Question: We're thinking about refinancing our home to invest in a second home that our son can rent from us. Our concern is that the housing market is going down. Should we wait?
Answer: Who says the housing market is going down? Do you mean the rate of appreciation is slowing in some markets, or do you mean that actual housing values are declining?
Real estate has general trends and local trends -- but there are also situations where individual homes defy such trends. Thus it is not possible to say from afar that you should or should not buy in a given market. Instead, you need to study the market with care.
You might, as an example, use the local MLS to check certain communities daily for new listings and price changes. Work with an experienced buyer broker. Make a point of driving past homes to identify those with potential. Your buyer broker can then arrange a showing and find additional information. Find out about the local community -- is the population growing? What about building permits?
As to renting to your son, you must charge a market-rate rental. There are other issues involved when family members engage in real estate transactions. For details, speak with a tax professional.
Question: Four months ago I obtained a construction loan to build a three-bedroom home to use as primary residence. After building it, I was supposed to rent out my current residence and move in to the new home.
Now that four months have gone by, I realize that it makes more sense financially to just sell the new home. The problem is that the mortgage company gave me a more favorable interest rate and terms, since the new home was going to be a primary residence.
Will they have problems with me changing plans? Should I tell the loan company what my intention is at this time? Would the loan company place a prepayment penalty on the permanent loan?
Answer: Plans change -- on the other hand there is no overt reason to not move in, such as a job change to a distant town or a sudden health decline.
You acquired financing because the lender believed you would be a low-risk owner-occupant and not a higher-risk speculator -- which is exactly the term for someone who first builds a home and then seeks a buyer.
Take another look at the after-tax number. It may be best to sell your current residence if you have lived there for two of the past five years. That would allow you to move into the new home and to live in it for at least two years so that capital gains taxes can be avoided. Speak with a tax professional for details.
If you do elect to sell, most probably the lender will simply be happy to get the loan repaid. Then again, if you elect to sell the new home immediately and never occupy the property, the lender may have good grounds to call the loan since it did not expect to finance investment real estate. That could be a huge problem if the loan must be paid off before the home is sold and settled or before the first loan can be refinanced with an investment mortgage.
As to a prepayment penalty, the lender can only impose one if such an assessment is allowed in the loan agreement.
If you elect to instantly sell it may be best to ask the lender to finance the property as an investment -- but beware, the loan terms will likely differ. If it is fair that your plans to change, it's also fair that the lender should not face excess risk. For details, speak with a local real estate attorney before contacting the lender.
Question: Recently I signed a contract to purchase a tract of land. The amount I offered was the full asking price. The seller amended the contract wanting an additional $500 down, a pre-approval letter from my lender, as well as their contract signed. I ran around like crazy meeting the terms and delivered such to my real estate within hours of the request.
After not hearing from the seller, the broker from the agency I was dealing with contacted the seller. Seems that this property was also listed on an auction site and they would get back to us after the auction had closed. This was not mentioned in the listing contract or the agreement to purchase.
The auction has now closed and the property was sold through this auction site. Do I have any recourse at all?
Answer: You use the term "contract" but from your note I'm not sure that's what you had.
You first made a full-price offer. It was not accepted. Instead the seller came back and said he would consider an offer with more money, the use of his contract form, etc. You then attempted to comply and made another offer.
Did the seller ever sign off on what was effectively your second offer? You say you did not hear back which does not suggest written acceptance.
On the matter of the auction, homes should always be seen as being for sale until a purchase offer has been accepted -- and even then back-up agreements can be sought. Whether that sale effort is based on an auction or ads in the Sunday paper is not relevant. For specifics, have an attorney look at the paperwork.
Question: I am an army officer stationed in Jacksonville, Florida. I closed on our home during July 2004. I have been given Permanent Change of Station (PCS) orders to move to St. Louis in June. If I sell my home before July 2006, will I have to pay a capital-gains tax? Is there an exclusion somewhere to protect service members who are forced to move in less than two years?
Answer: In the general case, owners must use a home as your prime residence for two of the past five years to avoid capital gains taxes on as much as $500,000 in profits from the sale of a principal residence.
In 2004 the IRS released final guidelines regarding safe harbor exceptions to the two-year standard. These exceptions may be helpful.
One of the exceptions is the "distance safe harbor." It essentially says that you may be entitled to some capital gains relief if you must sell your prime residence in less than two years because your place of employment has moved at least 50 miles.
The IRS actually provides this example:
"B is an officer in the United States Air Force stationed in Florida. B purchases a house in Florida in 2002. In May 2003 B moves out of his house to take a 3-year assignment in Germany. B sells his house in January 2004. Because B's new place of employment in Germany is at least 50 miles farther from the residence sold than is B's former place of employment in Florida, the sale is within the safe harbor of paragraph (c)(2) of this section and B is entitled to claim a reduced maximum exclusion under section 121(c)(2)."
Under the safe harbor exceptions you may be entitled to some capital gains relief -- but not 100-percent relief. For details, please speak with a tax professional.
Also, the Military Family Tax Relief Act of 2003 (MFTRA) may give you additional options. As the IRS explains:
"A taxpayer on qualified official extended duty in the U.S. Armed Services or the Foreign Service may suspend for up to 10 years of such duty time the running of the 5-year ownership-and-use period before the sale of a residence. This applies when the duty station is at least 50 miles from the residence -- or while the person is residing under orders in government housing -- for a period of more than 90 days or for an indefinite period. This election, which is an option for the taxpayer, applies to only one property at a time. Retroactive for home sales after May 6, 1997. Although taxpayers normally have only three years to file an amended return, qualifying taxpayers who sold a residence before 2001 had until Nov. 10, 2004, to amend their returns for this purpose. Military personnel and individuals in support of the U.S. Armed Forces serving in a combat zone during the period Nov. 11, 2003, through Nov. 10, 2004, may be entitled to additional time to amend their returns. Taxpayers amending a return to use this provision should put 'Military Family Tax Relief Act' in red in the top margin of Form 1040X."
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