For decades, Home ownership in the United States has been partially subsidized by the tax savings associated with owning a home. Many homeowners qualify for certain tax deductions and tax credits that make home ownership more affordable.  In order to utilize certain deductions, a homeowner must itemize their tax deductions. But almost everyone is eligible to benefit from one or more of the tax benefits of home ownership. Here are a few to consider as of the date of this article:

1. Property Taxes Deduction: In many areas, property taxes can be one of the most significant costs of homeownership. Therefore, the ability to deduct residential property taxes from taxable income is an incredible savings. A property tax deduction is essentially a tax-deductible tax, so that the homeowner does not pay income tax on money that was used to pay property taxes. This particular deduction may only be used for the period of time the homeowner actually owns the home. Back taxes paid as part of the purchase arrangement may not be deducted. But anything going to the Seller on the settlement statement for property taxes the seller paid in advance can be deducted. Homeowners can only deduct the amount of property tax actually paid to their local municipality for the tax year. However, if the property taxes are held in escrow for paying taxes at a later time, the deduction cannot be taken until such time as the money is paid out of the escrow account to the taxing authority. Many local assessments for improvements or other city/county fees that one may find on their property tax bill are not deductible. Also, if any (typically partial) refund of the property tax occurs, the amount of the deduction is generally reduced by the amount of the refund.


2. Mortgage Interest Deduction: For many homeowners, the mortgage interest tax deduction is the most valuable tax deduction, and can be used to deduct interest paid on a mortgage of up to one million ($1,000,000.00). When a homeowner receives their first Form 1098 from their lender, they should know that its potential value is vast and to consult with a tax professional as to how best to take advantage of this benefit. This deduction is especially useful for most new homeowners, as the initial mortgage payments for new homeowners are primarily comprised of interest for the first several years, making for a larger deduction (until more of the payment is comprised of principal when there is less interest paid and less interest to deduct). Prepaid mortgage interest paid at closing may also add to the amount of this deduction.


3. Mortgage Insurance Premiums Deduction: Many home buyers whose initial down payment is less than 20% of the purchase price are required to pay private mortgage insurance or "PMI." This insurance can be a significant expense. Homeowners may generally deduct the premiums paid for such mortgage insurance for the current tax year on a primary residence and a non-rental second or vacation home. However, eligibility for this deduction is phased out based on income levels (check with your tax professional).


4. Points Deduction: If an owner paid discount points or "points" (or sometimes "loan discounts") to reduce the interest rate on borrowed funds as part of the purchase or refinance of a home, the cost of these points can be deductible in the year they were paid or over the life of the mortgage, depending on the type of loan and the unique qualities of the taxpayer.


5. Energy Credits: Some homeowners can receive a tax credit (either federal, state or local) for a portion of the cost of materials used for energy efficient upgrades to their residence (including doors, windows, furnaces and air conditioners, roofing materials, insulation, solar panels, water heaters, geo thermal heat pumps, fuel cells, wind turbines, and other energy efficient upgrades).


6. Home Office Deduction: Many home owners, who use a portion of their home for office purposes, may be able to claim a tax deduction for the pro-rata portion of costs related to the office space (e.g. repairs, mortgage, insurance, utilities, and depreciation). To utilize this deduction, the home office must be used exclusively and regularly as a place of business, a place to meet clients/patients for business purposes, a place of storage (e.g. for inventory or records used in the business), or a place where a majority of business work is done.


7. Gain on Sale Exclusion: Individuals can exclude up to $250,000 of gain from a primary residence from taxable income, and married couples can exclude up to $500,000 of gain. To qualify, the seller(s) must have lived in the home as a primary residence for two of the prior five years before the sale.


8. selling Costs Deduction: If the seller’s gain from the sale of a home does not qualify for the exclusion in #7 above, or the gain exceeds the maximum amount of the exclusion in #7, the costs associated with selling the home may also be available to reduce the tax burden of the seller. For example, the following costs may be deductible: title insurance, advertising and marketing expenses, broker fees, or repairs (if made within 90 days of the sale and with the intent to facilitate a sale).


9. Home Improvement Loan Interest Deduction: Interest on loans for home improvements may be deductible, provided the loan was used for a "capital improvement," such as building a deck, installing a new water heater system, or building a garage or otherwise expanding the size of the home. Many s1maller items, such as wallpaper, paint, carpet, etc. are not considered "capital improvements."


10. Construction Loan Interest Deduction: Interest on a loan used to construct a new principal residence or vacation home for personal use may be deductible for the first 24 months of the loan.


11. Loan Forgiveness Exclusion: As of the date of this article, the Mortgage Debt Forgiveness Relief Act of 2007 was extended to allow debt that is forgiven by lenders in short sale situations to be excluded from taxable income, rather than being taxed as debt forgiveness income.


12.  IRA Penalty Exemption: The ten (10) percent penalty for the early withdrawal of IRA funds can be avoided if the withdrawal of such funds is used toward the purchase of a home within 120 days of the withdrawal. This benefit is limited to a withdrawal of up to $10,000 in IRA funds for each spouse, and only if each spouse did not own a home within the two years prior to the new home purchase.

These tax benefits represent some of the biggest tax benefits of homeownership. Other tax benefits also exist. And the above analysis is an informational summary only and is not to be used, and is not intended to be used, as tax advice. When it comes to tax matters, a tax professional, Certified Public Accountant, or tax attorney should be consulted for the particular circumstances of each taxpayer, to ensure that no tax benefit opportunities are missed and to ensure compliance with law. 

HOMESTEAD TAX CREDITS - The state of Michigan has a homestead tax credit for owner occupied residences.  This amounts to approximately a 33% discount on your annual local and state property taxes.  There are deadlines for filing this paperwork however in order to get your tax savings.  There is also options to get more than one homestead credit though in most cases it is limited to just one per person/household.  CALL us to discuss your situation as they there are complex rules and regulations which vary by individual case.  

Interested in new listing updates?  Just click on the link above "Get Listing Updates" to receive new listings the day they come out automatically.  You can also contact us by using one of the options found after clicking on our home button above or call our office direct line at 734-996-0000 and ask for Tom Stachler.

 

 

New Changes in the State of Michigan Homestead Exemption Filing Dates

Good News.  The Michigan Association of Realtors was instrumental in helping get this signed yesterday. The former deadline date of May 1st for your homestead exemption and discount on property taxes for Michigan property has been changed.  

See the information below regarding your Michigan Property tax homestead exemption and tax discount.

Congress Passes Tax Credit Closing Extension

Congress passed an extension of the closing deadline for the Homebuyer Tax Credit, the Homebuyer Assistance and Improvement Act (H.R. 5623). 

This extension applies only to transactions that have ratified contracts in place as of April 30, 2010, that have not yet closed. The legislation is designed to create a seamless extension; the new closing deadline for eligible transactions is now September 30, 2010. There will be no gap between June 30 and the date the President signs the bill into law. 

Contact our office for further details and as always you can get new listing update reports at www.shelterquest1.com

Well its that time of year again when we get our notice's from the local tax assessor.  The notice will contain your new tax assessment and what we can expect to pay for property taxes.  Remember you can appeal this decision if you do not agree.  Generally there will be instructions with your assessment that tell you how to sign up for to appeal initially to the local Tax Board of Review. 

I am please to announce that this past year I was notified that I would be getting back two checks for different properties that I had appealed to the State Tax Tribunal.  It should be noted that initially I did not receive any adjustments on the local level.  Initially, your case is reviewed by individuals appointed by local government that is very concerned about declining tax revenue due to declining tax values (Tax Board of Review).  No mystery here why they smile and tell you they will take your matter into consideration and then send you a denial letter once you are out of their door and confrontation range.  I have a few suggestions if you think your taxable value is higher than 50% of your market value and you want to lower your tax bill.

You will need to start by requesting a meeting with your tax board of review. This is a panel that will meet for several weeks straight following the mailing of your assessment and you need to request a time slot right away while they are convened.  Being a broker I can put together a market report showing comps or sold price data on similar properties.  I did this in the past but was unsuccessful on my appeals.   I would recommend that you spend $2-300. dollars for a formal appraisal.  The appraisal should be dated December 31st of the previous year which is the value date that your assessor is trying to establish.  Often, several of us in the community will go together and negociate a discounted price with a local appraiser for doing several appraisals at once for this purpose.  This makes the process much easier both at the local and state levels.  You now have an unbiased, third party market value opinion to present initially to the Tax board of Review and if needed, the State Tax Tribunal appeal.  I recommend this approach highly.  To start, you will make several copies (4) to supply to the local board and assessor at your first meeting which generally only last 15 minutes or less.  From my own past experience, this yields limited or no satisfaction at the local level, but you could get lucky.  You will receive an opinion from the Board of Review within a few weeks after your informal meeting along with instructions on how to appeal to the State Tax Tribunal.  Unhappy with the results?.... then don't stop and send a copy of your appraisal to the State if you disagree and then be prepared to wait up to two years for a notice from them, though you should receive a confirmation of receipt and case number within 60 days.  You can check you status online to by going to the State Web site as well.  If this is concerning your Home or principle residence, the appeal to the State is Free.  If its for investment property, then there is a $75. charge.  I have found far more receptive ears at the State level, so don't be shy about taking this final step.  

Of course there are more formal approaches involving hiring a tax attorney, but generally most people do not wish to speculate spending money on their fee's.  This is something you will need to weight vs. the potential return. 

Please call me if you have any questions or would like for me to send you some comps just to see if you should start with the appraisal route.  Remember, I got back thousands on each of my appeals to the state so think positive.  

Please scroll down and review other older posts herein for info on this and similar topics while your in this category.  

Good luck!

Principal Residence Exemption

Sellers who have taken advantage of the opportunity to retain two principal residence exemptions must file Form 4640 by December 31.

Legislation (signed in 2008) enables that the seller can retain an additional exemption for up to three years on property previously exempt as the owner's principal residence if the following criteria are met:

• the property is not occupied
• the property is for sale
• the property is not leased or available for Lease
• the property is not used for any business or commercial purpose.

For your convenience, a copy of Form 4640 is available at link to the form on the Michigan Government website.

 ECONOMIC RECOVERY ACT OF 2008

FEATURE	H.R. 3221 Housing and Economic Recovery Act of 2008
Amount of Credit	Ten percent of cost of Home, not to exceed $7500  Click Here for more info
Eligible Property	Any single-family residence (including condos, co-ops) that will be used as a principal residence.
Refundable	Yes.  Reduces income tax liability for the year of purchase.  Claimed on tax return for that tax year.
Income Limit	Yes.   Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return).  Phases out above those caps ($95,000 and $170,000, respectively).
First-time Homebuyer Only	Yes.   Purchaser (and purchaser’s spouse) may not have owned a principal residence in 3 years previous to purchase.
Recapture	Yes.  Portion (6.67 % of credit) to be repaid each year for 15 years.  If home sold before 15 years, then remainder of credit recaptured on sale.
Impact on District of Columbia Homebuyer Credit	DC credit not available if purchaser uses this credit.
Effective Date	Purchases on or after April 9, 2008
Termination	July 1, 2009
Interaction with Alternative Minimum Tax	Can be used against AMT, so credit will not throw individual into AMT.

This credit is in effect now.  Get started looking at home.  Click here for direct MLS access for the Ann Arbor and surrounding areas.

There is a little know law that exempts a seller from having to pay the normal transfer tax (approx $8.50 per 1K of sale price) at closing if your tax assessment is less at the time of sale than when you purchased the property.

MCL 207.526 (t) provides an exemption from State Transfer Tax for the following written instruments:
A written instrument conveying an interest in homestead property for which a homestead exemption is claimed under either the school code of 1976, Act No. 451 of the Public Acts of 1976, being sections 380.1 to 380.1852 of the Michigan Compiled Laws or the state education tax act, Act No. 331 of the Public Acts of 1993, being sections 211.901 to 211.906 of the Michigan Complied Laws, if the state equalized valuation of that homestead property is equal to or lesser than the state equalized valuation on the date of purchase or on the date of acquisition by the seller or transferor for the same interest in property. If after an exemption is claimed under this subsection, the sale or transfer of homestead property is found by the treasurer to be a value other than the true cash value, then a penalty equal to 20% of the tax shall be assessed in addition to the tax due under this act to the seller or transferor.

Attorney General Mike Cox issued an important opinion this week clarifying the proper application of an obscure exemption contained in the Michigan Transfer Tax Act. The opinion, arising out of a request from Representative Martin Griffin (D-Jackson), should afford certain Home sellers immediate financial relief as Michigan’s real estate market continues its road to recovery.

Exemption “t”, as designated in the Michigan Transfer Tax Act, sets forth that a seller may seek an exemption from paying the state transfer tax if the following criteria are met:

With property values and corresponding SEV declining due to the struggling economy, home owners and real estate agents first took notice of the exemption’s possible applicability under the state transfer tax. However, absent an official interpretation, there was little awareness of its proper application.

The opinion from the Attorney General uses examples to show how the application would apply. One example illustrating application provides:

If the SEV of the principle residence when acquired in 2006 is $74,000.00 and the SEV when transferred in 2008 is $72,000.00 then criteria one and two above are satisfied. You can establish the true cash value by doubling the SEV at the time of transfer. In this case the true cash value is $144,000. If the sale price in 2008 is $140,000.00 then the sale does not exceed its true cash value. All three criteria are satisfied and the exemption would apply.

The Attorney General’s opinion provides immediate relief to home sellers already faced with the reality of declining value on their single greatest asset. The opinion also provides a uniform reading of the exemption that is necessary to provide consistent application among the various Registers of Deeds across the state as they are already receiving filings for the exemption.

Sellers should be cautioned that a request for the exemption that fails to meet all three criteria could bring a penalty equal to 20% of the tax assessed in addition to the tax due. Additionally, no similar exemption exists in the County Real Estate Transfer Tax Act.

A Nutshell Lesson for Your 10 Minute Presentation

 

 

With our Michigan economy and money supply tight, many people are looking for financial relief. Our 2008 tax assessments have arrived and while they have provided a reprieve for many, some tax payers are scratching their heads wondering, “They say my value dropped, so how can it be that my taxes have again gone up?”

This year, the assessors and Boards of Review have been swarmed by upset tax payers looking to land one of the few available appeal appointments in the next few weeks. Some cities have limited appeal hearings to 10 minutes. My purpose in writing this is twofold: first, to help those who have a case, prepare it; second, to help those who don’t, understand why they don’t so that they don’t waste their time trying.

 

There is one and only one question that typically matters with a Board of Review… do the SEV(State Equalized Value) or Taxable Value exceed 50% of the market value of the property? Things that are irrelevant and not actionable by the Board of Review include: taxes going up while values are dropping; and the fact that subject property taxes are higher than taxes of neighbors, the fact that a property owner feels her taxes are excessive. Even if the taxpayer is right, it doesn’t matter. What does matter for Board of Review purposes and for a decision that will affect this year’s taxes is that the taxpayer shows their new Taxable value is greater than 50% of the market value of their Home as of the December 31^st of the prior year.

 

Since 1994 Michigan property taxes have had 3 values:

            SEV = assessor’s estimate of 50% of the market value of your home.

            Capped Value=  the 1994 SEV (or the SEV from the year following the most recent transfer of ownership) plus annual adjustments for cost of living (CPI, not to exceed 5% in any year).

            Taxable Value= the lesser of the SEV or Capped and the factor that is multiplied times the city’s tax rate to determine property taxes.

 

In the late ‘90’s we had a little tortoise and the hare action as property values and SEVs were shooting up and Capped/Taxables were plodding along behind.  We’re seeing situations today where the tortoise has gotten close or even passed the hare. We rarely saw Capped values exceed SEVs. We are starting to see that now, with declining property values pulling down SEVs and cost of living increases lifting Capped values. It is especially common where there was a recent sale and “uncapping” followed by a reduction in the SEV by the Assessor.

 

SEVs are adjusted by our Assessors, while our Caps are statutorily adjusted according to the Consumer Price Index (2.3% for 2008 and roughly 2-3% in recent past years).

 

 

Back to appeals

While there may be a reason we may want to reduce our SEV (i.e. in anticipation of an upcoming sale), for most taxpayers, the number of most significance is the Taxable value. The other numbers may or may not mean anything to us, but our Taxable Value is the factor that the Assessor multiplies times our tax rate to determine our property taxes. To lower my 2008 taxes, I need to demonstrate to the Assessor and Board of Review that my Taxable Value exceeds 50% of the market value of my home as it sat on December 31, 2007. Be focused. For practical purposes, Nothing Else Matters!  I recommend you get a formal appraisal dated 12/31/07 that  you can use for the board of review and later if needed for the State Tax Tribunal appeal. It makes a presentation much easier and credible. contact me if you need a referral for an appraiser providing a discount.

 

It doesn’t matter that I think my taxes are too high. It doesn’t matter that I pay more than my neighbor whose house is 75% larger. It doesn’t matter that my taxes went up while my value (even according to the Assessor) dropped. Basically the only way I can get my Taxable Value and/or SEV reduced is to demonstrate to the Assessor and Board of Review that my Taxable Value or SEV exceeded 50% of the market value of my home as of December 31, 2007. Again the number of most significance for a reduction of this year’s taxes is  Taxable Value. Unless I can persuade the Board of Review that my Taxable Value exceeds 50% of the market value of my home, I won’t save anything on my 2008 taxes.

 

Assembling and presenting your case.

As the tax payer, it is my responsibility to collect the materials and present a case (in about 5 minutes) that will convince the Board of Review that my Taxable Value and/or SEV exceed 50% of the market value of your home. Some people choose to pull together recent sold information on their own. Some hire appraisers. Many who have existing relationships with good real estate professionals call on them for help.

 

Keep it clear and simple.

Walk in the door with a positive attitude. Be nice. Today you are a salesperson making a sales presentation. Your job is to make it easy for the Board of Review to see and agree with your point. You only have about 5 minutes to present and a few minutes to answer questions. Focus on Value. If you are bringing comparables or other visuals, make copies so each member of the Board of Review has a copy. Keep it simple and tight. Be logical, reasonable and friendly (you are asking the same of the Board members).

 

If you recently purchased your home and your SEV/Taxable are higher than they should be, it is important that you appeal your assessment in the year following your purchase. By doing so, you preserve what might be the most compelling piece of evidence you have in establishing its market value… the selling price of your home. By doing so in the year following your purchase you will also establish a new starting benchmark which may affect and reduce taxes this year and all future years you live in the home.

 

The purchase price of a home is not conclusive in itself. We need to establish: that the home was on the open market for a period of time; that the transaction was an arms-length transaction; that the sale price is the best indication of market value as of the date of the sale; and that due to market conditions, the value of the property as of December 31^st in the preceding year had not increased since the sale.

 

Results from Your Hearing

Appealing taxpayers typically don’t receive an answer while at the Board of Review hearing. Different Boards may work in different ways, but most often, taxpayers present their case and leave. Board members then review and discuss the evidence behind closed doors and make a decision that is then sent to the taxpayer via mail which arrives a few weeks later with directions for appealing the Board of Review decision.

 

As a community service, I have posted other articels and information under the tax category heading and would suggest that you review them. There are some helpful materials to help you understand this confusing subject.

 

There has never been a time when homeowners were more in need of professional help from a REALTOR®.  Please feel free to contact me any time at 734-996-0000 or [email protected]

H.R. 3648 – Public Law 110-142  Signed December 20, 2007

 

Summary:  There have been some changes affecting Home tax credits for persons either involved in a short sale or foreclosure and also for persons who have lost a spouse.  Generally, individuals who are relieved of their obligation to pay some portion of a mortgage debt on a principal residence between January 1, 2007 and December 31, 2009 will not be required to pay income tax on any amount that is forgiven.

 

Background:  A fundamental principle of the income tax is that a taxpayer must recognize income and pay tax any time a debt of the taxpayer is forgiven or discharged.  Exceptions are provided in several circumstances, including bankruptcy, insolvency (as defined by state law) and for some investment real estate.  Until this new rule was enacted, however, no exception applied to any amount debt forgiven on a mortgage for a taxpayer’s principal residence. Thus, until now, when some portion of a mortgage debt was forgiven, that amount has been treated as taxable income and the borrower has been taxed at ordinary income rates on the forgiven amount, even though there is no cash.

 

The newly-enacted relief for mortgage debt forgiveness is Congress’s response to the problems generated by the subprime crisis, short sales, rising foreclosure rates and price corrections in some markets.  Thus, when a lender forgives some portion of a borrower’s mortgage debt in a short sale, a foreclosure, a workout with the lender or some similar circumstance, the borrower will not be required to recognize income or pay tax on the forgiven amount. This relief applies to debts forgiven between January 1, 2007 and December 31, 2009.

 

Provisions: General

 

-          No income limitation: All borrowers receive the relief, no matter what their income.

-          Dollar limitation: No more than $2 millions of mortgage debt is eligible for the exclusion ($1 million of debt for a married filing separately return).

-          Relief applies only to an individual’s principal residence.

-          The forgiven mortgage debt must have been secured by that residence.

-          No relief is available for cash-outs, whether the cash-out takes the form of a refinanced first mortgage, second mortgage, home equity line of credit or similar arrangement.

-          Eligible debt is what is called “acquisition indebtedness.”  This is debt used to acquire, construct or rehabilitate a residence.

- Refinanced debt qualifies, so long as the debt does not exceed the original amount of the debt. (Same rule as Mortgage Interest Deduction)

- Home equity debt (or second mortgages) qualifies if the funds were used to improve the home.  (Borrower must have adequate records, as under current law.)

- See cash-outs, above. No amount of a cash out may be treated as acquisition debt.

 

Additional Information:

 

Refinanced Mortgages:  The relief does apply to refinanced debt in some circumstances.  The rules seek to assure that any debt eligible for the relief is directly related to the acquisition or improvement (such as rehabilitation, expansion, renovation, reconstruction) of the principal residence.  Debt used for furnishings (i.e., any movable property) in the home is not eligible for the relief.  When the proceeds of any refinanced debt is used for any purpose other than acquisition or improvement, those proceeds are not eligible for the relief.

 

Principal Residence:  A principal residence is defined in the same manner as the rules that apply to the capital gains exclusion on the sale of a principal residence.  An individual may not have more than one principal residence at any given time.

 

Second Homes:  As a general matter, the relief does not apply to any debt forgiveness on any mortgage for any second home of the taxpayer.  However, if a taxpayer uses a residence (other than his principal residence) solely as an income producing rental property, already existing relief provisions might apply, depending on the taxpayer’s situation.  If the second home property was acquired as a speculative investment (such as for resale rather than rental), relief provisions are unlikely to be available.

 

In all events an individual who is in a short sale, foreclosure, workout or similar situation on a residence (including condos) other than his principal residence should consult a tax adviser to determine what, if any, relief provisions might be available.

 

Other Provisions in H.R. 3648

 

Mortgage Insurance Premiums:  The deduction for mortgage insurance premiums is extended through tax year 2010. Income limitations on the deduction will continue to apply.

 

Surviving Spouses/$500,000 Exclusion:  In some circumstances, a surviving spouse is denied eligibility for the full $500,000 exclusion on the sale of his/her principal residence. This most frequently occurs when the residence is not held in joint ownership at the time the spouse who is not on the title dies.  In that case, the deceased spouse had no ownership interest, so there is no basis step-up on that half of the property. The surviving spouse is thus eligible only for an exclusion of $250,000. (Had the home been sold during the deceased spouse’s lifetime, the full $500,000 exclusion would have applied, so long as they filed a joint return.)

 

Challenges for the surviving spouse are compounded when this circumstance occurs late in the year. The surviving spouse is often unable to sell the property within the same year that the spouse died. This legislation provides that a surviving spouse may claim the full $500,000 exclusion not only in the year of the deceased spouse’s death, but also during the two years after the spouse’s death.

 

Second Homes Converted to Principal Residence:  The original house-passed version of this legislation included a provision that would have limited the application of the $250,000/$500,000 exclusion when a second home is converted to a principal residence and later sold. This change was not included in the final legislation that the President signed.