Chapter 5 - Home Ownership: 3 hours + 11 sections + 1 infograph

1 mill is the same as

1/1000

Straight Line Depreciation

A method of depreciation under which improvements are depreciated at a constant rate throughout the estimated useful life of the improvement.

Residential Properties

According to the IRS, depreciate over 27.5 years. EXAMPLE: A single family home is purchased for $250,000. The land itself is valued at $50,000. The house itself is worth: $250,000 - $50,000 = $200,000 To determine the amount the homeowner can write-off for depreciation, simply divide the value of the house by 27.5: $200,000/27.5 = $7,272.73 The homeowner can deduct $7,272.73 each year from their taxable income.

Tax Assessor

An elected or appointed official of a county, city, town or village whose function is to value real property for the purposes of taxation.

Federal Tax Benefits of Owning Real Estate

Homeowners who fi le a 1040 and itemize deductions on Schedule A, can usually deduct mortgage interest paid, discount points, some real estate taxes, origination fees, and PMI associated with first mortgages, second mortgages, equity loans and lines of credit secured by your primary residence or a second home. Homeowners may deduct mortgage interest paid on a debt secured by a primary or secondary home, wholly or partially owned. That simply means you can own 100% of the real estate, or share ownership with one or more people. The Internal Revenue Service considers any real property that has sleeping, cooking and bathroom facilities a qualified home. So, along with accessing tax benefits for traditional homes like condos, trailer houses and single-family residences, if you live in a mortgaged house boat, recreational vehicle or other structure that fits the description above, you can deduct interest paid, as long as you use the property solely for your own personal use, with a few exceptions.

Homeowners' 7 (HO-7, Mobile Home Insurance) Policy

Is a policy specifically written to cover residences that fall into the manufactured home or mobile home classification. It is similar to the HO-3 coverage, with some limitations and exclusions; however this policy type is a comprehensive plan that covers many perils.

Challenging an Assessment

Is not unheard of and in some areas happens often. In short, a property owner completes a document explaining why the home's assessed value for property taxes is not accurate. Here's the key, though. The taxing authority isn't going to simply go by what the property owner says. To invest time and money into changing the assessment, the agency wants to see real, accurate information to back up any claim. Property owners are most likely to gain access to this information if they hire a licensed appraiser. This should be a third-party appraiser, one that does not personally know the property owner or others involved in the transaction. The appraiser's job is to determine the value of the home based on all the available data. This includes an interior inspection. It is likely to include a full assessment of the local real estate market within the home's neighborhood. Local changes to the area also can impact the value. The appraiser gathers this type of information and then determines the value of the property. Documentation to support an assessment challenge like this can help to show the taxing authority the real worth of the property. Keep in mind that this figure is never going to be exactly the same for the home across numerous appraisers. The taxing authority, then, needs to use the facts and data to make its own assessment. Let's say a homeowner wants to challenge an assessment. He or she should gather evidence to support their claim of why the value isn't accurate. This may mean paying out-of-pocket for an appraiser to come to the home and provide a full appraisal. From there, this information is submitted to the taxing authority. That taxing authority verifies the information and makes a decision. A challenge like this can take some time. However, it's a legal right most community residents have. And, because it plays such an important role in determining how much the property owner needs to pay in taxes, it's important not to rush decisions.

Property Insurance

Provides protection against most risks to property, such as fire, theft and some weather damage.

Homeowner preferences vary widely among different demographics and diverse geographic regions.

Rural areas have a higher percentage of ownership than urban and metropolitan areas, approximately 75% to 68% respectively. People in a lower income bracket tend to buy more mobile homes, and baby boomers aging into retirement age may prefer a well-equipped retirement community close to physicians, hospitals and grocery stores than the mixed-use property in a thriving downtown neighborhood in the city. This lesson should give you the information you need to help your clients find a home in an area that fits their needs and their budget.

Single Family Home

The single-family home is probably the most common property sold and bought on the market today. The percentage of single-family dwellings compared to all residential units fluctuates, but has consistently ranged between 60% and 70% since the 1940's, according to the 2011 US Census. Like the Sears and Roebuck homes mentioned above, a single-family home is a residence that isn't connected to other buildings. There is space on all sides, although the surrounding area may be limited only to the required easement to comply with building codes or encompass acres and acres of green space, if built in a rural area.

Assessments

A charge against real estate made by a unit of government to cover a proportionate cost of an improvement such as a street or sewer.

Straight Line Depreciation

A method of depreciation under which improvements are depreciated at a constant rate throughout the estimated useful life of the imrpovement.

Tax Rate

Amount needed in collected taxes [divided by] total assessed value

Tax Rate

Determined by the taxing jurisdiction which applies to each property.

Accidental Homewoner

Is someone who inherits a piece of real estate and decides to make the property their primary residence. Fortunately, immediately after they legally acquire the property, the cost is bumped up to fair market value, which means they do not have to pay capital gains tax on appreciation realized during the previous tenancy, or face a huge tax burden when the property value is worth much higher than the original cost. In some instances, homeowners may be required to recapture depreciation when a piece of real estate is disposed of; this is primarily called into play when the sale price exceeds the cost.

Fannie Mae "Home Ready" Mortgage Program

Mortgage loan type that is a great mortgage option for home buyers who need to use non-borrower income and nontraditional credit sources to qualify. Has flexible underwriting policies, up to 97 percent financing and even a cancellable mortgage insurance option to lower payments.

Are All Properties Taxed? Or, What Properties Are Commonly Taxed Like This?

State and county laws determine property types. In most states, property taxes apply to most real estate in the community. This includes all residential property including farms and undeveloped areas that are owned by citizens. It also applies to most commercial property, including your retail establishments, industrial buildings, and office spaces. Any type of income-earning property is going to have a property tax associated with it.

Tax-Deferred Exchange

The trade or exchange of one real property for another without the need to pay income taxes on the gain at the time of trade.

Homeowners' 6 (HO-6, Condominium Insurance) Policy

This is a hybrid policy that is similar to HO-2 and HO-4. Designed specifically for condo owners, this type of coverage protects owners against content loss like the renters' policy and also covers the walls, ceiling, floors and other structural features in the home. Essentially, the policy covers personal liability and personal property under a named-peril umbrella for the structure.

Assessing Unit

A city, county, town or village with the authority to value real property for purposes of taxation.

Time-Share

A form of subdivision of real property into rights to the recurrent, exclusive use or occupancy of a lot, parcel, unit, or segment of real property, on an annual or some other periodic basis, for a specified period of time.

Special Assessment Districts

A geographic area in which the market value of real estate is enhanced due to the influence of a public improvement and in which a tax is apportioned to recover the costs of the public improvement.

Tax Lien

A lien imposed by law upon a property to secure the payment of taxes.

Mobile Home

A structure transportable in one or more sections, designed and equipped to contain not more than two dwelling units to be used with or without a foundation system.

Modular

A system for the construction of dwellings and other improvements to real property through the on-site assembly of component parts (modules) that have been mass produced away from the building site.

Tax Depreciation

A term used for accounting purposes to identify the amount of the decrease in value of a property that is allowed for tax purposes

Special Assessment

A type of extra tax. When it comes to property taxes, we've already mentioned the importance of tax rates and how they are assessed. A special assessment tax goes above and beyond those requirements. There are various reasons why a special assessment tax may be levied on a property. Most commonly, they are designed to meet a specific funding goal. Various projects may warrant this. For example, it is common for a specific infrastructure project to require an added tax to be completed. Consider a community that needs to widen a road and cannot get enough state funding to help. They may turn to a special assessment tax - one that is above and beyond the current infrastructure taxes in place - to pay for that specific need. What makes these taxes a bit different is that they can only be charged to those property owners that are located within the designated special assessment district. Here's an example of how this may impact the tax. A small community may see a significant number of people leave over a period of time. They do not have the funding to meet community goals. They impose a special assessment tax to help cover those added costs. However, individuals in surrounding communities do not need to pay for these costs. Just those within the specific area. There are other reasons and benefits to using a special assessment tax. In some regions, a city may want to encourage new residents. Yet, the development of a new subdivision is costly and can be hard for a community to manage on its own. In this situation, the city may create a special assessment tax to those who move within the new subdivision. This tax may help to fund the building of new sewer lines and roads within that area. These added taxes are not just for infrastructure. They can be created for most needs that benefit the community. A city may use them to develop new programs or to build a public recreation center. They may be used to build a park or even a school in some cases. Any special assessment tax like this must be fully made available to those buying a home within the jurisdiction. Information on any taxes should be a component of the local county assessor's records.

Assessed Value

A valuation placed upon a piece of property by a public authority as a basis for levying taxes on the property.

Coal Mining Notice

A written document that informs buyers the property may not be protected against damage caused by mine subsidence. Sellers must certify all structures are supported, or inform the purchasers there is not adequate protection against mine subsidence. Also a Pennsylvania disclosure requirement.

Commercial Properties

According to the IRS, depreciate over 39 years. EXAMPLE: An office building is purchased for $1,800,000. The land itself is valued at $250,000. The building itself is worth: $1,800,000 - $250,000 = $1,500,000 To determine the amount the building owner can write-off for depreciation, simply divide the value of the building by 39: $1,550,000/39 = $39,743.59 The building owner can deduct $39,743.59 each year from their taxable income.

Cooperative

An apartment building, owned by a corporation and in which tenancy in an apartment unit is obtained by purchase of shares of stock of the corporation and where the owner of such shares is entitled to occupy a specific apartment in the building.

Special Assessment

An assessment made against a property to pay for a public improvement by which the assessed property is supposed to be especially benefited.

Condominium

An estate in real property wherein there is an undivided interest in common in a portion of real property coupled with a separate interest in space called a unit, the boundaries of which are described on a recorded final map, parcel map, or condominium plan.

A city determines that they need an annual budget of $5,000,000 to pay for all its services. The city expects to collect 80% of their budget needs from property taxes.

Annual budget needed: $5,000,000 Collection from property taxes for budget needs: 80% Amount the city will collect from property taxes: $5,000,000 * 0.80 = $4,000,000

Cooperative [Co-op]

Another housing type you may come across as a licensed real estate agent is the cooperative, or co-op. Unlike condominiums, where each dwelling is privately owned, cooperatives are apartment buildings owned by a corporation that sells shares which entitle shareholders to exclusive, private use of a residential dwelling, or housing unit. Here is something to remember when recommending this type of property to potential buyers. Co-ops aren't considered "real property," since buyers only purchase the right to use the dwelling. Occupants are basically just renters, so some of the tax benefits of home ownership aren't available to co-op residents, although they may be able to take some expensive deductions, like the allowance for home office and certain qualified repairs. All shareholders must pay a common area maintenance charge, typically calculated based on the square footage of the unit they occupy.

Real Estate Taxes

Are a tax deductible item. Real estate tax rates vary widely by state, town and even neighborhoods and communities within cities. Each appraisal district offers a diverse set of discounts and exemptions including adjustments for people over 65, Disabled Veterans and Non-Veteran Disabled Persons. Fortunately, homeowners can contest the assessed value and participate in open discussions during the proposed assessment phase. All tax assessments are based on Market Value, and differ according to the benefiting entity. As an example, a combined tax statement for a rural town in Texas assessed a county tax at 0.0457330, a city tax at 0.0735200, a local independent school district at 1.3080400, the junior college at 0.366350 and the regional water district at a rate of 0.008026 for a total annual tax of $494.60 on a property with a market value of $17,200. You may not deduct special fees that only apply to individual homeowners within a tax district, such as late fees, interest on unpaid tax bills and water connection fees or financed meter upgrades. All allowable taxes must meet a "conformity" standard, which means that all real estate owners in a common district or community are billed for the same entities at the same rate.

Homeowners' 2 (HO-2, Broad Form) Insurance Policy

Are another example of named peril plans, only you get a little more coverage with the HO-2. All 11 of perils covered under an HO-1 plus six more are covered under an HO-2 policy. Along with protection against loss caused by fire and smoke, you have peace of mind that a heavy snowfall or ice that damages your roof or a faulty appliance in your home won't cost you a fortune to repair.

Flood Insurance Reimbursements

Are based on the cost to repair or replacement cost. So, for example, let's say that your home and contents are totally destroyed by a tornado and it costs you $175,000 to repair your home. If your homeowner's policy had a maximum value of $250,000, you would receive $250,000. With NFIP, you would only receive the amount it takes to repair or replace based on the actual cost value up to the policy limit. In order to be eligible for replacement cost value (RCV) under a NFIP plan your residence must be a single-family home, and must be occupied at least 80% of the time by the homeowner. Additionally, building coverage must be 80% or more of the full replacement cost of the structure, or the maximum available under NFIP guidelines. It is important to meet all three of these requirements to qualify for RCV coverage.

How does fair market value, then, play a role in the value of assessments?

As noted, the assessed value of a home is not always the same as the fair market value. The fair market value is the value the home would sell for on the open market. Generally speaking, you can expect the assessed value to be less than the fair market value. In some markets, this may not be the case. Because fair market values can change so rapidly based on real estate market conditions, assessed values are calculated independently of this information. However, some locations will set the assessed value of a property based partially on the fair market value. For example, some jurisdictions will assign the property an assessed value based on a percentage of the fair market value. Here's an example of how this might work. Let's say the area assigns an assessed value as being set at 40 percent of the current fair market value of the home. A property in this market has a fair market value of $420,000 right now. Do the calculations to determine the assessed value: $420,000 times 40 percent, or 0.40 equals $168,000. As noted, that's a significantly less value than what the home would sell for on the open market. In a situation like this, where the assessed value is set as a percent of the fair market value, it is likely that a tax rate may be positioned a bit higher. It's important to remember that the ultimate goal of property taxes is to pay for the needs of the community. In some situations, then, the tax rate may be at a higher rate. The goal is to meet the jurisdiction's budget requirements. For now, recognize that assessed value is the starting point for determining property taxes. Which method the community uses depends on various factors, but the determination is set by the local government and rules.

Let's say a property has an assessed value of $325,000. This property is in several taxing jurisdictions, each of which has the right to apply a tax rate to that property. The property is subject to a 15 mills county tax. It also has a city tax equal to 1 mill. Finally, there is a local school tax of 12.5 mills. Now, how much is owed by this property owner to all taxing jurisdictions?

Assessed Property Value: $325,000 County Tax: 15 mills City Tax: 1 mill Local School Tax: 12.5 mills All tax rates: 15 mills + 1 mill + 12.5 mills = 28.5 mills 28.5 mills/1,000 = 0.0285 or 2.85% $325,000 * 0.0285 = $9,262.50 owed in annual taxes

If the local assessor determines that the total assessed value of all taxable properties in the city equals $200,000,000, what tax rate must the city apply to raise the $4,000,000 they need for their budget?

Assessed value of all taxable properties in the city = $200,000,000 Amount the city will collect from property taxes: $4,000,000 Tax Rate [Amount needed in collected taxes divided by total assessed value}: $4,000,000 / $200,000,000 = 0.02 or 2%

Capital Gains

At resale of a capital item, the amount by which the net sale proceeds exceed the adjusted cost basis (book value). Used for income tax computations. Gains are called short or long based upon the length of the holding period after acquisition. Usually taxed at lower rates than ordinary income.

Straight Line Method

Commonly used for real property, a homeowner can write-off the depreciation of their property as an expense

Let's say a home in the community is assessed at $425,000. Remember, this is assessed by the taxing authority. It is not necessarily based on the actual value of the property if it was sold on the real estate market to the public. Let's say the property is subject to a county tax rate of 25 mills. Doing the math, how much is owed in property taxes here?

Community home assessment: $425,000 County tax the property is subject to: 25 mills To determine the tax cost to the property owner, do the following: 25 mills = 2.5 percent $425,000 * 0.025 = $10,625

A few mortgage plans for current renters who may be wondering if they can afford to buy a home.

Few individuals will ever save enough money to plunk down a stack of cash to buy a home. People, who have contributed faithfully to a 401K, saving for retirement, could borrow against the fund to cover a down payment or pay down points. IRS rules allow homeowners to withdraw up to half of their nest egg in the form of a self-loan, to purchase a home. The withdrawal may not exceed $50,000. There are no penalties or taxes to pay as long as you pay back the loan, with interest, on time. Theoretically, you aren't really losing anything. Right?... Not exactly! There are some very important things to consider. Depending on the 401K plan you have through your employer, you may not be allowed to continue to make deposits into the account every payday until the loan is satisfied. And, if your employer matches your contributions, you will lose those extra funds. Plus, if you quit or get fired before the loan is settled, you only have a two-month window to pay off your loan. What happens if you can't pay it back on time? You'll be hit with a 10 percent tax bill on the balance. Unless you are positive, you can keep your job and afford to pay back the full amount of the loan, don't do it! Fortunately, you don't have to dip into your retirement nest egg. There are plenty of mortgage options offering a low down payment and reasonable interest rates, and some programs are specifically tailored for people with limited credit.

How does the jurisdiction determine the tax rate at any given time?

First, the community's annual budget must be determined. Next, the total assessed value of all properties in the community must be determined. Then, a tax rate (also known as a millage rate) must be determined, which would allow the community to collect enough money in taxes to cover their budget needs. In other words, the tax rate is equal to the total amount in tax dollars collected divided by the total taxable assessed value of the properties in the community. EXAMPLE: A city determines that they need an annual budget of $5,000,000 to pay for all its services. The city expects to collect 80% of their budget needs from property taxes. This means the city will collect $4,000,000 (or $5,000,000 x 0.80) from property taxes.

The Fair Access to Insurance Requirements (FAIR) program

Flood insurance option program designed for homeowners with unique challenges and risks. This state-mandated program helps high-risk homeowners gain access to affordable cover if they live in a flood-prone area or have had multiple FEMA claims. Although many homeowners are underinsured in the United States, having insurance, is a wise choice. As a real estate agent working with potential home buyers, it is your responsibility to help them understand the benefits of protecting their assets.

The sale of a property does not push a tax payer into another tax bracket.

For almost two decades, the short-term rate has remained the same as "ordinary" income. However, long-term capital gains have fluctuated significantly, with a maximum effective tax rate as high as 40% in the mid 1970s. The effective tax rate for long-term holdings ranges from zero to 20% for most homeowners. However, the maximum rate currently includes an additional 3.8% added to the capital gains bracket for the top earners in the United States, making the highest tax rate 23.8%. Top earners are classified as a single taxpayer that earns more than $200,000 per year, or a married couple filing jointly, who earns more than $250,000 per year.

Consider most homeowners have to pay property taxes on more than one tax rate

For example, they may have a tax rate for the city and an additional tax rate for the county they live in. The tax rate for the property, then, is a combination of all of these factors. You need to add up all associated tax rates for that property. This may include the school district, city, county, and any other tax within the community. That can significantly increase your taxes, of course.

Demonstration of How Ownership Percentages and Use Rules Affect Deduction Allowances: EXAMPLE 2

For this example, let's say Jeffry shares ownership equitably with four other people. Jeffry fully owns his residence, and occupies that home all year long. Each year, his lender provides a 1098 Form detailing the total interest, discount points and PMI paid in the previous year. If the 1098 Form shows Jeffry paid $2000, and that amount is less than the value of his home, Jeffry can only deduct $400, which is the total divided equally among the five owners. It is possible to structure ownership with different ownership percentages, based on the original purchase contract, or the amount each buyer invests in the purchase and/or property improvements. For example, Jeffry could own 60% and each of the other four owners own a 10% share.

Ways to Make Money and Capture Positive Benefits of Real Estate Investment Activities

From an investment perspective, taxes are not the only thing to consider when buying and selling real estate, maybe not even the most important consideration. A well-informed real estate agent understands the importance of building equity and exploiting appreciation as the market changes. For example, single-family home values usually change based on market statistics (also called stats) and comparisons (also called comps). As transactions in a neighborhood generate higher sale prices based on normal inflation, as a response to the economy, or fluctuation in demand, property values increase for similar homes. In multifamily environments, some investors proactively force the appraisal value to rise, by adding upgrades and amenity packages that boost revenue potential, then gradually increase base rents, which makes their properties more attractive to potential buyers. Forcing appreciation doesn't work as well for personal homes as it does for apartments and planned communities. Over renovating a home in a modest neighborhood won't necessarily bring higher returns unless other home owners follow suit. Most home buyers who invest in a personal residence are more interested in growing their equity faster, to allow them to access available money for renovations or as a down payment on another home. Buying low is the best way to grow an equity nest egg. Here's why. On a typical 30-year, fixed-rate mortgage it takes approximately 22 years to pay down half of the original loan principle. The first few years, the majority of each monthly payment goes to pay down the interest on the loan. Over the full term of the loan, a buyer with a $165,000 mortgage financed at 4.5% will pay a staggering $300,970. That's $135,970 in interest alone. More than 45% of total payments cover only interest. It may not be a good idea to show potential buyers how much they will ultimately pay for a home if they plan to make payments that long, unless you plan to show them how they can save money by doubling up on their payments, or paying a little extra each month designated for reducing the principle - that shows them they have control over how quickly their equity builds up.

Per Mill

How most communities will express their tax rate as a millage rate. Simply means that it applies the tax rate per $1,000 worth of assessed value of the property. This way, a property that is valued at $1,000,000 is not paying the same as a property worth $100,000. The higher the value of the property, the more that property should pay.

Why People Rent

In 2014, the Federal Reserve conducted a survey of almost 5900 participants to learn more about housing preferences and household living arrangements. More than 4 out of 5 respondents (81%) said if they could afford to buy their own home, they would. Approximately 50% of survey participants stated they didn't have enough money for a down payment. Slightly less than one- third (31%) said financial or credit issues prevented them from qualifying for a mortgage. While people who earn less than $40,000 annually cite finance and credit issues as the main barriers to owning their own homes, people earning more than $100,000 often cite personal preferences as the driving factor behind their decisions to rent. For example, the top earners were 20 percent more likely to rent for convenience compared to people earning $40,000, or less. And, 31 percent of people in the highest wage bracket thought it was cheaper to rent than invest in a homestead. People in all income brackets may rent because they are planning to relocate soon, buy a home in the future or just prefer to rent rather than commit to a long-term contract. Renting usually comes with perks like not having to maintain a lawn, lower utility bills and sometimes free internet and cable. You can also pack up and move whenever you want, without the hassle of trying to sell your home or becoming an unwilling landlord who has to assume those mundane tasks like mowing the yard and fixing the leaking roof.

Condominiums

In a condominium, each unit is owned individually. The units may be owner occupied, or used primarily for rentals, or vacation homes. In a condominium building, all common areas, such as walkways, meeting rooms, swimming pools and other shared spaces in a condominium arrangement are jointly owned by all condominium owners. And, homeowners typically pay monthly or annual dues to cover the maintenance, repair and insurance expenses established by covenants and by-laws approved and voted on by a select board and owners.

Interest Rates

Interest rates directly impact a home buyer's ability to make monthly payments, but they aren't the be all and end all of getting a good mortgage. You must consider the interest rate, the length of the loan and down payment requirements to ascertain whether a mortgage is truly affordable. Here is an example to show you why all three matter. Let's say you're buying a $150,000 home and plan to pay taxes and insurance separately, which is not likely, but this is just an example. If you are approved for an FHA loan with a 3.5 percent down payment, you would only need to come up with $5,250, before origination fees and closing costs. With an interest rate of 4.25 percent on a thirty-year fixed mortgage, your monthly payment would be $712. An interest rate of 5.75 percent would push that payment up to $845 per month. Shortening the term to twenty years, while keeping a 4.25 percent interest rate means you'd be paying $896, but you would shave ten years off the mortgage, saving $41,280 in the process, assuming you kept the home for the full term of the contract. Bumping the down payment to 10 percent, or $15,000, on a 30 year loan at 4.25 percent would drop the payments $48 a month. See what we mean? It is critical to carefully consider how much you can afford and then partner with a lender to find a loan package that works best for you.

Tax Depreciation

Is a gradual reduction in the value of your property that allows you to recover part of your cost or other basis in the form of a tax adjustment. You cannot depreciate land; however you can depreciate structures and improvements, including rental property. The most common depreciation method is known as the straight-line method, where you divide the value of your house by 27.5 to get the allowable annual depreciation deduction. So, assuming you have a rental home valued at $150,000, your annual deduction for residential property would be $5,454.54 which is the result of dividing $150,000 by 27.5. Non-residential, commercial real estate is assumed to have a life-span of either 39 or 40 years, depending on whether you use the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to calculate annual loss in value based on wear and tear, damage and obsolescence. You calculate straight-line depreciation by dividing the difference in the salvage value and the purchase price, or cost to build the structures, by either 39 or 40. Land is not depreciated.

Homeowners' O (HO-0, Dwelling & Fire) Insurance Policies

Is a limited perils policy that does not provide personal property, medical or liability coverage. If someone is hurt on your property, they may still sue you, but the insurance company is not obligated to defend you or help you reach a settlement. Each insurance carrier has unique terms and conditions; however, most provide optional coverage for the damage specifically caused by the following events: • Smoke infiltration related to natural causes and/or vandalism. By the way, vandalism, or malicious mischief are covered, even if arson isn't involved. • Fire damage caused by lightning and accidents such as grease fires in the kitchen • Riots or other civil disobedience activities • Severe weather events, such as hail or driving winds • Explosions • Aircraft • Volcanoes Most policies have a limited reimbursement for damage caused by vehicles, providing you were not driving the vehicle or otherwise responsible for the damage. The thing to remember is that only listed perils are covered. So, if an old tree on your property falls and damages the roof of your house, you would only be covered if you can prove one of the listed perils, such as wind or lightning, was the stimulus.

Assessed value of a property

Is directly related to the amount of taxes the property owner will pay on the home. However, there can be some discrepancies here in terms of what that value should be. In some cases, assessing property value can seem like a subjective thing. Someone must put a dollar value on it, though. If the assessed value is not correct, the homeowner could be paying higher taxes than he or she should pay. No one wants that to happen, but it can occur in various situations. The question is, then, what can cause a property's assessed value to be off in some way? Most people would never complain if the assessed value was too low. That could end up saving them some money in the long term, of course. However, many people will question the value of a property if they believe it is too high. Imagine, for example, a home listed on the market for the first time in 15 years. The home's assessed value is based on the area's previous value. Over the last few years, there's been a decrease in population, far fewer trees, and more pollution. This can change the value of the home. It may be significantly less now. While most properties are assessed on a yearly basis, most often no one visits the property in person each year to verify its value. This could allow something like this to occur. Another example may be the actual condition of the home. Even if someone came to the property to assess the value, the interior isn't accessible in most cases. The interior of the home may have foundation damage or be very outdated. This in itself can change the value of the home. It's less likely things like the physical location of the property (which jurisdiction it is in) can play a role. But there are circumstances in which the community changes, the home itself changes, and its overall value is no longer what is perceived. The assessed value can be wrong. When it is, the owner can challenge the assessment.

Homeowners' 8 (HO-8, Older Homes Coverage) Policy

Is one of the common policies homeowners choose if they live in an older residence, especially if it would be a hardship to replace the property if severely damaged, or destroyed. Like other Named Perils Policies, HO-8 only covers specific items listed in the policy. The plan typically pays the actual cash value minus depreciation, because it would cost more to repair the dwelling and outbuildings than replace them in many instances. Water damage is never covered under an HO-8 policy, or most other HO types, but you can add a rider that covers different kinds of water damage from overflowing a bathtub to damage caused by a flood. There may be coverage limits in any of the HO plans that affect the amount you can recover per claim, too. For example, theft, vehicle damage or vandalism may be limited to $1,000 per claim. It is very important to check exclusions and limitations carefully before buying or recommending an insurance policy.

Homeowners' 3 (HO-3, Special Form) Insurance Policy

Is one of the most common plans because everything is covered unless specifically excluded. HO-3 coverage is the minimum plan many mortgage lenders require to issue a loan. However, only structures and dwellings are covered. Personal property coverage only applies to perils listed. Some restrictions may apply, but general real property is covered at full replacement value, with no adjustment for depreciation.

Standard Flood Insurance Policy

Is similar to any other peril-based policy. It only covers that specific peril and damage resulting in loss. Contents and liability are not covered unless you purchase content protection separately. Also, your NFIP policy covers replacement costs, but is not a guaranteed replacement cost policy. Actual cash value is calculated by deducting reasonable depreciation. For example, FEMA may deduct 10% to 15% of the value of wall-to-wall carpeting per year, depending on the quality of the flooring. Since NFIP policies never pay out more than the insurance plan limit, you must carefully consider how much it will cost you to repair or replace your property based on the same formulas that FEMA uses. Like auto insurance and medical insurance, if you establish a higher deductible, you will have lower payments. But, it may be hard to come up with enough money to recover from a flood situation if you set a deductible so high you cannot afford to complete the repairs. Deciding how much coverage you need depends on your dwellings, or building property, your personal assets and uninsured items. When you talk with an insurance agent about coverage, ask plenty of questions and read the fine print. You may be surprised to learn that while drywall for walls and ceilings is covered in the basement, drywall isn't covered for elevated floors. And, furnaces and water heaters are covered under the building property, but refrigerators are not a covered appliance. Insurance usually covers the food freezers and food lost during an electricity outage. When deciding how much coverage you should buy, keep in mind there are many items not covered under either personal property or building property. For example, window treatments, blinds, shutters and curtains are excluded along with most personal property like computers, kitchen utensils, plates, and other electronic equipment. You will be responsible for replacing most of these items and you shouldn't calculate replacement value when determining coverage limits. Talking with your mortgage broker or insurance agent may help you create an accurate estimate about how much it would cost to replace your home and covered contents if a flood event occurred in your neighborhood. The reality is that most homeowners could benefit from flood insurance. The NFIP offers affordable policies for around $700 a year. And, when you consider that the average residential claim for flood damage a few years ago was more than $42,000, you can see the benefit far outweighs the costs. Currently the maximum coverage amount for flood related losses is $250,000 for buildings and $100,000 for eligible covered content, but you can buy additional coverage from private insurance agent. And, you can purchase policies with lower limits if you live in a low-risk area.

Capital Gain

Is the effective profit or loss realized based on the difference between the sale price of a piece of real estate and the cost of acquiring the asset. We mentioned earlier that orientation points aren't deductible expenses. However when it comes time to sell a property, the net profit reflects adjustments for transaction fees, such a real estate agent commissions, attorney's fees and sales tax, among other expenses. There are short-term capital gains and long-term capital gains. Real estate investments purchased and sold within a one year period have higher tax rates than assets held longer than twelve months. The current tax rate is based on marital status, tax brackets, and how the property was acquired.

How Investors Put Creative Spirit to Work Negotiating Deals

It is a high- stakes game for some people to see if they can find similar properties in areas they want and get all their I's dotted and T's crossed in time to avoid paying capital gains taxes. You have a responsibility as a real estate agent or broker to learn as much as you can about helping your clients make wise decisions as they buy and sell in the market place. Armed with the topics covered in this session, you can better help your customers understand the tax and investment aspects of home ownership.

Demonstration of How Ownership Percentages and Use Rules Affect Deduction Allowances: EXAMPLE 1

Jeffry fully owns his residence, and occupies that home all year long. Each year, his lender provides a 1098 Form detailing the total interest, discount points and PMI paid in the previous year. If the 1098 Form shows Jeffry paid $2000, and that amount is less than the value of his home, he can usually deduct the full amount.

What is the value of the property?

Legally, most properties are taxed as "ad valorem tax." That is a Latin word for "according to value." More specifically, it means the amount of tax paid is directly related to the value of the property. The higher the value, the more taxes apply to that property. Here's an area of confusion. This isn't the same as the value of the property the home sells for on the open market. Rather, it is based on what the county (or other taxing authority) believes the value of the property is. Most commonly, the county auditor assesses the value of the property for tax purposes. Determining this value doesn't necessarily take into account how much the property could sell for, though. When does the county assess the value of the property? This can change from area to area. In nearly all situations, though, the taxing authority will determine the value of the property one time every year. It is generally done prior to the property taxes being levied on the home or other property. It can change more frequently if necessary, though this is uncommon. It doesn't necessarily change when property changes hands between buyer and seller.

Loan Origination Fees

Lenders charge administrative fees for reviewing applications, verifying credit worthiness and processing paperwork prior to issuing a loan. The fee is based on the price of the real estate and typically equals 1% of the loan value. The origination fees cover the lender's costs for funding the loan. While discount points and loan origination fees are tax deductible, origination points are not. Some lenders tack on hidden fees under the label of origination points. If you ask for an itemize point statement, you may see charges for property inspections, a title search, lawyer fees, notary public services and other add-ons, all of which are not tax deductible items. Just because you can't take an immediate deduction for origination points, it doesn't mean you should ignore them. Clients considering investing in rental property should know that discount points and origination points qualify as depreciation expenses, and can be amortized, along with certain other expenses of buying, building or improving real estate holdings over the life of the real property.

Planned Unit Development [PUD] Model

Let's step away from traditional private housing types to a commercial example, the planned unit development (PUD) model. Even if you've never heard the term before, you have almost certainly seen a PUD. Commercial land developers may want to create a mixed-use area that doesn't fix any of the existing zoning and density guidelines by building individual homes, multi-family housing, retail space and recreational facilities such as hiking trails or a baseball diamond. To accomplish this, the developer must submit detailed plans to the appropriate agencies to get approval. Approval is often based on how well the developer incorporates business and residential uses, whether the builders have considered the economic and environmental impact for residents and the extended community beyond the borders of the PUD.

What Are Property Taxes, Then?

Local governments apply property taxes on real estate. The property owner must pay those taxes or, if he or she fails to do so, the government can levy fines, liens, or even force the sale of the property to recoup the losses. Generally speaking, property taxes are always based on the value of the property. This includes the structure as well as the land it sits own.

How Are Property Taxes Calculated?

Local governments calculate property tax rates based on laws in the region. Property taxes are dependent on county-based laws in the state. For example, the tax rate in one county can be significantly different than that in another. How much is charged to each property owner is specific to the laws within that state. Because these taxes are so individualized between counties, it's hard to pinpoint how much any given homeowner will pay. Not only is the location a factor, but there's also a consideration of value. The more valuable the home is, the more taxes the property owner pays on it. Most county tax laws specifically state how much is levied on the property per $1,000 worth of value. A tax rate is set through the laws within the community. This is then multiplied by the assessed value of the property. This tax rate is refigured each year, based on the budget needs of the community. Property taxes are levied on only real property in most states. This includes the land itself as well as the structured and fixed buildings on it. It does not take into account any personal property owned or maintained at the property.

Manufactured homes

Manufactured homes today come in single- and two-story models, and a variety of lengths and widths. And, although all are portable, many larger manufactured homes assembled on site are never moved once they are anchored down. Some manufactured homes are also multi-family homes, built similar to a duplex where they are two distinct dwellings joined by a common wall. A cousin of the mobile home is the modular home, or prefabricated home. In some ways, modular homes are like the kits Sears sold to twentieth-century home buyers, although the homeowner doesn't have to assemble the house. Modular homes are built in movable sections called modules in a factory according to a buyer's specifications or a particular floor plan designed by the company offering the home for sale. Where a new construction home typically takes many weeks to erect, once the modules arrive at the building site, professional builders can have the house ready for occupancy in about a week, baring extreme weather events. Unlike mobile (manufactured) homes, prefab houses are assembled on a permanent foundation, so moving is not usually an option.

Deductions

Many types of property taxes are a deduction on taxes. The property owner may be able to reduce his or her income tax payment by paying his or her taxes. However, special assessment taxes generally are not deductible in this manner. The reasoning behind this may not always be easy for a home buyer to understand. While property taxes, in general, are designed to meet the good of the greater community, special assessment taxes only benefit a smaller portion of the population. Therefore, they typically are not tax deductions.

Mobile Homes

Mobile homes account for roughly 8% of all housing units in the United States, but where those homeowners live is telling. Only 6% of metropolitan units are classified as mobile homes, while rural, or non-metro areas have three times as many mobile homes, according to Population Reference Bureau. There are positives and negatives to owning a mobile home - for one thing, as the name implies, they are easy to move. They typically cost less than other new home types, although buyers may pay a higher mortgage interest rate if they need to finance. For people with limited funds, trailers may be the only real property they can afford. There are some "hidden" expenses associated with this type of housing. For example, only about half of mobile homeowners own the land where their house is parked. This means on top of the mortgage, buyers have to pay a monthly rent for the space, or invest more money to purchase land, which increases the overall cost of ownership.

Appreciation

Monetary gain resulting from the increase in the market value of an investment, excluding additions of capital. For example, a house which is sold five years after it was purchased for 50% more than the purchase price.

Retirement Communities

More commonly seen as a primary residence option. Although there are many different types of retirement communities all have a few similarities. Most have a minimum age requirement, usually 55 or older. Some retirement developments have an 80-20 rule, where 80% of the properties are owned by people over 55 and the other 20% are owned or leased by younger families or singles. Services that are available in retirement communities may include lawn care, housekeeping, laundry, and access to a handyman to help replace light bulbs or hang pictures. There is usually a monthly fee beyond the mortgage payments to cover maintenance of common areas and amenities. Some communities have an on-site recreation director who schedules shopping trips, arranges group discounts for local plays and movies, and invites instructors to teach classes on a variety of topics from painting and sculpting to finance and computer literacy. It is important to consider why clients want to move to a retirement community before recommending specific properties. Some want the social engagement and security of living in a tight-knit community without having to commit to the daily structure of an assisted living property. Others aren't currently facing medical challenges, but they are looking for a property that can offer them different services as they age. One community in the Dallas, Texas area offers home buyers a chance to buy a private home initially, and trade up to a residence in the assisted living area on campus, if they develop medical challenges; then transition to a retirement dorm with 24 hour care when the time comes.

HUD Good Neighbor Next Door Mortgage Program

Mortgage Loan Type that only requires a $100 down payment. Basically, you get to buy a designated HUD property at 50 percent of the appraised value. If you qualify for any FHA lending program, you only pay $100 down. You must live in the house for 36 months, or you have to pay back the 50 percent discount, but this is a great way to buy a starter home, or even a future investment property.

Veteran Affairs [VA] Mortgage Loan

Mortgage Loan type that finances up to 100 percent of the loan value, at competitive interest rates, for active duty, reservists, retired military personnel and qualified dependents. Interest rates are low, and you don't have to pay PMI or upfront mortgage insurance payments. Plus, seller contributions are allowed, capped at 4 percent.

Federal Housing Administration [FHA] Mortgage Loan

Mortgage loan type that guarantees loans for people with exceptional credit and people with very low credit scores, no credit history and even past problems with bankruptcies. The 3.5 percent minimum down payment is a great solution for people who have a strong debt-to-income (DTI) ratio, but may not have a bundle of cash for upfront costs. People with a credit score below 600 may have to pony up a down payment closer to 10 percent to secure the loan.

Should a property owner challenge their assessed value?

Most of the time, property owners will receive a notification in the mail that alerts them to their new assessed home value. This is done by the taxing authority. This is generally the jumping off point for many property owners. With this letter in hand, they may decide to challenge the assessed value. That letter should also provide information on how to contact the agency to appeal the decision. However, ever jurisdiction sets its own specific process for appeals. You may need to complete documentation and send it in. In other cases, a full inspection and appraisal is done by the taxing authority. In still other areas, the process may warrant just a phone call to explain your case. It's important for the property owner to follow the specific directions provided to them in all cases. If they are not included on the letter alerting them there is a new assessed value - or there is no letter available - it's important to visit the taxing authority or call them to inquire about the appeals process. Most of the time, when annual assessments are created, there is a set process and time limit for requesting an appeal. For example, some taxing jurisdictions may provide a time period of 60 days from receiving the notice for the property owner to respond. Organizations may also have a time period they set aside each year to hear such protests. This is common in smaller areas where the taxing authority doesn't have the manpower to handle these types of matters quickly. In all cases, if the property owner feels he or she is overpaying due to an inaccurate assessed value, he or she should take action. This value will only increase year-over-year based on inflation and other factors. Getting it under control now is important.

Demonstration of How Ownership Percentages and Use Rules Affect Deduction Allowances: EXAMPLE 3

Now imagine that Jeffry owns 100% interests in his home and wants to rent out a couple of rooms to earn some extra money or defray costs of ownership. As long as he does not lease any part of his home for purposes other than residential living, and the leased space is not self-contained, meaning it could not be construed as a complete home unit with separate cooking facilities, bathroom and sleeping quarters, Jeffry can treat the rented space as part of his personal home for tax purposes, and claim the full tax benefits based on 1098 figures. One caveat, he is not allowed to lease the same space or different parts of his house to more than two renters at any time during the tax year. There are dozens of other special rules and exceptions within the tax code that directly and indirectly benefit homeowners. IRS Publications 936, 17, 550 and 530 provide general information worth reading, if you find yourself wanting to become more proficient in ways that could help homeowners. That is not to say that you should give any accounting advice though. Leave that to the trained professionals.

Time-Shares

Often considered as either an investment or strictly a vacation home. Like co-op dwellers, time-share investors never fully own a piece of real property. They gain access to the land, a dwelling or other real property. Time shares fall into three main categories: • The first is a Fee Simple contract which results in deeded interest, with a title in perpetuity. • The next is a basic Right-to-Use (RTU) arrangement where you have rights to exclusive use that expire on a given date and revert to the actual owner - this is usually ten to twenty years. • The final category is called "leasehold". Like the Fee Simple the property is deeded. However, it also has an expiration date, like the RTU. Some Leasehold contracts offer a first right to renew clause. Regardless of the category, time-share investors are limited to the amount of time they can use the property. For example, you may have exclusive access two weeks out of the year, or for a specific calendar month, depending on how many other "owners" have an interest in the property.

Who is eligible for the Property Tax and Rent Rebate Program?

Pennsylvanians over 65, widows and widowers over 60, and disabled adults can receive the rebate. The income limit for eligibility is $35,000 for homeowners and $15,000 for renters. However, half of any Social Security income is deducted in the calculation. In the event of death, spouses or executors can file the claim for deceased tax payers who lived at least one day in the current tax year.

Additional Rebate Eligibility in Pennsylvania

Philadelphia, Pittsburgh and Scranton have high local income taxes. In these areas, each senior household that has less than $30,000 in income receives an additional 50 percent for their rebate. This applies to senior households in the rest of Pennsylvania if more than 15 percent of the household income goes to property tax.

Cultivate Your Farm

Phrase in which successful real estate professionals sometimes pick a particular subdivision or section with a county and proactively "plant seeds," they hope will help them generate future sales. They take the time to get to know the residents, find out what they like and don't like about their homes, and maintain contact with these people hoping when it comes time to buy or sell, they will call them first. Part of farming an area means you have the knowledge and resources to serve the community.

Let's assume the property's assessed value is $560,000. The property is subject to a tax of 1.5 mills. Doing the math, how much is owed in property taxes here?

Property's Assessed Value: $560,000 Tax Property is Subject To: 1.5 mills 1 mill = 1/1000 $560,000/1000 = $560 $560,000/500 = $1,120 $560 + $1,120 = $1,680

Private Mortgage Insurance [PMI]

Protection for the lender, if a buyer fails to make payments. This insurance premium is typically included in the total monthly mortgage payment; however a one-time payment may be made at closing. Some lenders allow a large PMI down payment and smaller monthly installments as part of the regular mortgage schedule. PMI may be dropped after the balance falls below a predetermined amount, because this type of coverage is usually only required on conventional loans with a down payment less than 20%, or if the buyer wants to refinance a home with less than 20% equity built up.

Homeowners' 1 (HO-1, Basic) Insurance Policy

Provides the same basic coverage for the ten perils listed in Homeowners' O (HO-0, Dwelling & Fire) Insurance Policies, plus glass breakage. This plan is not very popular and many agents don't recommend the coverage because it is too narrow. Contents may be added when the policy is purchased, providing each item is listed or valued at the time the policy is issued.

Homeowners' 5 (HO-5, Comprehensive) Insurance Policy

Some agents proclaim that HO-5 is the top of the line policy available in the United States. Unlike many of the other homeowners' insurance packages that only cover what is specifically listed, the HO-5 covers everything that isn't listed as exclusion and you can add endorsements to expand coverage. Both contents and the dwelling are covered against damage and loss. You can buy an HO-5 policy, or you can add riders to an HO-3 to bring it up to the same basic coverage.

Multi-Use Properties

Speaking of mixed-use developments, there is another housing type that doesn't involve building an entire community from the ground up. Although many large cities have seen an uptick in multi-use properties in recent years, the practice of having retail space on the ground floor and apartments on upper floors isn't new. Remember those ready-to-build homes we mentioned earlier? At the same time those houses were popping up in many communities, there were boarding houses that offered private rooms for rent above a restaurant open to the public. Today, you'll find high-end apartment buildings with organic grocery stores, dry cleaners, bakeries and internet cafes on the street level while modern, well apportioned apartments occupy the upper floors. Today, consumers are looking for houses to buy in neighborhoods with high walkability scores and access to everything from food to entertainment, so mixed-use properties allow property owners to maximize earning potential on every square inch of the investment. In many cases it is a virtual trifecta - cities increase tax revenue, investor-owners can charge higher rents and tenants enjoy the convenience of picking up their dinner or dry cleaning on the way to the elevator that will take them upstairs to their apartment.

Mine Subsidence Insurance (MSI)

Special insurance in Pennsylvania that covers sinkholes, troughs, and mine subsidence. This coverage is typically not included in standard homeowner's insurance policies. Buying coverage is voluntary, but with premium costs relatively low, it is a wise decision to purchase a policy if you are buying a home or a piece of land with improvements in an "at-risk area". The Pennsylvania Mine Subsidence Insurance Fund, established in 1961, offers coverage for only 55 cents per $1,000 of coverage. Protection covers loss from physical damage to "insured structures," and permanent improvements. This means buildings, walkways, decks, in-ground pools, fences, retaining walls and other appurtenances attached to the ground surface as covered. Contents and temporary structures are not, although you can insure buildings and other structures under construction. Covered damages must be directly related to ground shifting, surface collapse, or water bursting through the surface. Insurance provides coverage for like-kind repair or replacement, and covers expenses consequential to their loss. These extra expenses may include temporary housing, relocation expenses, loss of wages and a cost of living adjustment if they pay higher rents or utilities while having the structures repaired. The Pennsylvania MSI Fund has paid out more than $30 million in mine subsidence claims since it was founded. Your role as a professional real estate agent is to make sure sellers and buyers understand their rights and responsibilities.

Who Can Require Property Taxes?

State and county laws establish property taxes. They can also be levied in emergency situations if state laws allow for it. Most property taxes are a combined figure that represents city taxes, county taxes, and local school district funding. A specific homeowner must contribute to all applicable property taxes based on the location of his or her home. For example, if the home sits in a specific school district, the property owner will pay taxes for that school district, even if he or she doesn't have a child in school. Most commonly, taxes are specific to the parcel of land, not to the homeowner's use of that property. From a property buyer's point of view, all property taxes should be clearly communicated within the transaction. This information is provided in a listing but needs to be verified before the sale.

Buydown

Term which is commonly used when buyers are looking to get discounted rates at least for the first years of their mortgage. There are some conditions that govern the buy down. For example, homeowners must utilize the cash accounting method when preparing tax returns to claim deductions- most people do anyway. And, the size of the buy down must be customary for the neighborhood.

Starker [Like-Kind/1031] Exchanges

The IRS code allows two property owners to literally trade like-kind property without paying capital gains taxes. There are a few requirements that must be met for property owners to defer, or avoid tax liability. For one thing, these exchanges only apply to business and investment properties. You can't trade a private residence for another private residence. And, you can't exchange a piece of rental property for a moving van or construction crane, even if they are valued at the same price. You could trade a four unit apartment home for a single-family rental, as long as the exchange results in the net market value and the property equity purchased is the same or greater than the property you're selling. You can also apply reasonable acquisition expenses to the cost of the new property. EXAMPLE: Say you have a multifamily apartment building valued at $1.5 million and a mortgage of $400,000. And you want to work an exchange to avoid paying any capital gains tax. You could purchase a single-family home, or several properties that have a combined market value of at least $1.5 million, and you would need to carry over a minimum of $400,000 in mortgage liability. It isn't as easy as simply transferring the deeds, although that is allowed, because finding another business property owner with a similar valued property, as yours, who is looking for a quick swap would be like finding a specific grain of sand in the middle of the Sahara Desert. Usually an investor first sells a property, and then reinvests the proceeds in a property with a similar cash value, and functionality - equipment for equipment, structures for structures, etc. Often investors involve a third party to act as a middle man, or open an LLC so their business can hold the assets in escrow until a suitable swap can be found. There are other options, but these are the most popular. This strategy works very well for investors who are looking to change the type of business real estate they own. For example, a property owner may want to trade an assisting living property for seniors for a high rise that caters to college students. Or, a management company may be looking to expand single-family homes and move away from multifamily complexes. Sometimes companies want to invest in another area, so they look to real estate in other towns or states to complete a like-kind exchange. Buyers have several timing limitations. For example, the property seller only has 45 days to identify up to three potential properties that would qualify as like-kind properties. It is possible to swap four or more properties, providing the combined total does not add up to more than 200% of the real estate being sold. And, all transactions must be completed within six months, or 180 calendar days, of the first closing, unless the property owner fi les for a tax extension.

Mortgage Interest

The fee lenders charge to off er loans secured by either a primary or secondary home, used primarily for personal use. This fee is structured much like a revolving loan. Interest is calculated every month, or after every scheduled payment, on the remaining principle over the term of the mortgage.

Homeowners Insurance

The first insurance policies in the United States were issued around the middle of the twentieth century. Property insurance covers loss associated with a variety of damage and typically protects the homeowner against natural events, like forest fires, hail storms and hurricanes, as well as man-made causes, such as vandalism. The typical American does not have the funds or available credit to replace the home and all of the things inside if a fire destroys everything. And, most mortgage companies require a minimum amount of insurance to protect their investment in your property. Protecting your assets, whether it is the dwelling and structures or the contents, is critical, unless you have financial assets available that could be used to replace your home after a significant loss. Homeowners' insurance plans may cover the buildings, the contents, and/or liability in case someone is killed or injured on your property. Depending on the type of home you have, its age and where you live, you may only need one type of coverage, or you may need all three.

How are properties assessed, then?

The tax assessor has three main ways to assess a property. All assessors set out to create a fair determination of the value of the property for the given tax year. Here's how it can play out. The first method is a sales comparison method. It is perhaps the most commonly used method. In this case, the tax assessor will compare the value of the current property to other properties in the immediate area. He or she is looking for a close match to other properties within the same community - usually as close to the home's size and location as possible. This provides insight into how much this home is worth by comparison. A second way to assess value is called the cost method. The tax assessor is looking at the cost to reproduce the home. If you wanted to build this very home right here right now, how much would it cost to do so? The tax assessor has to consider a variety of factors in this calculation. That includes the current cost of materials and the cost of labor to do the work. Of course, a brand new home is going to be valued at a higher price point than the existing home. For this reason, the cost method also factors in a percentage of depreciation. All of this combined determines the value of the house itself. Then, the tax assessor has to add in the value of the land the house sits on to come to the final value. It sounds complex, but formulas exist to help tax assessors to be rather accurate here. A third method is the income method. If the property in question is an income-producing property, it falls under this method. Because income-earning properties earn money for the property owner, this must be taken into consideration. This includes all types of properties such as rental properties, commercial retail spaces, or other buildings. This method is dependent specifically on how much income the property is likely to make for another owner. Talking to the buyer about assessed values is important. It's easy to get this information confused with how much the home is selling for on the open market. It's important to tell buyers that assessed value generally does not impact how much a home will sell for to the buyer. It is not uncommon for buyers to see the assessed value as what the home is worth. These factors are significantly different, and it is your job, as a real estate agent, to explain that difference.

Factors Affecting Homeownership

There are many factors affect home ownership rates in the United States, including age, ethnicity, location and the overall economy. Personal finances, poor credit and limited cash on hand also impact buying decisions. A 2015 study showed that while seniors want to stay in their homes, new renters across all age groups will outnumber new home buyers in 2030. Millennials may see the largest gap between those who want to buy a home and those who can afford it. Some 62% of today's Millennials will still be renting, or signing the first lease, ten years from now. And, the ownership rate for 35- to 44-year olds is projected to decline 12.2 percent in the coming decade, compared to 1990 rates. In this lesson, we'll explore a few of the advantages of renting versus owning, and discuss financing options for those who are ready to embrace the benefits of buying their first home.

What Properties Are Generally Exempt from Paying Property Tax?

There are some types of property exempt from property tax in most states. The rules for this change in some communities. However, most often, it is the property that isn't for-profit or otherwise privately owned. For example, there is no benefit to taxing government or city-owned property such as the courthouse or administration buildings. There is also no benefit to taxing educational buildings in the community. However, if the educational institution is a for-profit organization or one operating out of a leased space, that space can still be taxed. Most of the time, nonprofit organizations and charitable organizations also do not pay property tax. Religious organizations do not pay property tax on their real estate either. To qualify for this type of exemption, most counties and cities require the property owners to fi le for a nonprofit or religious status.

More than two-thirds of Pennsylvania's 67 counties have rich coal deposits underground

Two centuries of mining activity to bring that precious resource to the surface has resulted in large tunnels and voids that may collapse, causing the surface to subside. These cavern-like structures also collect water, from heavy rainfall and snow melt, gradually filling abandoned mine workings, which under some conditions, may erupt through the Earth's surface, damaging buildings directly above, or near, the rupture point. There are several different types of subsidence, including: mine drainage from water collection, sinkholes, which typically occur when mines are in proximity to the surface and trough subsidence that appears above a failed shaft pillar or some external pressure forces a pillar into a soft mine floor or ceiling. All of these depressions, cave-ins and eruptions may cause substantial damage to above-ground structures. Today, more than one million homes stand above abandoned mines. Pennsylvania state law requires sellers to provide written notice to potential buyers about risks in areas above, on or near underground voids, created by mining activity.

Multi-Family Buildings

Unlike stand-alone, detached dwellings, multi-family buildings, have two or more individual houses connected by at least one adjoining wall, floor or ceiling. There are many variations that include: duplexes, quads, Victorian homes converted to individual living quarters with cooking and bathroom facilities, and both low-rise and high-rise apartment buildings. Although there are some privately owned apartment homes in larger cities like New York City, Seattle and Los Angeles, most multi-family home units are investment rental properties. Classifying apartment buildings is a bit tricky because architects use terms like low-rise, mid- rise and high-rise differently. Some identify all buildings over nine stories tall as high-rise, while others say that buildings with less than three floors are low-rise, four to twelve story buildings are mid-rise and anything over 13 floors is a high-rise property. The city or region could also influence how local authorities classify each building. It is best to follow the International Building Code (IBC) guidelines which base classification on the height of occupied space. The IBC says that any structure with occupied living space higher than 75 feet above "the lowest level of fi re department vehicle access" is considered a high-rise. Most modern high-rise apartment buildings have elevators, but also have stairs to accommodate safe, rapid egress during an emergency.

The Property Tax and Rent Rebate Program

Was created to provide relief to qualifying individuals in Pennsylvania. The maximum rebate is $650, but supplemental rebates can increase that to $975. This refund is funded by the Pennsylvania Lottery and slots gaming. Since 1971, those qualifying for the rebate have received $6.1 billion in property tax and rent relief. The maximum rebate is determined by adjusted income. For example, if you make $8,000, your maximum rebate is $650; income up to $15,000 gets you a $500 maximum rebate; income up to $18,000 gets you a $300 maximum rebate; and income up to $35,000 gets you a $250 maximum rebate. For renters, if you make up to $8,000, your maximum rebate is $650 and up to $15,000 gets you a $500 maximum rebate.

Discount Points

What you have to remember is that one point is equal to one percent. So if you hear someone saying 3 points they mean three percent. Allow buyers to prepay interest in exchange for a reduced mortgage interest rate. You may opt to pay zero points, or go as high as 4 points, in some circumstances. As a rule of thumb, you can figure each point will cost about 1% of the loan amount. So, a one point buydown on a $90,000 mortgage equals $900 which is in essence one percent of the mortgage amount. Two points equals $1800, three points equals $2700, on so on.

Tax Liens

When a tax lien is present on a parcel of property, that indicates the responsible party has not paid his or her property taxes. Tax liens can be added for nonpayment of both standard property taxes and special assessment taxes if they are not paid. Most of the time, the taxing authority will fi le a tax lien on a property when the owner has failed to make payment within the given time. This isn't a simple manner and generally requires court approval. As a result, most of the time this isn't added to the property until the individual is significantly late on his or her taxes. When this occurs, the taxing authority recognizes the late payment, sends numerous letters, and likely has received court approval to impose the tax lien on the property. The property owner - or other responsible party - has to make payment at that time on the taxes. If he or she fails to do so, the taxing authority can then take legal action against the property owner. Most of the time, that legal action is the force of sale. If a property owner fails to make payment on his taxes, he or she may see the taxing authority force the sale of the property. This is done through the foreclosure process. It's important to know that the foreclosure process can be started by the mortgage lender as well as the taxing authority. If a person is making his or her mortgage payments but doesn't pay taxes on the property, that can trigger a tax lien and the eventual foreclosure on the home. It's not always about nonpayment of mortgage payments. Tax liens can be difficult to manage if a home is being foreclosed upon or is up for sale. Generally speaking, they should be disclosed in the sale. However, in some cases, it is possible for the property buyer to be held responsible for the tax lien on the property if he or she buys the home. In some cases, this is fully understood at the time of the marketing of the home. It can even lead to a discounted price on the home due to the presence of the tax lien.

Homeowners' 4 (HO-4, Tenant Coverage) Insurance Policy

While HO-4 is not for homeowners, real estate agents should recognize the term. HO-4 is similar to HO-2 and HO-3 in that these policies cover content perils typically seen in those two types of homeowner policies.

Why People Become Homeowners

While roughly 10 percent of the adult population doesn't plan to ever buy a house, most of us dream of having our own place. Remember that 81 percent of respondents who would buy a house of their own if they could? Buying into the American Dream has its own set of benefits that goes beyond pride of ownership. For one thing, there are some tax benefits. Buying a house or condo means owners can deduct points and interest paid on mortgage, home improvement loans and home equity lines of credit (HELOC) associated with repairs and renovation projects. You can also tap into your IRA penalty free to buy a home, as long as you don't draw out more than $10,000. Another financial benefit is long-term appreciation as your home value grows. Other factors motivate people to leave rental property in search of a private dwelling. Just slightly less than half (44 percent) of the respondents in the Fed survey who preferred to own rather than rent, said, they wanted to build equity rather than throw away hard earned cash on rent. Others said they like knowing how much their payments were going to be from month-to-month and year over year. Having the flexibility to customize a home to personal preferences and style, along with having fewer rules to follow, also made the list of reasons people preferred to own. And, some people just don't like to move. Once they find a spot they like, they plant themselves and dig in. Here's an interesting item that came to light in the Fed's survey. On average, 28% of all participants believe it is cheaper to rent than to own. This tells us two things. Perception influences buying decisions, and education is important to help first time buyers understand financing options available.

What's the Purpose of Property Taxes?

Why do we collect these taxes in the first place? It's simple - without taxes on property like this, there would be a limited amount of money to use to maintain the city or county. As we noted earlier, the counties create tax rates based on laws within those communities. In some areas, what property taxes pay for will differ compared to other regions. Most often, though, property taxes pay for the most important infrastructure needs within a community. This includes providing for the maintenance of water and sewer lines. It may include roadways. In most cases, it includes fire services as well as law enforcement. Though cities may also fund these organizations through separate taxes, most of this money pays for the community's needs. This can also include public servants. Education often relies on these funds as well. It can also include any construction within the city done for the community, such as the building or management of parks. In our communities, property taxes are the most important source of revenue of local governments as well as schools. They also pay for all other municipal services. When your client asks you about the benefit of paying property taxes, discuss just how valuable these funds are to their safety and quality of life.

Who is making these decisions?

You may hear a bit more about this when a person is facing an increase in their property taxes. They want to know who is making the decisions about what their home's assessed value is. This is done by a tax assessor. This tax assessor is a government official. In some areas, he or she is appointed to the position. In others, the person is voted into the position. In all cases, their sole job is to determine the assessed value of real property within their area. The assessor must consider things like the overall availability of land, the size, and features of the property, and how much the value of homes within the community as a whole has increased.

Flood Insurance

You probably noticed that none of the previously mentioned policies mention flood and water damage, although a non-peril based plan will provide water damage coverage, unless specifically excluded. Fortunately, there is another option for homeowners who live in flood-prone areas. The Federal Emergency Management Agency (FEMA) oversees and manages the National Flood Insurance Program (NFIP). While many people assume that FEMA funds are available to almost everyone, there are some restrictions. For example, there is a narrow definition of what NFIP covers and what it will not. Loss initiated from a real flood is defined as an excess of water that covers at least two acres, or at least two properties, one owned by the homeowner who wants to fi le a claim. The initial cause may be a river overflowing, tidal waves coming on shore due to damaged flood gates or natural barriers, or even heavy rains that produce excessive runoff . The federal government building policy is not intended to replace content insurance, and this protection must be purchased individually.