The 3.8% Tax Is Not a Real Estate Transfer Tax

By Robert Freedman, Senior Editor, REALTOR® Magazine

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.

Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8%  = $950.

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

NAR has prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence (which we just looked at), 2) sale of a non-real estate asset, 3) gain, interest, and dividend from securities, 4) real estate investment income, 5) rental income as sole source of earnings, 6) sale of second home with no rental use, 7)  sale of inherited investment property, and 8. purchase and sale of investment property.

You can download the brochure for free. It’s written in plain language and I think you’ll find it organized efficiently, so you can see at a glance the potential considerations for the different scenarios. Of course, it’s just guidance: each household’s situation will be different, so you would want to suggest to your customers and clients that they consult with a tax advisor to make sure the tax is applied correctly in their case.

You can also get a good sense of how the tax works in the video here, in which Goold walks through a sample income scenario.


End-of-Summer Checklist for Home Sellers

By Dan Steward

As we near the end of summer, it’s time to look ahead and plan out home maintenance projects that have to be done before the cold weather strikes. Real estate agents can help homebuyers understand which home fixes take priority if their new home isn’t quite new. Likewise, agents can help sellers prioritize their last warm weather fixes to increase a home’s curb appeal. While the weather is warm and before the peak months of September and October, encourage clients to walk around the exterior of their home and make a list of problematic areas. Some can be fixed by the current owners and others will require assistance from an expert. To help locate any issues and take care of them before winter arrives,

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Homebuilder Confidence in U.S. Increases to Five-Year High

By Shobhana Chandra

Confidence among U.S. homebuilders climbed in August to the highest level in more than five years, affirming the improvement in residential construction.

The National Association of Home Builders/Wells Fargo builder confidence index rose to 37, higher than projected and the best showing since February 2007, according to figures from the Washington-based group released today. The median forecast in a Bloomberg survey of economists called for no change from July’s 35. Readings below 50 mean more respondents said conditions were poor.

Builders such as PulteGroup Inc. (PHM) are benefiting as less-expensive properties and record-low mortgage rates entice buyers. At the same time, faster hiring and fewer foreclosures are needed to bring about bigger gains for the industry that precipitated the worst recession in the post-World War II era.

“The outlook appears to be brightening,” Barry Rutenberg, chairman of the NAHB and a builder from Gainesville, Florida, said in a statement. At the same time, “there is still much room for improvement.”

Other reports today showed production at factories, mines and utilities climbed more than forecast in July, and consumer prices were unexpectedly little changed.

Stocks Climb

Shares rose as the figures showed the world’s largest economy was sustaining the recovery that began in June 2009. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,406.14 at 10:08 a.m. in New York. The S&P Supercomposite Homebuilding Index advanced 0.8 percent.

Estimates for the builder sentiment index of 46 economists in the Bloomberg survey ranged from 31 to 38. The gauge, which was first published in January 1985, averaged 54 in the five years leading to the recession that started in December 2007. It reached a record low of 8 in January 2009.

The builders group’s index of present single-family home sales climbed to 39 this month from 36 in July and a measure of sales expectations for the next six months rose to 44 from 43. Both gauges reached the highest level since 2007. The index of buyer traffic increased to 31, the highest since May 2006, from the prior month’s 28.

The survey asks builders to characterize current sales as“good,” “fair” or “poor” and to gauge prospective buyers’traffic. It also asks participants to gauge the outlook for the next six months.

Regional Breakdown

Confidence improved among builders in two of the four U.S. regions, led by the Midwest, where it rose to 42, the highest level since October 2005, from 33 the prior month. The South reported an increase to 35 from 33. The sentiment index fell to 25 from 34 in the North, and declined to 40 from 43 in the West.

The report “provides further evidence of the gradual strengthening that’s occurring in many housing markets,” David Crowe, the association’s chief economist, said in a statement.

PulteGroup, the largest U.S. homebuilder by revenue, posted a better-than-estimated profit and a 32 percent jump in orders in the second quarter, the company said July 26.

With cheaper mortgage rates and homes, “we are very optimistic about housing demand,” Richard Dugas, Pulte’s chairman and chief executive officer, said on a July 26 conference call with analysts. “That being said, we are keeping a watchful eye on the macro trends, which ultimately need to turn more positive for the recovery to expand further.”

Home-improvement retailer Home Depot Inc. (HD) is also benefiting. The Atlanta-based company yesterday reported second-quarter profit that topped analysts’ estimates and raised its forecast for profit this year as customers spent more on remodeling projects.


Rebound Continues For Denver Home Market

Denver Business Journal by Dennis Huspeni

Metro Denver’s residential real estate market couldn’t maintain its breakneck pace all year — and July’s sales numbers reflected that, according to a Metrolist Inc. report released Thursday.

The number of homes and condos sold last month, 4,618, dropped 6 percent from June — but still exceeded July 2011 by 20.42 percent, the report states.

“Typically June or July is the top month, and it’s typically June,” said Charles Roberts, co-owner of Your Castle Real Estate in Denver. “What we’ve seen since January is this ridiculous run-up on prices and the number sold, so this is not surprising. It was just about unsustainable.”

The average sales price also dipped slightly from June, from $297,597 to $288,884, in July. But again, that July average sales price is 7 percent higher than July 2011, the report states.

“Fall is just around the corner and we’ve hit the typical season drop off with sales 6 percent under last month,” Kirby Slunaker, Metrolist president and CEO, said in a news release. “This drop is tracking right along with 2011 figures. In addition, the number of homes that were under contract at the end of July indicates that we may see another decline in units sold next month, but this is nothing to worry about and is attributable to seasonality.”

The average days on the market also continues to drop, falling from 72 in June to 65 last month and a whopping 36 percent from July 2011.

Inventory levels, meanwhile, remain at historic lows. There were 10,827 homes and condos on the market in July, down 1 percent from June and down 38 percent from July 2011.

“It all comes down to this: There’s no inventory,” Roberts said. “If there were double the amount of homes available for sale, we’d be selling them. Until we get more, it’s hard to keep up this torrid pace.”

Some year-to-date statistics:

• There were 26,478 homes sold through July, 17 percent more than one year ago.

• The average days on the market at the end of July stood at 85, down from 111 days one year ago.

• Homes and condos sold for an average price of $276,129 through July, up 8 percent from the average sales price of $256,843 in July 2011.

• Metro Denver’s inventory stood at 10,827, down 17,583 in the same period a year ago.

“It’s amazing this is happening before our eyes, with the prices up and the inventory down,” Roberts said. “It’s dramatic and in my time in the business, I’ve never seen a drop in inventory this far this quick.”

Greenwood Village-based Metrolist is metro Denver’s Multiple Listing Service, a database of home sales activity for real estate professionals.


Housing Recovery Could Lift Jobs, Spending

By Annalyn Censky @CNNMoney

NEW YORK (CNNMoney) — Could the real estate freeze finally be thawing?

After years of depressed activity, home prices and new construction have started to pick up in recent months as foreclosures have slowed, suggesting the housing market may have finally bounced off the bottom.

“It feels very much like we’ve hit a bottom and we’re starting to come off of that bottom,” Stuart Miller, CEO of homebuilder Lennar told analysts in June.

But with several previous false starts, it’s still too soon to say whether housing is finally out of the woods.

“I’m a little nervous about saying the word ‘recovery’,” Miller added.

Still, early indications are good that the worst could finally be over for the housing market. And that could be a sign of good things to come in other parts of the economy, too.

Jobs: A housing recovery is likely to have the most direct effect on construction jobs — and that’s no small feat.

The construction industry was one of the hardest hit sectors, slashing 2.3 million jobs, or roughly a quarter of all the American jobs lost in the financial crisis.

As of July, the unemployment rate for construction workers was 12.3%, much higher than the 8.3% unemployment rate for the broader U.S. population.

But a glimmer of hope also showed up in last month’s numbers: Homebuilders added 5,800 workers in July — about the same number they were adding during the real estate boom of 2005 and 2006.

A stronger housing market also translates into more jobs for real estate agents, furniture manufacturers, plumbers, architects and engineers.

Trying to estimate the gains for all these spillover industries is difficult, but economists at High Frequency Economics predict that hiring in housing-related sectors will soon pick up to a pace of 35,000 to 40,000 jobs a month.

Mobility: A housing recovery could help boost hiring in another way.

One of the big problems with the current job market is that there are jobs open, but many of the qualified applicants are in the wrong place at the wrong time. Relocating to follow the jobs isn’t an option for those who can’t sell their houses.

For example, jobs are booming in energy-rich states like North Dakota, Oklahoma and Kansas, but that doesn’t help the qualified job seekers who are tied to their homes in Nevada, Florida and Arizona.

If home sales start improving in these areas, that may finally free up some people to move to where the jobs are.

“As home prices start to increase, that would be a good change for people that cannot get out of a state or city because they cannot sell their homes,” said Eugenio Alemán, Wells Fargo senior economist.

Spending: Consumer spending — which is one of the largest components of the U.S. economy — has dragged in 2012. Without spending, the economy can’t get back on its feet.

Since the recession, consumers have been reluctant to open their wallets and have shunned spending in favor of paying off debt.

But a housing recovery could also have a strong effect on consumer spending. As home prices rise, so too does the perceived wealth of middle-class families.

Of course, a home isn’t a liquid investment like cash, but often just the perception of having a higher net worth can propel consumers to go out and spend.

Economic growth: All of these effects working together could contribute to growing the broader economy. But they’re still a long way from being fully realized.

The housing market is often cited as one major drag on economic growth. As the housing sector shrank, so did its share of the national economy.

Historically, residential real estate has accounted for roughly 5% of U.S. gross domestic product. Since the recession, that has halved, with residential investment now accounting for just 2.3% of the broader economy.

For it to get back to the 5% level, the recovery will probably have to continue for at least three to four years, Alemán said.

“We are cautiously optimistic on the recovery of the housing market, because it’s still very in its infancy,” he said.


Is The Real-Estate Rebound For Real?


For investors, “home” is no longer a four-letter word.

The real-estate sector, for the first time in years, is serving as a beacon of relative strength in an otherwise weak economy. Standard & Poor’s on Tuesday reported that home prices in its S&P/Case-Shiller 20-city index rose 0.9% in May from the prior month, after adjusting for seasonal trends, and have risen 2.6% since bottoming in January.

Some of the world’s smartest investors, including Warren Buffett, are taking notice, placing big bets on a continued recovery in the housing market. Other kinds of real-estate investments—including real-estate investment trusts that own shopping malls, apartment buildings and hospitals—also have been among the best performers this year.

For ordinary investors, the rebound serves as an opportunity to rethink how much of their portfolio should be in real-estate investments—and to participate in the rebirth of a sector they once left for dead.

“After the recent returns we’ve seen, people are naturally asking ‘Have I already missed it or is there further upside to come?’ From our perspective, yes, there’s further upside,” says Frank Haggerty, a portfolio manager at money manager Duff & Phelps Investment Management who comanages a $1.3 billion mutual fund that invests in commercial-real-estate companies.

There is reason for optimism. Not only are single-family home prices steadily climbing, but the Joint Center for Housing Studies at Harvard University in a June report said inventories of new, single-family homes in March were at the lowest level in 49 years. The upshot: It would take fewer than six months to sell the current inventory, the traditional boundary between a strong and weak market, says Eric Belsky, managing director of the center.

To be sure, some promising signals during the recession turned out to be false alarms. In mid-2009, the 20-city S&P/Case-Shiller Home Price Index began a yearlong rise, only to fall again. Yale professor Robert Shiller, who called both the early 2000s stock-market crash and the recent real-estate bust, says he isn’t certain prices have bottomed.

But even if the absolute nadir hasn’t been reached, most economists say the odds are good that real estate will be stronger over the next few years than it has been in the past few.

Meantime, experts say that because commercial real estate is such a big part of the economy, it should make up about 15% or more of the stock portion of an investment portfolio. Yet these days, commercial real estate comprises only about 3% of funds that track the broad stock market—meaning investors who follow the major indexes are drastically underexposed.

With that in mind, here is how to play the real estate turnaround smartly in three main ways—investing in home builders, buying real-estate investment trusts and buying and managing individual properties.

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What’s New In The Kitchen

by Huffman Inspections

What are contemporary kitchen designers doing in the kitchen these days? For starters, they are hiding appliances, adding color and using range hoods to make a statement!

In the 50’s, a homeowner could purchase aqua or pink refrigerators and no eyebrows were raised. Sixty years later, refrigerators and stoves are generally neither seen nor heard, hidden behind panels that match painted or stained wooden cabinets in a kitchen.

Identifying the dishwasher might be difficult as well, especially when it pulls out like a drawer from one or possibly both sides of the sink. Even if a dishwasher has a more traditional style, new units are often installed ten inches off the floor, making them easy to open, load an unload.

Kitchen islands are still popular, especially with the addition of a warming drawer in the center. The drawer keeps food at the appropriate serving temperature and allows for easy access. Pull-out shelving in the island and throughout the kitchen eliminates hunting for items located in the back of cabinets.

Range hoods are being installed not only for function, but for style, whether they appear underneath cabinets, against the wall or in a downdraft position. Range hoods are available in a variety of materials including copper, stainless steel, wood, glass, limestone and even marble and may more closely resemble mantles or fireplace hearths rather than the older metal range hood.

Kitchens and great rooms continue to be the gathering and entertainment centers in the home. To accommodate extra guests, seating that can double as storage is a sought-after accessory. Benches with underneath storage, bins, baskets, organizers and appliances garages are also incorporated into kitchens to reduce clutter and add efficiency.

Because kitchens have moved to the forefront and are no longer considered “the back of the house,” homeowners are paying close attention to style, color and design. Popular kitchen colors are bolder than in the past, and include shades such as apricot, yellow, red and turquoise, which are considered comforting and appetite stimulators.

Although granite’s popularity has shown no sign of waning, some consumers are individualizing their kitchens through the use of alternative materials such as concrete, glass, aluminum and slate for their countertops.

Lighting in the kitchen needs to do double-duty, illuminating countertops while creating an inviting atmosphere. Layered lighting is the answer in some kitchens, combining ambient (overhead) lighting with a task lighting layer and a decorative layer on top, used primarily to enhance the interior design.

Track-style lighting is still popular, but tracks often curve, rather than radiate in a straight line. Some contemporary tracks also allow for different individual lights to be hung. Under cabinet lighting is popular, and can give a kitchen new energy. Two or three pendant lights over the sink can also make a dramatic statement.

Many of the newer fixtures can accommodate LED (light-emitting diode) bulbs, which are popular for their durability and energy-efficiency. The initial cost of LEDs is more expensive, but the light bulbs are rated to last up to 60,000 hours or up to seven years.