President Obama Approves the Extension and
Expansion of the Homebuyer Tax Credit

Extends timeline; Raises Income Limit

It's a done deal! President Obama has officially signed the bill that includes the extension and expansion of the homebuyer tax credit. Here are the details:

• Provides an $8,000 tax credit to first time homebuyers
• Provides a $6,500 tax credit for repeat purchasers (those who have used previous home as principal residence for 5-8 previous years)
• Sets income limits at $125,000 for single filers and $225,000 for joint filers.
• Makes the credit available until April 30, 2010, with a 60-day extension if binding contract is in place by April 30, 2010.
• Purchase price of home must not exceed $800,000

Thanks for all you have done to help us extend and expand the federal homebuyer tax credit.


Jesse Acevedo, ABR, e-PRO
President, Realtor Association of Greater Fort Lauderdale, Inc.

Property Tax Challenges Just Got Easier

TALLAHASSEE, Fla. – June 4, 2009

Home and business owners who think their local tax bill is too high caught a break today when Gov. Charlie Crist signed a bill that makes it easier to challenge how much a property is worth. Flanked by business and real estate leaders, Crist put his name to HB 521. The bill lowers the burden of proof for owners who dispute property tax assessments to a preponderance of the evidence, a lower standard than the clear and convincing threshold they now must meet to overturn a property appraiser’s estimate. Local governments had successfully scuttled earlier efforts to lower the standard. In the just-signed version, property appraisers still enjoy the presumption that their estimates are correct, but the legislative analysts say the bill will cost local governments $157 million during the current fiscal year, increasing to $693 million a year by 2013.

Foreclosed Homes Could Become Hurricane Shelters

MIAMI (AP) – June 4, 2009

Trying to make the best of a bad situation, federal officials might use foreclosed homes as temporary housing for hurricane evacuees in Florida as soon as this summer. The proposal would keep people close to their homes and communities instead of scattering them around the country, which happened when Hurricane Katrina devastated New Orleans nearly four years ago. Thousands never returned.But the idea is still in its infancy and many questions remain unanswered, including whether the banks that own the foreclosed homes would agree to such a plan. “It makes all the sense in the world,” said Jack McCabe, a South Florida real estate analyst, who has watched tens of thousands of homes go into foreclosure. “We have a lot of vacant units available.”FEMA told The Associated Press that it might consider using foreclosed homes if hotels, shelters and other housing options are full and only for a catastrophic situation, such as Hurricane Katrina. The idea was discussed at a hurricane drill this week in Florida.Jeff Bryant, FEMA’s federal coordinating officer for Florida, said the agency will work with other federal agencies such as Housing and Urban Development and state emergency planners to see if it could be a solution.If the proposal works in Florida, it could serve as a model nationally. In April, there were 278,287 homes in some stage of foreclosure in Florida, according to RealtyTrac. The idea isn’t wholly new. About 100 families were moved into foreclosed homes after Katrina, FEMA said. “When you have a diaspora that leaves the state, it’s very hard to get those guys back. You really want to prevent them from leaving the state,” Bryant said. “We want to keep them in their same local community.”

Foreclosures fall 6 percent in May from April

WASHINGTON – June 11, 2009

The number of U.S. households on the verge of losing their homes dipped in May from April, and the annual increase was the smallest in three years. But as layoffs, rather than risky mortgages, become the main reason that borrowers default on their home loans, foreclosures likely will remain elevated this year and into 2010. Many economists expect unemployment, now at 9.4 percent nationwide, to rise as high as 10 percent, and some project it will exceed the post-World War II record of 10.8 percent.Foreclosure filings fell 6 percent in May from April, according to RealtyTrac Inc. More than 321,000 households received at least one foreclosure-related notice last month – 18 percent more than a year earlier – but the smallest annual gain since June 2006. Despite the drop from April, it was the third-highest monthly rate since Irvine, Calif.-based RealtyTrac began its report in January 2005, and the third straight month with more than 300,000 households receiving a foreclosure filing. One in every 398 U.S. homes received a foreclosure filing last month, according to the foreclosure listing firm’s report.The mortgage industry has resumed cracking down on delinquent borrowers after foreclosures were temporarily halted by mortgage finance companies Fannie Mae and Freddie Mac and other lenders. “It would not be a huge surprise to see the numbers level off a little bit at this point,” said Rick Sharga, RealtyTrac’s senior vice president for marketing.Banks repossessed about 65,000 homes in May, up from 64,000 in April, due to big increases in several states including Michigan, Arizona and Nevada.

The Obama administration announced a plan in March to provide $50 billion from the financial industry rescue fund as an incentive for the mortgage industry to modify loans at lower monthly payments. But the effectiveness of the relief plan remains unclear, with questions lingering about how much the lending industry will cooperate. Many housing counselors say it hasn’t made much of a difference so far. In Florida, one in every 148 households received a foreclosure filing. Rounding out the top 10 were Arizona, Utah, Michigan, Georgia, Colorado, Idaho and Ohio.

Chinese Drywall

After hurricanes, foreclosures and dizzying price declines, contaminated drywall from China is the latest hardship facing homeowners. Not all Chinese drywall is bad, but as many as 36,000 homes in Florida and 100,000 nationwide may contain defective wallboard, which can give off a sulfurous “rotten egg” odor, tarnish metals and ruin appliances and electronics by corroding pipes and wires.Complaints in Broward and Palm Beach counties generally have come from Parkland, Pompano Beach, Davie and communities west of Delray Beach and Boynton Beach. But local officials fear the problem is more widespread. Scores of bank-owned houses and condominiums may have the defective drywall and the lenders don’t know it because no one lives in the homes.Homeowners insist the drywall is making them sick, causing nosebleeds, headaches, sore throats and respiratory issues. State and federal agencies have yet to determine whether the wallboard poses a health threat. The Florida Department of Health is waiting for results after testing the air quality of a house in Parkland last week.Most complaints involve homes built from 2002 to 2006 during the housing boom that caused a shortage of materials. Builders then began using imports. Homes rebuilt after the busy 2004 and 2005 hurricane seasons also are at risk for the defective drywall.

Rainy Day Fund for Real Estate Investors

Clifford A. Hockley

In these economic times we all need to consider whether or not we have enough money set aside to cover our expenses. Many financial planners suggest three to six months pay as a good guideline.

As a real estate investor, setting aside a reserve fund is always a good practice. Not only is the economy unpredictable, so are the weather and your tenants. How do we evaluate how much to set aside? Let’s review some of our risks.

Economy

In an economic downturn real estate investors are faced with high unemployment, unpredictable interest rates and lack of financial liquidity, none of which we could have forecast. Inevitably, the lack of work means landlords lose tenants as tenants lose their jobs. Layoffs also mean that people are moving in together. Together these challenges mean that there are fewer tenants. This means a higher vacancy rate and, landlords will inevitably lower their rent and offer rent concessions in order to keep cash flow coming in. This rent reduction means lower returns for investors. This occurred in 2002 and is now occurring in 2009.

Weather

Worldwide, buildings are at risk for tornadoes, hurricanes, typhoons, summer storms, flooding, freezing, very hot temperatures, sandstorms, and snow storms; which then create downed trees, power outages, roof leaks and building envelope failures. These weather challenges create building repairs that may necessitate the use of insurance for repairs. Cash needs occur when an owner has high deductibles or the insurance will not cover a claim.

Tenants

Tenants are not always gentle with the use of their living spaces. Some tenants are victims of domestic violence, which may cause property damage; other tenants may not be familiar with the correct etiquette for living in an apartment and caring for the property and they can inadvertently damage the property. Finally, rental units are designed to cater to people who are in transition. Tenants tend to move in and out and this constant turnover causes damage to properties.

Other Risks

Of course, there is the unexpected. We see fires set by vagrants, people crashing cars into buildings, children getting behind a wheel of a car and losing control. We see electrical fires caused by mis-wiring, old wiring, electric blankets that short out for example. We also see plumbing that fails due to poor installation or electrolysis. Finally, we are also constantly faced with governmental agencies setting new standards for landlords. Examples here include; increased inspections of drywells, inspections of properties to make sure they comply with the American with Disabilities Act, continual code changes and currently a strong governmental push to reduce the use of electricity.

Regular maintenance and operations needs

We have major property expenses that need to be addressed as part of regular operations, such as tenant improvements, leasing fees, building renovations, pests control and other capital expenses.

Insurance and bank reserves

Many of the above risks can be insured for, so that when a huge expense occurs you have the ability to find some help. In addition, some financial institutions set aside a capital reserve as part of your loan structure, to help an investor overcome these challenges.

Rainy day fund

At this point you are probably saying, “Why invest in real estate there is too much risk.” As my father in law Sid Bluestone used to say, “There is risk when you walk across the street”. So how do we adjust? We review all of the above risks. When we buy a property we take the precautions to try to eliminate risk. We hire inspectors to make sure a property is built to current code, and that everything works. We hire engineers to make sure we do not have environmental hazards. We review the history of a property and see how it has operated in the past.

We learn from others, previous investments and underwrite a property conservatively. We buy insurance for huge risks and we screen tenants carefully to make sure we are not buying ourselves a headache. Finally we set aside some money to self insure. No one can forecast all of the expenses a property might have. So we self insure with a rainy day fund. We make sure we have at minimum a couple of mortgage payments, a couple of insurance deductibles, and some extra cash for those unexpected things. In that way when we go to sleep at night we know we have built a buffer that will help us buy time as we adjust to any of the risks we will encounter.

Don’t stop to think, start your rainy day fund today.

Here are some tips how to get started:

Put found Money aside

• Tax refund
• Insurance refund
• Laundry money from the vendor who is giving you an advance on your laundry room
• Repairs that come in under budget
• Put money in a money market fund
• Fund the reserves starting with analyzing your major repairs (maybe roof and asphalt), estimating the remaining life of the component and setting aside some of the $ every month.

2009 Tax Credit for First Time Buyers

In 2008, Congress enacted a $7500 tax credit designed to be an incentive for first-time homebuyers to purchase a home. The credit was designed as a mechanism to decrease the over-supply of homes for sale.


In 2009, Congress increased the tax credit to $8000 and made several additional improvements. This revised $8000 tax credit applies to purchases on or after January 1, 2009, and before December 1, 2009.


TAX CREDITS: THE BASICS


1. What's this new homebuyer tax incentive for 2009?


The 2008 $7500 repayable credit is increased to $8000, and the repayment feature has been eliminated for 2009 purchasers. Any home that is purchased for $80,000 or more qualifies for the full $8000 amount. If the house costs less than $80,000, the credit will be 10% of the cost. Thus, if an individual purchased a home for $75,000, the tax credit would be $7500. It is available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009.


2. Who is eligible?


Only first-time homebuyers are eligible. A person is considered a first-time buyer if he/she has not had any ownership interest in a home in the three years previous to the day of the 2009 purchase.


3. How does a tax credit work?


Every dollar of a tax credit reduces income taxes by a dollar. Credits are claimed on an individual's income tax return. Thus, a qualified purchaser would figure out all the income items and exemptions and make all the calculations required to figure out his/her total tax due. Then, once the total tax owed has been computed, tax credits are applied to reduce the total tax bill. So, if before taking any credits on a tax return, a person has total tax liability of $9500, an $8000 credit would wipe out all but $1500 of the tax due. ($9500-$8000=$1500)


4. So what happens if the purchaser is eligible for an $8000 credit but their total income tax liability for the year is only $6000?


This tax credit is what's called "refundable" credit. Thus, if the eligible purchaser's total tax liability was $6000, the IRS would send the purchaser a check for $2000. This refundable amount is the difference between $8000 credit amount and the amount of the tax liability ($8000-$6000=$2000). Most taxpayers determine their tax liability by referring to tables that the IRS prepares each year.


5. How does withholding affect my tax credit and my refund?


A few examples are provided at the end of this document. There are several steps in this calculation, but most income tax software programs are equipped to make that determination.


6. Is there an income restriction?


Yes. The income restriction is based on the tax filing status the purchaser claims when filing his/her income tax return. Individuals filing Form 1040 as single (or head of household) are eligible for the credit if their income is no more than $75000. Married couples who file a joint return may have income of no more than $150,000.


7. How is my "income" determined?


For most individuals, income is defined and calculated in the same manner as their adjusted gross income (AGI) on their 1040 income tax return. AGI includes items like wages, salaries, interest and dividends, pension and retirement earnings, rental income and a host of other elements. AGI is the final number that appears on the bottom line of the front page of an IRS form 1040.


8. What if I worked abroad for part of the year?


Some individuals have earned income and/or received housing allowance while working outside the US. Their income will be adjusted to reflect those items to measure Modified Adjusted Gross income (MAGI). Their eligibility for the credit will be based on their MAGI.


9. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?


Not always. The credit phases-out between $75,000-$95,000 for singles and $150,000-$170,000 for married filing joint. The closer a buyer comes to the maximum phase-out amount, the smaller the credit will be. The law provides a formula to gradually withdraw the credit. Thus, the credit will disappear after an individual's income reaches $95,000 (single return) or $170,000 (joint return).


10. What is the definition of "principal residence"?


Generally, a principal residence is the home where an individual spends most of his/her time (generally defined as more than 50%). It is also defined as "owner-occupied" housing. The term includes single-family detached housing, condos or co-ops, townhouses or any similar type of new or existing dwelling. Even some houseboats or manufactured homes count as principal residences.


11. Are there restriction on the location of the property?


Yes. The home must be located in the United States.


12. Are there restrictions related to the financing for the mortgage on the property?


In 2009, most financing arrangements are acceptable and will not affect eligibility for the credit. Congress eliminated the financing restriction that applied in 2008. (In 2008, purchasers were ineligible for the $7500 credit if the financing was obtained by means of mortgage revenue bonds.) Now, mortgage-revenue bond financing will not disqualify an otherwise eligible purchaser. (Mortgage revenue bonds are tax-exempt bonds issued by a state housing agency. Proceeds from the bonds must be used for below market loans to qualified buyers.)


13. Do I have to repay the 2009 tax credit?


NO. There is no repayment for 2009 tax credits.


14. do 2008 purchasers still have to repay their tax credit?


YES. The $7500 credit in 2008 is more like an interest-free loan. All eligible purchasers who claimed the 2008 credit will still be required to repay it over 15 years, starting with their 2010 tax return.


15. How do I apply for the credit?


There is no pre-purchase authorization, application or similar approval process. All eligible purchasers simply claim the credit on their IRS Form 1040 tax return. The credit will be reflected on a new Form 5405 that will be attached to the 1040. Form 5405 can be found at www.irs.gov.


16. Can I use the credit amount as part of my down payment?


NO. Congress tried hard to devise a mechanism that would make the funds available for closing costs but found that pre-funding would require cumbersome processes that would, in effect, bring the IRS in to the purchase and settlement phase of the transaction.


17. So there's no way to get any cash flow benefits before I file my tax return?


Yes, there is. Any first-time homebuyers who believe they are eligible for all or part of the credit can modify their income tax withholding (through their employers) or adjust their quarterly estimated tax payments. Individuals subject to income tax withholding would get an IRS Form W-4 from their employer, follow the instructions on the schedules provided and give the completed Form W-4 back to the employer. In many cases their withholding would decrease and their take-home pay would increase. Those who make estimated tax payments would make similar adjustments.


18. What if I purchase later this year but can't get to settlement before December 1?


The credit is available before December 1, 2009. A home is considered "purchased" when all the events have occurred that transfer the title from the seller to the new purchaser. Thus, closings must occur before December 1, 2009, for purchases to be eligible for the credit.


19. I haven't even filed my 2008 tax return yet. If I buy in 2009, do I have to wait until next year to get the benefit of the credit?


You'll have a helpful choice that might speed up the process. Eligible homebuyers who make their purchase between January 1, 2009 and December 1, 2009, can treat the purchase as if it had occurred on December 31, 2008. They actually have three filing options:

• If they purchase between January 1, 2009 and April 15, 2009, they can claim the $8000 credit on the 2008 return due on April 15.
• They can extend their 2008 income tax filing until as late as October 15, 2009. (The IRS grants automatic extensions, but the taxpayer must file for the extension. See www.irs.gov for instructions on how to obtain an extension.)
• If they have filed their 2008 return before they purchase the home, they may file an amended 2008 tax return on Form 1040x. (Form 1040X is available at www.irs.gov.)

Of course, 2009 purchasers will always have the option of claiming the credit for the 2009 purchase on their 2009 return. The 2009 return is due on April 15, 2010.


20. I purchased my home in early 2009 before the stimulus bill was enacted. I claimed a $7500 tax credit on my 2008 return as prior law had permitted. Am I restricted to just a $7500 credit?


No, you would qualify for the $8000 credit. Eligible purchasers who have already claimed the $7500 credit on a 2008 return for a 2009 purchase may file an amended return (Form 1040X) for the 2008 tax year. This amended return will enable them to obtain the additional $500 credit amount.


21. If I claim the 2009 $8000 credit on my 2008 return, will I have to repay the credit just as the 2008 credits are repaid?


No, Congress anticipated this confusion and has made specific provision so that there would be no repayment of 2009 credits that are claimed on 2008 returns.


22. I made an eligible purchase of a principal residence in May 2008 and claimed the $7500 credit on my 2008 tax return. My brother, who has never owned a home, wishes to purchase a partial interest in the home this spring and move in. Will he qualify for the $8000 credit as well?


No. Any purchase of a principal residence (or interest in a principal residence) from a related party such as a sibling, parent, grandparent, aunt or uncle is ineligible for the tax credit. Since you and your brother are related in this way, he cannot qualify for the credit on any portion of the home that he purchases from you, even if he is a first time homebuyer.


23. I live in the District of Columbia. If I qualify as a first time homebuyer, can I use both the $5000 DC credit and the $8000 credit?


No. Double dipping is not allowed. You would be eligible for only the $8000 credit. This will be an advantage because of the higher credit amount, plus the eligibility requirements for the $8000 credit are somewhat more easily satisfied than the DC credit.


24. I know there is no repayment requirement for the $8000 credit. Will I ever have to repay any of the credit back to the government?


One situation does require a recapture payment back to the government. If you claim the credit but then sell the property within 3 years of the date of the purchase, you are required to pay back the full amount of any credit, including any refund you received from it. This same 3-year recapture rule also applies to the $7500 credit available for 2008. This provision is designed as an "anti-flipping" rule.


25. What if I die or get divorced or my property is ruined in a natural disaster within the 3 years?


The repayment rules are eased for many circumstances. If the homeowner who used the credit dies within the first 3 years of ownership, there is no recapture. Special rules make adjustments for people who sell homes as part of a divorce settlement, as well. Similarly, adjustments are made in the case of a home that is part of an involuntary conversion (property is destroyed in a natural disaster or subject to condemnation by eminent domain by an authorized agency) within the first 3 years.


26. I have a home under construction. Am I eligible for the credit?


Yes, as long as you actually occupy the home before December 1, 2009.

Article by: National Association of Realtors: Government Affairs



If you have any questions about the 2009 tax credit for new homeowners, or any other real estate questions, please give me a call!