Chapter 5 - Home Ownership

Fannie Mae

- "Home Ready" mortgage program has flexible underwriting policies, up to 97 percent financing and even a cancellable mortgage insurance option to lower payments.

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

"HUD Good Neighbor Next Door" program

- $100 down payment - 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

Here are three examples that demonstrate how ownership percentages and use rules affect deduction allowances

- 1) In the fi rst scenarios, let's say 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 Jeff ry paid $2000, and that amount is less than the value of his home, he can usually deduct the full amount. - 2) But, what if Jeffry shares an ownership interest? For this example, let's say Jeff ry shares ownership equitably with four other people. Based on the details in the previous example where the annual 1098 statement reflects $2000 in payments, Jeffry can only deduct $400, which is the total divided equally among the five owners. It is possible to structure ownership with diff erent ownership percentages, based on the original purchase contract, or the amount each buyer invests in the purchase and/or property improvements. For example, Jeff ry could own 60% and each of the other four owners own a 10% share. - 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 diff erent parts of his house to more than two renters at any time during the tax year.

Tax Rate 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. 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? - (Formula) Tax Rate = Amount needed in collected taxes [divided by] total assessed value - This means, the tax rate will equal $4,000,000 / $200,000,000, or 2%. - most communities will express their tax rate as a millage rate or "per mill". - "Per mill" 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. - 10 mill equals 1 percent of the property's value.

Special Assessment Districts

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

Tax depreciation

- 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. - 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.

The assessed value can be wrong. When it is, the owner can challenge the assessment:

- 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.

Single-family homes

- A residence that isn't connected to other buildings - The percentage of single-family dwellings compared to all residential units fl uctuates, but has consistently ranged between 60% and 70% since the 1940's,

Special Assessment

- A type of extra tax - An assessment made against a property to pay for a public improvement by which the assessed property is supposed to be especially benefited. - 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.

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.

Mobile homes

- Account for roughly 8% of all housing units in the United States - 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.

How are properties assessed, then?

- All assessors set out to create a fair determination of the value of the property for the given tax year. -

Discount points

- 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 fi gure each point will cost about 1% of the loan amount - EX) 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 deductible

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 diff er according to the benefi ting entity.

Modular Home

- Are built in movable sections called modules in a factory according to a buyer's specifi cations or a particular fl oor plan designed by the company off ering 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.

Real Estate Tax deduction example:

- 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 who file 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. -

Benefits of Origination points

- 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 -

"Buydown"

- 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.

Property Insurance

- Covers loss associated with a variety of damage and typically protects the homeowner against natural events, like forest fi res, hail storms and hurricanes, as well as man-made causes, such as vandalism -

MSI protection coverage:

- 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.

In Pennsylvania there is special insurance, called Mine Subsidence Insurance (MSI):

- 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, off ers coverage for only 55 cents per $1,000 of coverage.

Interest rates

- Directly impact a home buyer's ability to make monthly payments - You must consider the interest rate, the length of the loan and down payment requirements to ascertain whether a mortgage is truly affordable -

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.

what can cause a property's assessed value to be off in some way?

- EX: a home listed on the market for the fi rst 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 signifi cantly 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.

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.

Veteran Affairs finances

- 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. - A great mortgage option for home buyers who need to use non-borrower income and nontraditional credit sources to qualify

Example of flood insurance:

- 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.

Positive Benefits of real estate investment activities: Single Family homes

- 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.

Timing Limitations for Starker Exchanges (Like-kind or 1031 Exchanges):

- 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 files for a tax extension.

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.

The Federal Housing Administration (FHA)

- 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

Multi-Family Buildings

- Have two or more individual houses connected by at least one adjoining wall, fl oor or ceiling. - 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 - Most multi-family home units are investment rental properties. -

A seller has accepted an offer from John. John wants to remodel and add an outdoor pool when he has enough equity built up to cover the project. Which loan arrangement will help him build equity faster than the others?

- If John makes a 40% down payment, he will already have a significant amount of equity in the property.

The tax assessor has three main ways to assess a property: (3) 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.

Starker Exchanges (Like-kind or 1031 Exchanges)

- If waiting impatiently for equity to grow, or trying to force faster appreciation, doesn't work for your real estate clients, you may introduce them to Exchanges as an investment tool - The IRS code allows two property owners to literally trade like-kind property without paying capital gains taxes. -

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 fl oor or ceiling. - All of these depressions, cave-ins and eruptions may cause substantial damage to above-ground structures.

Single-family homes experience ............ in sale prices based on normal inflation, fluctuations in demand, comps for similar homes and as a significant change in the economy.

- Increases or decreases - Home prices fluctuate based on supply and demand as well as other outside economic forces.

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

- 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 specifi cally 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.

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

- 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.

Depreciation on 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.

Who is making these property tax decisions?

- Is done by a tax assessor - 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.

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. - Tax deductible

Example of how interest can affect the life of a mortgage:

- 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 fi xed 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 aff ord and then partner with a lender to fi nd a loan package that works best for you.

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.

So, 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 signifi cantly diff erent than that in another. - How much is charged to each property owner is specific to the laws within that state. - 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. - Property taxes are levied on only real property in most states. - This includes the land itself as well as the structured and fi xed buildings on it. - It does not take into account any personal property owned or maintained at the property.

straight-line depreciation method

- Most common depreciation method - Where you divide the value of your house by 27.5 to get the allowable annual depreciation deduction - You calculate straight-line depreciation by dividing the diff erence in the salvage value and the purchase price, or cost to build the structures, by either 39 or 40. Land is not depreciated.

Retirement Communities.

- 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 fi nance and computer literacy

Should a property owner challenge their assessed value?

- Most of the time, property owners will receive a notifi cation 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.

What is the value of the property?

- 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. -

Exempt from Paying Property Tax:

- Nonprofi t 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.

Origination Points

- Not tax deductible - 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.

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.

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

- 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.

Points

- One point is equal to one percent. - So if you hear someone saying 3 points they mean three percent.

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.

The tax assessor has three main ways to assess a property: (1) A sales comparison method

- Perhaps the most commonly used method - 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.

The Property Tax and Rent Rebate Program: Additional Rebate Eligibility

- 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

Homeowners' 2 (HO-2, Broad Form):

- Policies 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.

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):

- Provides the same basic coverage for the ten perils previously listed, 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.

Long-term capital gains

- Real estate investments purchased and sold that are held longer than twelve months have lower tax rates - The current tax rate is based on marital status, tax brackets, and how the property was acquired. - 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. - 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 classifi ed as a single taxpayer that earns more than $200,000 per year, or a married couple fi ling jointly, who earns more than $250,000 per year.

Short-term capital gains

- Real estate investments purchased and sold within a one year period have higher tax rates - The current tax rate is based on marital status, tax brackets, and how the property was acquired. - The short-term rate has remained the same as "ordinary" income.

Which of the following typically offers the most flexibility?

- Renting a home is more flexible than owning a home. - Renting a home is typically only a year-to-year commitment. - Renting a home is also less expensive and requires less up-keep.

Pennsylvania state law regarding underground subsidies

- Requires sellers to provide written notice to potential buyers about risks in areas above, on or near underground voids, created by mining activity (Coal Mining Notice)

Example of Starker Exchange:

- 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 fi nding another business property owner with a similar valued property, as yours, who is looking for a quick swap would be like fi nding a specifi c grain of sand in the middle of the Sahara Desert. Usually an investor fi rst 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.

Tax Rate

- Set through the laws within the community. - Is equal to the total amount in tax dollars collected divided by the total taxable assessed value of the properties in 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.

Homeowners' 5 (HO-5, Comprehensive):

- 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.

Positive Benefits of real estate investment activities: 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.

Accidental Homeowner

- 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.

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.

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 specifi c to the parcel of land, not to the homeowner's use of that property

The phrase "cultivate your farm"

- 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.

Tax Rate Formula

- Tax Rate = Amount needed in collected taxes [divided by] total assessed value - most communities will express their tax rate as a millage rate or "per mill".

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.

Flood insurance

- 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. - 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 file 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. - It only covers that specific peril and damage resulting in loss. - As mentioned above, 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.

Patty is working with a commercial real estate investor. While touring an older manufacturing property, the client mentions much of the equipment will have to be updated in a few years because it is fast becoming obsolete. Which depreciation method did Patty most likely bring up during this discussion because it depreciates assets based on wear and tear, obsolescence, and damage?

- The alternative depreciation system is commonly used for equipment.

The 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.

Capital gain

- 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. - 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

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

- 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.

Many factors can increase or reduce monthly mortgage payments. Assume that a buyer is planning to buy a $150,000 home, and any loan payments will not include closing costs or insurance. Which scenario will produce the highest monthly payment?

- The longer the loan term, the lower the monthly payment. This may be offset by the loan's interest rate. The higher the interest rate, the higher the monthly loan payment. - Taking out a 20 year fixed rate private owner mortgage at 4.25 percent with 5 percent down

Which of these statements is true for all VA loans?

- The seller concession limit on a VA loan is 4% of the loan amount. Credit scores are still a very important when underwriting a VA loan. While VA loans may allow for 100% LTV, the borrower must first qualify for such a loan. Finally, VA loans are not only offered to active duty personnel.

The most common type of depreciation is the ............. You calculate the annual depreciation by dividing the value of the home by......?

- The straight-line method, - 27.5

The tax assessor has three main ways to assess a property: (2) 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 fi nal value. It sounds complex, but formulas exist to help tax assessors to be rather accurate here.

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 benefi t 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-profi t organization or one operating out of a leased space, that space can still be taxed.

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

- 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.

The Property Tax and Rent Rebate Program: About the Rebate

- 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.

Time-shares

- Time-share investors never fully own a piece of real property. They gain access to the land, a dwelling or other real property. - 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 specifi c calendar month, depending on how many other "owners" have an interest in the property

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. - 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.

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.

Homeowners' 4 (HO-4, Tenant Coverage):

- 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.

Tax Rate example (2):

- 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? - To determine the tax cost to the property owner here, do the following: - 25 mills equals 2.5 percent. Calculating 2.5 percent of the $425,000 value should give you $10,625. - This means that the property owner would need to pay $10,625 in annual taxes on his or her property.

Homeowners' 3 (HO-3, Special Form)

- 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

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.

What's the Purpose of Property Taxes?

- without taxes on property like this, there would be a limited amount of money to use to maintain the city or county. - the counties create tax rates based on laws within those communities. In some areas, what property taxes pay for will diff er compared to other regions. - 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 park

Example (2) of Starker Exchange

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.

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.