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Browsing the blog archives for December, 2008.
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Calculating the gain or loss on a sale of rental property is a very simple calculation, and understanding it will result in you saving thousands of dollars in taxes.

Dec 29, 2008
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Be sure to account for selling costs and improvements to reduce your gain.
 
Many investors forget to do that.

1. First, determine your selling costs. There is a great tip about accounting for all selling costs and you can read it here:

Assuming you sold a property for $200K and you paid 6% commission ($12K) plus other closing costs that added to $6K, your selling costs are

$18K (Selling Costs) = $12K (Commission) + $6K (Closing costs)

2. Second, you calculate the adjusted cost basis of your property. A simple formula for calculating adjusted cost basis is
Adjusted Cost Basis = Purchase price – Depreciation + Improvements 

Assuming that you had bought the property for $95K and paid closing costs of $5K that you added to increase the basis, your purchase price is $100K.

 
There is a tax tip about increasing the basis of the property for depreciation by accounting for all closing costs and maximizing your cash flow. You can read it here: 

Go and look up the depreciation that you have taken on your tax return for this property and the improvements done to the property. Assume in this case you had taken $30K of depreciation and have done $10K of improvements.

The adjusted cost basis of this property is:

$80K (Adjusted Cost Basis) = $100K (Purchase Price) – $30K (Depreciation) + $10K (Improvements)

3. Third, the gain or loss on the sale of this invest property is calculated using the formula:

Gain or Loss = Sale Price – Selling Costs – Adjusted Cost Basis
In this example the gain is:
 
$102K (Gain) = $200K (Sale Price) – $18K (Selling Costs) – $80K (Adjusted Cost Basis) 

4. Finally, the amount taxed at capital gains rate of 5% or 15% is calculated by subtracting depreciation from gain:

 
$72K Taxed at Capital gains rate of 5% or 15%
$30K Depreciation (Generally taxed at 25% rate) 

In this example, an investor pays $11,100 (if 5% capital gains tax rate) or $18,300 (if 15% capital gains tax rate) in taxes on a $102K gain. By accounting for all selling costs and improvements, the investor saved from $3K to $5K in taxes depending upon their tax bracket.

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Poor Economy Takes Toll on Home Sales

Dec 23, 2008
Main

Existing-home sales weakened against a backdrop of an eroding economy, according to the National Association of Realtors®.

Existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 8.6 percent to a seasonally adjusted annual rate of 4.49 million units in November from a downwardly revised level of 4.91 million in October, and are 10.6 percent below the 5.02 million-unit pace in November 2007.

“The quickly deteriorating conditions in the job market, stock market, and consumer confidence in October and November have knocked down home sales to another level,” says Lawrence Yun, NAR’s chief economist. “We hope the home sales impact from the stock market crash turns out to be short-lived, as was the case in 1987 and 2001.”

What Needs to Be Done

Yun says it’s imperative to provide incentives for homebuyers to rebound the market. “It also depends on how effectively Congress and the new administration can help facilitate the short sales process and unclog the mortgage pipeline – impediments remain for some buyers with good credit,” Yun says.

NAR President Charles McMillan says it’s crucial to enact sufficient housing stimulus to spark an economic recovery.

“We need more than low interest rates to encourage enough buyers to enter the market and meaningfully draw down inventory, which would stabilize home prices – that, in turn, would help the economy to recover,” he says. “We should extend the first-time buyer tax credit to all homebuyers and eliminate the repayment feature, and make permanent the higher loan limits that are vital in high-cost markets – the faster we do this, the faster housing and the economy can recover.”

Yun cautions that there will be negative consequences if housing stimulus is delayed.
“Falling home prices would lead to faster contraction in consumer spending and further deterioration in bank balance sheets,” he says. “More importantly, falling home values would lead to higher loan defaults, including those recently modified distressed mortgages.”

McMillan says NAR is grateful that the Treasury, the Federal Housing Finance Agency and the Federal Reserve have been working to bring interest rates down on most mortgages to historic lows.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 6.09 percent in November from 6.20 percent in October. The rate was 6.21 percent in November 2007. Last week, Freddie Mac reported the 30-year rate fell to 5.19 percent — the lowest on record since the series began in 1971.

A Closer Look at the Numbers

  • Inventory: Total housing inventory at the end of November rose 0.1 percent to 4.2 million existing homes available for sale, which represents an 11.2-month supply at the current sales pace, up from a 10.3-month supply in October.
  • Prices: The national median existing-home price for all housing types was $181,300 in November, down 13.2 percent from November 2007 when the median was $208,800. There remains a significant downward distortion in the current price from a large number of distress sales at discounted prices; the median is where half of the homes sold for more and half sold for less.
  • Single-family home sales: fell 8.0 percent to a seasonally adjusted annual rate of 4.02 million in November from a level of 4.37 million in October, and are 8.8 percent below a 4.41 million-unit pace a year ago. The median existing single-family home price was $180,800 in November, down 12.8 percent from November 2007.
  • Existing condominium and co-op sales: dropped 13 percent to a seasonally adjusted annual rate of 470,000 units in November from 540,000 in October, and are 23.1 percent below the 611,000-unit pace in November 2007. The median existing condo price was $185,400 in November, down 15.5 percent from a year ago.

Despite an overall softening in sales, there has been a solid trend of rising activity in California, Nevada, Arizona and Florida markets. “Sales are rising only in areas with large numbers of distressed properties as bargain hunters take advantage of discounted home prices,” Yun says.

By Region

  • Northeast: existing-home sales dropped 12 percent to an annual pace of 730,000 in November, and are 18 percent lower than a year ago. Median price: $257,700, down 0.1 percent from November 2007.
  • Midwest: existing-home sales fell 7.4 percent in November to a pace of 1 million and are 16 percent below November 2007. Median price: $142,400, down 11.2 percent from a year ago.
  • South: existing-home sales dropped 10.9 percent to an annual pace of 1.64 million in November, and are 17.6 percent below a year ago. Median price: $154,500, which is 10.6 percent lower than November 2007.
  • West: sales declined 4.3 percent to an annual rate of 1.12 million in November but are 17.9 percent higher than November 2007. Median price: $242,500, down 25.5 percent from a year ago.

Source: NAR

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