depreciation and commercial properties are given 39 years. But the people behind these ads and the broadcasters pushing those ads for money no doubt, are opening themselves up to legal challenges with the "tax benefits" promised if you just rent your home out instead of list and sell it. Again, only if you have equity in that home and especially if you have a high amount of equity. It might be a lot better to just sell your home and smile all the way to the bank with your tax free gain up to 1/2 million dollars! Then buy back any home you want, or homes with net equity after closing. Or just put the money into your retirement fund. Believe it or not, some people still think you have to replace your home with another home of the same or higher value. (That went out way back in 1997 folks)

    The reason for selling keeps it simple but is best expressed by giving you an example:

    You bought your main home in 1981 for $125,000. Today, that same home is appraising for $390,000 and after the expense of closing fees, you could net $375,000 of proceeds, minus any small mortgage payoff you may still have on the property. Using simple math, the IRS would say that you made a $250,000 gain. And regardless if you are single, married, or divorced - congratulate you by not taxing that gain and for being so smart YOU TOOK advantage of a tax law that at any time, could be wiped out in the future regarding home sales rules.

    But, if you rent that same home out, and miss that 3 year deadline... you miss most likely the biggest ship of your life! If you sign a lease agreement to rent your home out, the IRS can easily say your intent was to rent it out as a rental property in some cases long before the 3 year time limit expires. Can you imagine renting for 2 years then 6 months more and then listing it 2 1/2 years from now -- and not finding a buyer to pay the listing price in time?  Double discounts would then apply. You are selling a rental and you will have to sell for less than full value to meet the deadline. And if you are close to the maximum tax free limit, has anyone ever told you ALL that depreciation a rental gives you year by year is recovered and deducted from the home basis? 

    Not that it would be that big of deal since the BIGGEST mistake people make renting out their former home applies to all. Your basis for depreciation is based on your purchase price minus the value of the land beneath it. Yep, back in 1981 you paid $125,000 including the value of the land under your home. As a practicing professional accountant for decades, I can attest the IRS expects you to discount the original purchase price of a normal home (not a condo or townhouse) by a factor of 13-20% because of the value of the dirt under your home. Why? That land is not sticks and bricks and thus is not allowed a depreciation deduction.  Got a big lot or double lot?  Better take 20% or more discount to find the depreciation basis of your prior home now becoming a rental.

    And here is the math: $125,000 purchase price - 15% for land ($18,750) = $106,250 basis divided by 27.5 years and allows a first year rental depreciation deduction on your main home converted to a rental of just $3,864 for the first year if you rent it the first day of January. Otherwise your first year depreciation deduction will be pro-rata for the year it was put in service per IRS rules. Compare that to the better option of selling your main home and buying another home, but a rental home this time and rent it out. It could even be next door or across the street by the way. The key is to replace, not keep a main home with a low basis for rental purposes. Now, you may not want to pay that $390,000 for just one rental. (Ask me why buying back two rentals would be smarter)

    Here is the much smarter math that would apply if you sell and buy back:

    $390,000 New rental purchase price - 15% for land value which is $58,500. That nets a depreciation basis for this newly purchased rental of $331,500. Your first year full depreciation (net basis divided by 27.5 years) would be $12,054!  Yes, it would be over 3 times more write off each and every year for 27.5 years! Do you really think renting your old home out versus selling it and buying back one or more rentals would put money in your pocket?  Of course not. It's just a lazy sales approach to trick you into thinking renting a main home out is the best way to go. But instead, it kills your Section 121 free gain rule on a main home if you rent beyond that 3 year deadline you are required to not only list but execute a closed transaction sale. Don't let some fast talking salesman convince you to lose 2/3 rds of your potential rental property tax write off for depreciation.

    The whole idea of rental properties to achieve tax benefits is to get great monthly rent from steady and secure renters while producing a big negative figure to offset your day job or other retirement income. (More about that below) In fact, you permanently lose that big negative write off in my example here and may actually have to pay some income tax on your yearly rental income because your depreciation is greatly reduced from what it could have been. Where is the tax benefit in that?  Now a savvy salesman may say the more property you control the higher your net worth will go up. That might be true if values continue to rise on our real estate owned over the long run. But go for that goal with newly purchased rentals so your CPA or other tax professional preparing your tax returns doesn't give you this little "Pep Talk" after it's too late. SELL YOUR MAIN HOME if you have equity is what I am saying and especially if you have BIG equity. 

     Now, let me discuss those 3 tax traps:

    1.  Not everyone can deduct rental losses on their tax returns. Make sure you understand "passive loss" rules before you buy or convert to a rental.

    2.  Regardless of buying new rental property/ies, or renting your home out instead, don't get trapped to think that $20,000 kitchen redo can all come off in one year on your new Schedule E Rental Schedule. It takes 27.5 years folks to deduct it all!  However if you sell a rental or main home after being converted, at least the un-used portion of that kitchen upgrade will add to your basis for sales gain calculations and allow you to pay lower capital gains taxes (if held one year or longer).

    3.  Unless you are still underwater on your home, don't lose Section 121 tax free gain rules on your main home. Understand the rule and understand tax law can change drastically, especially after an election year.

    Noting: Most property sellers look at net proceeds from closing as their "gain".  Don't make that mistake. It has nothing to do with your net check you walk away from closing with. The IRS uses this formula to figure your gain: PURCHASE PRICE + IMPROVEMENTS - DEPRECIATION USED = Net Gain for tax purposes. Also noting if you are underwater with your home worth less than the payoff balance -- renting it out may be your only option anyway and I understand that. OK, that's it. Now, after a little "tax education", who still wants to rent their "high equity" home out now?  

    Get a professional opinion before you make any major real estate move. Perhaps using a "Tax Smart" Realtor will help you avoid the traps and find the opportunities waiting for those who want to avoid the minefields yet get their assets into non paper assets.  Give me a call at 1-800-782-2806 no matter where you live. I can assist you either by personal representation here in Arizona or by referral to a qualified Tax Smart Realtor in your state. Or visit: www.mdandersonrealestate.com or www.TaxSmartRealEstateAgent.com.

    M.D. Anderson

     

     

     

  • AVOIDING THE EASY SALE SCENARIO

    Greetings from sunny Arizona!  Lately, we have been bombarded here in Arizona with tons of private investors on our homes. In fact, I have been getting multiple post cards and letters from potential buyers of my home the past few weeks. And hearing the same type of offers on radio ads as well. The one prominent theme of these ads and offers is to take your home off your hands with the least amount of hassle or worry. What they don’t tell you is that they are “bottom feeder” investors who want to pay you less than fair market value for your current home. All so you can sell it “AS-IS”, un-fixed, and with any blemishes – all in the shortest period of time.I admit, they know that you have equity in your home or they wouldn’t bother spending the money, at least on the mailed advertisements. After all, if you are still “upside-down” and underwater, this program is not going to work for you.

    Since your “fair offer” may be a lot less than your home is really worth, the temptation for “fast cash” is the biggest motivator for people to sell their home this way. It may be true that the same people who go to those check cashing places on every corner will be most likely to sell their home and lose money selling this way. It may also be true that the real investors behind the “deal” they offer you are the same people running those check cashing places. And they don’t do business at normal rates folks. Sadly, Arizona law allows unbelievable interest rates on the loans they also make on cars you can still drive after taking a loan and has no law to stop someone enticing you to sell your home for a lot less than what it is worth, just so you can get that “fast” cash they promise.

    So what is the alternative?  Throw away the offers like I do. Turn the station when you hear the radio ads. And call a professional Realtor who can access true value pretty closely with modern tools or help you get an actual appraisal from a license appraisal service if you really want to know the true value of your home. And use a Realtor like me who reduces the stress and hassle of selling your home by not making common mistakes or making untrue statements about your net proceeds after closing. Time has proven that most of those “sell your home yourself” companies have folded and gone away since nothing is simple about selling or buying a home in this modern world.  It takes a professional real estate agent and frankly, one who is also tax smart to make sure your CPA doesn’t give you bad news after the fact.

    I invite you to experience the difference so you can bank more money in your pocket by working with an agent who knows how to suggest small improvements in preparing your home for sale to secure big price gains over selling to those bottom feeders running those “be lazy” and lose a bunch of money ads.

     

  • Make America Great Again - Buy More Real Estate!

    Yes, I am capitalizing on the Donald's popular campaign slogan. After all, Donald Trump didn't get rich buying bank CD's did he? He did it the old fashioned way by buying real estate. Big real estate in his case. No matter which side of the political fence you are currently on, thinking about changing to, or running away from all together (it is kind of a mess isn't it?). I am also a strong believer in buying real estate to beef up your net worth for the long haul, which for some of you might even take you close or over the 100 year old mark in total years you and your survivors hold a property.

    Originally, starting in the insurance business, I gained a pretty good handle on mortality and so far - we are still going the right direction with people living longer each time an official U.S. mortality study (leading to published tables) is performed . In fact I have an Arizona client less than 2 years away from the Century mark.  And, she still lives on her own. In fact, just a few years ago, I helped ghost write her own book telling her life story from Armistice Day 1917 up until age 94. And her assets maintain her lifestyle even now because she made two very important decisions on real estate during her lifetime.

    First, she decided early in life that buying a home made a lot more sense than renting one. And her Midwestern home was bought during peak earning years in professional secretary work. It provided for a nice nest egg of cash and also paying cash for her Arizona retirement home bought in the 1980's. Now, that home has risen to a nice value and though she hasn't had to sell it to find money to live on, it still provides that option should the need arise. The point is simple - just living in a home may bolster your net worth enough in life to retire and NOT have to go get a job at Walmart in order to pay your bills when you become a Senior Citizen. 

    My own son has lived in his first home purchase less than two years and yet he made over 20k in increased home value just by sleeping and living there! And, he is in that generation of young men that the stats are telling us are more inclined to want to rent a home or "pad" instead of buying one. Nothing has changed, buy a property to live in and if you can, buy a property big enough that it allows you to rent a room out if possible at least for awhile. That way the renter helps pay your own mortgage payment each month. Though you have to report the extra income on your taxes, the extra deductions can often offset that income nicely. So your net cash flow remains very positive.

    Mr. Trump says America isn't great anymore. I tend to agree at least in part, that our politicians are not helping the cause much lately. I find it sad so many young urban professionals accept being holed up in an apartment. Or a fancy 10th floor downtown rental that is costing an arm and a leg just to pay for. And guess who is smiling on that deal?  Of course it is the landlord/s.  If you have to raise the down payment, move back in with Mom and Dad for a while to raise down payment money. That's what my son did and it worked nicely. Cash accumulated quickly in just 6 months making it possible to buy his first home and we used the "conventional" mortgage to avoid FHA fees. His mortgage did require a higher 5% down payment, but by living back at home just a few months, he gained an extra 2% of equity over the 3% down FHA loan and avoided complicated requirement and additional government fees. It was a smart move in more ways than one..

    Let's Make America Great Again by embracing real estate as your first option, not your last, to get ahead slowly but surely with real estate. History proves, nothing has worked better. And as soon as you get equity in your home purchase, don't forget to use a tax smart real estate agent like me to assist you in buying your first rental that will make you smile when those foolish renters line up in long lines here in Arizona to rent your home at top rental dollar rates!

    Join Mike's "Make America Great Again By Buying Real Estate" campaign.  Call me at 480-345-1616 to get the ball rolling. 

  • The CFPB IS COMING AND ALMOST HERE!

    For many who are not yet familiar with the CFPB otherwise known as the Consumer Financial Protection Bureau, buying or selling real estate has a drastic change coming this October, 2015. In the past and still for a few more weeks, we have used other standard forms nationwide to disclose information about loan costs and closing costs. First, the GFE or good faith estimate was required for a buyer who was financing a real estate purchase. It had to reasonably be accurate in disclosing the true cost of mortgage credit initially and of course, over the entire period of the mortgage loan. The GFE is toast starting in October 2015. Delays have already happened this year in the implementation date. But odds are high your next home purchase or sale will be subject to the new system even before it becomes mandatory. 

    The form everyone was given if they bought or sold a home in the past is also being retired by the CFPB which is the infamous "HUD-1".  You all have one or more in your records. This legal size document was included in every closing packet you got from the title company and did a reasonably good job in first estimating closing costs (a pre-closing copy was always given so you knew how much money to deposit if you were buying and how much money you would net out of the transaction if you were selling). Every real estate agent was so familiar with those HUD-1's, especially the second page that disclosed how much money they were going to make on the sale.

    And there were other forms too but the United States government in their infinite wisdom and insight has now scuttled everything for a brand new system.  And, believe it or not -- it may be better than before!  Not that anyone in the industry likes the new system which includes just two separate forms for sales disclosure purposes. Make no mistake, the CFPB has made real estate agents, appraisers, mortgage companies and title companies scramble for these big changes. And they aren't fooling around either. What goes on paper become gospel now or big fines and censures will result. You have to sign and date the new documents to establish proof you received them.

    The first form is your "Loan Estimate" for the buyer. All buyers financing the property they are purchasing are given this 3 page document (approximately) which discloses the same information as the GFE. Of course if you are paying cash, only one form is required, the other new form -- the "Closing Disclosure" document which will run around 5 pages normally. Back to the loan estimate form - a $162,000 mortgage loan for 30 years at a 3.875% for example has an interest rate projected to run an APR of 4.274/% over the course of the loan. Nothing new there since all loans have costs which are added to your interest rate to calculate the true loan interest you will pay.

    But a new term called the TIP or Total Interest Percentage is also disclosed on the new Loan Estimate form. In the example above, the TIP is disclosed as 69.45%.  In other words, that $162,000 mortgage note you sign 30 years from now at a fixed rate will cost you 69.45% in interest costs on top of the original principal loan payments you make for the next 30 years. Now, that may seem high but it isn't compared to the actual 30 year mortgage cost rates in my adult life. (more or less the last 40+ years). The interest cost then will be added to the principal at $112,509 if every payment was perfectly on time and no prepayments take place for the next 360 months. It's a nice disclosure. Thank God we aren't still at 9% mortgage rates where the interest alone can cost more than twice as much as the cost of the home you bought!

    Frankly, I'm not a fan of government over-site when it makes it harder to sell real estate for clients. That has happened with many dictates that have come down the pike from "Dodd Frank" laws and others the past few years. Yet I had a recent experience with the CFBP this past month having gotten charged twice on two hotel rooms up in Sedona in July by a well known credit card company. Their "deal" was found out to be no deal and just a higher cost option than if I had called and reserved the rooms myself direct with the hotel's front desk. Long story short -- they refused to credit the higher charges. So I complained to the CFPB and wallah -- a permanent letter came from them stating the higher credits were posted, the matter was settled.... and as a good faith move - I was getting the difference in free money also posted to my credit card! I made money on the "deal" but only by using the power of the U.S. government to change their original decision.  (They told me "no way" initially)

    Lastly, the new Closing Disclosure form gives better data, contact information for all parties to the transaction, and yes it still has the side by side buyer/seller columns we all got very familiar with in the old HUD-1 forms. So, if you are buying or selling real estate, call me at 480-345-1616 to discuss any financial matter or question you may have. Or if you are outside the Arizona Valley area, just call me for free at 1-800-782-2806.

    Happy Trails! 

  • It's The End of The World As We Know It

    The famous R.E.M. song "It's The End of the World as We Know It" brings up the latest rumors out there that the world is going to suddenly stop turning like it has in the past and sudden and destructive economic chaos will replace the normal routine we all are so used to. Now, this really could happen with the derelict financial management our world governments have been practicing for most likely -- since the beginning of time. Yet, in spite of bad mismanagement, and in spite of past economic upheavals and stock market plunges of the past. In spite of country dictators that did a lot of bad things to good people. In spite of all the bad in the world, their remains good things. Good people. Good ideas. Good plans.

    So perhaps now is a good time to remind you that the most millionaires in the world made their fortunes with real estate. Not bank CD's. Not insurance policies. Not stocks and bonds and mutual funds. But with good ol' real estate investing and most commonly, investing during full market cycles (if not lifetime holding) to make sure the short term ripples that can and will take place don't upset the long term gain that real estate has provided since the very beginning of our modern world in the late 1800's.

    So until additional real estate is discovered "habitable" outside of planet earth, we only have so much "finite" dirt and land to own, build on, invest in, transfer to our heirs, etc. And because it is "finite", values trend higher most decades as they pass. You can't say that about diamonds or gold or silver as many undiscovered mines await the precious gems and metal searchers.  They haven't found everything yet on planet earth... so strong cartels are used to control pricing, especially in the diamond market. But you can't say that about real estate. There is only so much to go around and because of that fantastic factor -- opportunity exists no matter what happens. 

    Yes, the "End of the World" has come and went many times and no doubt, something may lie ahead of us now since economic policies everywhere defy logic or common financial stability principals. But people survive. Broken people and economies rebuild. People survive and hopefully get better and do better based on past mistakes.  And for that reason, no matter what may be coming or what may happen in economic circumstances - the R.E.M. song also reminds us that in it all and through it all - "I feel fine".  

    Don't let a bad economic cloud persuade you to ignore what the richest people on earth do when things get dicey.  They buy hard assets and especially, they buy real estate. Finite dirt and land. And some with bricks and mortar and wooden structures.Now that one of those success stories is running for President and financing the costs with his own money - I remind you to consider where your investment money is right now. If it is all tied to paper assets, you will be the first to be wiped out if the "big one" does hit America. There's time to convert some of your paper portfolio to real estate investment holdings. And then you will "feel fine" if something bad happens.

     

    MD Anderson's website to learn more:

    www.TaxSmartRealEstateAgent.com

     

    R.E.M. Song: 

    https://youtu.be/oIdPPVkkHYs

     

     

     

  • What Are You Doing Now To Reduce Your Income Tax Bill?

    There are a lot of people noticing their annual income tax "bite" has become larger and larger and many have no idea how to suddenly reverse the increases and actually lower their taxes in as as short of period as just one year. That is why a Tax Smart Real Estate agent is necessary here in America to represent you as your professional Realtor and advocate to assist you in lowering your income tax bill each year.

     

    And, there is a nice little bonus in the process. Your net worth might just go up as well!  In fact, the average gain here in Arizona on residential rental properties is about 5% per year. Compare that to your low bank savings rate which has drilled down to almost zero. In addition, there is tax sheltering from income tax as long as you own the property.

     

    Then, when you retire, you can even trade the property or properties you own for different types of investment property (such as residential to commercial) or vise versa -- and still pay no income taxes as long as you don't pull money out (considered gain and called "boot"). 

     

    So, get going early and ride this huge tax break for decades. Believe it or not, under current U.S. tax law, you can even "step up" values upon your death and leave the property/ies to your children or other heirs pretty well tax free. But you will need a tax smart real estate agent to assist you in the process of finding and buying investment grade real estate rental properties. And that is where I come in.

  • The End of Self Directed IRA's Could Be At Hand if the DOL Gets It's Way

    Sadly, the DOL is in the final stages of forcing insurance agents out of the IRA business for the most part. But they aren't the only ones worried about Government intervention over "Fiduciary" rules that also threaten those of us that offer self directed IRA accounts funded by investment grade real estate. It may be wise to get your self directed IRA account set up now before the law changes. Some feel it is imminent and will change sometime in 2016 (effective date of change). Most programs in my 40 years of financial consulting experience are grandfathered.

     

     http://www.natlawreview.com/article/us-department-labor-s-new-proposed-rules-defining-fiduciary-investment-advice