Should You Use the Listing Agent When Purchasing a Home?

First-time home buyers aren’t typically versed in the intricacies of agency disclosure, nor do they understand the concepts of a buyer’s agent and seller’s agent. They only know that the person they meet at an open house or email about a listing is an “agent.”

When they start getting more serious and want to inquire about a property, its price, condition or history, they typically direct their questions to the seller’s agent — which presents an immediate conflict of interest.

So what’s a buyer to do? It helps to understand the concept of agency before this happens.

A real estate agent’s loyalties and responsibilities change depending on the transaction. Here’s a quick rundown of the different roles an agent can play in any one transaction.

The listing agent

The listing agent or seller’s agent works for the seller and represents their interests in the sale. The seller hires their agent, typically in writing, to market and sell their home.

The listing agent’s responsibility is to get the seller the highest amount of money in the shortest period. Their fiduciary goals and loyalty should be with the seller at all times.

The buyer’s agent

Purchasing a home can be emotionally draining, not to mention financially stressful. Many consumers seek independent counsel from a buyer’s agent.

A buyer’s agent works with them for as long as it takes to make a purchase. They teach the buyers the market, show them lots of homes, and eventually advise when it comes time to make an offer and negotiate with the seller. An invaluable resource, a buyer’s agent stands by the buyer’s side for the duration of their home search.

The dual agent

Sometimes a buyer forgoes independent representation and chooses to work directly with the listing agent. This situation isn’t allowed in some states because of the conflict of interest. Where it is allowed, a dual agent represents both sides of the transaction at the same time.

In the case of a dual agent, it’s impossible for the agent to be completely loyal to either party. Both parties must agree to dual agency in writing, in advance.

Who pays for the agent?

The seller pays the real estate agent’s commission when the deal closes. The two agents then split the commission. In the case of the dual agent, the agent takes home the entire commission.

Should you use the listing agent as a dual agent?

Unless you are an experienced real estate investor, it’s best to stick with a buyer’s agent. There’s no cost, and a good buyer’s agent will provide an invaluable amount of advice and support in what can end up being a very stressful period.

The home search can involve many twists and turns, so having a loyal adviser along the way will help you make an informed decision on what is likely the largest purchase of your life.

 

Credit to Brendon DeSimone

Brendon DeSimone is a nationally recognized real estate expert and author of the book, Next Generation Real Estate: New Rules for Smarter Home Buying & Faster Selling. A fifteen year veteran of the residential real estate industry, Brendon has completed hundreds of transactions totaling more than $250M. His expert advice is often sought out by reporters and journalists, and he is regularly quoted in local and national press. Brendon is a regularly featured guest on major television networks and programs including CNBC, FOX News, Bloomberg, Good Morning America, ABC’s 20/20 and HGTV. Brendon is the manager of the Bedford and Pound Ridge Offices of Houlihan Lawrence, the leading real estate brokerage north of New York City.

10 best real estate tips for 2016

Sales of single-family homes will rise modestly again in 2016 and median sales prices should be up 3% to 5%, trade groups and researchers say. While rising mortgage rates and a shortage of first-time buyers may temper that outlook some, the coming year should be another seller’s market for real estate.

Despite an upsurge in construction, home inventories remain low and multiple offers are still common.

While a 6-month home supply is considered a balanced housing market, most markets are well below that, some significantly. Moreover, supporting fundamentals are far more solid than about a decade ago in the pre-bust years of 2006-2007.

With that as a backdrop, here are 10 tips for buying and selling real estate in a presumed up-market in 2016.

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1. Buyers: Don’t overreach

A bidding war might spur you to overspend, but paying an inflated price can make it tough to resell when prices stabilize or sink. (Read 2008-2009 real estate columns as a reminder.)

A decision to pay a premium isn’t always an errant one, though, when you plan to live in the house long term. Rather than focus on overheated developments, look at comparable homes in neighboring areas with the same access to the schools and amenities that you value. Set a bid ceiling, and try to have a few other deals in the works so you’re less inclined to overbid.

2. Sellers: Exercise your clout, but don’t overplay it

If you set a price from 5% to 10% above the market, you’re more apt to get an offer close to your home’s real value than if you start much higher and force your listing to go stale. However, if your home has better qualities than area comps, you have a bit more latitude.

No need to pay closing costs or offer other incentives to the buyer, especially if it means keeping your in-demand home off the real estate market. For example, a sale contingent on the buyers selling their home is reasonable but only with a contractual escape for you, often called a “kick-out” clause. That gives you the right to continue marketing your home. If a less-encumbered bid comes in, you then offer the initial buyers a set time of 48 or 72 hours to withdraw their contingency.

3. Buyers: Be ready, be early, be flexible

Are the best houses still getting snapped up quickly? Then don’t wait until you find a home to go loan shopping. Keep your preapproval letter, as opposed to a basic prequalification letter, in tow. Winnow your neighborhood choices before you shop.

Line up an action-ready inspector for an immediate property visit.

Have your agent ask what the sellers would value most in the sale. If you can accommodate a fast settlement or short-term, rent-back condition or fewer contingencies and conditions, that can make you stand out when that dream home is hanging in the balance.

4. Sellers: Know your agent’s commission split

A heated market is causing sellers to question why they should pay the full 6% commission.

Hence, sellers’ agents are accepting less, then offering less of a split to buyers’ agents in a practice known as “sell to the commission.”

When the co-op fee is low, buyers’ agents tend to be less than enthusiastic in showing such houses, and yours will typically take longer to sell.

5. Buyers: Buying new?

Get what you pay for. Builders are cranking production to pre-recession levels. But some are cutting corners by hiring untrained help, not waiting for concrete to cure, painting walls without primers or quietly substituting cheaper materials such as a lower grade of countertop granite, or installing inadequate plumbing or HVAC units.

Consider hiring an independent inspector to oversee construction (at $400-plus). Builders may tell you not to worry because they’ll hire one. Ahem!

And, be sure the builder is established and that you research online reviews, complaint pages and consumer ratings. Ask specific questions about the crew’s experience and certifications.

 

6. Sellers: Know your influential rooms

Upgrades rarely pay for themselves, but there are 2 spaces that can make or break a home sale: the kitchen and master bath.

Because kitchens are the heart of the home, or the “new living room,” make yours homey. Hide the coffee maker and toaster. Add simple decorative touches to the wall behind the sink.

Sure, new granite countertops and appliances are optimal, but new hardware for cabinets, new faucets, new lighting fixtures and fresh (neutral) wallpaper are inexpensive touches that carry weight. Thoroughly scour and depopulate the fridge and take magnets off it, please.

For bathrooms, always display a sparkling bathtub and commode. A new tub liner, or “shell,” can make that marred tub look like new and save you from replacing it.

A new faucet, new lights, fresh caulking, a new towel rack or new mirror may be in order. Clean out the medicine cabinet. Of course, this doesn’t mean you shouldn’t declutter, depersonalize, paint and scrub the rest of your space, too.

7. Buyers: Beware hidden costs

When is a $250,000 house not a $250,000 house?

Answer: Always! Consider these and myriad other closing costs when buying:

  • Origination fee: On a $200,000 mortgage for a $250,000 home, assuming 3.5% interest and no points, you’d pay the lender about $1,800.
  • Home inspection: Even if the mortgage insurer doesn’t require one, get one for peace of mind.
  • Property taxes: You’ll usually pay a few months upfront.
  • Appraisal: The bank will need to determine how much the place is really worth.
  • Private mortgage insurance, or PMI: This depends on your down payment and credit rating.

Other pre-occupancy costs should include home insurance, title insurance and deed-recording fee, and possibly title insurance, survey costs, credit report fees, flood insurance and homeowners association dues/insurance.

On that $250,000 home, allow an extra $5,000 or more atop the sale price.

8. Sellers: Consider the replacement

You’re getting multiple offers on your home, with several over asking price. Wow, that was fast! But can you find your next home in time to move once you sign?

If not, one option would be to request a lease-back from the buyer, allowing you to remain in your old home for the time you need to shop for the replacement. This will be contingent on when the new owners need to occupy, and the period is usually limited to 60 days.

The other option is to slow the selling process by asking for a longer period before closing.

Whatever you do, get your prospects and finances lined up (see tip No. 3!). Yes, a seller’s market swings 2 ways!

9. Buyers: Seek out an up-and-coming neighborhood

Things to look for include proximity to a new or resurgent business center, the addition of a major employer, a light-rail station, a city cleanup initiative, young people moving there, crime watch and other neighborhood groups being formed, multiple renovations underway and other up-and-coming neighborhoods abutting it.

New retailers, restaurants and other commercial tenants are also a good sign. Research by RealtyTrac shows that homes in ZIP codes that have a Trader Joe’s grocery store appreciated 40% on average since the homes were last purchased. Homes with a Whole Foods nearby appreciated 34% on average.

10. Sellers and buyers: Don’t play the bubble game

Thousands of would-be sellers and buyers are agonizing over how they can time their next sale or purchase to coincide with the “pop” of this housing bubble, either by selling soon for optimal profit or swooping in with cash to pounce on post-pop pricing.

True, the bust of 2007-2008 was a loud and robust one, but don’t look for anything catastrophic this time. The present froth is being fueled by narrow supply and widespread demand, not easy credit and “liars’ loans.”

Most real estate cycles don’t explode like the last one; they just deflate slowly. Real estate continues to be a reliable long-term investment prone to usually modest peaks and valleys, done on a deal-by-deal basis and subject to local economies.

Good luck in the new year!

 

By Steve McLinden

 

Four Steps to Selling Your Home for Top Dollar

We’re smack in the middle prime house-selling season. The National Association of Realtors predicts that 6.6 million existing homes will change hands this year.

But many markets around the country are cooling, and the inventories of homes for sale are rising. Compared to the hot real estate market of recent years, you can no longer automatically expect to sell a house quickly and for a high price.

However, sensible pricing and careful presentation can go a long way toward hastening a transaction. Follow these four tips, and you’ll be on your way to selling your home for a good price this summer:

  1. Find Out What Your House Is Worth

You can’t charge the right price unless you know what that is. So do a little research:

Go online. For a free Multiple Listing Service Home Market Check that shows what other residences like yours sold for recently in your area, visit the HomeInsight Web site. Or, check out Yahoo! Real Estate and click on “What’s my home worth.” Finally, visit Realtor.com, where you can browse more than 2.5 million residential listings and take advantage of several services that can help you to determine your home’s value.

Check local real estate listings. To get a more accurate sense of your home’s worth, look at local real estate listings (often searchable by neighborhood, house size, and price on local realtors’ Web sites) for a sense of what houses of similar size, condition, locations, and amenities are going for in your area. Large real estate brokerage firms tend to have the most sophisticated Web sites. Some of my favorite realtor sites include Coldwell Banker, Century 21, and Re/Max.

Attend open-house showings. To get to know a market in a weekend, check open-house listings and attend these events to see what your neighbors are selling their homes for. How do their homes look compared to yours? How are they priced? Talk to the real estate agents hosting the events to find out which properties are moving and why. Asking these questions can help you get a quick handle on the market — and let you know what you need to do to prepare your home for sale.

Get a comparative-value analysis from a professional. You don’t have to do this all yourself — and candidly, you shouldn’t. Get a referral for a real estate agent, and let them know that you’re considering selling your home. Ask them to provide you with a detailed “comparative-value analysis” on your home. The analysis will include information about recent sales of homes similar to yours. Ask the agent for an analysis that includes the last year or more of sales for a complete picture, but the most recent transactions are the ones to use as your benchmark.

While you’re at it, ask the agent to provide you with a listing of current homes like yours for sale and how long they’ve been on the market. Finally, request a marketing proposal stating at what price they’d list your house and what they’d do to help you sell it. There’s usually no charge for this service, as this is the agent’s chance to woo you as a client.

  1. Make It Look Pretty and Smell Nice Before the Sale

De-clutter the interior. Pare down before the move. Potential buyers want to see your house, not your possessions. A sparse interior containing just enough furniture to suggest each room’s purpose and to provide a sense of scale is ideal. Clean out drawers, empty closets and attics, vacate the basement, and tidy the garage.

Consider renting an inexpensive self-storage unit for items you don’t want in the house during a showing. And most importantly, lose the family photos. You want the visitor to think of the house as theirs, not yours.

Give it a good cleaning or hire a cleaning service to do a thorough, one-time job. Make ceilings, walls, floors, carpets, windows, faucets, and fixtures look good — dust, scrub, and polish until everything sparkles and smells clean.

Paint, repair, replace. The fastest and cheapest thing you can do to help you sell your house is repaint. A fresh coat of paint inside and out can quickly make your house look and smell new. When in doubt, paint the outside a color common in the neighborhood and the inside white.

If it’s broke and obvious, fix it! Cracked windowpanes, sticking doors, dripping faucets, running toilets — take care of them up front, so you don’t have to explain them away later. If you don’t want to do it yourself, make a “punch list” and hire a handyman service. Your investment will likely pay off many times over in a higher sale price — and, most importantly, a house that sells.

Create curb appeal. In the beginning, it always comes down this: How does the house look from the curb when the person drives up (assuming you aren’t selling a condo in a building). Studies have shown that simply repainting a house is the best investment you can make when reselling. If your home has synthetic siding, a good power washing may be able to help it shine like new again. Dirty or weathered decks can benefit from the same treatment.

Next, compare your landscaping to others in your neighborhood. You don’t have to have the cutest house on the block, but if your yard looks barren, plant some flowers (people love them) and a few bushes. Finally, new grass in the front can make an old yard look brand new (a fast and often cheap fix). Add new house numbers, a nice doorbell or knocker, and a plush new entry mat — they all help to make a great first impression. Oh, and make sure the front door looks great and functions perfectly.

Clean out the garage, and remove children’s toys from the yard. That goes for that creaky, rusty, long-abandoned swing set, too.

  1. Research a Sales Method

There’s more than one way to sell a house. Here are the three most popular choices:

Commissioned real estate agents are the traditional and most successful option. According to the National Association of Realtors, a recent study shows that sellers assisted by an agent get a price for their home 16% higher than those selling on their own. They offer many services for a commission that’s generally about 6 percent of your home’s sales price — but the fee is often negotiable. For more information, visit Realtor.com, which is owned and operated by the National Association of Realtors.

Flat-fee brokers perform many of the same services for a fixed fee — often less than a traditional agent’s commission. For more information, check out FlatFeeListing.com.

Selling it yourself allows you to potentially avoid broker fees and commissions altogether by doing your own marketing. However, there are costs and do-it-yourself work involved. ForSaleByOwner.com has more information.

  1. Consider renting out your house instead of selling it.

O.K., now that you know what you need to do to sell your house, I’d like you to consider another option that will not just make you some money, it may make you rich. Don’t sell your house now. Hang onto it and rent it out. That’s right — if you rent out your home for more than the cost of the mortgage payment, taxes, insurance, and maintenance costs, it’ll provide you with some extra income each month.

Real estate investors call this “positive cash flow” or “passive income.” That income is apt to increase over time, as your mortgage payment is likely fixed, but the rental’s value tends to grow. Eventually, the mortgage is paid off, you own the home free and clear, and you still get to collect the rent — and pocket almost all of it. Plus, the property will likely continue appreciate, even as it throws off cash.

Written by David Bach

Tech to Control Homes

“Smart homes” usually mean extra phone jacks and high-speed Internet connections. But if the dreams of Microsoft, IBM, Sony and others come true, it could mean a whole lot more than speedy Internet service.

Just ask Todd Thibodeaux, vice-president of marketing and research at the Consumer Electronics Manufacturers Association, who predicts that half of all consumer electronics will have Internet access by 2004.

With that in mind, Microsoft has redesigned several rooms at its Redmond, Wash. campus to test a system that would allow a home computer to run a home’s operations.

In one room, with its pre-Colombian artwork and comfy couch, people can use voice commands — ala “Star Trek: The Next Generation” — or a remote control to manipulate lights, music and temperature or, of course, change TV stations.

The kitchen, meanwhile, has a host of computer monitors linked to the Internet allowing orders to be placed for groceries or for downloading recipes.

Also, the “home” has been equipped with a Fujitsu “Web Pad” — a portable device to issue commands and hook-up with the Internet — as well as a notebook computer and Microsoft cordless phone for issuing commands. The whole home, hypothetically, could be connected with Windows CE, a home-based network.

The company is also working on AutoPC, an automobile system that would create maps, check traffic and maybe connect via the Internet to your at-home gadgets and doohickeys.

But Microsoft’s rivals are also putting their shoulders to the home-tech millstone.

Sony is working on top-speed networks based on high-definition TV and IBM has allied with several computers and wireless communications companies to create networks linking home appliances to the Internet.

The Brave New World is right around the corner.

– See more at: http://frogpond.com/Tech-to-Control-Homes-FP1-binman06

Written by Brad Inman

Real Estate Auction: A Superior Pricing Strategy

The property auction system of selling real estate when implemented effectively is without a doubt the most successful method of sale available. The auction system is designed to remove the price as an objection and encourage purchasers to act based on the benefits and features of the property itself.

Property is not unlike any other commodity whereby ‘the market’ will ultimately determine the final selling price. Naturally, the quality of the selling system implemented and the caliber of the salesperson can have a positive effect on the end result.

It is fair to say that the highest amount of activity generated for a home is normally in the first three to four weeks from the date the home is announced for sale to the market. A property auction is designed to capitalize on this high buyer activity period as the auction date set’s a date for the buyers to act after a 3-5 week marketing period.

Doesn’t it make sense to sell your home in competitive environment and in a period when the maximum amount of buyer interest is at hand?

Non Fixed Price Strategy Vs Fixed Price Strategy

The most common objection we receive from buyers, which often prevents them from inspecting property is based on the perception that the property is too expensive.

The auction system removes the price as an objection and ‘casts the net’ over the widest range of prospective purchasers. Our objective in an auction-marketing program is to make sure that all the likely buyers for a particular property are sold on the benefits of the home rather than the perception of price. Even buyers in slightly lower price ranges should be encouraged because we know that basic buyer psychology tells us that buyers buy up and they will normally pay 10-20% more for a property once thy have become emotionally involved in a property. We make sure that we don’t exclude buyers in lower price ranges who could end up paying more for a higher range property once they have been given time to become emotionally involved.

For example, let’s just say that we had two identical homes that are both worth around $100,000. House A decides to use the traditional method of marketing and uses an asking price of $119,000. House B however is being marketed via the auction system and calls for interest in excess of $90,000 and has set a date for buyers to act.

Now if you’re a buyer in the $90,000 – $120,000 price range, which home do you think you would inspect first?

Of course it would be House B.

What has happened with House A, with an asking price, is the buyer has been encouraged to inspect the home based on an unrealistic price. Most buyers are obviously interested in buying well and as a result they have probably inspected House B first.

This is the pricing tool used in conjunction with an auction campaign.

– See more at: http://frogpond.com/Real-Estate-Auction–A-Superior-Pricing-Strategy-FP1-datherton01#sthash.sQJfHUwh.dpuf

Written by Dane Atherton

5 tips for first-time homebuyers

You’ve decided to go for it. Buying a home can be thrilling and nerve-wracking at the same time, especially for a first-time homebuyer. It’s difficult to know exactly what to expect. The learning curve can be steep, but most of the issues can be resolved by doing a little financial homework at the outset.

Take these 5 steps to help make the process go more smoothly.

Now that you know how much you can afford, check out Bankrate’s mortgage rate comparison-shopping tool today.

Check your credit

The homebuyer’s credit score is among the most important factors when it comes to qualifying for a loan these days.

“In addition, the standards are higher in terms of what score you need and how it affects the cost of the loan,” says Mike Winesburg, formerly a mortgage planner with McKinley Carter Wealth Services in Wheeling, West Virginia.

To get a sense of where your credit stands, go to myBankrate to collect your credit report and score today, free and with no obligation.

Scour the reports for mistakes, unpaid accounts or collection accounts.

Just because you pay everything on time every month doesn’t mean your credit is stellar, however. The amount of credit you’re using relative to your available credit limit, or your credit utilization ratio, can sink a credit score.

The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used.

Repairing damaged credit takes time — and money, if you owe more than lenders would prefer to see relative to your income. Begin the process at least 6 months before shopping for a home.

Evaluate assets and liabilities

So you don’t owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month, or are you on a shoestring budget?

A first-time homebuyer should have a good idea of what is owed and what is coming in.

“You should understand a little bit about monthly cash flow,” says Winesburg.

“If I were a first-time homebuyer and I wanted to do everything right, I would probably try to track my spending for a couple of months to see where my money was going,” he says.

Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending.

For instance, some professionals, such as the self-employed or straight-commission salesperson, may have a more difficult time getting a loan than others.

According to Winesburg, the self-employed or independent contractor will need a solid 2 years’ earnings history to show.

Organize documents

When applying for mortgages, homebuyers must document income and taxes.

Typically, mortgage lenders will request 2 recent pay stubs, the previous 2 years’ W-2s, tax returns and the past 2 months of bank statements — every page, even the blank ones.

“Why it has to be every single last page, I don’t know. But that is what they want to see. I think they look for nonsufficient funds or odd money in or out,” says Floyd Walters, owner of BWA Mortgage in La Canada Flintridge, California.

Buying a home can take a long time, but knowing what you need and where to find it can save time when you’re ready.

Qualify yourself

Ideally, as a first-time homebuyer, you already know how much you can afford to spend before the mortgage lender tells you how much you qualify for. Bankrate’s “How much house can I afford?” calculator will help.

By calculating debt-to-income ratio and factoring in a down payment, you will have a good idea of what you can afford, both upfront and monthly.

Though there’s not a fixed debt-to-income ratio that lenders require, the old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs. This percentage is called the front-end ratio.

The back-end ratio shows what portion of income covers all monthly debt obligations. Lenders prefer the back-end ratio to be 36 percent or less, but some borrowers get approved with back-end ratios of 45 percent or higher.

“Find out what you can afford and then you can back into everything else. We know the money you have available to put down, we know the monthly payment and we can solve (the equation) for the third variable — and that is the home price,” Winesburg says.

Figure out your down payment

It takes effort to scrape together the down payment.

There are programs that can assist buyers with qualifying incomes and situations.

“I’ve helped arrange assistance loans for $10,000, which are interest- and payment-free, and forgivable after 5 years. Although considered a loan, they’re more like grants. Other programs can provide up to $40,000 interest-free,” says Winesburg.

“Each state is different, but most of this money comes from the HOME Investment Partnership Program, which is a federal block grant to create affordable housing,” he says.

Finally, speak with mortgage lenders when you’re starting the process. Check with friends, co-workers and neighbors to find out which lenders they enjoyed working with and ask them questions about the process and what other steps first-time homebuyers should take.

 

By Sheyna Steiner • Bankrate.com

 

How Home Ownership Can Benefit You When You File Your Taxes

Taxpayers are constantly bombarded by the tax benefits of home ownership, but are often given misleading information including embellishment of benefits and other overlooked areas. I would like to take the time today to clear up some of the confusion around home ownership and its tax implications.

You are often told your mortgage payment will save you money at tax time, but it isn’t often explained how and when your payment will save you tax dollars. Your mortgage interest, real estate taxes, and mortgage insurance premiums during the year, as well as any points paid at the time you close on your loan, can all be claimed as an itemized deduction on Schedule A. Itemized deductions are an alternative to the standard deduction for most taxpayers. In order to benefit from itemized deductions, the total of all allowed expenses from your home, as with interest and property taxes, your charitable contributions, select state income or sales and use taxes, certain miscellaneous expenses and some of your medical expenses must exceed the standard deduction amount for your filing status. In 2013, the standard deduction for married filing joint taxpayers is $12,200, $8,950 for head of household filers, and $6,100 for single taxpayers. As you can see, for married taxpayers without a home, it can be difficult to have enough allowed itemized deductions to exceed the standard deduction.

The first year a home is purchased can be a difficult year to itemize (depending on the timing of the purchase) because, the later in the year you buy your house the less interest and real estate taxes you will pay, making your itemized deduction total lower than needed in many cases. So when you buy a home is as important to your tax return as the size of your mortgage loan and other costs when it comes to itemizing. Even if you are unable to itemize in the first year of purchase you most likely will be able to in the second and future years.

Another easily misunderstood tax benefit is claiming a credit for energy efficient home improvements. Yes, if you upgrade your hot water heater, re-insulate your home, add new windows, or even upgrade your central air conditioning to a more energy efficient model you may be able to claim an energy credit for the improvement. The Energy credit has a lifetime total credit maximum of $500. The credit is 30 percent of the cost of qualified energy efficient home improvements with other maximum limitations based on the type of improvement. Contact a tax professional or go to the IRS website before you purchase any potential energy credit item. A few minutes of advice can help you save up to $500 on your taxes.

You may have heard you can claim your closing costs as a deduction the year you buy your home. With the exception of any real estate taxes you prepay for the year, mortgage interest, points, and mortgage insurance premiums paid when you close on your home, there is generally no other deductions you can claim from the closing costs paid when you bought your home. However, those closing expenses you can’t deduct may help you reduce or eliminate any taxable gain if you sell your home in the future.

One of the largest tax breaks for a homeowner comes when selling your home. The tax laws allow you to exempt from taxes a gain of up to $250,000 ($500,000 if married filing jointly) when you sell your main home. Keep your closing papers in a safe place and any time you make an improvement keep a copy of the receipt and write what the improvements was on the receipt. You will need to combine many of the costs of buying and selling your home with the sales price and the cost of your improvements over the years, to determine your gain and then apply the exemption limit. While the cost of buying your home may not be deductible, they can certainly help reduce or even completely eliminate the taxes on your gain when you sell your home.

Buying a home is a very big life and tax return event. From being able to include mortgage interest expense, property taxes, and Private Mortgage Insurance and other deductions like charitable donations, medical expenses, and certain other miscellaneous expenses in itemized deductions to excluding from income a gain from a future home sale — buying a home can put more tax dollars in your pocket. Talking to a tax professional before and after you purchase or sell a home can help you be prepared to make the most of available tax breaks.

FROM: huffingtonpost.com/mark-steber/how-home-ownership-can-be

9 Easy Mistakes Homeowners Make on Their Taxes

Don’t rouse the IRS or pay more taxes than necessary — know the score on each home tax deduction and credit.

As you calculate your tax returns, be careful not to commit any of these nine home-related tax mistakes, which tax pros say are especially common and can cost you money or draw the IRS to your doorstep.

Sin #1: Deducting the wrong year for property taxes

You take a tax deduction for property taxes in the year you (or the holder of your escrow account) actually paid them. Some taxing authorities work a year behind — that is, you’re not billed for 2013 property taxes until 2014. But that’s irrelevant to the feds.

Enter on your federal forms whatever amount you actually paid in that tax year, no matter what the date is on your tax bill. Dave Hampton, CPA, a tax department manager at the Cincinnati accounting firm of Burke & Schindler, has seen homeowners confuse payments for different years and claim the incorrect amount.

Sin #2: Confusing escrow amount for actual taxes paid

If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your property tax bill. Your lender will adjust the amount every year or so to realign the two.

For example, your tax bill might be $1,200, but your lender may have collected $1,100 or $1,300 in escrow over the year. Deduct only $1,200 or the amount of property taxes noted on the Form 1098 that your lender sends. If you don’t receive Form 1098, contact the agency that collects property tax to find out how much you paid.

Sin #3: Deducting points paid to refinance

Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, you must deduct points over the life of your new loan.

For example, if you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $2,000 divided by 15 years, or $133 per year.

Related: How to Deduct Mortgage Points When You Buy a Home

Sin #4: Misjudging the home office tax deduction

The deduction is complicated, often doesn’t amount to much of a deduction, has to be recaptured if you turn a profit when you sell your home, and can pique the IRS’s interest in your return.

But there’s good news. There’s a new simplified home office deduction option if you don’t want to claim actual costs. If you’re eligible, you can deduct $5 per square foot up to 300 feet of office space, or up to $1,500 per year.

Sin #5: Failing to repay the first-time homebuyer tax credit

If you used the original homebuyer tax credit in 2008, you must repay 1/15th of the credit over 15 years.

If you used the tax credit in 2009 or 2010 and then within 36 months you sold your house or stopped using it as your primary residence, you also have to pay back the credit.

The IRS has a tool you can use to help figure out what you owe.

Sin #6: Failing to track home-related expenses

If the IRS comes a-knockin’, don’t be scrambling to compile your records. File or scan and store home office and home improvement expense receipts and other home-related documents as you go.

Sin #7: Forgetting to keep track of capital gains

If you sold your main home last year, don’t forget to pay capital gains taxes on any profit. You can typically exclude $250,000 of any profits from taxes (or $500,000 if you’re married filing jointly).

So if your cost basis for your home is $100,000 (what you paid for it plus any improvements) and you sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains.

However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Consult IRS Publication 523. And high-income earners could get hit with an additional tax.

Sin #8: Filing incorrectly for energy tax credits

If you made any eligible improvements in 2015 and 2016, such as installing energy-efficient heating and cooling system, you may be able to take a 10% tax credit, up to of $500. With some systems your cap is lower than $500. For instance, you can only claim $200 on windows. But keep in mind, this is a lifetime credit. If you claimed the credit in any recent years, you’re done.

Installing a solar electric, solar water heater, geothermal, or small wind energy system can also make you eligible to take the Residential Energy Efficient Property Credit.

To claim the deduction, you have to use the complicated Form 5695, which can mean cross-checking with half a dozen other IRS forms. Read the instructions carefully.

Sin #9: Claiming too much for the mortgage interest tax deduction

Taxpayers are allowed to deduct mortgage interest on home acquisition debt up to $1 million, plus they can also deduct up to $100,000 in home equity debt.

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

FROM: houselogic.com/home-advice/taxes-incentives/common-tax-mistakes

Deducting Mortgage Interest FAQs

It pays to take mortgage interest deductions

If you itemize, you can usually deduct the interest you pay on a mortgage for your main home or a second home, but there are some restrictions.

deducting mortgage interest

Here are the answers to some common questions about this deduction:

  • What counts as mortgage interest?
  • Is my house a home?
  • Who gets to take the deduction?
  • Is there a limit to the amount I can deduct?
  • What if my situation is special?
  • What types of loans get the deduction?
  • What if I refinanced?
  • What kind of records do I need?

 

 

What counts as mortgage interest?

Mortgage interest is any interest you pay on a loan secured by a main home or second home. These loans include:

  • A mortgage to buy your home
  • A second mortgage
  • A line of credit
  • A home equity loan

If the loan is not a secured debt on your home, it is considered a personal loan, and the interest you pay usually isn’t deductible.

Your home mortgage must be secured by your main home or a second home. You can’t deduct interest on a mortgage for a third home, a fourth home, etc.

Is my house a home?

For the IRS, a home can be a house, condominium, cooperative, mobile home, boat, recreational vehicle or similar property that has sleeping, cooking and toilet facilities.

Who gets to take the deduction?

You do, if you are the primary borrower, you are legally obligated to pay the debt and you actually make the payments. If you are married and both you and your spouse sign for the loan, then both of you are primary borrowers. If you pay your son’s or daughter’s mortgage to help them out, however, you cannot deduct the interest unless you co-signed the loan.

Is there a limit to the amount I can deduct?

Yes, your deduction is generally limited if all mortgages used to buy, construct, or improve your first home (and second home if applicable) total more than $1 million ($500,000 if you use married filing separately status).

You can also generally deduct interest on home equity debt of up to $100,000 ($50,000 if you’re married and file separately) regardless of how you use the loan proceeds.

For details, see IRS Publication 936: Home Mortgage Interest Deduction.

What if my situation is special?

Here are a few special situations you may encounter.

  • If you have a second home that you rent out for part of the year, you must use it for more than 14 days or more than 10 percent of the number of days you rented it out at fair market value (whichever number of days is larger) for the home to be considered a second home for tax purposes. If you use the home you rent out for fewer than the required number of days, your home is considered a rental property, not a second home.
  • You may treat a different home as your second home each tax year, provided each home meets the qualifications noted above.
  • If you live in a house before your purchase becomes final, any payments you make for that period of time are considered rent. You cannot deduct those payments as interest, even if the settlement papers label them as interest.
  • If you used the proceeds of a home loan for business purposes, enter that interest on Schedule C if you are a sole proprietor, and on Schedule E if used to purchase rental property. The interest is attributed to the activity for which the loan proceeds were used.
  • If you own rental property and borrow against it to buy a home, the interest does not qualify as mortgage interest because the loan is not secured by the home itself. Interest paid on that loan can’t be deducted as a rental expense either, because the funds were not used for the rental property. The interest expense is actually considered personal interest, which is no longer deductible.
  • If you used the proceeds of a home mortgage to purchase or “carry” securities that produce tax-exempt income (municipal bonds) , or to purchase single-premium (lump-sum) life insurance or annuity contracts, you cannot deduct the mortgage interest. (The term “to carry” means you have borrowed the money to substantially replace other funds used to buy the tax-free investments or insurance.).

What kind of loans get the deduction?

If all your mortgages fit one or more of the following categories, you can generally deduct all of the interest you paid during the year.

  • Mortgages you took out on your main home and/or a second home on or before October 13, 1987 (called “grandfathered” debt, because these are mortgages that existed before the current tax rules for mortgage interest took effect).
  • Mortgages you took out after October 13, 1987 to buy, build or improve your main home and/or second home (called acquisition debt) that totaled $1 million or less throughout the year ($500,000 if you are married and filing separately from your spouse).
  • Home equity debt you took out after October 13, 1987 on your main home and/or second home that totaled $100,000 or less throughout the year ($50,000 if you are married and filing separately). Interest on such home equity debt is generally deductible regardless of how you use the loan proceeds, including to pay college tuition, credit card debt, or other personal purposes. This assumes the combined balances of acquisition debt and home equity do not exceed the home’s fair market value at the time you take out the home equity debt.

If a mortgage does not meet these criteria, your interest deduction may be limited. To figure out how much interest you can deduct and for more details on the rules summarized above, see IRS Publication 936: Home Mortgage Interest Deduction.

What if I refinanced?

When you refinance a mortgage that was treated as acquisition debt, the balance of the new mortgage is also treated as acquisition debt up to the balance of the old mortgage. The excess over the old mortgage balance is treated as home equity debt. Interest on up to $100,000 of that excess debt may be deductible under the rules for home equity debt. Also, you can deduct the points you pay to get the new loan over the life of the loan, assuming all of the new loan balance qualifies as either acquisition debt or home equity debt of up to $100,000.

That means you can deduct 1/30th of the points each year if it’s a 30-year mortgage—that’s $33 a year for each $1,000 of points you paid. In the year you pay off the loan—because you sell the house or refinance again—you get to deduct all the points not yet deducted, unless you refinance with the same lender. In that case, you add the points paid on the latest deal to the leftovers from the previous refinancing and deduct the expense on a pro-rated basis over the life of the new loan.

What kind of records do I need?

In the event of an IRS inquiry, you’ll need the records that document the interest you paid. These include:

  • Copies of Form 1098: Mortgage Interest Statement. Form 1098 is the statement your lender sends you to let you know how much mortgage interest you paid during the year and, if you purchased your home in the current year, any deductible points you paid.
  • Your closing statement from a refinancing that shows the points you paid, if any, to refinance the loan on your property.
  • The name, Social Security number and address of the person you bought your home from, if you pay your mortgage interest to that person, as well as the amount of interest (including any points) you paid for the year.
  • Your federal tax return from last year, if you refinanced your mortgage last year or earlier, and if you’re deducting the eligible portion of your interest over the life of your mortgage.

FROM: turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Deducting-Mortgage-Interest-FAQs

Buying Your First Home – Updated for Tax Year 2015

Tax breaks ease the cost of mortgage

Buying a home is when you begin building equity in an investment instead of paying rent. And Uncle Sam is there to help ease the pain of high mortgage payments. The tax deductions now available to you as a homeowner will reduce your tax bill substantially.

buying your first home

If you have been claiming the standard deduction up until now, the extra write-offs from owning a home almost certainly will make you an itemizer. Suddenly, the state taxes you pay and your charitable donations will earn you tax-saving deductions, too. So make sure you know about all these breaks that may now be available to you:

  • Mortgage interest
  • Points
  • Real estate taxes
  • Mortgage Insurance premiums
  • Penalty-free IRA payouts for first-time buyers
  • Home improvements
  • Energy credits
  • Tax-free profit on sale
  • Home equity loans
  • Adjusting your withholding

Mortgage interest

For most people, the biggest tax break from owning a home comes from deducting mortgage interest. You can deduct interest on up to $1 million of debt used to acquire or improve your home.

Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098. If you are in the 25 percent tax bracket, deducting the interest basically means Uncle Sam is paying 25 percent of it for you.

Points

When you buy a house, you may have to pay “points” to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment equals the points.

For example, if you paid two points (2%) on a $300,000 mortgage—$6,000—you can deduct the points as long as you put at least $6,000 of your own cash into the deal. And believe it or not, you get to deduct the points even if you convinced the seller to pay them for you as part of the deal. The deductible amount should be shown on your 1098 form.

Real estate taxes

You can deduct the local property taxes you pay each year, too. The amount may be shown on a form you receive from your lender, if you pay your taxes through an escrow account. If you pay them directly to the municipality, though, check your records or your checkbook registry. In the year you purchased your residence, you probably reimbursed the seller for real estate taxes he or she had prepaid for time you actually owned the home.

If so, that amount will be shown on your settlement sheet. Include this amount in your real estate tax deduction. Note that you can’t deduct payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real estate tax amounts paid out of the account during the year.

Mortgage Insurance Premiums

Buyers who make a down payment of less than 20 percent of a home’s cost usually get stuck paying premiums for Mortgage Insurance, which is an extra fee that protects the lender if the borrower fails to repay the loan. For mortgages issued in 2007 or after, home buyers can deduct premiums.

This write-off phases out as adjusted gross income increases above $50,000 on married filing separate returns and above $100,000 on all other returns. (If you’re paying mortgage insurance on a mortgage issued before 2007, you’re out of luck on this one.)

Penalty-free IRA payouts for first-time buyers

As a further incentive to homebuyers, the normal 10 percent penalty for pre-age 59½ withdrawals from traditional IRAs does not apply to first-time home buyers who break into their IRAs to come up with the down payment. This exception to the 10 percent penalty does not apply to withdrawals from 401(k) plans.

At any age you can withdraw up to $10,000 penalty-free from your IRA to help buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents. However, the $10,000 limit is a lifetime cap, not an annual one. (If you are married, you and your spouse each have access to $10,000 of IRA money penalty-free.) To qualify, the money must be used to buy or build a first home within 120 days of the time it’s withdrawn.

But get this: You don’t really have to be a first-time homebuyer to qualify. You’re considered a first-timer as long as you haven’t owned a home for two years. Sounds great, but there’s a serious downside. Although the 10 percent penalty is waived, the money would still be taxed in your top bracket (except to the extent it was attributable to nondeductible contributions). That means as much as 40 percent or more of the $10,000 could go to federal and state tax collectors rather than toward a down payment. So you should tap your IRA for a down payment only if it is absolutely necessary.

There’s a Roth IRA corollary to this rule, too. The way the rules work make the Roth IRA a great way to save for a first home. First of all, you can always withdraw your contributions to a Roth IRA tax-free (and usually penalty-free) at any time for any purpose. And once the account has been open for at least five years, you can also withdraw up to $10,000 of earnings for a qualifying first home purchase without any tax or penalty.

Home improvements

Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace and any additions.

You can’t deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is now tax-free, it’s possible for the IRS to demand part of your profit when you sell. Keeping track of your basis will help limit the potential tax bill.

Energy credits

Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit worth up to $500. A tax credit is more valuable than a tax deduction because a credit reduces your tax bill dollar-for-dollar.

You can get a credit for up to 10 percent of the cost of qualifying energy-efficient skylights, outside doors and windows, insulation systems, and roofs, as well as qualifying central air conditioners, heat pumps, furnaces, water heaters, and water boilers.

There is a completely separate credit equal to 30 percent of the cost of more expensive and exotic energy-efficient equipment, including qualifying solar-powered generators and water heaters. In most cases there is no dollar cap on this credit.

Tax-free profit on sale

Another major benefit of owning a home is that the tax law allows you to shelter a large amount of profit from tax if certain conditions are met. If you are single and you owned and lived in the house for at least two of the five years before the sale, then up to $250,000 of profit is tax-free. If you’re married and file a joint return, up to $500,000 of the profit is tax-free if one spouse (or both) owned the house as a primary home for two of the five years before the sale, and both spouses lived there for two of the five years before the sale.

Thus, in most cases, taxpayers don’t owe any tax on the home-sale profit. (If you sell for a loss, you cannot take a deduction for the loss.)

You can use this exclusion more than once. In fact, you can use it every time you sell a primary home, as long as you owned and lived in it for two of the five years leading up to the sale and have not used the exclusion for another home in the last two years. If your profit exceeds the $250,000/$500,000 limit, the excess is reported as a capital gain on Schedule D.

In certain cases, you can treat part or all of your profit as tax-free even if you don’t pass the two-out-of-five-year tests. A partial exclusion is available if you sell your home “early” because of a change of employment, a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.

A partial exclusion means you get part of the $250,000/$500,000 exclusion. If you qualify under one of the exceptions and have lived in the house for one of the five years before the sale, for example, you can exclude up to $125,000 of profit if you’re single or $250,000 if you’re married—50 percent of the exclusion of those who meet the two-out-of-five-year test.

Home equity loans

When you build up enough equity in your home, you may want to borrow against it to finance an addition, buy a car or help pay your child’s college tuition. As a general rule you can deduct interest on up to $100,000 of home-equity debt as mortgage interest, no matter how you use the money.

Adjusting your withholding

If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don’t have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay. Get a W-4 form and its instructions from your employer or go to www.irs.gov.

Count on TurboTax to help you get the money-saving deductions available to you as a homeowner.

FROM: turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Buying-Your-First-Home