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27 Jan, 2012

The proposed real estate transfer tax that was in the Obamacare bill may not be what it was first thought

Shortly after the federal government enacted sweeping healthcare reform earlier this year, there was considerable concern over a last-minute addition to the legislation: a 3.8 percent tax on investment income of upper-income households to help shore up Medicare. The tax takes effect in 2013.

Among the concerns expressed among consumers and business people, including real estate professionals, both then and today, is that the tax amounts to a transfer tax on real estate. Not true, NAR Director of Tax Policy Linda Goold says.

Here’s how the tax works. For individuals earning $200,000 a year or more and married couples earning $250,000 a year or more, certain investment income above these income levels might be subject to the 3.8 percent tax on a portion of that income. I say “might” because whether the tax applies or not depends on many factors having to do with the kind and amount of the investment income the household receives.

Investment income includes capital gains, dividends, interest payments, and, for those who own rental property, net rental income.

 

Importantly, the $250,000 (for individuals) and $500,000 (for married couples) capital gain exclusion on the sale of a principal residence remains in place. So, if you’re a married household that sold a house for a $500,000 gain (that’s gain, not sale proceeds), that amount remains excluded from your income calculation.

Let’s take a look at a married couple that has $325,000 in adjusted gross income (AGI), plus $525,000 in capital gains from the sale of their house.

This household would be considered upper-income by most standards. Not only is their income relatively high, at $325,000 (adjusted gross income, or AGI), but they’re receiving a $525,000 gain on their house sale. Presumably, they bought their house years ago and it’s appreciated over the years, so upon selling it, their gain is a relatively high $525,000.

For this household, only $25,000 in investment income would be subject to the 3.8 percent tax. That would amount to $950. That’s because it’s the $25,000 over the $500,000 capital gains exclusion that’s taxable.

Before they would know that, though, they would have to do a calculation that involves their adjusted gross income. They would have to add their capital gain of $25,000 to the amount of their income above the $250,000 income trigger (for married couples).  Since their income is $325,000, they would add the $25,000 to $75,000 ($325,000 – $250,000), which would equal $100,000. Then they would compare the $25,000 to that $100,000, and apply the tax to the lesser of the two, which is the $25,000. Thus, $25,000 x 3.8%  = $950.

So, you have a household that had income of $850,000 for the year, and its tax on investment equaled $950.

This is a simplification. Other tax issues could come into play. But it shows that the tax applies to just a portion of investment income for certain upper-income households and that the capital gains exclusion remains untouched.

Nobody likes taxes, and this tax was inserted into the legislation at the 11th hour as a “pay-for,” that is, as a revenue generator to help offset some of the costs of the reform. It’s expected to generate $325 billion over eight years.

NAR has prepared a brochure that looks at how the tax might apply under eight income scenarios: 1) sale of principal residence (which we just looked at), 2) sale of a non-real estate asset, 3) gain, interest, and dividend from securities, 4) real estate investment income, 5) rental income as sole source of earnings, 6) sale of second home with no rental use, 7)  sale of inherited investment property, and 8. purchase and sale of investment property.

 It’s written in plain language and I think you’ll find it organized efficiently, so you can see at a glance the potential considerations for the different scenarios. Of course, it’s just guidance: each household’s situation will be different, so you would want to suggest to your customers and clients that they consult with a tax advisor to make sure the tax is applied correctly in their case.

02 Jan, 2012

Mortgage rates end the year under 4%

The Miami Real Estate Club learned that the average fixed mortgage rates in the U.S. over the past week finished the year near all-time lows, with the 30-year home loan at 3.95%.

According Freddie Mac's weekly survey of mortgage rates, the rate for a 30-year fixed-rate mortgage has been at or below 4% for the past nine consecutive weeks and only twice in 2011 did it average above 5%.

The 30-year fixed-rate mortgage averaged 3.95% for the week ended Thursday, up from 3.91% the previous week and below 4.86% a year ago. Rates on 15-year fixed-rate mortgages averaged 3.24%, up from 3.21% last week and below 4.20% a year earlier.

Five-year Treasury-indexed hybrid adjustable-rate mortgages, or ARM, averaged 2.88%, up from 2.85% yet below 3.77% of a year ago. One-year Treasury-indexed ARM rates averaged 2.78%, up from 2.77% in the prior week and below 3.26% last year.

To obtain the rates, 30-year and 15-year fixed-rate mortgages required payments of 0.7 percentage point and 0.8 percentage point, respectively. Five-year and one-year adjustable rate mortgages required an average payment of 0.6 percentage point. A point is 1% of the mortgage amount, charged as prepaid interest.

02 Jan, 2012

Leaders speak up regarding Miami's commercial real estate market

The Miami Real Estate Club read that there is an overall sense of growing optimism, including leaders in real estate.

In 2011, San Antonio-based The Lynd Co., which has offices in Miami and Doral, bought $400 million in distressed real estate notes including a 490 unit apartment building in Miami Gardens.

The company, which has owned 34,000 residential units and 10 million square feet of commercial, will continue to look to invest in distressed assets in 2012 in all areas including multifamily, student housing, condos, hospitality and other commercial real estate, said A. David Lynd, President/COO of Lynd.

Lynd said he expected to grow its construction division next year and plans to open a new office in California in 2012.
Stanley Tate and Sergio Rok

Lynd isn’t the only company looking to distressed assets for opportunity: Stanley Tate and Sergio Rok, which sold their stake in the Omni Center in 2011 for more than $160 million, plans to continue their distressed asset investment strategy.

“We will continue down the same path whereby we source deal flow from our current stream of institutional relationships and then carefully select one-off transactions that afford us the ability to professionally perform our due diligence prior to closing the transactions,” the partners said in response to emailed questions. “This format has allowed us to acquire over 10 assets in two-plus years. We see no slow down for 2012. In fact , we anticipate a large surge in opportunities from the CMBS markets.”
Michael Internoscia, Pordes Realty

Commercial development, especially multi-family assets, were some of the first to recover from the recession and will continue to be a hot sector for institutional buyers, investors and developers in 2012.

The interest is part of the reason Pordes Realty, which has operated as a residential brokerage, launched a commercial division in 2011.

Michael Internoscia, senior VP of Pordes Realty, said 2012 will focus in part on establishing and growing that commercial business through careful broker-relationship management.
James C. Roberts III, Jim McDonald, Suddath

Industrial is another sector that was very active especially toward the end of 2011, with existing assets traded and lots of new products announced. Positive growth in the industrial sector and commercial overall are some of the variables spurring moving company Suddath to position itself to hire additional drivers, movers and warehouse personnel in the coming year in South Florida, said James C. Roberts III, manager, marketing and communications for Suddath.

“We budgeted for a minimum 15 percent increase in business in 2012,” said Jim McDonald, senior VP of branch operations and current interim GM/president of South Florida branches.

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