Vacation or Second Homes

Sometimes, actually a lot of times, people think they don’t have the ability or resources to accomplish a certain goal, and then it truly becomes unattainable. A timely quote for this might be, “People don't plan to fail; they fail to plan.” (This was most recently said by a REALTOR in New Jersey, but don’t think he was the first.)

First, you have to ask yourself what you really want—possibly this will lead to workshops on goal-setting, or minor, then major, soul searching, then therapy. We’ll leave that up to you, but we do recognize that for most people making transitions can take time. Fast forward and move onto your second home strategy.

A down market of new and existing home sales spells opportunity, and the IRS allows for certain benefits, if you plan well. Do you plan to make it your future retirement home? Then area will be especially critical. Have you factored in your upkeep and expenses for maintaining a second home vs. an annual summer rental? Are you living in the desert and wishing for ocean breezes—if you’re calling on a coastal listing and it’s 108 degrees where you live now, you might be calling out of desperation (see “Fools Rush In” at the link) rather than a good long-term plan.

Have you talked with your tax accountant or attorney first to be aware of how you can gain or lose with the IRS—how many days you may or may not rent out the second home, how to avoid the Alternative Minimum Tax or minimize it, or how your Subchapter S corporation through your business can benefit you. Have you thought about your 1031 exchange and capital gains factors if you decide to turn this into an investment property, or vice-versa? If you have an vacation investment property you may be able to exchange it or convert it later to personal use:

“A section 1031 exchange lets you sell one investment property and defer the capital gains if you put the proceeds into another. You'll have to rent out that new property, too, to qualify for the tax deferral. But after renting the property out for a year, you can convert it back to personal use. There's still no tax until you sell.” (Jeffrey Schnepper is a New Jersey lawyer and CPA, personal finance columnist and the author of several books on tax strategies.)

You could be considering a family home, a smaller cabin, a condo or townhome or a duplex or a triplex near the beach where you could be gaining income on the other units. The initial planning stages may put you through some work, but it’s better than buying a property and later losing money on it because you bought it in that dream like state while you were on vacation already.

Good News for Loan Financing--Mortgage Insurance is Tax Deductible in 2007

Buyers have always been faced with certain loan condition when making less than a 20 percent down payment on a home. To avoid paying that extra non-tax deductible mortgage insurance premium -- or a higher interest rate factored into some 10 percent down loan programs -- buyers frequently chose "piggyback" seconds whose interest was tax deductible. But, Congress recently passed legislation that provides for an itemized deduction on federal tax returns for the cost of private mortgage insurance paid by eligible borrowers. Previously, borrowers could not deduct the cost of their mortgage insurance payments. Now, a new federal law allows qualified borrowers with adjusted gross incomes up to $100,000 to deduct 100% of their 2007 MI premiums on their federal tax returns. The legislation is effective for mortgage insurance certificates issued in 2007.

Individual savings will vary depending on the size of the loan and a borrower’s adjusted gross income and tax bracket. According to an analysis by Bankrate, a leading source of consumer financial information, a homeowner with a $180,000 mortgage would save about $351 in taxes a year.

This new deductability allows buyers to now reconsider whether to choose lender seconds--where the interest has always been tax deductible but higher interest rates now apply--or go with deductible mortage insurance which may have extremely competitive ratios compared to the current interest rates on many piggyback loans.

The legislation specifies that the tax deduction applies to mortgage insurance contracts issued between January 1 and December 31, 2007, so it would include purchases and refinances within that year. However, Congress has the power to extend the tax deduction to future years, or even to make it permanent. This currently does not apply to investor purchases.

Currently, this MI tax-deductibility legislation only applies to eligible borrowers with adjusted gross incomes of $109,000 or less who purchase or refinance a home between January 1 and December 31, 2007 and pay mortgage insurance premiums. Mortgage insurance premiums allocable to 2007 will be fully deductible for eligible taxpayers earning up to $100,000. The amount of the deduction incrementally phases out for those who have adjusted gross incomes between $100,000 and $109,000 annually. For more specific information, please visit www.pmi-us.com/tax.

Income Tax, tax deductions, Mortgage Insurance

Property Tax Exemptions from Reassessment

Did you know that in certain California counties you are able to transfer your tax base? A taxpayer who is 55 years of age or older may transfer the Proposition 13 base-year assessment value of his or her principal residence to any replacement dwelling of equal or lesser value in the same county and, sometimes, in another county ( Cal. Rev. & Tax Code § 69.5(a)(1)and (2)). And, you may have up to two years before the sale or two years after the sale of the original dwelling to purchase or construct the replacement property. The catch is, your replacement property must be of equal or lesser value than your sold property. So, if you're thinking of selling your principal residence located in Los Angeles County and moving to Alameda, Orange, San Mateo, Los Angeles, San Diego, Santa Clara or Ventura Counties, you may transfer your tax base to those locations provided all the transfer qualifications are met. Otherwise, the transfer applies if you stay within the same county you're selling in.