How do the changes to the Mortgage Interest deduction impact me?

The only type of home mortgage interest that is tax deductible in 2018 is interest on up to $750,000 of

loan proceeds used to buy, build or improve a qualified home.  The $750,000 is aggregate total for both qualified homes(one primary home + one vacation home). For more details, see my article called, “When is Mortgage Interest Tax Deductible.” Here are five ways this change may impact your home loan strategy:

• Debt Consolidation Loans – the interest on the “cash-out” proceeds or home equity loans used to pay off other debt that was not used for home improvement is no longer tax deductible
• Vacation Home Loans - it may not be a smart idea to use a “cash-out” mortgage or home equity line of credit on your primary home to buy a vacation home. Instead, you may want to consider placing a mortgage on the new vacation home when you buy it so that it can be treated as “acquisition indebtedness” for tax purposes.
• Home Improvement Loans - the interest on a “cash-out” mortgage or home equity lines of credit is generally still deductible if you are using the funds for home improvements. There are certain rules and timelines that need to be followed to make this work.
• Refinancing an “Acquisition” Mortgage Closed on or Before December 15, 2017 – there may be no need to worry about losing your tax deduction if you refinance an old loan that was used to buy, build or improve your home. That’s because the interest on your new home loan is generally still tax deductible on balances up to $1mm if the new loan balance is the same as your current loan balance.
• Refinancing an “Acquisition” Mortgage Closed After December 15, 2017 – the interest on your new home loan could be deductible on balances up to $750,000 if the loan balance is the same as the old loan balance. If you are increasing your mortgage balance, you may want to use the funds for home improvement to keep your tax deduction on that portion of the loan.

Be sure to check with a CPA for more details about how these changes may impact your specific situation.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.

How do the changes to the Gift Tax Exclusion impact me?

$15,000 Annual Exclusion  The federal government gives each of us an allowance to gift anybody $15,000 per year without incurring
any gift tax. This $15,000/year replenishes every year, and it’s $15,000 per person. So, theoretically, I could gift every person that I know $15,000 today, and then another $15,000 next year and the year after, and there would be NO gift tax.  The limit was $14,000 in 2017, and it went up to $15,000 in 2018.

$11,200,000 Lifetime Exclusion  What most people don’t realize, is that there’s a second allowance of $11.2mm! In other words, let’s say that I want to give you $115,000. That’s $100,000 more than what I can give you out of my $15,000 annual bucket. That’s not a problem at all because I also have the $11,200,000 bucket. The $11.2mm bucket is called my “Lifetime Exclusion.” If I use any of it during my lifetime, I simply reduce my estate tax exclusion by that amount.

So, in our example, if I gift you $115,000, I would take $15,000 out of my annual bucket and $100,000 out of my lifetime bucket. My annual bucket replenishes each year. But my lifetime bucket does NOT replenish. In fact, I must reduce my lifetime bucket by $100,000, so now my lifetime exclusion is “only” $11.1mm instead of $11.2mm.  The lifetime exclusion went up from $5.49mm in 2017 to $11.2mm in 2018.  For more details, see my article called, “The Gift Tax Myth: How to Navigate Around It.”

Be sure to check with a CPA for more details about how these changes may impact your specific situation.

PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 559.  ALSO, THIS ARTICLE REFERENCES THE FEDERAL GIFT TAX.  YOUR STATE GIFT TAX LAWS MAY BE DIFFERENT.

HOW CHANGES TO THE STANDARD DEDUCTION MAY IMPACT YOU

A tax deduction is an expense that we can subtract from our income before paying taxes on our income.  For example, if I earn $100,000 per year, and I have a $10,000 tax deduction, I would only have to pay income taxes on $90,000. 

Taxpayers can either itemize individual tax deductions (such as qualified home mortgage interest and property taxes), or they can take a “standard deduction,” which is a flat amount. In 2017, the standard deduction was $6,350 for single taxpayers $12,700 for married taxpayers who file a joint tax return. However, the new tax law basically doubled the standard deduction.  In 2018, the standard deduction is $12,000 for single taxpayers $24,000 married taxpayers who file a joint tax return.

This rather large increase in the standard deduction means that fewer people are likely to itemize their tax deductions moving forward.  Generally, if all my itemized deductions added together are more than my standard deduction, I would probably choose to itemize. However, if all my itemized deductions (including qualified home mortgage interest and property taxes) are less than my standard deduction, I may as well just take the standard deduction… there's probably no need to itemize in that case.

Be sure to check with a CPA for more details about how this may impact your specific situation.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 501.

HOW TO BENEFIT FROM A 1031 EXCHANGE

A 1031 Exchange could allow you to defer the capital gains tax on the sale of investment property if you roll over all the sales proceeds into a new investment property. Here's how it works:

• The buyer of the investment property that you're selling gives his/her funds to a "qualified intermediary" who keeps the funds in escrow on your behalf
• Within 45 days of the sale of your old property, you identify a replacement property that you'd like to purchase
• Within 180 days of the sale of your old property, you close on the purchase of the new property.  At that time, the qualified intermediary uses the funds that you have in escrow to purchase the new property on your behalf.

For example, assume that Jerry has a $200,000 long term capital gain on his property. If he sells the property outright, he'd probably have to pay $30,000 in capital gains tax (15%), plus an additional $7,600 as a 3.8% net investment income tax. On the other hand, Jerry may be able to save $37,600 in taxes if he simply uses a 1031 exchange and rolls over all his sales proceeds into another investment property.  Keep in mind that there's no limit on the number of times Jerry can use a 1031 exchange. He could use this strategy to continuously roll over his profits from the sale of real estate without ever having to pay capital gains tax. Then, when his heirs inherit his property, they'd receive what's known as a step-up in basis. This means that if they sell the property at that time, they won't have to pay capital gains tax either!

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION, PLEASE REFERENCE IRS PUBLICATION 527 AND ALSO IRS PUBLICATION 544.

TAX DEDUCTIBLE ITEMS FOR 2017 MORTGAGES

Congratulations on your mortgage closing!  Here is a general overview of some information that may be helpful to you and your CPA as you prepare your 2017 tax returns:

POINTS PAID ON A HOME PURCHASE IN 2017

Closing Disclosure Page 2, Section A - If the origination charges on Page 2, Section A of the Closing Disclosure include points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points in the year paid… even if they are paid by the seller.  Other fees in this section (application, underwriting, processing, etc.) are NOT tax deductible.  Only bona fide points are deductible if they are expressed as a percentage of the loan amount and paid in exchange for a lower interest rate.

POINTS PAID ON A MORTGAGE REFINANCE IN 2017

Closing Disclosure Page 2, Section A - If the origination charges on Page 2, Section A of the Closing Disclosure include points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points in the following manner:

• You can deduct over the life of the mortgage all points paid on the portion of the mortgage proceeds that were not used for home improvements (for example, if you refinance your mortgage to reduce your interest rate, but do not take any cash out for home improvements).
• You can deduct this year all points paid on the portion of the mortgage proceeds that were used for home improvements (if you received cash-out and are using that cash-out for home improvements). Remember, any points paid on the portion of the mortgage NOT used for home improvements must be spread out over the life of the loan. For example, assume you refinance an old $200,000 mortgage into a new $300,000 mortgage and walk away with $100,000 to be used for home improvements. In this case, 1/3 of your points are fully deductible this year and 2/3rds of your points are deductible over the life of the loan.
• As outlined above, other fees itemized in this section are NOT tax deductible.

PROPERTY TAXES (ACTUAL AND PRO-RATED)

Closing Disclosure Page 2, Section F - Property taxes itemized in this section are generally tax deductible in the year they are paid. However, property tax escrows in section G are NOT tax deductible until they are actually paid by your mortgage company to the municipality (city, state, county).

PRE-PAID INTEREST

Closing Disclosure Page 2, Section F - Mortgage interest is calculated in arrears. This means that your monthly mortgage payment actually covers the month that just passed. For example, your February payment covers the interest for the month of January, your January payment covers the interest for the month of December, and so on. Oftentimes, when you refinance a mortgage or buy a new home, you “skip” a month’s worth of mortgage payments. That is why you sometimes pay "pre-paid interest" or “daily interest charges” in Section F of the Closing Disclosure. These daily interest charges cover the interest for the current month.  If your mortgage interest is deductible, then pre-paid interest that you pay in this section is also deductible (this will be included in the 1098 statement that you receive from your mortgage company).

PREVIOUS YEAR POINTS NOT YET DEDUCTED

You may be able to deduct the remaining portion of the original points paid on an old mortgage if you refinanced that old mortgage in 2017. For example, assume you paid points on a refinance transaction 3 years ago.  You probably were not able to deduct all the points you paid in the year they were paid. Instead, you had to spread that deduction out over the 30-year life of your mortgage. So, assume you’ve deducted 3/30ths of those points so far, and you refinanced your mortgage again in 2017. You can now deduct the remaining 27/30ths of those old points that you have not yet deducted.

PRE-PAYMENT PENALTIES

A pre-payment penalty paid on an old loan would be deductible on your 2017 tax returns as long as the new loan was taken out with a different lender than the old loan.

OTHER CLOSING COSTS

Closing costs not mentioned above are not tax deductible. However, they are added to your “tax basis” for purpose of calculating your capital gain when you sell the property. In other words, you may be able to reduce your capital gains tax (if applicable) when you sell the property in the future because your home purchase closing costs get added to your cost basis.

DISTINCTION BETWEEN A QUALIFIED RESIDENCE AND AN INVESTMENT PROPERTY

Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a “qualified residence” for tax purposes. If your transaction involved an investment property, see IRS Publication 527.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936.

Three Ways to Avoid Getting Outbid on Your New Home

Bidding for a new home can get pretty fierce in today's market.  Here are three potential solutions to avoid getting outbid on your new home:

1. Turn in your loan paperwork BEFORE you place an offer.  In many cases, you are bidding against cash buyers who don't need to wait for financing approvals.  Look at it this way:  if you were the seller, would you prefer to do business with a buyer who needs to wait for financing approvals, or a cash buyer who can close the deal quickly?  With that in mind, it's important to be proactive and provide your mortgage lender with things like your source of down payment funds, your asset documentation, your credit report and your income documentation.  This way, you'll be in a better position to close the deal quickly and compete with those cash buyers.
   
2. Pay cash, but do it right.  Keep in mind that you only have 90 days after closing to place a mortgage on a property that you bought with cash if you want to secure your tax deduction.  (For more info, see my article entitled, 90 Day Rule for Cash Buyers.)  In order to get that loan approval after closing, you'll need to document the source of funds that you used for your cash purchase.  Talk to me for more details so that you can avoid problems down the road.
   
   Note - this 90 Day Rule might be going away with the new tax law
   
3. Write your offer correctly to begin with.  Mortgage lenders are implementing some pretty significant changes this year to the legal requirements for mortgage paperwork as part of the Dodd-Frank Act. When real estate agents and loan officers aren't familiar with some of these changes, it causes unecessary delays in the loan process. That's why it's important to work with someone like myself who keeps up to date on all the new requirements. I can work with your real estate agent to make sure you write your offer correctly in the beginning, so that you won't have to redo the paperwork and delay the closing.

Contact me so that we can further explore any/all of these ideas together!

How to Improve Your Credit Score

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Your credit scores usually determine the price you pay for your money (your mortgages, your auto loans and leases, your credit cards, business loans, etc.). Perhaps the most significant part of your credit report is your credit score. Credit scores range from 350 to 850, with 850 being the best possible credit score that you could receive, and 350 being the worst possible credit score. There are five factors that determine your credit score:

Your Payment History: 35% impact on your credit score

Paying debt on time and in full has a positive impact. Late payments, judgments, charge-offs, collection accounts and bankruptcies have a negative impact. If you have had any bankruptcies within the last 7 years, it will seriously affect your ability to borrow or establish new credit accounts.  If you have had any judgments within the last several years, it is very important that you pay off the judgment and get a "satisfaction of judgment" from the court. Any unsatisfied or recent judgments will make a bad dent in your credit scores and adversely affect your ability to borrow. Usually, judgments and liens must be paid prior to the closing. Timely mortgage payments are weighted heavily by the scoring systems and are one of the most vital requirements that lenders look for when evaluating your credit history. Many times a single late mortgage payment within the last 12 months can hold up your file or spell the difference between the best interest rate and the next credit level.