Blog :: 01-2016

6 Questions To Ask Yourself Before Buying A Home

Informed decisions are always the way to go. So when we came across this blog, we thought it was the perfect checklist to go through to make sure you emotions and checkbook are on the same page. Especially before that perfectly designed and decorated ensuite runs away with your emotions, leaving your poor checkbook in the dust.

Buying a home is a major decision. Whether you’re a first time home buyer or you’ve owned dozens, you always have to ask yourself certain questions before moving forward. While you shop and compare mortgage rates, there are things that you may not consider about purchasing a home. Some of these things can affect the experience and your ability to get the home that you want, or to keep it once you do get it. These questions are easy to answer and knowing the answers can help you to stay financially secure and on the right path.

ARE YOU READY?

Not everyone is ready for homeownership. If this is your first home, you may not know what it takes to own a home. Look into the costs associated with homeownership and the responsibilities that come with owning one. It is not as simple as some people might think. On top of that, the search itself can cause a large amount of stress. Some people underestimate the amount of effort, time, and money that goes into this. They might think that they will get their new home within days, or that owning a home is a breeze. While some people might find both of these easy, and might get their dream home almost immediately, that is not the case for most homebuyers. Before starting on this adventure, know what to expect.

DO YOU KNOW HOW MUCH IT COSTS?

Homeownership is expensive. The cost of buying and paying for a home is sometimes immense. It is the price of the home itself, closing costs, mortgage, insurance, and various other fees. While you may own a home, you still have to pay several people to stay in it. There is also the price that you will have to pay to take care of the home in repairs and maintenance. The bigger the home and the more it offers, the more you will have to pay for everything. Pools cost money, yards cost money, property costs money, heating costs money, and nearly everything else you can think of will cost money. When you look into homes, estimate the total cost you would have to pay per year on it.

DO YOU KNOW HOW MUCH YOU CAN AFFORD?

On top of knowing what a home costs, you should know what you can afford. Calculate how much you earn, monthly or yearly. Calculate how much a home will cost you in the same period. The home should not go over or come too close to the amount that you earn. Remember, you have to manage the home, utilities, food, gas, new items, and luxuries while still having some money to save. Everything that you plan to spend and put away each month should go into your calculations. If it looks like you will have to live paycheck to paycheck, you should go for a home that you can afford comfortably.

When first moving in, you should also make sure that you have several months’ worth of bills saved for emergency purposes. This avoids any unknowns and financial dangers.

WHAT WILL YOU PUT DOWN?

Your down payment is essential for getting a home. The down payment amount is not the same for everyone. Some people might put down 5%, while others might put down 25%. How much you can put down depends on your income and mortgage. The more that you can put down right away, though, the lower that your mortgage is. You want to make sure that you put a lot of thought into the down payment of your home.

HAVE YOU READIED THE OTHER FEES, TOO?

Along with a down payment, you have to get closing costs and other fees ready. Buying a home is not just about getting the mortgage in line; you have to pay several amounts right away. These are not amounts covered by your mortgage, but you can get help from some lenders. There are certain lenders and systems in place for people who need help paying. Look into these if you cannot afford the down payment or the other fees you have to pay.

HAVE YOU CHECKED OUT YOUR FINANCES AND CREDIT?

Before you attempt to get a mortgage, make sure that you look into your financial history and your credit score. A mortgage is a loan, after all, and your history with money is important to get one. If you have a poor history, you might have to pay considerably more money to receive a mortgage, through either interest or a down payment or both. Try to fix up your credit history by removing items that should not be there, by paying off or down debts, and by trying to increase your credit score. Doing all of this will make you more likely to receive a good mortgage loan from a trusted lender. It makes buying a home easier and more affordable for you.

Blog courtesy of R. Abbe of Realty Times.

Capital Gains: The Stepped Up Basis

Some of this tax stuff can be quite confusing. We found this article from Realty Times, and thought it did a fairly good job explaining some of the in's and out's of the tricky subject.

If you are married, and file a joint income tax return, the tax laws allow you to exclude up to $500,000 on any gain you make on the sale of your principal residence. There are some basic rules (conditions) which must be met, the most important is that you must have owned and lived in the house for two out of the last five years before the sale. This is referred to as the "ownership and use" test.

If you are single -- or widowed -- you can only exclude up to $250,000 of your profit.

At first blush, this seems unfair -- especially to a person who has lived in their principal house for many years and then the spouse dies. There are, however, two tax breaks available.

First, according to the IRS, "if you sell your home after your spouse dies (within 2 years after your spouse dies), and you have not remarried as of the sale date, you can count any time when your spouse owned the home as time you owned it, and any time when the home was your spouse's residence as time when it was your residence." (IRS Publication 523, Selling Your Home). In other words, the surviving spouse can claim the up-to-$500,000 exclusion of gain if the house is sold within two years from the date of death, and it is not necessary to file a joint tax return.

Let's assume for this discussion that the couple purchased their home many years ago for $50,000, and when the husband died, it was worth $750,000. Let's further assume no capital improvements that would have increased the tax basis. In our example, if within two years from death, the spouse sells for $750,000, the gain is $700,000. The spouse can exclude $500,000 of the gain. But $200,000 of gain still has to be accounted for.

Then we go to the second tax break: called "Stepped Up Basis".

Basically, the value of the house on the date of death becomes the basis of the person who inherits from the deceased. In effect, the basis is "stepped up".

Let's go back to our example. The basis of the surviving spouse in the house is $25,000 (half of the purchase price). When one spouse died, the survivor inherited his/her basis as of the date of death, which was $375,000 (half of $750,000). Thus, for tax purposes, the surviving spouse's basis is now $400,000 (the original $25,000 basis plus the inherited basis of $375,000).

If we continue to do the math, when the house is sold for $750,000, the capital gain -- i.e., profit -- is only $350,000 ($750,000 - 400,000). If the house is sold within two years from the day the spouse died, the surviving spouse can exclude all of the gain and pay no tax.

However, if the house is sold after the two years, the gain is $100,000 more than the $250,000 ceiling authorized by Congress, and the survivor will have to pay capital gains tax on the $100,000. Clearly, while the IRS will get some money, the stepped-up basis does reduce the pain.

Since the gain is over $250,000, it is important to include all capital improvements that the owners made to the house over the many years. Any such improvements are additions to basis, and thus would reduce the profit. Hopefully, in this situation, it can be reduced sufficiently so that the gain falls under the $250,000 cap.

Before you consider selling, you must review your specific situation with your tax advisors. Clearly you don't want to make any mistakes with your valuable equity.

Original article written by Benny Kass. Click here to view.