Why Some Sellers May Get a Break From the IRS

Most people who sell their home after having owned it for at least two years don't have to pay federal taxes on their gain.  A sale in less than two years after the purchase, however, often triggers some sort of tax hit.  But even owners who need to sell in less than two years may qualify for special relief if they had to sell because of "unforeseen circumstances," according to a 1997 law.

The general rule is that you can exclude a gain of as much as $500,000 if filing a joint return with your spouse, or as much as $250,000 if single or filing separately, under certain circumstances.  To be eligible for this full exclusion, you typically must have owned your home, and lived in it as your primary residence, for at least two of the five years prior to the sale.  This rule applies only to a main residence, not a vacation home.

Even if you can't meet the two-year tests, you still may be eligible for a reduced exclusion if you had to sell because of "a change in place of employment," health reasons or "unforeseen circumstances."  An IRS publication offers a general definition of unforeseen circumstances as "the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home."

Talk to your tax accountant or advisor to see whether you might qualify under the "unforeseen circumstances" ruling, or see the IRS Publication 523 for more information.

Think you might qualify for such an exception?  Post your comment here and we'll try to get an answer for you.

How and When to Bid Low on a Property

With prices stagnant or falling and inventory up in many markets, home sellers are no longer automatically turning up their noses at offers that come in far below their asking price.

Buyers who make offers asking for deep discounts still risk offending sellers to the point where they quash any deal.  Some real estate professionals suggest that before making an aggressive offer, some homework is in order.  Buyers might want to effectively explain why the price of a home should be lower.

Here are some guidelines on how — and when — to make an aggressive bid:

1. Learn how motivated the seller is to make a deal.

• Certain sellers are going to be more willing than others to negotiate a low offer — and there are several reasons which might indicate more leeway on price.
   
• If the sellers have already purchased another home and that sale has closed, they're usually more likely to be willing to make a deal.
   
• If the property has been on the market for a long time, sellers will be interested in entertaining any offers.
   
• Overall local market conditions also play a role.  Is the market sluggish, or is it still a hot or competitive market?

2. Make your case with hard facts.

According to Jon Boyd, an Ann Arbor, Michigan broker and president of the National Association of Exclusive Buyer Agents, "When you're making the offer, if you justify that offer with outside data, then it's much less likely to be perceived as being an insult or [the buyer] not as serious."  When putting together an aggressive offer for a client, Mr. Boyd doesn't just hand the seller a purchase agreement with the price the buyer is willing to pay — he creates a cover letter explaining exactly where that number came from. 

In addition to citing comparable sales in making the offer, it also could be important to include details regarding the amount of inventory in the immediate surrounding area, he says.

3. Prepare for the possibility of rejection or negotiation.

Dick Gaylord, president elect of the National Association of Realtors and a broker in Long Beach, California says he warns buyers making very low offers that the seller might refuse to negotiate.

Danielle Kennedy, a real-estate sales coach and author based in Pacific Palisades, Calif., advises sellers not to think of a low offer as an insult but as "a sign of interest."  It "begins the dialogue regarding the purchase of your house," she says.

Have you made an offer on a property that you (as the buyer) thought may have insulted the seller due to the low offer?  Have you (as a seller) received a "low-ball offer" from a potential buyer?  We'd love to hear your comments either way.

Home Buyers: Save for That Down Payment

As the mortgage meltdown has spread, lenders are demanding stellar credit and proof of income.  Zero-down payment mortgages have almost disappeared.

This means if you plan to buy a home in the next few months, you'll need to put some money on the table.  The Federal Housing Administration offers a 3% down payment loan for low-income and first-time buyers.  But FHA loan limits haven't kept up with home prices in some high-cost areas.  For a private loan, expect to put down at least 5%, and that's assuming you have good credit.  If you want to avoid private mortgage insurance, which will increase your monthly payments, you'll need to put down 20%.

You should invest your savings someplace safe so it will be there when you're ready to buy a house.  But you don't have to stuff your money in a mattress.  Some options:

Certificates of Deposit: CDs are your best choice if you plan to buy a home from six months to a year from now.  With a CD, you can lock in an interest rate that matches your time horizon.

Credit Unions: Credit unions don't advertise much, and you have to be a member to use their products and services.  But if you do a little research, you can find good rates on credit union share certificates which are similar to CDs.

High-Yield Savings Accounts: These accounts, typically offered through online banks, are paying rates ranging from 5% to 5.3%, compared with less than 1% for traditional passbook savings accounts.  If the bank is insured by the FDIC, there's no risk you'll lose your money.

 

These rates could fall, particularly if the Fed decides to cut short-term interest rates.  But you can withdraw your money at any time without penalty — an option that makes these accounts a good choice for people who are looking for a home and need quick access to their money quickly.  CDs, by contrast, offer a guaranteed interest rate, but if you withdraw your money before the CD matures, you'll forfeit some of your interest.

 

Are you trying to save to buy a home?  Have you found a particularly good place to stash your cash?  We'd love to hear your comments.

Latest Home Prices: More Up Than Down

The median price for a single-family home sold during the three months ending June 30 fell to $223,800, 1.5 percent below the price a year ago.

Some of the results of the survey from the National Association of Realtors were more positive.  More metro area markets - 97 of 149 - gained ground than lost.

One of the four U.S. regions, the Northeast recorded a slight price gain of 0.7 percent.  The West lost 0.4 percent, the South 1.6 percent and the Midwest 2.2 percent.

NAR predicts home prices will turn slightly positive again by spring of 2008 and rise about 2 percent that year.

Who Can't Get a Mortgage Now?

For the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.

Not only have home valuations come down, but interest rates are still historically low.  In addition, tightened lending standards stemming from the subprime crisis likely means fewer buyers, pushing down home prices.

The one catch is: You have to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).

If you're among the 10 percent of people with credit scores below 620 who need a subprime mortgage, things could get tricky.

If you're not sure whether you would qualify for a mortgage under today's tougher standards, or what your credit score might be, contact us or leave a comment below.  We'll get back to you with answers.