Friday, December 28, 2007

Capital Gains rule changed for married joint-filers

Most homeowners know that you can claim capital gains tax-free of up to $250,000 for single-filers and up to $500,000 for married joint-filers, so long as you have occupied your home for any of two of the last five years. But when a married homeowner dies and leaves his/her spouse with the house, what the IRS has been "enforcing" until now has not exactly been fair or easy to deal with, especially in the midst of a grieving period.

With Congress' final tax bill of 2007 being passed, this has been changed for the benefit of the surviving spouses. They now have up to two years to claim the full $500,000 exemption.

Prior to this bill, the spouse could only claim the full $500,000 gain in the year that a joint return was filed. So the property would have to be sold by the end of that calendar year in which the the death occurred, and if it happened late in the year that would make for a difficult haste to get the house sold. Not something likely to be high on the priority list of a grieving spouse.

Home price declines accelerating across the nation

The closely watched Standard & Poors/Case-Shiller Home Price Indices were released on Wednesday, revealing the 10th consecutive month of negative annual returns and the 23rd consecutive month of decelerating returns across the nation.

This highly regarded analysis of real estate values for 20 of the largest metro areas in the U.S. uses a repeat-sales methodology, unlike the National Association of Realtors which uses median values for its ultimately skewed figures. The Case-Shiller method eliminates "non-arms length" transactions and other questionable data points to create their indices.

Prices are down 6.7% annually for their Composite-10 and 6.1% for the Composite-20, using data through October of 10 and 20 of the largest MSAs, respectively. The 6.7% annual drop is the largest in the 20 years the Case-Shiller indices have been calculated, with the previous being 6.3% in April 1991.

On a monthly basis, prices fell 1.4% for both indices - the largest monthly decline in over seven years. Only Portland, Charlotte and Seattle have positive annual gains through October, but all three are experiencing accelerating monthly declines. Eleven of the 20 MSAs recorded their largest monthly decline in 20 years in October. That just cannot be good when it's spread across all regions of the country.

The San Francisco MSA (San Francisco, Marin, Alameda, Contra Costa and San Mateo counties) revealed a 6.2% annual price decline with a 2.1% drop from September to October.

Some of these negative records should be broken in the coming months and year. Stay tuned as the Case-Shiller indices will be closely monitored right here. And if you are a betting man or woman, you can even put your money where your mouth is by buying housing futures or options on futures via the Chicago Mercantile Exchange using these same indices. Now there is a platform to bet on the rise and fall of real estate values without actually owning real estate.

What a country.

Monday, December 24, 2007

Just another good reason to pursue short sale opportunities

On December 20th Congress passed and GW signed the "Mortgage Forgiveness Debt Relief Act" much to the liking of short sellers and would-be buyers alike. This now prohibits the IRS from demanding income tax payments from homeowners who sell their property for less than the amount owed i.e. a short sale. Prior to this legislation, which goes into effect immediately, sellers would be hit with a tax bill based on the amount forgiven by their lender. The lender was required to file a Form 1099 with the IRS to alert it of the home seller's forgiven debt, which was treated as income, which seems strange as it was never actually received by the home seller. Talk about no mercy.

This long-awaited change is a positive for both sellers and buyers/investors as it removes a large hurdle to consider for struggling homeowners who need to sell, and investors who are potentially wasting time with people who might not end up selling due to the tax implications.

A rare win-win.