Plenty of Online Help for 2006 Real Estate Tax Info

M. Anthony Carr gives tips on how to handle some of this year's tax questions.
By M. Anthony Carr: Realty Times
It's that time of year again and I can tell people are starting to do their taxes by the level of emails I receive with tax questions regarding real estate. There are so many ways to skin this tax cat, that I felt it best to let the professionals handle your calls. Thus, I've sifted through several search engine pages to point out some pages and sites worth your click to get you headed in the right direction for answering those questions on investment, vacation or personal properties.

Below are resources divided by topic and real estate type. You'll find links that I have found beneficial, rather than just the links that wound up at the top of the search engine page. Let's begin.

The best site for all your real estate tax questions is IRS.gov – the official web site of the Internal Revenue Service. In particular this year, I found a page that was very beneficial: Frequently Asked Questions regarding deductions for your house.

There are questions on topics like, flooding, deductions for second mortgages, home equity loans, etc. If you need deeper reading for your particular issue, you may want to check out the online publications listed below:

  • First-time homeowners (IRS Publication 530)

  • Selling your house (IRS Publication 523)

  • Business use of your home (Publication 587)

  • Moving expenses (Publication 521)

  • Home mortgage interest deductions (Publication 936)

  • Giving away real estate (Form 8283)

Nolo.com is a great legal website that I visit quite frequently. Its Top 10 Tax Deductions article should fill you in on the best ways to garner tax benefits from your home, including:

1. Mortgage Interest

2. Points

3. Equity loan interest

4. Home improvement loan interest

5. Property taxes

6. Home office deduction

7. Selling costs and capital improvements

8. Capital gains exclusion

9. Moving costs

10. Mortgage tax credit

If you own a vacation home, then click on over to SmartMoney's guide on how to report taxes on the beach house. The web page talks about the various ways you use the house, i.e., Use a lot, rent a lot; use a lot, rent a little; use a little, rent a lot, etc., etc.

For investors with rental properties, visit Jackson Hewitt Tax Service's piece on tax concerns for rental properties.

The site includes answers to various questions, including:

  • What is and is not considered rental income?

  • What expenses can be deducted?

  • What to look out for as an investor?

Some folks want to donate real estate rather than sell it. There are varying tax benefits and responsibilities when real estate is given to non-profits and/or individuals. Begin with the IRS information here.

For donations of real estate, one of the best explanations of real estate gifts I've seen published is at the Lincoln Center for the Performing Arts' guide to estate gifts, found here.

The site answers questions, such as:

  • What typical donors of real estate have in common?
  • Ways to make a gift of real estate
  • Tax Rules for Gifts of Real Estate
  • Using a qualified appraisal to valuate the property, and more.
  • If you're facing losses and financial struggles do to the hurricanes of 2005 –
    the IRS has some help for you. "The Internal Revenue Service is working to
    provide appropriate relief and assistance to victims of Hurricanes Katrina, Rita
    and Wilma. If you are a hurricane victim and need help with tax matters, please
    call 1-866-562-5227," according to the IRS's announcement of its new publication
    specially for hurricane victims.
  • Publication 4492 explains the tax law changes and relief provisions available to
    individual and business victims of Hurricanes Katrina, Rita and Wilma. It's
    located at the following web page: http://www.irs.gov/pub/irs-pdf/p4492.pdf
  • KFindLaw.com's guide to Estate and Gift Taxes, answers
    questions such as:
  • Will my estate have to pay taxes after I die?
  • What are the rates for federal estate taxes?
  • Are there ways to avoid federal estate taxes?
  • Can't I just give all my property away before I die and avoid estate taxes?
  • Do some states impose death taxes?
  • Can I avoid paying state death taxes

It's a valuable resource for those facing estate and gift issues for 2005.

International Real Estate Directory's Guide to Property Taxes provides a state-by-state, linked map providing the clicker access to as many real estate property tax sites that have been documented by this august web site. For instance, click the state of Texas and you'll have links to scores of county appraisal district web sites and their databases. Some states have plenty of information, while others have none. In addition, the directory includes links to sites around the globe.

Another source of online Public Records is at netronline.com, the site for Nationwide Environmental Title Research, LLC, which creates databases for sale to consumers. In addition, it has a very complete (and free) directory set up of public records located on the web.

The internet is loaded with "knowledge" about real estate investments and taxes - hopefully you'll use the above sites to sift through the hype and come up with the nuggets of wisdom.
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Condo Hotels: The Latest Twist In Buying a Vacation Residence

Hoping to cash in on Americans' appetite for second homes, developers are increasingly selling something new: a piece of the resort. Condo hotels are the latest attempt by companies to slice and dice the housing market.
By: Michael Corkery: The Wall Street Journal Online
Hoping to cash in on Americans' appetite for vacation properties, hotels are increasingly selling something new: a piece of the hotel.

In the past few years, developers have started aggressively marketing "condo hotels," which look and feel like regular hotels with one difference - you can buy an individual room. Owners can use that room whenever they want, and they also share in any income when the hotel rents it out to other guests.

Properties like these aren't entirely a new concept: Real-estate mogul Donald Trump developed an early one 14 years ago. However, today the number is rising. As of December, condo-hotel rooms made up 11% of the roughly 113,170 new hotel rooms under construction in the U.S., according to Smith Travel Research, based in Hendersonville, Tenn.

At one San Diego property, the Hard Rock Hotel, scheduled to open next year, all 420 units will be condo-hotel rooms. Last summer, developers Mr. Trump, Bayrock Group and New York developer Roy Stillman announced they are building a 298-unit condo hotel in Fort Lauderdale, Fla. Actor George Clooney is a co-developer with Related Las Vegas in a project to build a casino and 926 condo-hotel units.

Projects like these are different from timeshares, which typically don't generate income, and limit owners to only a few weeks' use a year.

Condo-hotels are popular among developers because selling units to individual buyers lets them cut the cost of maintenance and utilities. Prices of units at the San Diego property range from a $400,000 "studio suite," with a kitchen area and one bathroom, to a $2.3 million two-bedroom property that's more akin to an actual condo than a hotel room.

For investors, the advantages aren't as clear-cut. The owner gets income only if their room is rented: If bookings at the hotel drop, so does the room owner's income. Meantime, the owner still has to cover real estate taxes and often a mortgage, as well as monthly maintenance fees. Those fees -- much like regular condo-association assessments - cover things like maintenance and general repairs to the building.

Resale values are also uncertain. "We have no data on whether you can sell it for more in five to ten years" says John Vogel Jr., a permanent adjunct professor at the Tuck School of Business at Dartmouth College. It's a particular concern amid signs that the overall real-estate market may be cooling. Condo-hotels are "a complicated and risk-filled asset class" that lack a long-term track record, says Mark Lunt, a lodging analyst at Ernst & Young in Miami.

On top of everything, for a room owner, it can be tricky to decide when to rent it out and when to use it yourself. After all, if you use your room during peak vacation season - the time you'd most likely want to - you can miss out on earning the highest seasonal room rates.

Proponents of condo hotels say one advantage is that the owner can use the property more often than a typical timeshare or fractional-share property. Since condo-hotels also have prospects for generating rental income, some are also purchased as investments.

"We thought of it as the best of both worlds - having other people's money buy our second home," says Kimberly Hartke, who three years ago bought a $700,000 unit with one bedroom and a living area at the Fontainebleau resort on the oceanfront in Miami Beach. Ms. Hartke, who lives in Reston, Va., says her family used it about 30 days last year. She and her husband paid for most of the unit up front and took out a relatively small mortgage. She says on average the rental income has covered about 35% of their expenses, but she expects the income will increase as the hotel gets more popular.

Some experts warn that condo hotels shouldn't be viewed as simply an investment. "I would be very cautious about buying," says Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. "It is certainly not the best way to invest in real estate. You should buy it to use it; if the investment works out, even better."

Condo hotels are the latest attempt by developers to slice and dice the second-home market.

Second homes can be a good investment if they are in an area where residential real estate is appreciating quickly and there's a strong rental market. The downside is that the owner is responsible for all the upkeep, from cutting the grass to finding a plumber.

That's helped drive the market for a wide array of "fractional ownership" programs. Typically in those arrangements, buyers pay for the right to use a condo or villa. That cuts their ownership costs, but they're also typically limited to using the unit just a few weeks a year.

Timeshares often let users have access to numerous properties nationwide and overseas. But they have a mixed history when it comes to resale values. Fractional ownership is a variation on timeshares in which a buyer often gets use of a property for a longer period of time. In addition, they've tended to show stronger resale values partly because they are often located in more upscale communities where it's tougher to buy in general.

Timeshares can be tough to resell because they tend to lose value over time, it costs money to market them and it can be hard for a prospective buyer to get financing for an older timeshare. Overall, "No piece of a unit is going to resell as much as a whole unit," says Robert J. Webb, a senior partner in the hospitality practice in the Orlando office of the law firm Baker & Hostetler.

When shopping for a condo-hotel property, the first thing to realize is that you're actually shopping for a hotel: A condo-hotel room has the best shot at being a successful investment if it's a prime property located somewhere with heavy demand for hotel rooms. "If it doesn't work as a hotel, it won't work as a condo hotel," says Mr. Webb.

However, hotels can be a fickle form of real estate, since they can they be sensitive to even slight shifts in the economy and even the weather. And projecting rental income can be surprisingly difficult. Many developers say buyers shouldn't expect to make a profit from renting their room -- but they avoid giving specifics.

One reason: They say they are afraid of triggering the Securities and Exchange Commission to regulate sales of the units as if they are a security. Mr. Webb says many developers are taking their cue from a November 2002 letter that the SEC sent to Vancouver-based Intrawest Corp., a developer of condo hotels. In the letter, the SEC suggested it wouldn't take enforcement action if the company sold the condo hotels under certain conditions. One condition was not to provide prospective buyers with projections of income or expected occupancy.

There are ways around it. Some developers set up a "rental office," separate from the "sales" office, to provide information about the broader rental and hotel market in the area. For instance, when deciding whether to buy their Fontainebleau unit, Ms. Hartke and her husband, Keith, studied rates and occupancy at an existing hotel nearby.

Without information like this, says Mr. Lunt of Ernst & Young, "It's kind of like buying a stock without checking the prospectus."

A newly formed group, the National Association of Condo Hotel Owners, is in the process of creating a service to assess different projects for potential buyers, by studying such things as the cost of operations, rental programs and potential competitors.

One important test of a project is whether an experienced hotel company is operating the building, since that could give the building an edge in attracting nightly guests. A number of brand-name hotels, such as Starwood Hotels & Resorts Worldwide Inc. and Marriott International Inc., are managing condo-hotel projects across the U.S.

Currently, the vast majority of condo hotels - 212 projects - according to Smith Travel Research, are being developed by independent developers (though that doesn't mean they won't affiliate with hotel brands in the future). There are only a couple dozen or so projects now affiliated with a major hotel company, according to Smith Travel Research, although of course a brand name alone isn't a guarantee of success.

Location is also key. Experts say it helps if the condo-hotel is in a year-round resort or a popular city where demand for hotel rooms is strong. Properties in second-tier markets that aren't heavily traveled spots might be risky.

The tax issues surrounding condo hotels can be complex. Tax laws vary depending on how many vacation properties someone owns, how often they use the units and the legal structure of the ownership. Mr. Webb says a condo hotel cannot be used as a tax shelter - meaning buyers can't use losses from a failing hotel development to reduce their income taxes.


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How to Save for Your First Home As Buying One Gets Tougher

With today's lofty housing prices, purchasing even a 'starter home' can mean saving tens of thousands of dollars for a down payment. We offer several suggestions that may make the path to home ownership a bit easier.
By: Kelly K. Spors: The Wall Street Journal Online
It's a dream of many young adults to buy a first home. But there's an unfortunate reality: Even buying a "starter home" with today's lofty prices can mean saving tens of thousands of dollars for a down payment.

How do you pull it off? The key, obviously, is to save like crazy. Beyond that, here are several suggestions that may make the path to home ownership a bit easier.

1. Aim for 20% down.

Timothy Wyman of the Center for Financial Planning in Southfield, Mich., says you may be able to get by with putting only 10% of the purchase price down, as long as you are confident your income will remain steady or grow and you plan on keeping the home at least five years.

But Mr. Wyman says buyers should ideally aim to save up 20% or more of the price. The risk of putting down too little: If the home falls in value and you sell at a loss, you'll owe more to the lender than you receive from the buyer.

In addition, many mortgages require buyers who put down less than 20% to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.

Mortgage lender Washington Mutual estimates that a buyer who puts down 5% on a $300,000 home with a 5.88% 30-year fixed-rate mortgage might pay $2,133 a month, including fees and property tax, while a buyer who puts 20% down would likely pay $1,682 a month. (The estimate assumes the 5%-down buyer must pay for mortgage insurance.)

You'll also need extra money set aside on top of the down payment for closing costs such as title insurance and mortgage fees, which can reach up to $5,000. If you want to pay "points" to lower your mortgage rate - a smart idea for borrowers who expect to stay in a home several years - you'll want a few thousand dollars more.

To find out the price of local starter homes, so you can estimate what you'll need to save up, you can check out home listings on Realtor.com or compare sales data at Zillow.com.

2. Keep it separate.

Set up a separate account for your down-payment funds, so the money doesn't get intermingled with other savings and so you can keep track of how much you save. This would probably be a taxable account at a bank or brokerage firm.

Mr. Wyman suggests setting up regular automatic deposits from a checking account into the down-payment account to force regular savings. "You want to be moving money to this account before you spend it," he says.

3. Consider your time horizon.

How best to invest down-payment money depends on your time horizon for purchasing a home. Those planning to buy in three years or less should put the money in conservative investments such as short-term certificates of deposit or short-term bond mutual funds to shield themselves from potential market downturns.

If you're waiting at least five years to buy, you can invest more aggressively. A balanced mutual fund that invests in, say, 60% stocks and 40% bonds, such as Vanguard Balanced Index Fund, is a good choice and should perform better over the longer period.

4. Get extra help.

Few first-time buyers pony up the entire down payment on their own. Nearly 23% of first down payments come as gifts from relatives and friends, according to a recent survey by the National Association of Realtors.

While such assistance is great, there are also other places you can look. There are many down-payment assistance programs for first-time buyers that are offered by banks, local governments and charities. Many are open only to low- or moderate-income buyers and some are targeted to specific communities.

Some programs lend buyers a substantial portion of the down payment. For example, the California Housing Finance Agency can provide eligible first-time home buyers in Los Angeles 3% of a home's purchase price as down-payment or closing-cost assistance. The money must be repaid when the buyer sells the home, refinances or pays off the loan.

Many lenders have information about assistance programs that borrowers can seek help from.

5. Clean up your finances.

Your credit history will determine the loan terms and mortgage rates you qualify for. You could be offered a smaller loan or charged a higher rate if a lender is concerned you might not be able to repay.

So before approaching lenders, first-time buyers should give themselves the financial equivalent of a physical exam, says Ellie Deskin, a financial planner in Troy, Mich. This means checking your credit score and credit reports with the three major credit bureaus and fixing any errors. (Consumers can now get one free copy of each report annually by going to Web site annualcreditreport.com.)

Also consider paying down some debt, especially high-interest debt such as credit cards, that might flag you as a riskier borrower.

While some debt is okay, being overloaded will likely tarnish your loan terms.

6. Weigh mortgage tradeoffs.

Lenders increasingly offer creative loans, such as interest-only loans and certain types of adjustable-rate loans, that can reduce your monthly payments - at least for a while. But these alternative loans can be much riskier than fixed-rate loans, because monthly payments can jump after a few years.

A general rule of thumb is that your monthly mortgage payment shouldn't exceed 28% of your household's gross monthly income. Check out some mortgage calculators at Dinkytown.net to calculate what your monthly payment would be with different types of loans.

7. Hands off retirement savings.

If you're just shy of saving up enough for a home, you might consider taking a small loan from your 401(k) plan or withdrawing some principal from a Roth IRA. But many financial advisers caution against tapping retirement accounts too heavily for a home purchase.

For one thing, you're going to need your retirement stash, so you don't want to gouge it. Taking a loan from your 401(k) can also be risky, since you may have to pay it back if you leave the company. And if you take money out of your Roth, you can't replace it, so you lose some of the Roth's long-term benefit of tax-free earnings.
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New Federal Tax Incentives Benefit Homes, Businesses

Energy guidelines cover existing homes, new homes and new manufactured homes.
RISMedia
The Tax Incentives Assistance Project (TIAP) has posted links to new Internal Revenue Service guidelines so consumers and businesses can take full advantage of new federal tax credits for energy-saving technologies and practices (www.energytaxincentives.org). The guidelines cover existing homes, new homes, and new manufactured homes.

TIAP is a nonprofit effort by a coalition of more than a dozen organizations, led by the American Council for an Energy-Efficiency Economy (ACEEE) and the Alliance to Save Energy, to inform consumers and businesses about federal tax incentives enacted in the Energy Policy Act of 2005.

"This guidance clarifies what measures are eligible for tax incentives and provides clear direction to taxpayers on what they need to do to qualify for the tax incentives," said ACEEE Executive Director Steven Nadel, who coordinates the overall TIAP effort. "We hope that the IRS will soon issue similar guidance for other incentives in the Energy Policy Act of 2005 including commercial buildings and heavy-duty vehicle tax incentives," he continued.

"We commend the IRS for issuing guidelines less than two months into the two-year window for claiming the energy-efficiency tax credits," said Alliance to Save Energy President Kateri Callahan. "Having this guidance so soon enables consumers to purchase and install insulation, Energy Star-labeled windows and other energy- and money-saving home improvements in time to lower both current winter energy costs and their 2006 federal taxes. We also are gratified that the IRS adopted the Alliance's suggestion to make all Energy Star windows eligible for a tax credit. Consumers recognize the Energy Star as the government's label for energy-efficient products, and this makes it easy for them to choose windows that qualify for the tax credit."

For existing homes, homeowners can claim credits totaling up to $500 for any combination of eligible measures installed in their primary residences. Eligible measures and credit amounts are:
• A credit of 10% of component costs (but not installation costs) for:
o Insulation (meeting efficiency levels defined in the 2001 Supplement to the International Energy Conservation Code -- IECC)
o Windows (meeting ENERGY STARSM or IECC requirements; there is a $200 ceiling on the tax credit for windows
o Storm windows and doors, which when combined with existing windows and doors meet IECC requirements
o Sealing to limit air infiltration
• A credit of $150-300 for heating and cooling equipment meeting defined efficiency levels
• A credit of $300 for water heaters meeting defined efficiency levels.
Under the IRS guidance, manufacturers or contractors will provide purchasers with a certification that a measure is eligible for the tax incentives, and homeowners can rely on this certification to claim their tax incentive.

Home builders are eligible for tax incentives of $2,000 for new homes. To qualify, homes must be designed to use 50 percent less energy for heating and cooling than a reference home design that meets the standards of Section 404 of the 2004 International Energy Conservation Code (IECC). The rules set out the procedures for documenting and certifying the home's energy performance and rely heavily on home energy rating procedures developed by the national Residential Energy Services Network (RESNET).

For manufactured new homes (those governed by federal construction standards), the new energy law sets forth a slightly different set of qualification criteria, allowing builders of theses homes to qualify for either a $2,000 credit, using procedures similar to those applicable to new homes as described above, or of a $1,000 credit if homes are documented to save 30 percent of the heating and cooling energy compared to a reference home that meets the standards of Section 404 of the 2004 IECC. Homes that are certified under the Energy Star Homes program for manufactured homes also qualify for the $1,000 credit.

The TIAP website (www.energytaxincentives.org) has additional details on the new IRS guidance and on other federal energy tax incentives created by the Energy Policy Act of 2005.
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How to screen tenants for your rental property

Previous landlords, credit reports worth checking out
By: Robert J. Bruss: Inman News
DEAR BOB: I own a rental house. I recently renovated it and now want to rent it to tenants. My previous tenants were there for 12 years, but I was a lazy landlord and they took advantage of me. I put about $50,000 into the house and want to screen prospective tenants. What is the best way to do that? -Berta G.

DEAR BERTA: Qualifying a rental tenant isn't difficult. Of course, insist on a written rental application and a deposit that is fully refundable if you don't select the applicant.

It is perfectly legal to take several applications for the same rental, check each applicant, and select the best-qualified applicant. Then promptly refund the deposits of the applicants you don't accept. Of course, the first step is to verify employment and income.

Next, be sure to get a credit report on all applicants, including their FICO (Fair Isaac Corp.) credit score. Better yet, ask all applicants to supply their credit report and FICO score, which they can obtain for $14.95 at www.myfico.com. If the applicant's FICO score is 650 or higher, you probably have a good applicant who will pay the rent on time.

However, be sure to also phone the applicant's two or even three previous landlords to inquire why the applicant moved out. My experience is landlords are usually very truthful on the phone (except perhaps the current landlord who might want to get rid of the applicant).

My final question to prior landlords is always, "Would you rent to this tenant again?" You will instantly know if you found a good tenant.

CLEAR TITLE NOW OF DECEASED SPOUSE'S NAME

DEAR BOB: My husband died about four years ago. We hold title as joint tenants with right of survivorship. Our house was our major asset together. I haven't done anything about the title, but as I read your articles, I am thinking I might need to go to the probate court to clear my title. Do I need to hire a lawyer? -Angie W.

DEAR ANGIE: No. Please clear the title now to your home before you have an urgent need to do so. As the surviving joint tenant, you automatically received 100 percent ownership without the need for probate court proceedings.

However, you must clear the title. In most states, all that is required is you record a certified copy of your late husband's death certificate along with an affidavit that you are the surviving joint tenant. A phone call to your local recorder of deeds office clerk will give you exact details of what you will need to record to clear the title.

SHOULD HOME SELLER HIRE BROTHER REALTY AGENT TO SELL HOUSE?

DEAR BOB: My brother is a real estate agent. Is it a good idea to hire a close relative to sell my house since I am now living about 1,000 miles away? I did not use my brother when I bought the house in 2001 because I felt it was not a good idea. -Carol M.

DEAR CAROL: If you trust your brother, and if he is a successful real estate agent selling homes near the house you want to sell, why not give him a try for a 90-day listing?

However, before deciding, please interview two or three other local agents who sell homes in the vicinity. Compare their CMAs (comparative market analysis) forms with the CMA provided by your brother. The recommended asking price and probable sales price should be fairly close among the interviewed agents.

Only after you interview several competitive realty agents will you know if your brother is the best agent who should get your 90-day listing.

The new Robert Bruss special report, "2006 Realty Tax Tips: Eight Chapters of Tax Savings for Homeowners and Realty Investors," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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Work at home, save a bundle on taxes

2006 Realty Tax Tips-Part 7: Home business tax deductions
By: Robert J. Bruss: Inman News
(This is Part 7 of an eight-part series. See Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6.)
Whether you are a renter or a homeowner and you use part of your residence for your full- or part-time business, you probably qualify for the special home business tax deduction to save on your income taxes. It doesn't matter if you are self-employed or if you are an employee whose employer doesn't provide suitable workspace and expects you to work at home.

However, if you bring work home from the office because you prefer working at home, then you won't qualify for the generous tax savings offered by the home business tax deduction.

For example, if you are a teacher who prefers grading student papers at home while watching television, but your school provides suitable workspace, you don't qualify for this deduction. However, if the school is unsafe after work hours, then your home office deduction is justified.

EMPLOYEES WORKING AT HOME HAVE A SPECIAL TEST. The Internal Revenue Service imposes a special test for employees who work at home. It is called the "convenience of the employer" test.

If your employer doesn't provide suitable workspace, then you probably meet this test. Examples include outside salespeople, computer entry clerks, and telephone order takers working from home.

SELF-EMPLOYEDS MUST PASS THE PRIMARY BUSINESS LOCATION TEST. To qualify for the Internal Revenue Code 280A home business tax deductions, whether you run a full- or part-time business from home, your residence must either (1) be used to meet with patients, clients or customers, or (2) used for administrative activity if you have no other fixed business location.

This tax law change was primarily caused by the 1993 U.S. Supreme Court decision denying Dr. Nader Soliman, an anesthesiologist, any home business deduction although he spent many hours on administrative work and reading professional medical journals in his condominium. Because Soliman spent the majority of his work time at various hospitals, the court denied his home business deductions. Today, thanks to a tax law charge, Soliman is allowed to deduct his applicable home office expenses.

In 1999, Congress changed the tax law to allow self-employeds, such as Soliman, to deduct their home business expenses if the residence is their "primary business location."

Other examples include a self-employed handyman, plumber and bookkeeper whose residences are their "primary business location," even if they spend most of their working hours at other job locations.

EVEN A PART-TIME BUSINESS CAN QUALIFY. Whether you work full- or part-time from home, if you meet the "primary business location" or "convenience of the employer" test, then part of your home operating costs are tax-deductible as business expenses.

For example, if you sell Amway, Mary Kay, or Avon products from your home, and you store inventory and supplies in your home business area, you may qualify if your residence is your primary business location.

However, the home use must be a business, not a hobby or investment. To illustrate, in the tax case of Joseph Moller, 553 Fed.2d 1071, Moller earned 98 percent of his income from his investment business, operated from his home. But the U.S. Court of Appeals denied his home business deductions because Moller was a passive investor in stocks and bonds. However, if he was an active "day trader" with frequent transactions, his home office deductions probably could have qualified.

The leading U.S. Tax Court decision on this issue is Dr. Edwin Curphey, 73 T.C. 61. Although Curphey was a full-time dermatologist at a hospital, he managed his rental properties on a part-time basis from his home office. The Tax Court ruled he was entitled to deduct applicable home office expenses for his part-time property management business.

"EXCLUSIVE BUSINESS AREA" IS REQUIRED. Whether full- or part-time home business use is involved, there must be an "exclusive business area," which is not also used for personal or family purposes.

However, the exclusive business area need not be a full room. The part of a room where you keep your business supplies and equipment can qualify. However, it cannot be shared use.

To illustrate, entertaining business clients at home clearly doesn't qualify. Neither does using your kitchen table for your part-time bookkeeping business if the family also eats meals there.

HOME BUSINESS DEDUCTIONS ARE BASED ON SQUARE FOOTAGE. The percentage of your home business deductions depends on the square footage of your residence set aside for exclusive business use. Time spent on your business doesn't matter.

To illustrate, suppose you rent or own a 2,000-square-foot house or apartment. You use one bedroom for your home office. It is 400 square feet. Therefore, 20 percent of applicable household expenses are deductible as business expenses. The same rule applies if your business area is in a separate building on your premises, such as a detached garage.

The tax result is 20 percent of your applicable home expenses such as insurance, utilities, repairs, mortgage interest, property taxes and rent become deductible business expenses.

But 100 percent of some home business costs are fully deductible. Examples include your business telephone line (if you also have a personal telephone line), business computer DSL or broadband fees, and painting or improvement costs for the business area.

BUSINESS EQUIPMENT MAY BE FULLY DEDUCTIBLE. For qualifying business equipment bought and placed in service in 2005, such as a home business computer, the business owner can elect to deduct (rather than depreciate) up to $105,000 of the cost. But business equipment costs exceeding $105,000 must be depreciated over their useful life.

However, for a business automobile placed in service in 2005, the maximum expensing deduction is $2,960, although qualifying sport utility vehicles used in a business may be deductible up to $25,000.

HOME BUSINESS AREA IS DEPRECIABLE. Homeowners can depreciate the exclusive business area of their house or condominium. Using the example above, if your home office occupies 20 percent of your home's square footage, then you can depreciate 20 percent of the house's cost (excluding non-depreciable land value) on the 39-year commercial property straight-line basis.

However, IRS Regulation 2002-142 says although business use of your home won't affect entitlement to the Internal Revenue Code 121 principal residence sale $250,000 or $500,000 exemption, the total depreciation deducted must be "recaptured" and taxed at a special 25 percent federal tax rate.

SPECIAL TAX BREAK FOR AUTO EXPENSES STARTING AT HOME. If you begin your workday from your home business location, and you use your automobile or truck to visit customers or work locations, your business mileage expense becomes tax-deductible when you drive away from your residence.

For 2005, the deduction is 40.5 cents per mile from Jan. 1 to Aug. 31, 2005, and 48.5 cents per mile from Sept. 1 to Dec. 31, 2005. But you must keep a daily mileage record.

LIMIT ON HOME BUSINESS EXPENSES. However, home business expenses are limited. When subtracted from the income of your home business, home office costs cannot create a tax loss to shelter your other ordinary taxable income.

SUMMARY: Whether full- or part-time, home business use can produce substantial tax savings. Employees and self-employeds, as well as renters and homeowners, can qualify if they meet the tests explained. For full details, please consult your tax adviser.

Reprints of the entire eight-part 2006 Realty Tax Tips series are now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com.
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Real Estate Investors Big Winners in 2005

By: Thomas C. Palmer Jr.: REALTOR® Magazine Online
Investors who put their money in real estate last year were huge winners, earning an unprecedented 34 percent on their dollars.

The performance of real estate surpassed the stock market worldwide, government and corporate bonds, according to a study being released today by the Massachusetts Institute of Technology’s Center for Real Estate.

"Real estate as an asset class has great potential for the investment industry because there's so much of it out there," says David Geltner, director of MIT's 21-year-old Center for Real Estate.
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Housing affordability slips for fourth consecutive quarter

Los Angeles area is rated least affordable
Inman News
Nationwide housing affordability slipped for a fourth consecutive quarter to its lowest level yet, according to the National Association of Home Builders'/Wells Fargo Housing Opportunity Index released today.

"The latest HOI shows that only 41 percent of new and existing homes that were sold during the final quarter of 2005 were affordable to families earning the national median income," said David Pressly, a home builder from Statesville, N.C.

That index level is down from 43.2 percent of homes sold in the third quarter and 52 percent of homes sold in fourth-quarter 2004.

Indianapolis was the most affordable housing market in the fourth quarter, with homes selling at a median price of $120,000 and households earning a median income of $64,000.

The least affordable market rated by the index was Los Angeles-Long Beach-Glendale, Calif., where 2.3 percent of homes sold in the fourth quarter were affordable to families earning the area's median household income of $54,500, according to the index.

The median price of all homes sold in that area was an even $500,000. The bottom of the affordability scale was dominated, as usual, by California cities, including Santa Ana-Anaheim-Irvine, San Diego-Carlsbad-San Marcos, and Stockton. New York-White Plains-Wayne, N.Y.-N.J. rounded out the list of the five least affordable major housing markets.

Among cities smaller than 500,000 people, Merced, Calif., was lowest on the list and the second least affordable market overall. Other small cities in the unaffordable column included Modesto, Salinas, Santa Barbara-Santa Maria, and Santa Cruz-Watsonville, Calif.

Pressly stated that the housing affordability situation should improve, as mortgage rates are expected to peak later this year and home-price appreciation is expected to decelerate from the record rates of the last several years. "This will give incomes a chance to catch up."

He added, "Between the third and fourth quarters of last year, the national weighted interest rate on fixed- and adjustable-rate mortgages that we use in calculating the HOI rose from 5.84 percent to 6.21 percent, and this certainly increased the threshold for families seeking home ownership," said NAHB Chief Economist David Seiders. "Meanwhile, nationwide home prices were on a strong upward trajectory through 2005."

NAHB forecasts predict that the average rate on a 30-year, fixed-rate mortgage will inch up gradually to about 6.6 percent late in 2006 and average about 6.5 percent for the year as a whole.

In the nation's most affordable major housing market of Indianapolis, Ind., 88.7 percent of new and existing homes that were sold in the fourth quarter were affordable to households earning the area's median income of $64,000. The median sales price of all Indianapolis homes sold in that time frame was $120,000. Also near the top of the list for affordable major metros were Youngstown-Warren-Boardman, Ohio-Pa., followed by Detroit-Litonia-Dearborn, Mich.; Grand Rapids-Wyoming, Mich.; and Dayton, Ohio, in that order.

Midwestern metros also dominated the list of the most affordable small housing markets with fewer than 500,000 people. Davenport-Moline-Rock Island, Iowa-Ill. was tops, followed by the metro areas of Cumberland, Md.-W.V.; Lima, Ohio; Mansfield, Ohio; and Lansing-East Lansing, Mich.

The index is a measure of the percentage of homes sold in a given area that are affordable to families earning that area's median income during a specific quarter.

The index incorporates newly revised U.S. Housing and Urban Development Department data for household income, which was previously underestimated in some markets, and revised property tax and insurance data in several metro markets, the trade group announced.

Prices of new and existing homes sold are collected from actual court records by First American Real Estate Solutions, a marketing company. Mortgage financing conditions incorporate interest rates on fixed-rate and adjustable-rate loans reported by the Federal Housing Finance Board.

The association's Web site, www.nahb.org/hoi offers more tables, historic data and details.

The National Association of Home Builders has about 225,000 members involved in home building, remodeling, multifamily construction, property management, subcontracting, design, housing finance, building product manufacturing and other aspects of residential and light commercial construction.
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Predatory Lending, Other Real Estate Scams Targeting Latinos on Rise

Group posts "Home Buyer Bill of Rights" to inform public.
RISMedia
Drawn to the American dream of homeownership – yet unfamiliar with U.S. real estate practices and wary to report abuse – Latinos are twice as likely as other groups to be targeted by a growing wave of predatory lending and other real estate con games.

To help Latinos avoid falling victim to real estate scams, www.CaseNuevaHouston.com has posted a "Home Buyers Bill of Rights" that highlights the most common abuses.

Unfortunately, there has been no shortage of real estate con games aimed at Latino home buyers. Widespread examples include:

• Fictitious fees, including unethical real estate agents charging hundreds or thousands of dollars just to look at homes. In the United States, agents are paid by the seller, not the buyer, and payment occurs only at closing.

• Padding loans with inflated and unauthorized charges. There have been reports of predatory lenders charging up to 10 points to originate loans, while the standard origination fee is 1 point (or 1 percent of the loan amount.)

• Channeling borrowers into loans with much higher interest rates, even when they would qualify for a lower rate.

• Selling properties for more than their market value and covering up major structural problems.

• "Bait and switch" tactics that stick buyers with much higher interest rates, prepayment penalties and other onerous terms. Predatory lenders often do everything they can to force buyers to default, so they can resell the property to more victims.

CasaNuevaHouston.com decided to create the "Home Buyer's Bill of Rights" when its founders kept hearing stories of predatory lending and other real estate scams from consumers and real estate agents in Houston's Latino community.

"Latinos are quick to embrace the American dream of homeownership, because in most Latin American countries, mortgage lending as we know it doesn't exist," said Anita Sparks-Bohn, a founder of CasaNuevaHouston.com. "This eagerness creates a wide opening for scam artists, especially when combined with a language barrier and a general lack of understanding about the home buying process."

Sparks-Bohn said creating a "Home Buyer's Bill of Rights" was a logical step for CasaNuevaHouston.com, launched in 2005 to help educate Latinos about the home buying process in Houston and other cities. A San Antonio version, www.CaseNuevaSanAntonio.com, was launched in 2006.

Some of the rights described in the "Home Buyer's Bill of Rights" take direct aim at preventing abuses such as those described above, while others are designed to improve understanding of opportunities available to Latino home buyers who may or may not be U.S. citizens.

For example, many Latino buyers may have the right to purchase a new home in the United States even if they do not have a Social Security number, lack traditional credit, or receive part of their income in cash. Some buyers may also be eligible for programs that provide assistance with down payments and closing costs.

"When more Latino home buyers understand their rights, options and opportunities, they will hopefully be less likely to be taken advantage of," said Sparks-Bohn.

The complete "Home Buyer's Bill of Rights" can be found at www.CasaNuevaHouston.com.

RISMedia welcomes your questions and comments. Send your e-mail to: realestatemagazinefeedback@rismedia.com.
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The Weekend Guide! February 23 - February 26, 2006

The Weekend Guide for February 23 - February 26, 2006.
Full Article:
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California luxury-home values increase in 2005

But price gains slow in fourth quarter
Inman News
Luxury-home values rose to all-time highs in Los Angeles, San Diego and San Francisco in 2005, but appreciation slowed significantly in the fourth quarter, according to the First Republic Prestige Home Index, released today.

The Index, which has tracked luxury homes since 1985, found that Los Angeles values rose 0.7 percent from the third quarter of 2005 to the fourth quarter of 2005 and rose 16 percent for the year. The average luxury home in Los Angeles is now a record $2.29 million, up $316,000 from a year ago.

San Diego values rose 0.7 percent from the third quarter of 2005 to the fourth quarter of 2005 and were up 13.3 percent for the year. The average luxury home in San Diego is now a record $2.09 million, up $245,000 from a year ago.

San Francisco Bay Area values rose 1 percent from the third quarter of 2005 to the fourth quarter of 2005 and gained 13.2 percent for the year. The average luxury home in San Francisco is now a record $2.88 million, up $336,000 from a year ago.

In Los Angeles, the 16 percent increase in 2005 followed a gain of 27.7 percent in 2004, 14.9 percent in 2003, 3.6 percent in 2002, 9.4 percent in 2001 and 8.3 percent in 2000. Since December 2002, the average luxury home in Los Angeles has increased more than $945,000 to almost $2.3 million.

"In 2005, luxury-home values in California appreciated at double-digit rates, although the momentum clearly slowed in the second half of the year," said Katherine August-deWilde, chief operating officer of First Republic Bank, in a statement.

"Continuing demand and limited inventory in some markets may result in increased luxury-home prices in 2006, but at a very modest level compared to the past two years. In markets where inventories spike, values will be impacted," August-deWilde said.

First Republic Bank produces the Prestige Home Index each quarter with Fiserv CSW Inc., a leading provider of automated property valuation services and home price metrics to U.S. financial institutions.
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Real estate purchases pick up

Borrowers hold off on refinancing
Inman News
Overall mortgage applications inched up 0.8 percent last week on a seasonally adjusted basis from the week before, ending a three-week slide, according to the Mortgage Bankers Association's latest survey.

The seasonally adjusted purchase index increased by 4.3 percent to 408.7 from 391.7 the previous week, whereas the refinance index decreased by 4 percent to 1,571.4 from 1,636.7 one week earlier.

The refinance share of mortgage activity decreased to 38.2 percent of total applications from 41.2 percent the previous week. The adjustable-rate-mortgage share of activity decreased to 29.1 percent of total applications from 29.6 percent the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 6.22 percent from 6.25 percent. Points including the origination fee decreased to 1.23 from 1.34 for 80 percent loan-to-value ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 5.87 percent from 5.92 percent. Points including the origination fee increased to 1.21 from 1.17 for 80 percent loan-to-value ratio loans.

The average contract interest rate for one-year adjustable-rate mortgages increased to 5.6 percent from 5.52 percent. Points including the origination fee decreased to 0.97 from 0.99 for 80 percent loan-to-value ratio loans.

Washington, D.C.-based Mortgage Bankers Association is a national association representing the real estate finance industry. The survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
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3 Easy Ways to Boost Your Home's Value

3 Simple Steps to Reel In Buyers
By: Bankrate.com
Think like a potential buyer and your mission becomes clear, an expert renovator says. That means fixing what can be seen (or, ugh, smelled) first.

The single most cost-effective investment you can make to increase the value of your home is to buy a roll or two of plastic trash bags. Stuff them with junk outside the house - from beer cans to raked leaves.

Nothing could be more common-sense than cleaning up the yard and exterior, right?

"You'd be surprised at how many people don't recognize the importance of doing these kinds of items," says Steve Berges, a real estate investor in Michigan who buys dilapidated houses, fixes them up and sells them for a profit. His advice: When renovating a house or preparing it for sale, spend money on things a buyer can see.

Any successful investor is adept at spotting hidden value, buying low and selling high. That's what Berges does when he scouts properties, generally houses 20 to 70 years old. "One of the things that we like when we drive up to a house is what we refer to as high 'Yikes!' appeal," he says. He defines "yikes appeal" as the state of a house in which a normal person would drive up, say, "Yikes!" and keep on driving.

What a 'Yikes' house looks like
A house with high "Yikes!" appeal has weeds, a boat parked in the front yard and an old car transmission on the side of the house, nested amid beer cans. A rain gutter hangs down. Overgrown shrubs obscure the front windows, creating a dreary interior. People actually try to sell their homes in such condition, creating opportunities for bargain-hunters.

Working the other side of the equation, Berges has written a book called "101 Cost-Effective Ways to Increase the Value of Your Home."

The book lists various kinds of exterior and interior improvements (improving the porch, replacing kitchen cabinets) and ranks each project's "impact value." A one-star impact value means the project won't add to the home's value and might actually lower it; a five-star impact value means the project could potentially add $1.50 or more to the home's price for every dollar spent.

A lot of money is at stake. Homeowners spent $166 billion on home remodeling in 2001, according to the Harvard Joint Center for Housing Studies. More than three-quarters of that was spent on what the Joint Center calls improvements, with the rest going to maintenance and repairs. Another $48 billion was spent on the remodeling of rental properties. Researchers credit the $214 billion in remodeling for preventing the economy from dropping further into recession in 2001. More money was spent on remodeling than on clothing that year.

Researchers discovered that 6.3% of remodelers spent more than $20,000 on improvements in 2000-2001 and 2.7% spent more than $35,000. Much of that was targeted toward fixing up kitchens and bathrooms.

Protect, improve, appreciate
"Families that spent more on home improvements also realize the greatest rates of price appreciation," the Harvard study said. "In many regions of the country, homeowners recover as much as 80% to 90% of the cost of home improvements in the form of higher home values. Little wonder, then, that homeowners spent almost $2,300 on average in 2001 to help protect and improve their most important financial asset."

If you're getting ready to sell a house, you want to be among the homeowners who recover 80% or more of their investments in the form of a higher price. Berges says the key is thinking like a buyer. And what do buyers do? They drive up to a house and look at it. If they're not repelled by what they see, they step inside and look around.

Based on that typical experience, Berges formulated the following guidelines:

    • Spend money on what can be seen vs. what can't be seen.

    • Fix up the exterior first, then the interior.

    • Focus first on what Berges calls the "Yikes!" appeal - clutter, trash and bad
      smells that drive down a home's value.

"Visibility adds value," Berges says. "The improvements that are most visible are the things you need to focus on."

What you see is what pays off
This means that, if you have $10,000 to spend, and you can either spend it all on a new roof or all on repairing a cracked foundation (but you can't do both), you should replace the roof because it can be seen. Whatever your budget, put a higher priority on improvements that can be easily seen, because those give you the best bang for the buck.

"People expect the foundation, plumbing and wiring to work," Berges says. "If they don't, they detract from value. But fixing them to bring them up to code doesn't necessarily add value."

Because an unkempt yard and ugly exterior can cause prospective buyers to drive away without going inside the house, you should work on those first. Clear up clutter. If you want to, hire day laborers to remove that old engine block in the driveway and reattach that rain gutter that fell two years ago and has been lying by the side of the house ever since. Then concentrate on landscaping. Prune hedges, trees and shrubs, especially if they obscure the front of the house. Paint. If the roof is dirty, hire someone to power wash it.

From the curb, "the roof takes up 30% of what you see," Berges says. "If you have a nice-looking roof, that goes a long way in curb appeal for the house."

Cut clutter, clean
Maybe you notice that Berges isn't recommending that you break the bank - just that you spend a little time and money to make the place look better. You should do the same inside the house - reduce clutter and clean everything. If you own a pet, invite a non-pet owner inside the house to sniff around. You might be inured to the smell of your Weimaraner's urine, but the stench could make a buyer retch.

When Berges buys a house that he intends to fix up quickly and sell, he almost always has the interior repainted wall-to-wall and has the carpets and vinyl flooring replaced. Once, when he and his wife sold their own home, they didn't replace the carpets and they regretted it.

"We thought that by offering a flooring allowance, a family could move in and select their own flooring," he writes. But he discovered that buyers don't want to select their own flooring. He already had bought a house and didn't want to be stuck with two mortgage payments, so he unloaded the old house quickly, for $10,000 less than he thought it was worth.

Deal with the hassle, keep the profit
"For half that amount we could have replaced all of the flooring and sold the house for its market value," he ruefully writes. "People don't want to fool around with painting and replacing carpet and fixing the house up. In the world of fast food and instant gratification, people just want to buy a house and move in."

Berges's book is geared toward middle-class homeowners. On the upper end, buyers expect well-kept yards and painted walls, of course, but they often yearn for amenities that middle-class people might not expect. For example, one of the hot trends in the Hamptons on Long Island, says architect Marcia Previti of Gillis Previti Architects, is for two dishwashers in the kitchen. "You might reserve one for glassware and one for pots and big dishes," she says.

Adding a second dishwasher might be a sound investment in the Hamptons or in Beverly Hills, but it would be a waste of money in Toledo or Peoria. Berges's final piece of advice is to keep up with the Joneses, but "you don't want to overimprove."

Berges lives in a neighborhood of concrete driveways. A neighbor recently spent $28,000 replacing a concrete driveway with brick pavers. In a high-end neighborhood, that would be a cost-effective use of money, but Berges's neighbor won't come close to recouping the cost of installing the beautiful driveway.

When you're trying to decide how to spend remodeling money, Berges recommends seeking the advice of an experienced real estate agent who is familiar with your neighborhood. A licensed appraiser should be able to provide guidance, too.
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Can a Feng Shui Expert Really Give Your Home Good Chi?

The ancient art is meant to improve your life by arranging your living quarters in a harmonious way. In the U.S., it has become a niche area of the booming interior-design industry. Here is a test of five feng shui practitioners in major cities.
By: Christina S.N. Lewis: The Wall Street Journal Online
Can a bowl with seven goldfish really make you rich?

Feng shui, an ancient Chinese art that traces back thousands of years, is meant to improve your life by arranging your home in a harmonious way.

Traditional feng shui has loyal followers around the world, particularly in Hong Kong, where residents follow it for advice on decisions about new apartments or office buildings.

In the U.S., the art form has become a niche area of the booming interior-design industry. There are about 350 American members of the International Feng Shui Guild, (compared with more than 38,000 members of the American Society of Interior Designers).

Unlike interior designers, who typically make their money by adding a markup to the furnishings their clients buy, feng shui experts charge a fee ranging from 30 cents to one dollar per square foot, or a flat fee. Some feng shui experts sell fountains, wind chimes, light-reflecting crystal balls and other "cures" that are frequently prescribed by feng shui.

To test if feng shui could make our homes more livable, we hired a feng shui expert in five major cities to evaluate our living spaces and give us recommendations.

Overall, we enjoyed looking at our homes in this new way and we received useful suggestions for improving the look and feel of our homes. But some practitioners also delivered some beliefs that we found a bit far-fetched. Our Dallas-based consultant suggested that we plant plastic flowers in our front yard, (just run them under water and set them outside to absorb the natural elements). A Los Angeles-based designer purified our home by burning native grasses, while we followed her with a gas fireplace clicker to keep the flames alight. Those who are uncomfortable with concepts like bad energy might be better off with an interior designer.

A feng shui expert divides the home into eight or nine areas, where each zone represents a specific part of life such as health, romance, career or finances. The rooms are tweaked to direct good energy, or chi, into the proper parts of the home, with particular attention to the main entrance, the bed, stove and work or office area. In addition, each room should have a balance between the five elements: earth, water, fire, wood and metal.

In Hong Kong, an epicenter of feng shui, we consulted a master with more than 20 years of experience. He arrived toting a book of fortunes for the next 10,000 years, a regular compass, and a Lo Pan, a special compass incorporating other feng shui information. He suggested we place a bowl in a corner with exactly seven goldfish - and one of them should be a different color than the other six - for extra wealth.

Our consultant in New York recommended adding more running water, like a fountain, although an aquarium or a lava lamp would work as well. She also suggested we move our desk away from some bookshelves that were "cutting our chi." The area indeed now feels more spacious and restful.

Our Chicago expert said an astrological chart indicated our tester's son should sleep with his head facing the opposite direction. He tried it and didn't like it. On a more practical note, she pointed out that our kitchen would feel bigger with a small, round or square rug.

Our Dallas-based expert said that our house's narrow entrance foyer was a big trouble spot. It opens directly facing a set of stairs - a feng shui no-no because energy immediately flows out of the house, instead of dispersing through it. She suggested round rugs to fix it. She also said that our writing would improve if we relocated our third-floor office to an unused room on the first floor, which is closer to our back yard - our prosperity and growth area.

Our consultant in Los Angeles suggested adding feminine furniture, such as round, low tables in the bedroom, which is also our prosperity area, to counterbalance the masculine feel caused by tall bed posts and a gas pipe. Although some of her suggestions were a bit kooky, such as placing a mirror under the bed to bounce away bad energy, many made the house more livable.

None of our testers has since become wealthy (so far), but maybe that's because no one bought any goldfish.

- Sarah McBride, Jonathan Eig, Geoffrey Fowler and Melanie Trottman contributed to this article.
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LOS ANGELES Area Home: OPEN HOUSE Today Sunday 2/19/06

Status: Active
Address: 2044 LAUREL CANYON
Los Angeles, CA 90046
Type: Single Family Home
Bedrooms: 4 Baths: 5
MLS #: 06-010957
Price: $2,499,000
OPEN HOUSE today Sunday 2/19/06 1-4PM
Meticulously remodeled 1917 estate captures the elegance of the time when Fairbanks and Pickford rumored to have secretly met here. Outdoor fireplace off formal dining room. Library with a wall of pocket windows bridges to main house to the master suite with sitting room and day porch. Guest suite, maids quarters, sunny country kitchen with patina walls and restored Magic Chef stove. Gym with 15 ceiling, bath, grotto entry to the Zen-like swimmers pool. Private guest studio/office.

Description:
Interior: Dishwasher,Garbage Disposal,Intercom,Refrigerator

Lower Laurel Canyon, 3 houses down from the "country store".
More Info

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Downtown Los Angeles enjoys real estate 'renaissance'

Once residentially devoid area is now home to thousands
Inman News
About 7,000 residential units have been rehabilitated or built from scratch in the Los Angeles downtown area since 1999, according to a report prepared by the Los Angeles County Economic Development Corp., with thousands more on the way.

"The Downtown Los Angeles Renaissance" report also states that about 26,500 residential housing units in the downtown area will be constructed by 2015.

About 100 residential and commercial projects are under construction or at the permitting or planning stages, the report states. "As the projects currently in the pipeline are completed, the downtown skyline will be dramatically transformed."

About 62 downtown development projects were completed between 1999 and 2005, another 59 projects currently under construction or in permitting and expected to finish up in the next two years, and 33 planned projects have estimated completion dates of 2008 or later.

"The estimated construction cost of all projects involved in the downtown renaissance is $12.2 billion," the report concludes. "Huge, one-time-only economic and revenue impacts are associated with such an enormous effort. The impacts arise from the creation of numerous construction jobs, from purchases made by the construction contractors (for building materials, supplies and equipment), and from spending by all of the employees involved for consumer goods and services."

The 154 privately funded adaptive re-use and new construction projects and 32 civic and cultural projects analyzed in the report will generate:

    • About 174,000 annual full-time-equivalent jobs;

    • $7 billion in wages and salaries and $25.9 billion in total (direct and
      indirect) business revenues;

    • $169 million in one-time tax and fee revenues;

    • $86 million in taxes, permits and fees for the City of Los Angeles;

$59 million for Los Angeles County (including the transit authority) and $24 million in sales taxes, to be split among other cities in the county.

According to the report, the analysis assumes that "the projects involved in the downtown renaissance will go forward as currently planned and … that the new space, once built out, will be occupied quickly. However, the actual outcome may well be different, leading to higher or lower impacts than we have projected.
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Real estate exchange best way to maximize savings

Realty Tax Tips-Part 6: How investors avoid profit tax
By: Robert J. Bruss: Inman News
This is Part 6 of an eight-part series. See Part 1, Part 2, Part 3, Part 4 and Part 5.)
Do you own a rental or investment property that would produce a large taxable capital gain if you sell that property? Would you like to avoid paying any capital gain tax on your profitable property sale?

If you answered "yes" to both those questions, you are among the millions of U.S. real estate investors who want to sell their rental or investment property without owing a large capital gains tax.

Many real estate fortunes have been earned by savvy investors who understand how to avoid capital gains tax when selling their investment properties. The best-known example was documented in the classic best-seller real estate book, "How I Turned $1,000 into $5 Million in My Spare Time," by the late William Nickerson, who pyramided his way to wealth without tax erosion of his profits.

THE TAX SECRET IS MAKING TAX-DEFERRED EXCHANGES. If you want to learn how to build your real estate investment wealth without owing capital gains tax as you do so, like Nickerson did, the secret is tax-deferred exchanges, as authorized by Internal Revenue Code 1031.

The simple tax rule for avoiding capital gain tax when disposing of a rental or investment property is that the investor must trade "equal or up" in both price and equity for one or more qualifying "like-kind" properties without removing any taxable "boot," such as cash or net mortgage relief.

I shall never forget my first tax-deferred exchange years ago. I owned a three-unit apartment triplex in which I had a modest capital gain. After reading Nickerson's great book, I had dreams of pyramiding my way to a real estate fortune.

My first step was to make a tax-deferred trade of my three units for a nine-unit "fixer-upper" apartment building worth about three times as much as my old property. But the sellers of that building wanted to retire; they didn't want my triplex.

So my savvy real estate agent found a "stand-by buyer" for my three units after I made my tax-deferred exchange for the nine apartments. I got my tax-deferred exchange, the seller of the nine apartments got a taxable cash sale, the stand-by buyer acquired my three units, and we all lived happily ever after.

TODAY'S TAX-DEFERRED "STARKER EXCHANGES" ARE MUCH EASIER. After 1984, when so-called Starker exchanges became legal in Internal Revenue Code 1031(a)(3), investment property trades became even easier.

Investors no longer have to make direct trades, as I did in that exchange of three units for nine units.

Today, I could sell my triplex, have the sales proceeds held by a third-party accommodator or intermediary beyond by "constructive receipt," and then use that money to buy the nine apartments.

However, there are strict Starker-exchange time limits. After the first property in a Starker trade is sold, and the sales proceeds are held by a qualified third party, the "up trader" has 45 days to designate to his accommodator or intermediary the property to be acquired. For this reason, it is wise to have the "up leg" of the exchange lined up before selling the old property.

Up to three possible property acquisitions can be designated. Then the trader can take up to 180 days from the sale date to complete the tax-deferred acquisition.

More than one property can be traded on either side of the exchange. For example, I could trade two rental houses for one apartment building of equal or greater cost and equity. Or I can trade my office building for three rental houses of equal or greater total cost and equity.

WHAT IS A "LIKE-KIND" EXCHANGE? As mentioned earlier, Internal Revenue Code 1031 requires a "like-kind" property trade. But "like-kind" does not mean "same kind."

"Like-kind" simply means all properties in the tax-deferred exchange must be held for investment or for use in a trade or business. Virtually the only properties that are not eligible for tax-deferred trades are (1) your personal residence, and (2) property owned by a "real estate dealer" such as a home builder.

For example, if you own a rental house you want to exchange for an office building of equal or greater cost and equity, that situation qualifies. Or you can trade your vacant land, held for investment, for a shopping center, warehouse, or rental house.

WHY EXCHANGE INSTEAD OF SELLING REAL ESTATE? The obvious reason for trading investment or business property, instead of selling it, is to avoid the capital gains tax on the profit. But there are at least 10 other reasons to exchange.

They include (1) pyramid your investment property equity without tax erosion of your sale profit, (2) minimize or eliminate the need for new mortgage financing on the property acquired, (3) acquire more desirable property to replace an undesirable property, (4) increase your depreciable basis, (5) acquire a property that better meets your investment or business needs, (6) partially defer your profit tax while trading down to a smaller property that is easier to manage, (7) avoid the dreaded 25 percent depreciation recapture tax when selling an investment or business property,(8) refinance either property before or after (but not during) the exchange to take out tax-free cash,(9) accept an unexpected desirable purchase offer to sell a currently-owned property and avoid capital gain tax, and (10) completely avoid capital gains tax by still owning the last property in your pyramid chain of tax-deferred trades when you die.

HOW TO MAKE A TAX-DEFERRED TRADE FOR YOUR ULTIMATE DREAM HOME. Savvy real estate investors, especially those desiring to retire, tried to figure out how to make tax-deferred exchanges of their investment or business properties for their ultimate dream homes. However, as explained earlier, personal residences don't qualify for IRC 1031 tax-deferred trades because they are "unlike property."

The simple solution is to make a tax-deferred exchange up for your ultimate dream home. However, because a personal residence can't qualify, the acquired property must be a rental at the time of the trade. Most tax advisers suggest renting it to tenants for at least 12 months before converting it to the investor's personal residence.

In 2004, Congress plugged a big loophole in this scheme where an investor could move into a dream home acquired in a trade by living in it for at least 24 months before selling it and claiming the generous Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 for a single owner or up to $500,000 for a qualified married couple filing a joint tax return.

After Oct. 22, 2004, for sales of a principal residence acquired in an IRC 1031 tax-deferred exchange, the home must be owned at least 60 months before sale (rather than the minimum 24 months of ownership ordinarily required). At least 24 of those 60 months must be owner-occupied to qualify for the IRC 121 exemptions.

THE ULTIMATE TAX SHELTER OF ALL. However, if you acquired your ultimate dream home, and perhaps millions of dollars of investment property, in tax-deferred exchanges, which you still own at the moment of your death, you will have achieved the ultimate tax shelter of all.

Uncle Sam will be so overcome with grief at your passing, he will completely forgive any capital gain tax or depreciation recapture tax that would have become due if you sold your real estate the day before your death.

However, the net worth of your real estate (market value minus secured debt) will be included in your estate. For deaths after Jan. 1, 2006, total estate net assets less than $2 million are fully exempt from federal estate tax. Also, assets left to a surviving spouse are free of the federal estate tax.

To make matters even better, your heirs will be overjoyed to learn they will receive a new "stepped-up basis" to market value on the date of your death for the assets they inherit. For complete details, please consult your personal tax adviser.

Next week: How to maximize home office tax savings.
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Housing-Price Growth Still Hot, But Pace Has Cooled Some

U.S. existing-home prices appreciated late last year, but at a slightly lower rate, an industry group says. Still, a record 72 metro areas had double-digit price increases for single-family houses.
By: Jeff Bater and Steve Kerch: The Wall Street Journal Online
Prices for previously owned U.S. homes appreciated late last year, but the double-digit growth was a bit cooler than it had been, an industry group says.

The national median existing single-family home price was $213,000 October through December, up 13.6% from $187,500 a year earlier, the National Association of Realtors, or NAR, said Wednesday. The median is the midpoint; that is, half of the homes sold for more than the median price and half sold for less.

In the third quarter of 2005, the annual rate of home-price appreciation was 14.7%.

The association's report, covering 145 metropolitan areas, shows a record 72 areas had double-digit annual increases in the median price of existing single-family home prices. Only six areas posted price declines. (See metropolitan-area data - Adobe Acrobat required.)

The biggest single-family price increase in the nation was in the Phoenix-Mesa-Scottsdale area of Arizona, where the fourth quarter price of $268,400 rose 48.9% from a year earlier. Next was Cape Coral-Fort Meyers, Fla., at $293,100, up 48% from the fourth quarter of 2004. Orlando, Fla., with a fourth-quarter median price of $261,800, was up 42% in the last year.

Detroit and Cleveland saw prices fall by less than 1%. The largest price decline, 5.3%, was recorded in the South Bend, Ind., metro areas. Other cities that saw declines included Erie, Pa., Lansing, Mich., and Springfield, Ill.

David Lereah, chief economist for NAR, said the modest dip in appreciation indicates a market adjustment. "Although home sales have eased, the tremendous momentum in price appreciation was sustained in the fourth quarter because tight inventories still favored sellers," he said.

Previously owned home sales dropped a third straight month in December. Resales fell to a 6.60 million annual rate last month, down 5.7% from 7.00 million in November. Sales were down 1.3% in November and 2.7% in October. Yet for all of last year, there were 7.072 million sales, which was 4.2% higher than the level of 6.784 million in 2004 and marked a fifth consecutive record. NAR began tracking sales in 1968.
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The Weekend Guide! February 16 - February 19, 2006

The Weekend Guide for February 16 - February 19, 2006.
Full Article:
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SoCal real estate sales hit 5-year low

January activity drops 30% in one month
Inman News
Los Angeles home sales fell 11.4 percent in January to 6,761, while the median home price jumped 17.6 percent to $487,000.

The number of Southern California homes sold in January edged down to the lowest level in five years as many potential buyers decided to sit on the fence during the real estate market's off-season, a real estate information service reported.

A total of 20,085 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month, down 30.6 percent from 28,952 in December, and down 7.4 percent from 21,680 for January last year, according to DataQuick Information Systems.

A decline from December to January is normal for the season, DataQuick reported. Last month's sales count was the lowest for any January since 2001 when 18,010 homes were sold. The strongest January in DataQuick's statistics was in 1989 when 23,379 homes were sold; the weakest was in 1992 when 10,994 homes were sold.

"Trends in January and February are notoriously bad at predicting upcoming activity. Is the market taking a breather? Or is it starting to tumble? It's impossible to say, there's nothing really ominous in the numbers, but we won't know for another couple of months," said Marshall Prentice, DataQuick president.

The median price paid for a Southern California home was $469,000 last month, down 2.1 percent from November and December's record high of $479,000. Last month's median was up 13 percent from $415,000 for January 2005. The median always drops from December to January because of changes in market mix; January is always a weak month for new-home sales.

The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,162 last month, down from $2,255 for the previous month, and up from $1,822 for January a year ago. Adjusted for inflation, current payments are about 0.5 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle.

Indicators of market distress are still largely absent, and foreclosure activity is edging up from its bottom, but is still low. Down-payment sizes are stable, as are flipping rates and non-owner-occupied buying activity, DataQuick reported.

DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
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Single Women Add Fuel to Housing Market

By: Noelle Knox: REALTOR® Magazine Online
While the number of unmarried men and women purchasing their own homes was virtually even 25 years ago, single females have pulled way ahead of their male counterparts in recent years.

In 2005, they bought 20 percent of all U.S. homes sold — about 1.5 million properties, or more than double the 9 percent purchased by single males. Changes in the mortgage lending industry have contributed largely to the shift in home buying demographics.

"There have been so many advances and innovations in the market to respond to [single female buyers]," according to Mortgage Bankers Association Chairman Regina Lowrie, who cites as an example the fact that lenders now will factor in alternative forms of credit history, such as bill payment records, for female applicants who do not have credit established under their own names.

Lenders also help single women become homeowners by including child support as income to help qualify for financing and by categorizing divorcees as first-time buyers, even if they had purchased property with a former spouse.
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Divorce settlement impacts real estate taxes

Sole homeowner fears capital gains dilemma
By: Robert J. Bruss: Inman News
DEAR BOB: As a result of my divorce settlement, I am the sole owner of the house where I lived since 1977. The purchase price was $113,000. Today, I can sell it for $900,000. I am aware I can get that $250,000 principal residence sale tax exemption you often discuss, but I need to know how the taxes are calculated. Did my basis change when the house was deeded to me as the sole owner in 2003? -Tatiana S.

DEAR TATIANA: Before selling your home, please consult your personal tax adviser to go over the exact home sale price details. Because interspousal real estate title transfers are usually tax-free, from your description it appears you will owe tax on the entire capital gain, minus your $250,000 principal residence sale tax exemption of Internal Revenue Code 121.

Your taxable capital gain appears to be the $900,000 sales price, minus your $113,000 adjusted-cost basis, minus your $250,000 exemption, or $537,000.

If any capital improvements were added to the home during ownership, those costs will increase your basis (thus reducing the capital gain). Also, you can subtract sales costs, such as the real estate sales commission and transfer fees.

At the current federal capital gains tax rate of only 15 percent, plus any applicable state tax, your tax situation appears to be very advantageous.

WHO PAYS TO MAINTAIN EASEMENT OVER NEIGHBOR'S LAND?

DEAR BOB: I own a right-of-way across my neighbor's land to the public road. It predates both my ownership of my property and my neighbor's ownership of his parcel. The right-of-way agreement gave my neighbor the right to use the right-of-way if he helps maintain it. Recently, my neighbor used this driveway to have a contractor bring in heavy equipment for land clearing. This equipment damaged the right-of-way. Is my neighbor responsible for repairing this damage? What are my rights to limit access to this right-of-way? -Tom C.

DEAR TOM: Please consult a local real estate attorney to review the documentation. From your description, in the absence of any maintenance agreement in the recorded easement, it appears the neighbor damaged your easement driveway and he should pay for necessary repairs.

The best way to resolve this issue is a friendly face-to-face discussion with the neighbor.

If he refuses to pay for necessary repairs, a letter from your attorney to him would be appropriate to insist the neighbor repair the driveway within 30 days.

In the event of no results, a stronger letter explaining you have no alternative but to have the repairs made, and you shall expect the neighbor to pay for those repairs, would be appropriate. Should the neighbor still fail to pay, the local Small Claims Court is your next resource.

PARTIAL TAX-DEFERRED EXCHANGE AVOIDS FULL TAX

DEAR BOB: When you sell a home via an Internal Revenue Code 1031 tax-deferred exchange, must all of the funds be reinvested in one or more rental properties? Or can some of it be claimed as capital gains on the income tax return? -Jean L.

DEAR JEAN: I presume you intended to say "rental home." If the property is your personal residence, it is not eligible for an IRC 1031 tax-deferred exchange.

To qualify for a 100 percent tax-deferred IRC 1031 exchange, the property seller cannot take out any cash or other taxable "boot" such as net mortgage relief.

However, if you want to take out some cash from the investment or business property trade, such as $50,000, you can make a partial tax-deferred exchange for another "like- kind" rental or investment property. But the $50,000 cash you receive in this example would be taxable as a capital gain and the balance of your capital gain will be tax-deferred. For full details, please consult your tax adviser.

The new Robert Bruss special report, "How to Earn Your First Profit When Buying Your Home or Investment Property Right," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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Divorce and Taxes: Is This the End of the Great American Dream

By: Benny L. Kass: Realty Times
The word "divorce" is something that we generally try to avoid. It is not a pleasant topic. But if you and your spouse own a home, you must do some careful tax planning as early as possible, indeed immediately after the parties begin to realize that divorce is inevitable.

Your house is probably your largest asset. You would like to keep it or - if it has to be sold - you want to pay as little tax as possible.

Under current tax law, married taxpayers can completely exclude from taxation up to $500,000 of any profit they make when the house is sold, so long as during the past five years prior to sale (1) they both lived in the house for at least two years and (2) at least one spouse owned the home for at least two years. The IRS calls this the "ownership and use" test. Congress decreed that married couples -- who meet the use and the ownership tests -- could save up to $500,000 of their gain. Single people, however, or taxpayers filing a separate tax return, could only save $250,000 of gain. How does this impact on the divorcing couple? Let us look at the following example:

Several years ago, a husband and wife bought a house for $200,000; it is now worth approximately $500,000. They have three children in their early teens, who want to stay in the house until they complete high school. The husband has agreed to move out, but the wife will stay in the house at least until the children reach age 18. (It must be pointed out that neither the law nor this columnist has a gender bias, and thus is applicable regardless of which spouse stays in the house.)

In some situations, the husband will agree, pursuant to a divorce settlement agreement, to immediately transfer his one-half interest in the property to the wife. Alternatively, they may agree that the husband will retain ownership of his share of the property until some later time when it is sold, at which time any profits will be distributed pursuant to their Divorce Separation Agreement.

It is important to consider the tax implications for both scenarios. Where the husband transfers his share of the house [we'll presume it to be a 50 percent interest] to the wife, under certain circumstances the law treats this as a nontaxable event. Since 1984, under section 1041 of the Internal Revenue Code, any transfer of property between spouses or former spouses is considered non-recognized gain. The transfer has to be during the marriage, or as an "incident to a divorce."

The concept of "incident to a divorce," is very significant. According to Section 1041 of the Internal Revenue Code, a transfer of property is incident to the divorce if such transfer:

    • Occurs within one year after the date on which the marriage ceases, or

    • Is related to the cessation of the marriage.

The IRS has taken the position that if the transfer is specifically spelled out in the divorce or separation agreement, it is incident to the divorce only if the transfer occurs within six years after the date on which the marriage ends.

It should be noted that this non-recognition of gain concept is not available for transfers to spouses (or former spouses) who are nonresident aliens.

On the other hand, for transfers that are not made under a divorce or separation instrument, or that do not occur within six years after the end of the marriage, there is a presumption that the transfer was not related to the ending of the marriage. This is a presumption that can be overcome, if the parties can demonstrate facts to support the position that, in fact, this was really part of their divorce obligations.

In our example, the property was purchased for $200,000. Assuming no improvements were made to the property, the husband's basis in the property is $100,000. If the husband were to transfer his one half interest in the property to the wife, he would have no taxable consequences. The wife, on the other hand, would pick up the husband's basis in the property ($100,000), and her basis would thus become $200,000.

When the wife later sells the property she alone will pay tax on the gain from the sale. The amount of gain will be calculated by subtracting her basis in the property ($200,000 in our example) from the selling price of the house. If the value is still $500,000, she will realize gain in the amount of $300,000.

But since her husband no longer owns or lives in the property, she will be considered a single tax filer, and -- assuming she has met the use and ownership requirements) - she will only be eligible to exclude $250,000. She will have to pay capital gains tax on the difference, which is $50,000. Under current tax laws, in most cases (depending on her income) the capital gain tax will be 15 percent, and this will result in a federal tax in the amount of $7,500. And we cannot ignore any state income tax which she will have to pay.

Instead of the husband transferring his interest to the wife, the parties may agree that the husband will remain a co-owner of the property and will receive half - or some agreed upon portion - of the sales proceeds when the property is sold. The tax benefits of this arrangement can be significant.

Even though the husband no longer lives in the property, so long as the wife has been granted use of the property under a separation agreement or divorce decree, and they meet the other tests for the exclusion (i.e. use and ownership), up to $500,000 of gain can still be excluded from tax. This is because of a special rule under I.R.C. Section 121 that treats the husband as using the property as his principal residence during any period that the former wife uses the property as her principal residence. The rule only applies, however, if the husband still owns the property. In addition, the wife's entitlement to use it must be set forth in a separation agreement or divorce decree.

In our example, if the husband remained a co-owner of the property when it sold for $500,000, all $300,000 of the gain would be excluded from income. If the property is not sold until after the children move out and the property has appreciated beyond its $500,000 value at the time of the divorce, all of the additional gain would be excluded up to $500,000.

The most tax effective route is for is for both husband and wife to stay on title until the house is sold. This way they can take advantage of the full $500,000 exclusion, especially since real estate has appreciated dramatically in the past few years.

However, there are other factors - other than tax - that come into play when there is a divorce. The spouse using the property may not want to have a fixed date for selling and moving out of the property. Conversely, the other spouse may not want (or be financially able) to have an open-ended agreement as to the time for sale. For example, if the husband moves out of the house, but remains on title to the property with his wife, he may have a difficult time getting a new mortgage loan should he ever decide to buy another property in which to live.

Thus, husbands and wives who are in the process of separation must look carefully at the taxable consequences on how to deal with the house they own. If one spouse moves out and can no longer claim the family home as the principal residence, be prepared to pay the tax if there has been considerable appreciation of the family home. And, perhaps of most importance, make sure that your legal documents comply with the applicable federal tax laws. As with any tax issue, if you are not clear on the law, consult your financial and tax advisors.
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Smathers Mediterranean - OPEN TODAY SUNDAY FEBRUARY 12, 2006

Status: Active
Address: 7776 Firenze Ave. Los Angeles, CA 90046
Type: Single Family Home
Bedrooms: 3 Baths: 4
MLS #: 05-067485
Price: $2,400,000
OPEN TODAY SUNDAY 2/12/06 1-4PM
Beautiful Mediterranean property sitting on an 11,325 sq.ft. street to street lot. Lots of privacy. 2 story living room, 3 bedrooms, 4 baths, incredible gourmet style kitchen with oversized eating area. There is a den, wet bar, bonus room off of the pool/spa area.
Description:
SQFT: 3150 Year Built: 1969 Lot Size: 11325.00 SQFT
Fireplace: 3 Garage: 2 car Lot Description: Street to Street Heat: Central A/C: Central
Floors: tile More Info
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Should Holders of HELOCs Consolidate? Calculating Weighted Average Debt

by: Henry Savage: Realty Times
When property values were soaring and the prime rate was at four percent, home equity lines of credit were a great deal. With the prime at 7.25 percent and poised to rise further, folks with HELOCs are in a conundrum.

The scenario is common in most areas across the country: homeowners gloating about their new-found wealth through skyrocketing home values. With double digit real estate appreciation, home equity proved to be abundant.

What better way to take advantage of a smart real estate investment than to borrow against it? These lucky folks could take out a home equity line of credit (HELOC) equal to or near the prime rate.

Seeing as the prime rate was sitting pretty at four percent only a year and a half ago, homeowners were scooping up these loans like it was new found money stashed away in a forgotten hiding place.

But that was 18 months ago.

Consider this real life situation that accurately depicts the conundrum many homeowners are in today, thanks to the unusual interest rate environment.

Last week, I received a phone call from a client who wisely refinanced his 30 year fixed rate mortgage with me back in 2003, when mortgage rates were near 40 year lows. He refinanced his $275,000 balance to a 30 year fixed rate loan at 5.50 percent. His timing was perfect.

Since then, he reads all the news stories about how home values are continuing to rise at an unprecedented pace. At the same time, he is bombarded with media advertisements for HELOCs being offered at great rates.

So my client decides that it might be a good time to make some home improvements. Among other things, he wants to remodel his kitchen, install a brick patio and build a front porch. He goes to his bank and applies for a HELOC, and is delighted to learn that he's been approved for a $120,000 HELOC with an interest rate equal to the prime rate plus one half percent. Since the prime rate at the time was at four percent, the HELOC was carrying an interest rate of only 4.50 percent. To make the deal even sweeter, the bank allows interest only payments on the HELOC for the first 10 years. The monthly payment of the full line is only $450.

So my client closes on the loan, contracts his improvements and realizes he still has over $30,000 left on the line. He uses the balance and buys a new car. After all, $450 is a very affordable payment.

Let's fast forward to the present day. The prime rate has jumped from 4 percent to its current rate of 7.25 percent. Likewise, the rate on my client's HELOC is now at a much-less-desirable 7.75 percent. The payment spiked up to $775.

What's my client supposed to do? He can't stand the notion of the rate on his HELOC rising from four percent to 7.75 percent, and he hates the idea that the rate can continue to rise even more.

I tell him that he can certainly refinance his HELOC to a 2nd trust with a fixed rate, but most 2nd trust programs that carry low fixed rates require a short term, usually 5 or 10 years. A short term loan requires hefty payments. He doesn't want to increase his payment any more than it has already.

So I suggest that we run the numbers to see if refinancing and combining both loans would make sense. My client tells me that he doesn't want to touch his first trust because the rate is so good -- much lower than the fixed rate loans available today. This is true, I tell him, but his 5.50 first trust rate isn't so hot anymore, now that he has an additional $120,000 in mortgage debt that's costing him 7.75 percent.

I suggest that we calculate the weighted average of his mortgage debt.

A weighted average, by definition, is an average that takes into consideration the proportion of each component, rather than treating each component equally.

My client's total mortgage debt is made up of 2 components: a $275,000 1st trust and a $120,000 HELOC. To calculate the weighted average, we take the first trust component and multiply the loan balance by the interest rate. 275,000 X 5.50 percent equals 15,125. We do the same thing with the 2nd component: 120,000 X 7.75 percent equals 9,300.

Next, we add the two sums together: 15,125 + 9,300 equals 24,425.

To determine the weighted average, we then divide this sum by the total mortgage debt: 24,425 divided by 395,000 equals 6.18 percent.

Despite the great interest rate on the first trust, the actual weighted average interest rate that my client is paying for his mortgage debt is 6.18 percent.

I suggest that we refinance the whole ball of wax to one 30 year fixed rate of 6 percent. Such a rate would carry low closing costs and the interest cost of their mortgage debt would drop from 6.18 percent to 6 percent.

What about the payment? He was making interest only payments on the HELOC. Wouldn't his payment rise significantly since there would be an additional $120,000 amortized?

The answer is no. Since the interest rate on the $120,000 drops from 7.75 percent to 6 percent, I see from my calculator that the principal and interest payment on the new loan would only be $32 higher.

There are three distinct advantages to this arrangement. First, $120,000 of their mortgage debt is no longer subject to rate increases. Second, the overall "cost-to-borrow" drops from 6.18 to 6 percent.

Third, in exchange for a slight increase in payment, a much larger chunk of their monthly payment is going towards the curtailment of principal.

It's an unusual market, folks. Not often do you see an interest rate environment where the prime rate is significantly higher than 30 year fixed mortgages. For those who have very large HELOC balances subject to the prime rate, it may not be a bad idea to check the weighted average of your total mortgage debt.
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Investors cash in on real estate depreciation

Realty Tax Tips-Part 5: Pros and cons of owning properties
By: Robert J. Bruss: Inman News
(This is Part 5 of an eight-part series. See Part 1, Part 2, Part 3 and Part 4.)
In addition to owning your home, do you own one or more investment properties? If you do, or you would like to own real estate held for investment, it pays to understand the pros and cons so you can obtain maximum benefits.

You are not alone. Millions of U.S. homeowners own second homes and other investment properties.

At the recent International Builders Show in Orlando, economists David Berson of Fannie Mae, David Seiders of the National Association of Home Builders, and Frank Nothaft of Freddie Mac agreed house and condo sales to investors are major residential sales factors, perhaps as much as 10 percent of the market.

Their concern is these short-term speculators might all "dump" their properties on the market at the same time, thus causing significant local home-price declines. For this reason, many builders will sell their new houses and condos only to owner-occupants.

WHY INVEST IN REAL ESTATE? During 2005, the average residence appreciated over 10 percent in market value, according to the National Association of Realtors, the National Association of Home Builders, and other reliable sources. Of course, there are a few depressed areas lacking job growth where residential values appreciated slower or not at all.

Compared to the stock market and other alternative investments, real estate stood out as a great investment in 2005, especially for investors who leveraged their purchases by obtaining 80, 90 or even 100 percent mortgage financing. But the home appreciation rate for 2006 is expected to slow down, according to the economists mentioned above, to around 5 percent or 6 percent. However, that is still an excellent rate.

MAJOR TAX BENEFITS OF REALTY INVESTMENTS. A second major reason investors purchase real estate is for the big tax benefits if they "materially participate" in managing their properties. Even investors who hire professional property managers can meet this tax test by making the major decisions, such as setting tenant selection and repair policies, yet leaving the day-to-day operating details to their manager.

To enjoy maximum tax benefits, realty investors who materially participate in owning and managing their properties must own at least a 10 percent interest in the property. This leaves out investors in large partnerships and other group investments such as REITs (real estate investment trusts). Vacation-home owners who place their properties into a "rental pool" managed by others usually do not meet the material participation test.

If you meet these two management and ownership tests, then you can deduct up to $25,000 of your investment property losses against your ordinary taxable income if your adjusted gross income is less than $100,000. Most investment property losses are known as a "paper loss" (rather than an actual cash loss) because they are not cash-out-of-pocket losses.

When your annual adjusted gross income exceeds $100,000, the realty tax loss deduction gradually phases out to zero above $150,000 AGI.

However, unused deductions can be "suspended" and saved for use in a future tax year, or to shelter capital gains from taxation when the property is sold. IRS Notice 88-94 allows use of these suspended tax losses on an aggregate basis, rather than property-by-property, when selling.

The reason is that most investment property paper losses come from the depreciation deduction. Depreciation is a non-cash allowance for "wear, tear, and obsolescence" of the rental property building. Residential rentals must be depreciated over 27.5 years, but commercial properties are depreciable over 39 years on a straight-line basis.

In addition, depreciation is allowed over shorter 5- to- 10-year terms for personal property used in the rentals, such as apartment building washers and dryers. However, land value is not depreciable because it never wears out.

Your car or truck used to operate your investments can also qualify for tax deductions. In addition, equipment purchased to operate your investment property is also eligible for generous tax breaks, including first year expensing, subject to limitations.

THE BEST TAX BREAKS GO TO "REAL ESTATE PROFESSIONALS." If you are a "real estate professional," such as a realty broker, sales agent, property manager, builder, contractor, or leasing agent, you can qualify for unlimited tax deductions from your investment property against your ordinary income.

To qualify for the real estate professional unlimited investment property tax deductions, you must spend at least 750 hours per year, or over 50 percent of your working hours, involved in real estate activities.

DON'T FORGET DEPRECIATION RECAPTURE WHEN SELLING. The only downside of the depreciation tax deduction, which saves income taxes during investment property ownership, is at the time the property is sold Uncle Sam is waiting to "recapture" and tax the total depreciation deducted during the years of ownership.

To make matters worse, Uncle Sam imposes a special 25 percent recapture tax, with a very few exceptions. This tax rate is considerably higher than the current 15 percent long-term capital gains federal tax rate.

However, if the investor dies while owning depreciable real estate that would have been subject to the depreciation recapture tax rate, then Uncle Sam completely forgives all taxes that would have been due if the decedent sold the property before death. In other words, death is the ultimate tax shelter of all.

But capital gains taxes, and the recapture of depreciation tax, can be fully avoided by making an Internal Revenue Code 1031 tax-deferred exchange. To qualify, the replacement property must equal or exceed the old property's equity and cost without taking out any taxable "boot" such as cash or mortgage relief.

CONCLUSION: Investment real estate offers significant tax benefits both during ownership and at the time of resale or tax-deferred exchange. Not only do most investment properties appreciate in market value, but they also produce significant tax savings.

Next week: How tax-deferred exchanges can pyramid wealth.
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California real estate affordability falls

Home prices jump over 35% in Santa Barbara
Inman News
An affordability index produced by the California Association of Realtors trade group held steady from November to December but was down 5 percentage points since December 2004..

Only 6 percent of households were able to afford a median-priced home along Santa Barbara County's 45-mile-long South Coast in December.

The percentage of households in California able to afford a median-priced home stood at 14 percent in December, compared with 19 percent for the same period a year ago, the group reported today.

C.A.R.'s monthly housing affordability index measures the percentage of households that can afford to purchase a median-priced home in California. C.A.R. also reports housing affordability indexes for regions and select counties within the state.

The minimum household income needed to purchase a median-priced home at $548,430 in California in December was $134,200, based on an average effective mortgage interest rate of 6.33 percent and assuming a 20 percent down payment, C.A.R. reported.

At 24 percent, the High Desert region was the most affordable C.A.R. region in the state, followed by the Sacramento region at 19 percent. Santa Barbara County was the least affordable region in the state at 6 percent, followed by the Northern Wine Country region at 7 percent.

Affordability was also low in the Northern Wine Country (7 percent), Monterey (9 percent), San Diego (9 percent), Orange County (10 percent), Palm Springs/Lower Desert (10 percent), and San Luis Obispo (10 percent) regions, the association also reported.

Home prices increased from $960,000 to $1.3 million (35.4 percent) in the Santa Barbara South Coast area from December 2004 to December 2005, the association reported.

Prices increased 31.1 percent in the High Desert area, 26.2 percent in the Santa Barbara County area, and 20.6 percent in the Riverside/San Bernardino area in that time, according to the report. Price increases were slightest in the North Santa Barbara County area (4 percent), San Diego area (4.6 percent), San Francisco Bay Area (8.2 percent), and Palm Springs/Lower Desert area (8.2 percent) from December 2004 to December 2005.

C.A.R. reported that it will begin reporting the Housing Affordability Index on a quarterly basis – rather than a monthly basis – this year. The first quarter HAI will be released May 4. The California Association of Realtors has about 185,000 members.
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Home sellers benefit from adjusted cost basis

Part 2: Minimizing home-sale taxes
By: Robert J. Bruss: Inman News
(This is Part 2 of a five-part series. See Part 1.)
The starting point for avoiding long-term capital gains tax on the profitable sale of your personal residence and investment real estate is its adjusted cost basis. This number is needed because it must be subtracted from the property seller's "adjusted sales price" to arrive at the long-term capital gain when the property is sold. Most property owners think their adjusted cost basis is their purchase price. As we will see, that is often wrong!

1. The basic "adjusted cost basis" rule. The starting point is usually (a) the property purchase price, plus (b) any purchase expenses that were not tax deductible at the time of purchase.

EXAMPLE: If you bought your personal residence for $200,000, paid $2,000 in tax-deductible loan fee points to obtain your home acquisition mortgage, and paid $5,000 in various non-deductible closing costs such as transfer fees, attorney or escrow charges, and title fees, your home's adjusted cost basis is $205,000. The $2,000 mortgage loan fee points qualify as an itemized income tax deduction in the year of home purchase. Each "point" equals 1 percent of the amount borrowed. But the mortgage amount doesn't matter for determining the adjusted cost basis.

2. Subtract any "rollover" deferred capital gain from principal residence sales before May 7, 1997. If you used the old now-repealed Internal Revenue Code 1034 "rollover residence replacement rule" before May 7, 1997, don't forget to subtract from your home's adjusted cost basis, as explained above, the amount of any deferred capital gain from the sale of your prior principal residence(s). You might even have deferred "rollover" capital gains from more than one principal residence sales before new IRC 121 replaced the old rule. The new IRC 121 exemption, discussed below, includes these "rollover deferred capital gains.

3. If real estate was acquired in an Internal Revenue Code 1031 tax-deferred exchange, subtract the amount of the tax-deferred capital gain profit from the acquisition cost. Although your tax adviser will calculate your exact adjusted cost basis for property acquired in an IRC 1031 tax-deferred exchange, such as a rental house or an apartment building, a quick shorthand method to estimate your adjusted cost basis of the acquired property is to use your purchase price and then subtract your deferred capital gain resulting from the old exchanged property.

EXAMPLE: Using an IRC 1031 tax-deferred exchange, suppose you had a $100,000 capital gain on the sale of a rental house, which you traded for a $600,000 warehouse. From your $600,000 warehouse purchase price, subtract the $100,000 deferred capital gain to arrive at a $500,000 estimated adjusted cost basis for the warehouse. Of course, be sure to add any non-deductible acquisition costs to arrive at the warehouse's full adjusted cost basis.

4. Add the total costs of capital improvements made during property ownership. Most homeowners and property investors fail to keep accurate records of their total capital improvements added during ownership. Be sure to add the cost of capital improvements to your property's adjusted cost basis. To illustrate, if you paid a contractor to build a new $5,000 deck, or had new landscaping installed for $10,000, those are capital improvement costs to be added to your cost basis. However, if you did the labor yourself, then only the costs of the materials qualify as capital improvements. Your labor is valued by Uncle Sam at zero!

EXAMPLE: If you had a new roof installed on your house for $10,000, add that $10,000 to your home's adjusted cost basis. However, if you just repaired your leaking roof at a cost of $1,000, that's a personal expense without any tax significance because repair costs on a personal residence are neither tax deductible nor are they capital improvements. However, repair costs on an investment property are tax-deductible expenses in the tax year paid.

5. Subtract total property depreciation deducted on your income tax returns. If you rented all or part of your real estate during ownership years, you should have deducted depreciation on your income tax returns. To illustrate, if you rented your house to tenants for a year while you were in Europe, you probably deducted depreciation on your Schedule E of your income tax returns for those 12 months. That's the same place you reported the rental income. Or, if the property was always a rental during your ownership, then you had many years of annual tax-saving depreciation deductions. Add the total depreciation deducted on your tax returns and then subtract the total depreciation from the property's adjusted cost basis.

Depreciation tax deductions must be subtracted to arrive at your home's adjusted cost basis. Most investment property owners are very familiar with the depreciation deduction, which is a major tax benefit of owning depreciable real estate, but it also reduces their property's adjusted cost basis.

HOW TO KNOW YOUR "ADJUSTED SALES PRICE." After estimating your home or investment property "adjusted cost basis," if you are thinking of selling that property, it pays to estimate its adjusted sales price. Briefly, that is the gross sales price, minus non-deductible selling expenses such as the real estate sales commission, transfer taxes, and attorney or escrow fee. Such sales expenses aren't deductible, but they are subtractible from the gross sales price.

Your long-term capital gain is the difference between the adjusted sales price and the adjusted cost basis. This capital gain amount may be eligible for either full or partial tax exemption, or tax deferral, depending on the type of property (principal residence or other property).
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The Weekend Guide! February 9 - February 13, 2006

The Weekend Guide for February 9 - February 13, 2006.
Full Article:
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Forecast Looks Good for Commercial Real Estate

By: Jack Snyder: REALTOR® Magazine Online
With the U.S. economy growing and foreign investment at an all-time high, mortgage industry economists are predicting a solid year for commercial real estate.

"We're looking for a pretty good year, at least as good as last year and possibly better," says Doug Duncan, chief economist of the Mortgage Bankers Association of America.

Lending increased in all commercial sectors last year, with office development leading the way, followed by apartments, retail and hotels.

The mortgage bankers, who are currently holding their annual meeting in Orlando, applauded the recent extension of federally backed terrorism insurance, which they say gave commercial real estate a boost.
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Buying a House Gets Easier As More Homes Stay on the Market

Inventories are climbing in a number of cities. In another sign of a cooling housing demand, home-builder Toll Brothers reported a 29% drop in new orders.
By: Ruth Simon and James R. Hagerty: The Wall Street Journal Online
With the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities.

It is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. The slowdown is affecting both existing homes and new homes. Yesterday, the nation's largest builder of luxury homes, Toll Brothers Inc., reported a 29% decline in new orders in its first quarter, which ended Jan. 31. That was below many analysts' expectations and prompted a sharp selloff in Toll Brothers stock. And Ryland Group Inc., a Calabasas, Calif., builder that sells homes in a wide range of prices, recently announced that new orders declined 4.7% for its quarter ended Dec. 31.

Nationwide, there were 2.8 million existing houses and condominiums on the market at year end, according to the National Association of Realtors. That is down slightly from November's 2.9 million listings, but up 26% from a year earlier. Adjusted for seasonal variations, inventories have climbed 38% since April, according to Goldman Sachs Chief U.S. Economist Jan Hatzius, the largest eight-month increase on record.

The changing climate is particularly noticeable in once-hot markets such as Miami, Phoenix and Washington, D.C., and in areas such as Detroit, where price increases have been modest but the job market is weak. Some brokers report that traffic has increased in recent weeks. But with plenty of properties to choose from, buyers have become more selective.

The rise in inventories has been good news for people like Mike Perillo, an accountant who has been looking for a home in the Philadelphia suburbs for well over a year. "We're now seeing a lot more properties that appeal to us," says Mr. Perillo. "There's more on the market, and there seems to be a lot less people looking now as opposed to this time last year."

In Phoenix, where inventories have climbed steadily since last spring, open houses are attracting a steady stream of lookers, says Charles McLean, broker-owner of Century 21 Metro Alliance. "But people are taking their time," he says. "They're not just jumping and writing a contract." Mr. McLean says that if a listing doesn't attract enough traffic, within 30 days they will consider lowering the price.

In Detroit, sales fell nearly 10% in the fourth quarter and inventories climbed amid uncertainty about auto-industry layoffs. To stimulate demand, Real Estate One, a Detroit brokerage firm, has been running a companywide "Bonu$ Homes" promotion in which sellers agree to provide $2,000 to $10,000 toward buyer closing costs on purchases made before April 15.

"The creativity to sell homes is coming back," says Dan Elsea, president of brokerage services at Real Estate One. "We haven't needed it for years."

Economists and real-estate experts are watching the inventory numbers closely for signs of whether the housing market is poised for a soft landing - or something worse. When inventories are tight, buyers competing for scarce properties bid up prices. As the supply of homes on the market increases, price increases slow and buyers gain negotiating power.

The recent rise in inventories follows a prolonged housing boom during which strong demand and low mortgage rates triggered bidding wars and fueled double-digit price gains in many markets. But those days appear to be over. The National Association of Realtors said that it expects sales of existing homes to fall by 4.7% this year to 6.74 million and median home prices to rise an average of 5%, down from 12.7% last year.

Some analysts are more pessimistic. In a joint forecast issued last month, housing analytics firm Fiserv CSW, a unit of Fiserv Inc., and economic forecaster Moody's Economy.com, a unit of Moody's Corp., called for home prices to increase by an average of 1.5% this year.

With the number of listings rising and the pace of sales slowing, there is now a 5.1-month supply of existing homes on the market, based on the current rate of sales, according to the National Association of Realtors, compared with a record low of 3.8 months in January 2005. Historically, a 5.5-to-six-month supply has been considered a balanced market, says NAR Chief Economist David Lereah. But with the Internet making shopping for a home easier, he says, it is no longer clear just what a balanced market is.

Another uncertainty: how much of the increase in inventories is due to speculators looking to sell, and whether they will be more willing to cut prices as the market cools. Investors accounted for 9.5% of mortgages to buy homes through October, but their share of purchases peaked during the first half of the year, according to LoanPerformance, a unit of First American Corp. Brokers in markets such as Phoenix and South Florida say they've seen an increase in investor-owned properties for sale.

The sharp rise in inventories isn't universal. In Seattle, inventories have declined modestly over the past 12 months as a robust job market sustains demand. The supply is so tight, "I don't know if it can get any lower," says Michael Skahen, owner of Lake & Co., a Seattle brokerage firm.

In Dallas, inventory has edged up slightly, but the pace of sales is up. "The buzz around my office is that everybody is busy now," says Steve Hendry of Re/Max Associates of Dallas. "Our economy seems to be picking up considerably. It's just night and day compared to what was going on this time last year."

Still, the pinch is being felt in many corners of the housing market. The number of completed new homes currently on the market has risen nearly 40% over the past year, according to Hanley Wood Market Intelligence in Costa Mesa, Calif., a market research and consulting firm. The shift has been particularly noticeable where inventories had been thin: In central California, the inventory of new homes climbed to 238 in the fourth quarter, from just 26 a year earlier, an increase of more than 800%.

As orders slow, builders are engaged in heavy discounting and promotional activity, particularly among homes for the second-time, move-up and luxury buyer. A survey conducted last month by the National Association of Home Builders found that 64% of builders are now using incentives such as offers to pay closing costs and free upgrades; 19% are cutting prices.

Last week Standard Pacific Corp., a major builder, said that new orders, excluding acquisitions, fell about 20% in the fourth quarter compared with the same period a year earlier. Lennar Corp., another builder, recently offered discounts of $20,000 to $30,000, plus help with closing costs and bonuses to brokers, on selected homes in the Tampa area.

Robert Toll, Toll Brothers' chairman and chief executive, indicated that slowing orders appeared to reflect three trends. First of all, speculators, who buy homes as investments hoping to flip them later at a hefty profit, are getting out of the market and canceling contracts. Toll said it also is constrained by long delivery times in many communities. During the first quarter, delivery times have increased to 11 months or more - before the maximum was 11 months. Buyers are reluctant to commit to such a long delivery time when the future of the market is uncertain. Toll also has a big exposure to Washington, D.C., New Jersey, Phoenix and California - markets that appear to slowing more rapidly than some others.

The supply of unoccupied condominiums is also climbing in many areas. In New York's Westchester County, the number of condos on the market jumped to 617 at the end of 2005 from 397 a year earlier. In the Boston area, the number of condos listed at the end of January was 5,114, up from 2,876 a year earlier. In the Washington, D.C., metro area, new-home inventory climbed by more than 900% to 2, 413 in the fourth quarter over the same period a year earlier, largely because of the completion of several condo projects, according to Hanley Wood.

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2006 Home Sales Slower, But Sustainable

NAR
Home sales this year are expected to stay below the peak levels in 2005 but will remain historically strong, according to the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says the sales slowdown has already occurred. “Right now, home sales are a little lower than projected, but they can be sustained around current levels,” Lereah says. “Sometimes people lose sight of the fact that real estate is cyclical. Even so, sales will continue at a historically high pace with modestly higher interest rates as the year progresses, and 2006 is forecast to be the third-strongest year on record.”

Existing-home sales are likely to decline 4.7 percent to 6.74 million this year, down from a record 7.07 million units in 2005, while new-home sales are expected to fall 8.5 percent to 1.17 million from a record 1.28 million in 2005; both sectors would see their third-best year after the totals for 2005 and 2004. Housing starts are seen at 1.87 million units in 2006, down 9.3 percent from 2.06 million last year.

The 30-year fixed-rate mortgage should rise to 6.9 percent by the end of the year.
NAR President Thomas M. Stevens from Vienna, Va., says home sellers are making some adjustments. “It’s easy to understand that sellers have taken it for granted that it would be fairly easy to sell without much compromise during the recent sales boom,” says Stevens, senior vice president of NRT Inc. “Now that buyers have more choices, it’s even more important for sellers to seek advice from real estate professionals. Pros can recommend the right mix of improvements to maximize return, as well as bridge the differences between buyers and sellers that often arise in the negotiation process. Consumers should keep in mind that not all real estate professionals are REALTORS®, who subscribe to a strict Code of Ethics.”

The national median existing-home price for all housing types is expected to increase 5.0 percent this year to $219,200. At the same time, the median new-home price is projected to rise 5.7 percent to $250,900.

Inflation as measured by the Consumer Price Index is forecast at 3.1 percent in 2006. Inflation-adjusted disposable personal income is likely to grow 3.9 percent this year.
Growth in the U.S. gross domestic product is seen at 3.4 percent in 2006. The unemployment rate should average 4.8 percent this year.

NOTE: Minor revisions to monthly seasonally adjusted annual sales rates for 2002 through 2004 will be made when the January existing-home sales report is released on Feb. 28. Each February, NAR Research incorporates a review of seasonal activity factors and fine-tunes historic data for the past three years based on the most recent findings.

Additionally, within the next two months, NAR will revise national and regional median existing-home price data back to 1999. The fixed reporting sample of representative multiple listing services has been updated to reflect geographic changes over time so that the monthly samples for regional price measurements are as accurate as possible. The changes in price patterns will be consistent with previously reported data.

Editor's Note: For more housing statistics, visit the Research section at REALTOR.org.
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Windermere eyes second-home market

Launches niche marketing program and destination Web site
Inman News
Windermere Real Estate has launched a new Web site targeting resort and urban second-home markets across the West. The launch of WindermereDestinations.com is part of a new niche-marketing program within the brokerage company.

In line with Windermere's Premier Properties program, which offers exclusive marketing resources and a distinctive Web site tailored to luxury home listings, the Windermere Destinations program focuses on homes and condominiums located in resort, recreational, and urban destinations across the Western United States.

The development of Windermere Destinations mirrors the growing trend in second-home ownership across the nation. About 1 million vacation homes were purchased in 2004, representing about 13 percent of all homes sold, according to National Association of Realtors statistics. Further NAR data shows a near 20 percent increase in vacation home sales from 2003 to 2004.

"The Windermere Destinations program is in direct response to the steady increase of second-home ownership and the need for specialized, results-driven marketing resources for these buyers and sellers," said Matt Carroll, president of Windermere Real Estate.

Windermere Real Estate has more than 280 offices and 8,000 sales associates serving neighborhoods in Arizona, California, Idaho, Montana, Nevada, Oregon, Utah, Wyoming, Washington and British Columbia.
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Home Owners Spend Less on Remodeling

By: Sara Schaefer Munoz: REALTOR® Magazine Online
Home remodeling contractors finally have time to take a holiday — whether they want it or not.

In the last few years, many home owners took advantage of low interest rates to refinance mortgages and use the proceeds to pay for pricey home improvements that drove up the value of their homes. Now that rates are higher and the market less frenzied, home owners are not so motivated to undertake extensive projects.

Spending on home remodeling rose just 4.3 percent in 2005, peanuts compared to 2004 levels, which rose 20 percent over 2003, according to estimates from Harvard University's Joint Center for Housing Studies. The center also expects single-digit growth in 2006.

For home owners who do embark on remodeling projects, this could be good news. "For consumers, this means they are going to get contractors who return phone calls, and they are going to be able to get two or three bids, instead of just one," says Kermit Baker, a senior research fellow at the center.
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Housing Counsel: Starker Exchanges Can Defer Your Tax Payment

By: Benny L. Kass: Realty Times
The rules are complex, and the time limitations are strict, but if you plan to sell investment property, the Starker (like-kind) exchange will allow you to defer the profit you make.

Let's take this example. In the 1970's, you and your new spouse bought your first house for $30,000. You raised three children and in the early 1980's, that house was just too small for your growing family.

You bought a larger house, but decided to keep the old residence and rent it out. It is now worth approximately $700,000.

If you sell, you will have to pay capital gains tax on the profit. For this discussion, we will ignore any improvements which you have made, although when you calculate your profit, these improvements will increase your tax basis and thus lower your tax obligations.

You have made a gross profit of $670,000 ($700,000 - 30,000). There are other costs and expenses which will reduce your profit, such as real estate commissions, legal fees, and closing costs, but for our example, these items will not be considered. The current federal tax rate is 15 percent, and thus you will owe the IRS $100,500. You may also have to pay State tax on this profit. There is a way of deferring payment of this tax, and it is known as a Like-Kind Exchange under Section 1031 of the Internal Revenue Code.

This is not a "tax-free" exchange, although that is what it is often called. It is also called a "Starker exchange" or a "deferred exchange." It will not relieve you from the ultimate obligation to pay the capital gains tax. It will, however, allow you to defer paying that tax until you sell your last investment property.

The ideal exchange is a direct exchange. I own investment property A and you own property B (also investment). Both are of equal value. On February 1, 2006, you convey B to me and on that same day I convey property A to you. If there is a written agreement between us that this is to be a 1031 exchange, neither of us will have to immediately pay any capital gains tax on any profit we have made.

However, such a transaction is rarely possible. The logistics of finding the replacement property to be exchanged simultaneously with the relinquished property is very difficult, if not impossible to coordinate.

Many years ago, a man by the name of T.J. Starker sold property in Oregon, pursuant to a "land exchange agreement," but did not receive any money for the sale. Instead, the seller - a couple of years later - transferred replacement property to Mr. Starker. The Internal Revenue Service considered this a taxable sale, but the 9th Circuit Court of Appeals held that this was a deferred exchange which was permitted under Section 1031 of the Tax Code. In other words, the exchange did not have to take place simultaneously.

There are two kinds of deferred (Starker) exchanges:

    • a forward exchange: you sell the relinquished property, and within the time
      limitations spelled out in Section 1031, you obtain the replacement property;
      and

    • a reverse exchange: you obtain title to the replacement first, and then sell
      the relinquished property.

The rules are complex, but here is a general overview of the process. With some important exceptions (discussed below) the rules apply equally whether the exchange is forward or reverse:

Section 1031 permits a delay (non-recognition) of gain only if the following conditions are met:

First, the property transferred (called by the IRS the "relinquished property") and the exchange property ("replacement property") must be "property held for productive use in trade, in business or for investment." Neither property in this exchange can be your principal residence, unless you have abandoned it as your personal house. Your vacation home would also not qualify as investment property, unless you actually start to rent it out more or less full time.

Second, there must be an exchange. The IRS wants to ensure that a transaction that is called an exchange is not really a sale and a subsequent purchase.

Third, the replacement property must be of "like kind." The courts have given a very broad definition to this concept. As a general rule, all real estate is considered "like kind" with all other real estate.

Thus, a single family house can be exchanged for a condominium (or cooperative) unit; raw land can be swapped for an office building, and a farm can be exchanged for commercial or industrial property.

Before you decide to do an exchange, it is important that you determine the tax consequences. If you do a like-kind exchange, your profit will be deferred until you sell the replacement property. However, it must be noted that the cost basis of the new property in most cases will be the basis of the old property. Discuss this with your accountant to determine whether the savings by using the like-kind exchange will make up for the lower cost basis on your new property. Additionally, if your capital gains tax will be relatively small, you may decide just to pay the tax and not be a landlord anymore.

Here is a general overview of the requirements:

    1. Identification of the replacement property within 45 days. Congress did not
       like the fact that the Starker opinion imposed no time limitations on when
       the exchange could take place. Accordingly, the law was amended to require
       that the taxpayer identify the replacement property no later than 45 days
       after the relinquished property has been sold.

       A taxpayer may identify more than one property as replacement property.
       However, the maximum number of replacement properties that the taxpayer may
       identify is either three properties of any fair market value, or any number
       of properties as long as their aggregate fair market value does not exceed
       200 percent of the aggregate fair market value of all of the relinquished
       properties.

       Furthermore, the replacement property or properties must be unambiguously
       described in a written document. According to the IRS, real property must be
       described by a legal description, street address or distinguishable name
       (e.g., The Excalibur Apartment Building).


    2. Who is the neutral party? Perhaps the most important requirement of a
       successful 1031 exchange is that the taxpayer cannot receive (or control)
       even one penny of the net sales proceeds from the relinquished property. All
       such proceeds must be held in escrow by a neutral party, and go directly into
       the purchase of the replacement property. Generally, an intermediary or
       escrow agent is involved in the transaction.


       In order to make absolutely sure that the taxpayer does not have control or
       access to these funds during this interim period, the IRS requires that this
       agent cannot be the taxpayer or a related party. The holder of the escrow
       account can be an attorney or a broker engaged primarily to facilitate the
       exchange.

    3. Take title within 180 days: The replacement property must be obtained no
       later than 180 days after the relinquished property is transferred or the due
       date of the taxpayer's income tax return for the year in which the transfer
       is made. If, for example, you transferred the relinquished property on
       December 15, 2005, your tax return is due on April 15, 2006. That is only 121
       days. You either have to take title to the replacement property by that date
       or get an extension from the IRS so that you can extend out to the full 180
       days. It should be noted that as of this year, instead of the four month
       automatic extension, you can now opt for a six month automatic extension by
       filing IRS form 4868.

    4. Interest on the exchange proceeds. The interest which is earned while the
       sales proceeds are held in escrow is called the "growth factor," and any such
       interest to the taxpayer has to be reported as earned income. Once the
       replacement property is obtained by the exchanger, the interest can either be
       used for the purchase of that property, or paid directly to the exchanger.


       Reverse exchanges: As many taxpayers have discovered, it is sometimes
       difficult to meet the 45/180 day requirements. You have found the replacement
       property, but do not yet have a buyer for the relinquished property. And the
       owner of the new property is not willing to wait until you are able to go to
       closing on your current property.

Thus, you may have to go the reverse Starker route. Here, in very general form, are some of the important rules:

    1. The taxpayer must arrange for the replacement property to be held in
       a "qualified exchange accommodation arrangement." In government language,
       this will now be called "QEAA."

    2. Qualified indicia of ownership of the property by the QEAA is required. This
       means that the QEAA must either have legal title to the replacement property
       or other some other arrangement which is acceptable to the IRS to demonstrate
       ownership. A land sales contract (also called "contract for deed") may
       suffice.

       Under this latter arrangement, the QEAA will not have actual legal title, but
       will have certain obligations under a contract. This may - depending on state
       or local law - avoid having to pay a double recordation-transfer tax.
       Otherwise, this tax must be paid when the property is first transferred to
       the QEAA and then again when it is transferred to the ultimate taxpayer.

    3. No later than five business days after the property is transferred to the
       QEAA, the taxpayer and the exchange accommodation titleholder (called the
       QEAT) must enter into a written agreement which provides that the latter is
       holding the property for the benefit of the taxpayer in order to facilitate
       an exchange under section 1031. Generally, this can be accomplished by a
       lease of the property from the QEAT to the taxpayer.

    4. Both the taxpayer and the exchange accommodation titleholder (the QEAA) must
       file separate federal income tax returns, so as to advise the IRS of any
       income and expense incurred while the QEAT had ownership of the property.

    5. No later than 45 days after the replacement property is transferred, the
       taxpayer must identify the relinquished property. The IRS allows the taxpayer
       to identify alternative and multiple properties, and if the taxpayer owns
       several investment properties, this provides some flexibility as to which
       property will be sold.

    6. No later than 180 days after the replacement property is transferred to the
       QEAT, it must be conveyed to the taxpayer.

    7. Perhaps the most important aspect of a reverse Starker is the requirement
       that the taxpayer have a bona fide intent to engage in a 1031 exchange.
       According to the IRS regulations:


       At the time the qualified indicia of ownership of the property is transferred
       to the exchange accommodation titleholder, it is the taxpayer's bona fide
       intent that the property held by the property ... in an exchange that is
       intended to qualify for non-recognition of gain (in whole or in part) or loss
       under §1031.

In other words, you cannot buy the replacement property and then - as an afterthought - decide to treat the transaction as a 1031 exchange.

The rules are extremely complex. You must seek both legal and tax accounting advice before you enter into any like-kind exchange transaction - whether forward or reverse.
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Bathrooms As Home Offices For Type-A Workaholics

By: Jon Weinbach: The Wall Street Journal Online
With a BlackBerry, two mobile phones, three office computers and wireless Internet for his car, Greg Shenkman is never far from his work. But recently the CEO of San Francisco-based Exigen Group eked out more productivity by wiring the final frontier: his bathroom.

When Mr. Shenkman answers the speaker-phone in his shower, the water automatically shuts off. He can open the front door for deliveries while shaving. He's also put the finishing touches on a waterproof computer that will let him answer emails from his sauna. "I took Gates a little too literally," he says. "The flow of information never stops."

So it's come to this. The humble bathroom, long a place of refuge and solitude, is playing quiet host to more workplace transactions. Bathroom business has gone way beyond tapping out furtive emails on a BlackBerry. Lately, more hard-driving homeowners have converted their loos into virtual satellite workspaces, with retractable desks or waterproof touch-screen monitors. Manufacturer Acquinox of New York says sales of its steam shower/whirlpool units - a hands-free phone is standard in each - nearly tripled last year to 14,800 modules. Wisconsin-based Seura, meanwhile, reports rising sales of its vanity mirrors, which feature LCD screens in the glass. The mirrors, starting at $2,400, let users check their tie-knot, then flip a switch to watch the embedded TV.

Many Type-A bathrooms are showing up in high-end "smart homes," which feature computer systems that let homeowners control music, temperature and lights from wall-mounted touch pads. Now, builders and interior designers say, more owners also want toilet-side technology. Future Home, a Los Angeles-based entertainment-system installer, says half of its clients request tech gear in the bathroom, up from about 10% five years ago. A year ago, New Jersey-based smart-home installer Crestron began offering an Internet option on its home touch-screen monitors. And Audio One says about all of the 30 home-automation systems it's installed near its Miami head office in the past year -- prices can reach $200,000 - have featured TVs in the bathroom. "It's become a given," says company engineer David Sussman. "There's not much sanctity left."

For Jeff Borris, the bathroom serves an essential function - helping the sports agent keep constant tabs on the players he represents, including San Francisco Giants slugger Barry Bonds. Mr. Borris's home in Calabasas, Calif., has two bathrooms in the master suite, each with phones and flat-panel TVs so he can field calls and catch clients' games late at night or early in the morning. "My business knows no time, space or geography, so I'll take calls from anywhere," says Mr. Borris. "But I try to be real careful when I'm around water."

Many of these homeowners say they're just having fun taking technology to its extreme. But they're also on the front line of a broader move to trade contemplative solitude for networked productivity. BlackBerrys and cellphones have long let users check in from everywhere, and now laptops can be hauled to any corner of the home: The number of U.S. households with wireless networks more than tripled, to 12.5 million, from December 2003 to December 2005, says Dallas-based technology researcher Parks Associates.

The upshot? According to a recent report by Forrester Research, commissioned by Yahoo, 21% of homeowners with laptops and wireless broadband say they've checked their email in the bathroom. "People feel the need to be able to put out a fire from anywhere," says Catherine Stellin, vice president of research at The Intelligence Group, a trend-spotting firm. "Even from the toilet."

Working in the bathroom, of course, brings old workaholic conflicts (spousal discord, late nights) even closer to home. There's also Warren Struhl's worry - that he'll be outed when making a call from there. Mr. Struhl lives in Boca Raton, Fla., but he's the CEO of snack-food maker Dale & Thomas Popcorn, which is based in Teaneck, N.J., so he conducts much of his business by remote. In the morning, he spends his first quiet moments in the bathroom reviewing his overnight emails. He often dials into work calls on his BlackBerry, and he figures that if he happens into the bathroom, the acoustics may give him away. To avoid embarrassment, he says, he'll cough to cover noises, or press the mute button. "They know by the echo," he says.

Another emerging hazard: the BlackBerry dunk. "There's something magnetic about a BlackBerry and a toilet," says Paul Normand, president of BlackBerry Repair Shop, a Houston company that specializes in fixing the devices. He says he gets about 100 broken units a day, and estimates five to 10 have fizzled out after customers dropped them in a sink, tub or worse. "They get leery when we ask them, 'Was the water clean?'"

Soaked BlackBerry

Melanie Brandman has been victim of two BlackBerry soakings - but says hers has never fallen into the toilet. Once, in the bathroom of a hotel in Turkey, she put her handbag in one sink while running water in a second one. She accidentally tripped the first sink's automatic sensor and flooded the bag with water, swamping her BlackBerry. (The other time involved dropping her device into a Starbucks grande soy latte.) Though she used to take the device into the bathtub with her, now she's much more careful. "I'm just too nervous I'll drop it," says Ms. Brandman, president of a New York public-relations firm. "I'm beside myself when I can't get my emails."

Of course, there's a long, shared history between productivity and the privy that predates even the corporate washroom. Privacy-seeking playwright Edmond Rostand wrote much of "Cyrano de Bergerac" in the bathroom, according to at least one source, "Uncle John's All-Purpose Extra Strength Bathroom Reader." President Lyndon B. Johnson ordered assistants to stand by and take dictation as he performed his toilet routine, writes biographer Robert Caro. Even The Fonz would motion toward the men's room when he invited visitors to "step into my office."

Still, as long as people see bathrooms as private, they will ask that their habits there stay anonymous. That's the case with a client of Lawrence Lanzilli, president of Manhattan-based Smart Home Designs. Mr. Lanzilli recently installed a $150,000 system for a 35-year-old Wall Street investor designed to make its owner productive the moment he opens his eyes. When his client shuts off his alarm, automatic shades gradually let sunlight in the bathroom. Then the towel warmers switch on, the floor warms and the toilet seat heats up.

When he turns on his faucet, a 15-inch LCD screen appears in the mirror with a touch panel full of icons; he can click on a "Bloomberg" logo to see his portfolio, an "email" logo to check messages and a "TV" logo for morning financial news. Behind that screen is a computer. Says the project's consulting architect, Adam Naim of Bricolage Design in Brooklyn, N.Y.: "It feels like it's a computer I'm walking into."

Attorney Brian Bixby says the added productivity is a mixed blessing. Mr. Bixby, chair of the private client group at Boston law firm Burns & Levinson, says his multitasking won him an important account. Checking his email by wireless late one night in the bathroom, he answered a query from a prospective client - and later heard that his 2 a.m. response had helped clinch the deal. Still, Mr. Bixby says it can be annoying to his wife, and remembers the day when work stayed behind at the office. "The concept of 9-to-5 has really disappeared," he says. "If the technology is available to be reached anywhere or anytime, why shouldn't a client expect that?"

Joel Hall had to draw the line. The 40-year-old Los Angeles software developer and engineer is a self-described gadget freak, and he's nearly done with a home-renovation project that will let him control temperatures in any zone of his house, and bring wireless Internet access and a flat-screen TV to his bathroom. "It's a little overkill. When you see these things available, you have to get them," he says. He likes to watch about 10 minutes' worth of news in there, but there's one boundary he won't cross. "I never read my email in the bathroom," he says. "I'm not that far gone yet."
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Living Large, Condo-Style

Supersized condominiums, or McCondos, are popping up in several cities.
By: Rich Motoko: REALTOR® Magazine Online
Affluent buyers now have access to 20,000-square-foot penthouses in Miami, 16,000-square-foot apartments in Las Vegas, and 10,000-square-foot units in Manhattan.

Experts say McCondos are just another status symbol. Setha Low, environmental psychology professor at City University of New York Graduate Center, compares these buyers to those who flock to gated communities. Low says that these buyers "want to be around other people like themselves."

Trump Group President Michael Goldstein adds that some buyers prefer condos for security, especially if they have large art collections and do not wish to hire private guards. He notes that buyers will spend hundreds of thousands a year in property taxes and tens of thousands per month in maintenance fees.

Professor Robert Fishman of the University of Michigan's Taubman College of Architecture and Urban Planning describes the trend as "elephantiasis," which he defines as "the disease or syndrome of an individual or species that, just before the crash, there's this huge expansion in size."
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Out with the cold, in with the new windows

How to select and replace home's old windows
By: Paul Bianchina: Inman News
If you're not relishing the thought of shivering through another winter with your chilly old aluminum windows, installing some new vinyl or upgraded aluminum windows is probably not as difficult as you might imagine, and in many cases is well within the abilities of the do-it-yourselfer. You can even tackle the project in stages, replacing one or two windows at a time as your budget and time allows. (One note about replacing your windows in stages: some window models will occasionally be discontinued and replaced with different ones, so talk with your dealer about your time frame and the availability of the windows you want before you get started).

SELECTING THE REPLACEMENTS

The overwhelming choice for today's homes is vinyl. Vinyl windows are attractive, affordable and very energy efficient. The vinyl frames do not conduct the cold like metal does, and the wide air spaces between the panes of glass offer very good insulating qualities. Vinyl windows are available in a number of different configurations, and when combined with options such as different grid patterns and a couple of different color choices, there's sure to be something available to compliment any architectural style.

If you prefer to stay with aluminum, look for windows with thermally broken frames. These energy efficient designs utilize a small strip of rubber, vinyl or other non-conductive material to separate the inside and outside of the frames, which greatly reducing the transference of cold through the metal frame.

OUT WITH THE OLD

Vinyl and aluminum windows are sold in a variety of standard sizes, in 6-inch increments. They are specified by the width and then the height, so a 5-0 3-6 window would be 5-feet wide and 3-feet 6-inches high. These sizes have been standardized for many years, so chances are that a new 5-0 3-6-vinyl window will slip perfectly into the rough opening of your old 5-0 3-6-aluminum window.

To remove the old window, first remove the exterior trim around the existing window to expose the nailing flange – the metal strip around the window that is used to fasten the window to the wall framing. Carefully remove the nails that were driven through the flange to hold the window in place, and with the help of another person lift the window out of the opening.

If your existing windows do not have trim around them, you will need to cut through the siding around the window to expose the flange. Measure out approximately 2 inches all around the existing window, then use a circular saw to cut through the siding. Remove the flanges nails and the window as described above.

IN WITH THE NEW

Chances are that your old window frame was thinner than the new one, so you will probably need to adjust the inner window surround to match the new window. First, measure from the face of the nailing flange on the new window to the inside face of the window itself. Next, mark this same measurement on the interior window surround, measuring from the exterior face of the wall. Allow an additional ¼ inch, then cut the wood or drywall of the interior window surround. Done correctly, when you slip the new window into the opening, the interior face of the window will butt up to the existing window surround with about ¼-inch gap.

Apply a bead of caulking to the inside face of the flange, and with the help of another person, lift the new window into the opening. Make sure the window is level and centered in the opening, then secure it in place by nailing through the flange into the wall framing. Follow the manufacturer's recommendations for nail size and spacing, and nail into the bottom and side flanges only – do not nail the top flange.

If the old window had trim pieces around it, you can reinstall the old trim (or cut new trim to fit) to cover the nailing flange and finish off the installation. If the old window did not have trim, you'll need to install some now. Select a trim board that fits the architectural style of the house, such as a 1x3 or 1x4. Place a scrap piece of trim against each side of the new window, and use it as a guide to mark the siding. Cut the siding along the marked lines, then cut and install the new trim in the space between the edge of the window and the cut edge of the siding. Caulk the new trim in place.

Finally, complete the interior installation. If the existing window surrounds are drywall, you can caulk or tape the gap between the window and the edge of the surround. For wood surrounds, install a complimentary piece of trim to cover the gap.

Vinyl and thermally broken aluminum windows are available through home centers, hardware stores, and window retailers. Ask to see actual samples before placing your order.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.
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Big tax savings for moving costs

Realty Tax Tips – Part 4: How you can deduct some moving expenses
By: Robert J. Bruss: Inman News
(This is Part 3 of an eight-part series. See Part 1, Part 2 and Part 3.)
Whenever I see a moving van, I think to myself, "I wonder if those folks are deducting their moving costs." Although not every household move is tax-deductible, if you change your work location within 12 months before or after the move, your expenses could qualify for Uncle Sam's generous moving expense deductions.

Both renters and homeowners are eligible for this tax break. Whether you itemize personal tax deductions, or claim the standard tax deduction, you can still deduct qualified moving costs on line 26 of your IRS Form 1040.

IRS Form 3903 must be used to list your deductible moving expenses. But there are two eligibility tests that must be passed.

THE VITAL JOB RELOCATION TEST: The first and most important moving expense-deduction rule is the job relocation test. To qualify, your new job location must be at least 50 miles further away from your old residence than was your old work site.

It doesn't matter if you changed employers, stayed with the same employer, became self-employed, or took your first job.

To illustrate, suppose your old home was six miles from your old job location. To qualify from the moving expense tax break, your new job site must be at least 50 miles further away from your old home.

In this example, that's six miles plus 50 miles, or 56 miles. Either spouse can qualify. Congratulations if you met this first test; now you have to meet a more difficult test.

THE WORK TIME TEST: The second moving-cost eligibility test involves the length of your work time in the vicinity of your new job location. It doesn't matter if you change jobs, location, or employer, but to qualify you must stay in the vicinity and work full-time at least 39 weeks during the 52 weeks after your household move.

Part-time work doesn't count. But either spouse can qualify. However, time spent searching for employment is irrelevant.

If you are self-employed, the test is tougher. Self-employeds must work at least 78 weeks full-time in the vicinity of their new job location during the 104 weeks after the residence move.

This tough rule prevents self-employed individuals from deducting moving expenses if they only work a few hours each week. However, the work time test is waived for disability, job layoffs, and the taxpayer's death.

NO NEED TO MEET THE WORK TIME TEST BY APRIL 15, 2006. As long as you meet the 50-mile additional job distance test, if you have not yet met the 39-week or 78-week work time test by April 15, 2006, when your 2005 income tax returns are due, you can still claim the deduction if you plan to continue working in the same vicinity.

However, if you later don't meet the 39-week or 78-week work time test, then you must amend your 2005 income tax return to delete your moving cost deduction and pay the extra income tax.

Another alternative, which most tax advisers don't recommend, is avoid the deduction when filing your original tax returns but later amend your return to claim a tax refund when you meet the work time test. The prime reason this choice is not recommended is that you might forget to later claim the large moving cost deduction.

DIRECT MOVING COST DEDUCTIONS ARE UNLIMITED. If you passed the two eligibility tests above, there is no limit to your direct moving cost deductions.
Examples of deductible household moving costs include: expenses for hiring a moving van, shipping your pets, in-transit storage costs up to 30 days, moving insurance, and even costs of transporting your "personal effects" such as your horse, yacht, and recreational vehicle.

If you drive from your old to your new home, you can deduct actual out-of-pocket costs, such as gasoline and oil, but not auto repairs and depreciation. Or, you can elect to deduct 15 cents per mile for 2005 household moves until Aug. 30, 2005, and 22 cents per mile for moves until the end of 2005. In addition, you can deduct parking and tolls.

NO DEDUCTIONS FOR INDIRECT MOVING COSTS. But non-deductible expenses involving your household location change include pre-move inspection trip fares, meals and lodging enroute, and real estate sales or lease commissions.

The expenses of moving your cook, maid, chauffeur, nurse, nanny, and butler are also non-deductible indirect moving costs.

If your employer reimbursed you for indirect moving expenses, such as a loss on the sale of your home, that reimbursement is taxable income to you. For this reason, it is usually best to ask your employer to pay any indirect moving costs directly rather than reimbursing you and raising your taxable income for the non-deductible indirect moving cost.

HOW EMPLOYER REIMBURSEMENTS AFFECT MOVING COST TAX DEDUCTIONS. When your employer reimburses you for your direct moving costs for which you have receipts, you have no additional taxable income because the reimbursement is offset by the deductible moving costs.

However, if your employer gave you a flat moving cost allowance, regardless of your actual moving expenses, the excess allowance exceeding your deductible direct moving costs becomes taxable income. Thus, employer reimbursement for non-deductible indirect moving costs becomes taxable income.

Military taxpayers have special rules that do not include in gross income the costs of moving and storage expenses paid by the military, or cash reimbursements that do not exceed actual expenses paid for permanent changes of duty station, including moving your spouse and dependents.

Only reimbursements in excess of actual moving expenses are included in the service member's gross income, while expenses exceeding reimbursements are tax-deductible. For full details, please consult your tax adviser.
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Which Makes a Better Investment, A House or a Multifamily Property?

With signs of the real-estate market cooling, it may get harder to profit from investments. June Fletcher offers a few pointers for investors about making strategic decisions.
By: June Fletcher: The Wall Street Journal Online
Question: With reports of the real-estate market cooling, should I be investing in single-family or multifamily properties in the future? - Al Lee, Los Angeles, Calif.

Every real-estate investor is a gambler. And over the past few years, just about anyone who bought a single-family home on either coast, where prices have been appreciating at double-digit rates, has been a winner.

To illustrate, let's say that you bought an investment home for $200,000 three years ago, and it appreciated 15% a year - not unusual in many metro markets. And you bought it the normal way, without any below-market or unusual financing, with 15% down and a 30-year fixed-rate loan at 6%. Assuming annual expenses of $3,000 in property taxes, $500 in insurance and $1,000 in maintenance, and assuming your marginal income tax rate is 40%, your yearly costs were $16,731. Even considering the fact that your $30,000 down payment wiped out your first year's appreciation, you're coming out ahead on the deal - and that's before any rental income you may have received.

But single-family homes aren't likely to keep appreciating at such a blistering pace. Prices of both new and existing single-family homes fell in December, marking the end of the national housing boom. Dave Seiders, chief economist of the National Association of Home Builders, predicts home prices overall will increase 6.5% in 2006, about half the gain they made last year, and will slow even further, to 4.4%, in 2007.

Meanwhile, experts predict a brighter future for multifamily properties, which includes both for-sale and rental units. According to Mr. Seiders, "multifamily is doing well." McGraw-Hill's Construction Outlook 2006 report says that multifamily housing starts are expected to rise 1% over the coming year, while the "the sharp rise in housing prices in certain markets," the report says, "provides room for rents to move up."

Emerging Trends in Real Estate 2006, a report issued by the Urban Land Institute and Pricewaterhouse Coopers LLP, says that multifamily properties will lead other housing sectors this year as renters enter the market in greater numbers, "creating a full-blown landlord's market." The National Association of Realtors expects that this year, condominium prices will again set records, and that median condo prices will outpace those of single-family homes, as they did last year.

However, if you buy and lease out multifamily properties, you likely will be dealing with far more tenants - and their late-night clogged toilet problems -than you will as a single-family landlord. Your record-keeping hassles also will be multiplied (a good way for small property owners to keep track of cash flow, tax deductions, utility costs and other financial matters is through Quicken Rental Property Manager 2.0, which costs $99).

You can also get some help through LandlordAssociation.org, an Erie, Pa.-based organization, which provides its members such services as legal and tenant forms, information on repairs and lead-hazard risks, tenant credit-check reporting, electronic rent collection, debt recovery and properties for sale. The organization also provides leads to local real-estate investment clubs and commercial lenders. Membership is $40 a year, or $50 for two years.

June Fletcher is a staff reporter at The Wall Street Journal and the author of "House Poor" (Harper Collins, 2005). Her "House Talk" column appears most Fridays on RealEstateJournal.com. Email your questions about the residential real-estate market. Please include your name, city and state. If you don't want your name used in our column, please indicate that. Due to volume of mail received, we regret that we cannot answer every question.
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EPA Proposes Regulating Home Renovations

The federal agency wants lead-paint rules for repairs to homes built before 1978, regulations that contractors say will sharply raise the price for renovations.
By: Sara Schaefer Munoz: The Wall Street Journal Online
In an effort to reduce lead poisoning in children, the Environmental Protection Agency is proposing a broad rule requiring contractors working on homes built before 1978 to use lead-safe work practices.

The proposal, published Jan. 10 in the Federal Register, would create the first nationwide requirements covering the way contractors perform routine renovations and clean up afterward. For any work that could disturb lead-based paint - including removing paint, taking down wallpaper or replacing windows - contractors would have to take various steps to minimize clients' exposure, including using special vacuums, sealing off work areas and posting warning signs.

A wider swath of the population has become concerned about the health hazards of lead paint amid a recent renovation boom, with Americans fixing up hundred-year-old Victorian homes in gentrifying urban neighborhoods and expanding midcentury split-levels in the suburbs. Lead poisoning is a potential hazard in any home built before 1978, the year when lead paint was banned. About 65% of current U.S. housing stock was built before 1978, according to the U.S. Census Bureau. Renovations of older homes can stir up lead dust that can be ingested or inhaled. Children are particularly vulnerable, because they absorb lead more readily than adults and are more likely to put dusty hands in their mouths.

The National Association of Home Builders says some members estimate the rule could boost the price of home renovations by 25% for consumers, because of expenses for insurance, training and equipment. The EPA estimates that the rule would cost the industry approximately $5 million a year.

If the rule is finalized in its current form, it could change the way many contractors work. At least one contractor on a work site would have to be EPA-certified in lead-safe work practices and would have to train workers on the site. Currently, general contractors involved in routine remodeling are required under federal law to give families an EPA pamphlet on how to protect themselves from lead-paint hazards during renovations.

While responsible remodelers usually take steps to minimize dust exposure, like sealing off the work area, "the average contractor does nothing, because there is no hard and fast rule on it," says Mike Nagel, president of Remodel One, a Roselle, Ill. design and remodeling firm. "They just go in and start replacing windows and knocking out walls."

The proposed rule comes as the $500 billion remodeling industry is starting to soften. According to the most recent data from the Commerce Department, spending on home improvements was down 4.1% in November from the previous month.

But some homeowners think the rule for contractors is a good idea. After 34-year-old Leslie Trundy started taking down plaster and removing wallpaper in her 1830s-era home in Bath, Maine, she decided to have her 15-month-old son tested for lead. Her son's blood lead levels were at 18 micrograms per deciliter, which health experts consider elevated.

Ms. Trundy has since had a certified lead-abatement firm replace window casings and doors and seal surfaces to minimize further risk. She says her son's blood levels have dropped. "It was only after he tested high that I really found out how much danger that put him in," says Ms. Trundy. "In hindsight, had we known, we would have quarantined the area off."

More than 300,000 children in the U.S. have elevated levels of lead in their blood, according to the federal Centers for Disease Control and Prevention. It can affect children's nervous systems, causing reduced IQ and learning disabilities. In large doses, it can cause blindness, convulsions and death. Lead exposure in pregnant women can affect fetal development and cause miscarriages.

Elevated levels are widely defined as 10 micrograms per deciliter of blood or higher, according to the CDC, but no safe levels have been established, according to Mary Jean Brown, chief of the center's lead poisoning prevention branch. Levels as low as two micrograms per deciliter have been known to affect children's school performance, she said.

Still, it is unclear how many children nationally get lead poisoning from remodeling jobs. Data collected by state health workers in Maine from 2001-2003 showed that 62% of children who had lead-blood levels of 20 micrograms per deciliter or higher were in homes with recent or ongoing renovations.

The likelihood a home contains lead-based paint varies with the home's age. According to a 2002 survey by the Department of Housing and Urban Development, just 24% of housing built between 1960 and 1977 contains lead-based paint, while it is found in 69% of housing built between 1940 and 1959 and in 87% of housing built before 1940. HUD researchers also found that housing in the Northeast and the Midwest had about twice the prevalence of lead-paint hazards compared with housing in the South and West.

While contractors laud the goal of reducing children's exposure to lead-based paint, they say the proposed rule is too sweeping. The National Association of Home Builders is studying whether routine jobs, such as window replacement, could pose a lead-paint risk, and plans to submit its findings to the EPA. "It's a question of whether EPA is painting with too broad a brush," says Gary Suskauer, the association's environmental policy analyst.

Contractors are also concerned that working under the assumption that lead is present will require expensive liability insurance, on top of costs related to paperwork, training and clean-up equipment. For example, a HEPA vacuum can cost more than $1,000, and replacement filters run as high as $250, says Mr. Suskauer.

"We are concerned about children, but we just don't feel that it's been proven that remodeling is a big cause of lead poisoning," says Michael Heuser, vice-chair of government affairs for the National Association of the Remodeling Industry, based in Des Plaines, Ill. Both Mr. Heuser's group and the National Association of Home Builders have worked with their members on voluntary lead-safety practices.

The public has until April 10 to submit comments on the proposal. The agency will then consider the public's input and issue a final rule.

The first phase of the rule to go into effect would apply to owner-occupied housing built before 1960 where a child under age 6 resides, rental housing built before 1960, and homes built between 1960 and 1978 where a child has been found to have high blood lead. The second phase of the rule would go into effect a year later and would apply to owner-occupied homes built between 1960 and 1978 where children under the age of 6 live, as well as rental housing built during the period. The proposal would not apply to activities that disrupt less than two square feet of painted surface, the EPA says.

Some states, including California, Indiana and New Jersey, already regulate renovations in pre-1978 housing. States could administer their own versions of the rule with EPA approval.

Rebecca Morley, the executive director of the National Center for Healthy Housing, a child-advocacy group in Columbia, Md., called the proposed regulations a "critical piece" of eliminating childhood lead poisoning. She said they should expand to include a ban on practices that can create a lot of dust, such as sand-blasting or torching painted surfaces. She also said the rule should require contractors to provide an independent lead-clearance test that assesses at what levels, if any, lead is still present when the job is done, rather than the on-site "white glove" tests that the EPA is proposing. She and other advocates also note the proposed rule doesn't cover other buildings where children may spend time, like day-care centers.

People who are planning renovations can learn more about minimizing risk by calling 1-800-424-LEAD or going to www.epa.gov/lead.
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The Weekend Guide! February 2 - February 5, 2006

The Weekend Guide for February 2 - February 5, 2006.
Full Article:
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Pending Home Sales Index Down, But Expectations Up

Pending sales have trended steadily down from a record index of 129.2 last August.
RISMedia
Pending home sales continue to decline but are expected to recover in the months ahead, according to the National Association of Realtors®.

The Pending Home Sales Index, based on contracts signed in December, was down 3.0 percent to a level of 116.4 from 120.0 in November, and is 5.5 percent below December 2004. Pending sales have trended steadily down from a record index of 129.2 last August.

The index is based on pending sales of existing homes. A sale is listed as pending when the contract has been signed and the transaction has not closed, but the sale usually is finalized within one or two months of signing. An index of 100 is equal to the average level of contract activity during 2001, the first year to be examined, and was the first of five consecutive record years for existing-home sales.

David Lereah, NAR’s chief economist, said momentum in the housing market shifts slowly. “Changes in the overall direction of the housing market are akin to a large ship making course corrections – it takes some time for the driving factors to materialize as a change in the sales level,” he said. “In many recent transactions we’re looking at a delayed effect of mortgage interest rates that peaked in November but are now lower than expected. Mortgage applications have trended up in recent weeks, so we shouldn’t be surprised to see pending home sales rise in the next couple months.”

View Pending Home Sales Data

Even with an upturn in sales, Lereah expects the housing market to stay below last year’s record. “We’re going through a period of adjustment. As home sellers recognize a return to more normal rates of price growth, some that have been holding out for higher prices will be more willing to negotiate terms that are acceptable to buyers but still provide them a solid return on their investment.”

Regionally, the PHSI in the South rose 2.3 percent in December to 135.9 and was 4.1 percent above December 2004. In the Northeast, the index increased 1.5 percent to 90.7 but was 11.1 percent below December 2004. The index in the West fell 8.1 percent to 117.1 in December and was 11.8 percent lower than a year ago. The index in the Midwest dropped 9.3 percent to a level of 105.8 and was 11.0 below December 2004.
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Too Many Flips Back Investors Into Tax Corner

By: Kay Bell: REALTOR® Magazine Online
Flipping real estate is a popular strategy these days, but beware — the Internal Revenue Service is watching.

If anyone completes several real estate transaction in a short time, the IRS might consider the property transactions a business rather than an investment strategy, warns Lonnie Davis, a certified public accountant with the Philadelphia office of CBIZ Accounting, Tax and Advisory Services.

If that happens, instead of paying lower capital gains taxes, investors face paying ordinary income taxes, including self-employment tax. And they’ll be unable to perform like-kind exchanges.

What’s the rule of thumb?

"It's a facts-and-circumstances test," says Davis. "There's no rule of thumb that says: Buy three houses, you'll get capital gains; buy five, and you're a dealer-trader. The IRS looks at whether the activity is really a business.”

Davis urges people who buy and sell real estate to ask themselves these questions to avoid running afoul of the IRS:


- How many properties have you bought and sold?

- How often have you bought and sold them?

- In terms of income, is it your primary business?


The IRS is looking to identify dealers because they put more money in the government’s coffers. "There's going to be a wake-up call for tens of thousands of people," says Mark Zilbert, broker-owner of Zilbert Realty Group in Miami.
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