When It Makes Sense to Keep an Underwater Home

By Tara-Nicholle Nelson

Inman News®

Editor's note: This is the first of a two-part series.


Q: At the top of the market, I owned three properties: my first home (in a marginal neighborhood, now about 100 percent upside down), my own residence (a big fixer in a great neighborhood), and a triplex I bought as an investment (an OK neighborhood, needed some work, fully rented, but now upside-down by about 30 percent).

When the market turned, I had a couple of bad tenants in my first home and the triplex that set me way back financially, and I was unable to borrow the money I needed to fix the house I lived in. I did a short sale on the fixer, got temporary loan mods on the other two, and moved back into my first home.

Problem is, they're both so upside-down and don't seem likely to come back up anything soon. I'm 45 years old and have a great job, but I don't like the neighborhood I live in now and I can barely ever save anything because these properties -- which I thought would help fund my retirement -- eat me alive.

Also, I just got word that my loan mod on the triplex is going to expire in January. Should I just sell everything and start over?

A: First, know this: You are not alone. More than 25 percent of home mortgages nationwide are upside-down.

While the majority of Americans have held onto homes with declining and stagnant values in the hopes that the market will recover to avoid locking in their losses, the data is clear on the fact that those who own homes worth less than they owe are the borrowers most likely to fold, short-selling, strategically defaulting or negotiating a "deed in lieu of foreclosure" with the bank.

I don't think data exists on this point, but I suspect these are the borrowers most prone to give up on the excruciating and prolonged path of home retention efforts the most easily. "Why throw good money, time, energy and emotions after bad?" they wonder.

A few years ago, I would probably have fallen into the cheerleader camp, exhorting "Hang on! Hang in there!" Now, though, going into the fifth or sixth year of this real estate recession, depending on whom you talk to, I'm more jaded and realistic.

As I see it, you have two different scenarios that make up your dilemma, and there are a couple of different ways to think about them. First, let's limit the scope of our conversation to the situation on the home you actually live in. Next week, we'll look at the broader constellation of issues you have, including both your residence and the investment property.

My advice to people in your situation is to always go through the preliminary step of getting clear on whether their personal residence still works for their lives as a personal residence.

If you own a home that works well for your life, is affordable and seems like it will continue to be a good fit for your life and your finances in the foreseeable future, I'm generally inclined to advise homeowners to avoid making market-based decisions about whether to continue to hold on to it, whether or not it happens to be upside down.

On the flip side, I've seen numerous situations in which families have expanded or shrunk or need to relocate, rendering the upside-down home a serious mismatch. In these cases, it makes sense to more seriously consider whether to divest.

I'd encourage you to ask yourself that question -- "Does this home 'fit'?" -- regarding your personal residence. You mention the neighborhood weighs against that finding of fit; you might also be thinking that the neighborhood could prolong the "value recovery" timeline.

Take a more holistic viewpoint and make a decision about whether the home overall still works for your life or not -- outside of the context of it being underwater. Whether it does or does not, this knowledge will get you started down the path of cultivating the clarity you'll need to put a full action plan and decision-making process in place. We'll discuss what the rest of that plan looks like next week.

THIS ARTICLE WAS ONE THAT I THOUGHT AFTER READING WAS WORTH SHARING GIVEN THE MARKET AND THE TOPIC.  STAY TUNED FOR THE FUTURE ARTICLE, PART TWO.

Home Selling Tax Tips for Accidental Landlords

I read an article today that I felt was worth passing along as many home sellers are now becoming landlords.  In this article Stephen Fishman, a real estate Tax Expert and Attorney shares some thoughts:

Stephen Fishman:

Due to the precipitous decline in the housing market over the past few years, many homeowners who would otherwise sell their homes are renting them out. This may be because prices are too low, or because they have to move before they can sell due to a job change.

Such accidental landlords should understand that if they rent out their homes too long before they sell them, they could lose the biggest tax break available for most people: the home sale exclusion.

Homeowners who qualify for the home sale exclusion don't have to pay any income tax on up to $250,000 of the gain from the sale if they're single, or up to $500,000 if they're married and file a joint return. Of course, this exclusion is useful only for homeowners who have equity in their homes, not the millions who are "under water" and will receive no profit if they sell their homes.

To qualify for the exclusion, a homeowner must satisfy the ownership and use tests. This means that during the 5-year period ending on the date of the sale, the homeowner must have:

• owned the home for at least 2 years (the ownership test), and
• lived in the home as a primary residence for at least 2 years (the use test).

However, the homeowner need not be living in the house at the time it is sold. The two years of ownership and use may occur anytime during the five years before the date of the sale.

This means that a homeowner can move out of the house for up to three years and still qualify for the exclusion. Moreover, a homeowner can rent out a home and count that time as ownership time.

This rule has a very practical application: A homeowner may rent out a home for up to three years prior to the sale and still qualify for the exclusion. However, the exclusion works a bit different for homeowners who have rented out their homes.

They cannot exclude from their income the part of their gain equal to the depreciation they claimed (or could have claimed) while renting the home. Moreover, if the home is rental property at the time of the sale, the sale must be reported to the Internal Revenue Service on Form 4797: Sales of Business Property.

Example: Connie purchases a house on Feb. 1, 2007, and lives in it for two full years. She then moves to another state to take a new job. Rather than sell the house in a down market, she elects to rent it out.

If she sells the house by Feb. 1, 2012, she'll qualify for the $250,000 home sale exclusion because she owned and used the house as her principal home for two years during the five-year period before the sale. If she waits even one more day to sell, she will get no exclusion at all.

Thus, accidental landlords who have equity in their homes need to sell them before the three-year rental period expires, or they'll lose the home sale exclusion. If they can't or don't want to sell, they would have to move back into the home to preserve the exclusion.

Homeowners who don't qualify for the exclusion will have to pay a 15 percent capital gains tax on their gain from the sale (assuming the home was owned for at least one year).

Advice from Warren Buffett on the Real Estate Market

Warren Buffett, the man the myth the legend.  Commonly known as the worlds number one investor.  A man that despite his means, lives a very humble life.  Meeting him, you'd never know he was a billionare and known as the Oracle of Omaha.  His wisdom and investing strategies are such that when he speaks, Wall Street listens.  Well with his influence over the masses it sure would be nice to hear his thoughts on the housing market wouldn't it?  Well here he shares some tips for us all to buy into and learn from if you feel his advice is warranted, which i do :)

1. The Basic Premise of Home Ownership -- That Homes Increase In Value Over Time -- Is Sound

Last spring, the Congressional Financial Crisis Inquiry Commission called Buffett in for an interview. He was asked to explain some of his bubble-era investment decisions, as well as to give his take on what in the heck had happened to the economy. In the process, Buffett expressed his belief that the housing bubble was inflated by an irrational, widespread belief that home prices would only ever go up -- an extreme corruption of a generally valid premise. "It's a totally sound premise that houses will become worth more over time because the dollar becomes worth less," Buffett declared.

The sound premise, Buffett explained, got distorted and eventually caused the housing crisis when Americans started buying multiple homes to cash in on what they assumed was guaranteed appreciation, taking out "liar's loans," buying homes with no down payment and with unaffordable monthly payments -- and lenders let them -- all because of the assumption that prices could never go down.


Clearly, this assumption was wrong. As Buffett said in an earlier shareholder's letter: "A pin lies in wait for every bubble."


2. Buy Low (And Now Would Be a Good Time for That)


Buffett writes a letter to Berkshire Hathaway's shareholders every year that is chock-full of his review of the company's fortunes (literally) over the preceding year, his analysis of the stock market and the economy in general, and his smart, plain English tips on life and money and on life.


In last month's annual shareholder letter, Buffett addressed the industry-leading 2010 performance of one of his company's holdings, which sells and finances manufactured homes. During that discussion, the money maven declared that now would be a sensible time to buy a home, in light of record-high affordability: "Home ownership makes sense for most Americans, particularly at today's lower prices and bargain interest rates."

And Buffett didn't stop there. He pointed out his own tenure as a homeowner as an example. "All things considered, the third-best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks," he wrote. Then, to clarify for the readers who'd want to know what numbers one and two were, Buffett elaborated: "The two best investments were wedding rings."


3. But Don't Wait Too Long To Take Advantage of Low Prices


Buffett wrote a 2008 Op-Ed in the New York Times, explaining that buying while prices are low is stressful, because economic markets are volatile and impossible to predict in the short term, even for him. So, when conditions make an investment -- in stocks or in a home -- particularly advantageous, Buffett says not to hesitate too long. Painting a vivid verbal image to illustrate the likelihood that market prices "will move higher, perhaps substantially so, well before either sentiment or the economy turns up," Buffett warned: "if you wait for the robins, Spring will be over."

4. The Smart Way to Own a Home Has Three Elements


Those elements are: fixed mortgage, affordable payments and long-term hold. Detailing why his manufactured housing holding has done so much better than the rest of the real estate market, Buffett pointed out that "[o]ur approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept [the company] solvent and also kept buyers in their homes." And that was the ultimate difference between smart home-buying and the home-buying that led to the real estate bubble and the foreclosure crisis.


"If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did."


 In the stock world, Buffett has been quoted as advising investors to "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." Well known for practicing what he preaches, we can presume a long-term hold strategy would also be an integral part of Buffett's advisory to homeowners, too. Despite his net worth of somewhere around $50 billion, according to the latest Forbes tally, Buffett still lives in the 5-bedroom Nebraska home he bought 52 years ago for $31,500.

5. Buying Your "Dream Home" May Lead to Nightmares


In the 2010 shareholder letter, after he pointed out the right way to own a home, Buffett went on to caution Americans against the wrong way. When dream homes are bought for ever-escalating prices, using rapidly adjusting mortgage payments and unsustainable monthly costs vis-a-vis the homeowners' income, the dream can go bad quickly. Buffett warned, "a house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender -- often protected by a government guarantee -- facilitates his fantasy. Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford."

I can't agree more with Mr. Buffet that now is a wonderful time to buy and that timing the market perfectly may not be feasible.  If you are currently renting or thinking about moving into a larger home, the opportunities that we are seeing daily are amazing and shouldn't be ignored. 

If you find this blog useful or beneficial, please as always forward to any friends or family that may also benefit.  Thanks and have a wonderful day! :) Ben

10 Tax Deductions for Realtors or Brokerages

I wanted to pass along this wonderful article. If your like me and in this business, then more now than ever its vital to keep each and every penny earned as the business is far from that one would compare to "easy money". Hope this article comes to you as useful as it came to me!

10 tax deductions: in time for the April 18 deadlineReal Estate Tax Talk
By Stephen FishmanInman News™
March 18, 2011

Your tax return is due by April 18, 2011 (the deadline was extended three days this year because of weekends and holidays).

If you haven't filed yet, make sure you haven't forgotten the following 10 tax deductions, which are often overlooked by real estate agents and brokers.

1. Business clothing with logos: You can deduct clothing you buy for business use only if it can't be used for ordinary street wear. This means you can't deduct a regular business suit. However, you may deduct the cost of a sport jacket, coat or other clothing item with a company logo on it.

2. Car expenses if you take standard mileage rate: If, like most small businesspeople, you use the standard mileage rate to deduct your car expenses, you get to deduct 50 cents for every business mile you drove in 2010. You don't get to separately deduct the cost of gas, insurance, depreciation and similar items because these are all included in the standard mileage rate.
However, you can still deduct certain expenses, including the interest you pay on a loan for your business car, parking and tolls. However, you can't deduct the cost of parking tickets.

. Home telephone expenses: You get no deduction for a single phone in your home; but you may deduct the cost of long-distance phone calls and special phone services you use for business such as call waiting or message center. You may deduct the full cost of a second phone line you use at home for business, including a cell phone.

4. Business gifts: Gifts you purchase for clients are deductible as a business expense, but the deduction is limited to $25 per person per year. However, the $25 limit applies only to gifts to individuals.
It doesn't apply if you give a gift to an entire company, unless the gift was intended for a particular person or group of people within the company. Such companywide gifts are deductible in any amount, as long as it is reasonable.

5. Continuing-education courses: You can't deduct the education expenses you incur to qualify for a new business or profession. For example, you can't deduct the cost of studying for your real estate license.
However, you can deduct the cost of continuing-education courses you must take each year to maintain your license. Education that improves your knowledge and skills as a real estate professional is also deductible -- for example, you can deduct the cost of a webinar on how to use social media to find sales prospects.

6. Tax-preparation fees: You can deduct the cost of hiring a tax professional to prepare your business tax return. If the same tax pro prepares your personal and business return, you can deduct only the cost of preparing the business portion. Make sure that you get an itemized bill showing the portion of the tax preparation fee allocated to your business.

7. ATM fees, credit card fees, and interest: You can deduct ATM fees, credit card fees and other bank charges you paid during 2010 for all your business accounts.

8. Subscriptions: Real estate-related magazines and trade publications are deductible. You can also deduct the cost of subscribing to an online real estate news service.

9. Greeting cards: Greeting cards you send to clients and sales prospects are a deductible advertising expense.

10. Websites: You can deduct the cost of designing and maintaining a website you use for business. You can also deduct your Internet hosting fees and the cost of obtaining a domain name for your business.