Cash for Cottages, Castles and Condos: NO TRADE-IN REQUIRED!

August 8, 2009

by Brian Short, CMC, CRMS, GMACertified Mortgage Professional

            The US Senate just approved another $2 Billion for the auto industry’s stimulus program referred to as “Cash for Clunkers” after the first $1 Billion was used up last week in only 3 days.  It seems, at first glance, that this auto industry bail-out program might be havingCash for Clunkers some positive affect on another ailing US industry.  At least the players are allowing the program to work.  The Feds are giving away money (whether you agree with this approach or not), the dealers are accepting the qualifying vehicles and giving a $4,500 trade-in allowance toward a new qualifying car, and US consumers are using up the allowed funds to work this program.

            The housing industry has witness many attempts by the Feds to “jump-start” the stalled industry for the past 12-18 months.  One of the first was the FHA Secure Program with “impossible to qualify” underwriting guidelines for those who had made late payments on their adjustable mortgages.  Most of the national wholesalers were not participating and none of the FHA participating lenders would approve these borrowers for this program. 

            The Troubled Assets Recovery Program (TARP) initiated by then Treasury Secretary Henry Paulson and President Bush and expanded by the Obama administration attempted to infuse cash into the ailing national and regional banks so they would be more willing to free up credit to business owners, home owners and borrowers.  However, with the expansion of this TARP program came the announcement that the Feds could jump into the books of any bank who received these funds to determine if they were “financially solvent enough” to avoid a federal government take over.  Some banks refused the money, others returned it and most who received it held on to it to bolster their bottom line figures.  Either way, no credit was freed up and no home owners, home buyers, home builders or Real Estate industry players have received any relief from such a misguided and over funded Federal effort.

            The recent announcement by President Obama to design a federal loan modification program has been met with delays and unresponsiveness by Bank of America and Well Fargo – the nation’s two largest remaining banks holding the largest number of servicing rights on most of America’s residential mortgages.  On the one hand, these banks appear very unwilling to work with their customers to write down loan balances or interest rates to keep the existing home owner in the home, and yet on the other hand, they are all saying that they do not want any more foreclosed properties and the process of foreclosing on US homes is causing home values to dive bomb unlike anything we have ever experienced.

8000 dollars The one program still being promoted – “$8,000 tax credit of first-time homebuyers” – is far too limited in its scope.  This author was calling for this approach long before the Feds rolled out their version.  However, we were calling for a tax credit for any down-payment and closing costs used to buy a house by ANY buyer.  Only this breadth of a program which would include Real Estate investors, buyers of second homes and “move-up” or “move-down” buyers will truly have any effect of the most critical industry in our downward spiraling US economy. 

            Again, I am calling for the inclusion of those solid borrowers, experienced buyers and business owners to be enticed to get off the sidelines and risk THEIR capital (rather than the future Federal tax revenues for generations to come!) to help get the housing industry out of the dumps. 

            The average first-time homebuyer is still too scared and too inexperienced to be a major player in rescuing the ailing housing industry.  They are fearing for their own job security and seeing house prices plummet causes them to be squeamish about investing what little cash they can scrape together to buy something which may be worth less than what they paid in 2-3 years when they might be ready to sell and buy something bigger or in a different location.  This group of buyers does not have the “staying power” to be the key to a housing industry recovery.  Bring in the Pros!  We need the seasoned home buyers and investors to be encouraged to buy up the housing inventory busting at the seams so builders will be enticed to start building again.

            In the meantime, those who desire to take advantage of the $8,000 tax credit have less than 4 months to get their first-time home purchase selected, financed and closed.  This is not much time in light of heightened underwriting requirements, appraisal delays and turn times in wholesale approval processes.  Those who can benefit from this limited time tax credit must move quickly to get the benefit of the $8,000 “give-away” by the Feds. 

            If you or someone you know has not owned a house in the past 3 years and desire to buy a house before the end of the year to take advantage of this $8,000 refund of all tax withholdings during 2009 and an outright rebate of whatever the difference is between what has been withheld and $8,000, they must get into the game quickly by contacting a Certified Mortgage Professional to get pre-qualified before going out to shop for houses with a Realtor.  The clock is ticking.  There is no promise that the Feds will extend or revamp this program once it expires on December 1, 2009, regardless of how many housing experts, like this author, call for a program which will really help the struggling housing industry.  Sellers are motivated to sell, there is a record-breaking level of houses included in the existing home inventory, and Realtors and Certified Mortgage Professionals have time to give a first-time buyer the time and attention they need to make a great choice to get into (or back into) the housing market.

            The good news is – no “clunker” trade-in is required to participate in this cash give-away.  You can buy anything you want and still get the $8,000 tax credit – a cottage, a castle or a condo!  COME ON DOWN!  You’re already a winner!

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Homeowners Make Long-term & Happy Employees

July 5, 2009

By Brian Short, CMC, CRMS, GMA  – Certified Mortgage Professional

As a business owner who has hired and trained many employees and who has worked closely with hundreds of business owners during my career, I have come to a very critical conclusion: Business owners must hire and cultivate “happy employees.”

empty deskI have heard trainers working for Sandler Sales Institute claim that it costs an average employer over $10,000 to hire, train and “on-board” an employee. Yet, according to the US Bureau or Labor Statistics (http://www.bls.gov/news.release/tenure.t05.htm) the average employee will stay at his or her job less than 4 years. As a business owner or manager, you could be spending over $10,000 every 4 years just to keep a body at that desk or covering those accounts or keeping your customers happy.

In this day of cutting costs and trimming budgets I believe that it is imperative for all employers and managers to look at ways to find, nurture and keep employees who will give your company stability, productivity and profitability. One very simple strategy is to help your employees become homeowners. How does this simple strategy develop “happy employees” who will come to work and work hard for you for long periods of time with a strong work ethic? Let’s explore some of the answers to that question.

1. Employees who are homeowners will work harder for you.

Homeowners take pride in their homes and are reminded that they are building equity in their homes EACH MONTH when they make their house payment. They are investing in their largest asset when they send in their house payment and are motivated to do all they can to keep that asset and pay it off over the term of the loan toward which they are paying.

2. Employees who are homeowners will work longer for you.

These employees are putting down roots, raising their kids, contributing to a community and contributing to a local economy. They are developing an identity with the locale when they own their house. They are becoming part of the fabric of their neighborhood and will not easily uproot themselves or their families because of short-lived work-related set-back or for a couple of additional dollars per pay-period. Your competition across town or across the country will find it more difficult snatch away your top dollar producers if they own their home and are part of the community where they live.

3. Employees who are homeowners will desire to see your company grow.

Those who are set on making a long-term contribution to a job and a community will more likely share the same goals as the owner or manager than a “short-termer”. Your home-owning employees will more quickly demonstrate that they are on your team and desire to see you and your company succeed if they have come to accept that their identity is wrapped up in their long-term employee for you.

4. Employees who are homeowners will miss less work and be more willing to work occasional overtime.Craig

Those who are making their house payments to pay off or pay toward their largest investment will want to make sure that they are keeping a steady stream of dependable income to meet their obligations and pay their bills. They will not miss work if they can avoid it and will be willing to work extra in order to continue to get ahead in their house payment or to make improvements to their house.

5. Employees who are homeowners will see the long-term value of their work.

An employee who has big goals and is making steady progress toward meeting those goals – outside of the workplace – will be happier employees. They will see that their work and your company are making a contribution to their wealth, happiness and success. These employees have come to accept that life is full of trade-offs: they work hard for you and your company gives them the rewards to move them toward the financial security and independence that they treasure.

6. Employees who are homeowners are more honest and dependable.

Employees who are making monthly payments on their house will be less likely to participate in any behavior or action to damage their company, their reputation or the likelihood of their continued status as your employee. They need your continued favor, your pay and the possibility of any advancement at their job. Some have called your employee’s house payment as your “golden chain” which will ensure that your employee stay loyal to his or her job. Again, it should be a mutual dependence between the grateful employee and the appreciative employer – both benefiting from the arrangement hard work and fair pay.

Do you need to cut your employee-turnover costs? Do you have current employees who are making a valuable contribution to your company, branch or office but are not homeowners? Do you or your employees need some professional advice on how they could become homeowners? Download and complete this Pre-Approval Request Form and return it for a free homeownership consultation.

I will also come to your company to make an onsite presentation to your employees or a group of them about the possibility and benefits of homeownership. Many of your employees will qualify for an $8,000 refundable tax credit if they buy a house by December 1 of this year. Contact me today (BCShort@bellsouth.net)  to set up an onsite presentation at your company or office.


First-Time Home Buyer Tax Credit

June 27, 2009

 The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.

 The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.

Frequently Asked Questions About the Home Buyer Tax Credit  

 1. Who is eligible to claim the tax credit?

First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.

  2. What is the definition of a first-time home buyer?

The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

 For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

 3. How is the amount of the tax credit determined?

The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.

 4. Are there any income limits for claiming the tax credit?

Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

 5. What is “modified adjusted gross income”?

Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.

To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income. See IRS Form 5405 for more details.

6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phase-out limits.

 7. Can you give me an example of how the partial tax credit is determined?

Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phase-out to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phase-out range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

 Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by the phase-out range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

 Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

 8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008?

The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous “credit” was essentially an interest-free loan. This tax incentive is a true tax credit. However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.

 9. How do I claim the tax credit? Do I need to complete a form or application?

Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase.

 10. What types of homes will qualify for the tax credit?

Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.

11. I read that the tax credit is “refundable.” What does that mean?

The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

 For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

12. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns. How can I claim the new $8,000 tax credit instead?

Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.

 13. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?

Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009.

 In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.

 14. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?

Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.

 15. I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?

No. You can claim only one.

 16. I am not a U.S. citizen. Can I claim the tax credit?

Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of “nonresident alien” in IRS Publication 519.

17. Is a tax credit the same as a tax deduction?

No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.

 A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.

 18. I bought a home in 2008. Do I qualify for this credit?

No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit. Please consult with your tax advisor for more information.

 19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?

Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment.

 Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.

Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.

The National Council of State Housing Agencies (NCSHA) has compiled a list of such programs, which can be found here.

20. The Secretary of Housing and Urban Development has announced that HUD will allow “monetization” of the tax credit. What does that mean?

It means that HUD will allow buyers to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 income taxes to receive a refund. These funds may be used for certain down payment and closing cost expenses.

 Under the guidelines announced by HUD, non-profits and FHA-approved lenders will be allowed to give home buyers short-term loans of up to $8,000.

 The guidelines also allow longer term loans secured by second liens to be used by government agencies, such as state housing finance agencies, to facilitate home sales.

 Housing finance agencies and other government entities may issue tax credit loans, the funds of which home buyers may use to satisfy the FHA 3.5% down payment requirement.

 In addition, approved FHA lenders will also be able to purchase a home buyer’s anticipated tax credit to pay closing costs and down payment costs above the 3.5% down payment that is required for FHA-insured homes.

 More information about the guidelines is available on the NAHB web site. Read the HUD mortgagee letter (pdf) and an explanation of the FHA Mortgagee Letter on Tax Credit Monetization (pdf). An FAQ about monetization (pdf) is available at the NAHB web site.

 21. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?

Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.

 Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.

 22. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?

Yes. If the applicable income phase-out would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.

 NAHB is providing the information on this web site for general guidance only. The information on this site does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action on this information, you should consult a qualified professional adviser to whom you have provided all of the facts applicable to your particular situation or question. None of the tax information on this web site is intended to be used nor can it be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. 

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