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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