Consider This – Death and Taxes

I could not resist the headline. As they are the only thing sure in life it makes sense to write about them. My experience gives me enough knowledge to paint a picture using broad brush strokes. Anyone thinking of purchasing real estate should discuss the purchase with their legal and tax professionals.

Let’s start with a brief note about death. To be specific, let’s talk about what happens to your real property when you die. Simply put what happens depends upon where you live and how you hold title to your property.

State and federal law govern how the estate of the deceased is distributed and taxed. If you live in one of the nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA or WI) and have a surviving spouse, most likely the property will automatically convey to the surviving spouse. If you place the property into a trust the trust may dictate what happens.

If you do not live in a community property state, or have no surviving spouse and the property is not in a trust, then most likely your property will need to go through probate. State law governs how the probate is handled. Some states have an inexpensive, streamline probate process. Other states have an expensive and lengthy probate process. Regardless of the state, any probate may become lengthy and expensive if there is a dispute among the survivors. This is part of the reason why it is important to create a will.

None of us want to think about death. And with the myriad of decisions to make during the purchase of real property this important issue may not receive the attention it deserves. If you have children from a previous marriage, a large estate or any other unusual circumstance it is in your best interest to discuss with the title officer or your tax/legal professional the method of holding title which will work best for your situation. You could also perform an internet search on how to hold title. Each state differs slightly so be sure that any article you read pertains to the state in which the property resides.

Moving on to taxes. As I’m sure the end result of reading about taxes is similar to that of having a lobotomy I’ll avoid lengthy discourse on the subject and limit the discourse to taxes relevant to real estate in San Juan County, Washington.

Since we were on the subject of death you should know that estate taxes will depend upon the total value of the estate including real and personal property. According to the IRS website, as of 2015 the federal tax applies to estates in excess of $5,430,000. The tax will not apply to an estate if it is left to a spouse or a federally recognized charity. Check with the state in which the property resides to determine the threshold for filing state estate taxes. According to the Washington State Department of Revenue as of 2015 that threshold is $2,054,000.

Property Taxes in San Juan County are paid semi-annually with the first half due on April 30 and second half due on October 31. The tax year runs from January 1 to December 31.

Typically the seller of real property will pay property tax to the date escrow closes. The buyer will pay from close of escrow to the semi-annual due date. These prorations are noted on the HUD1 closing statement.

If taxes have been paid on time then property taxes are pretty much a non-issue. Things become a little more complicated when the seller of real property has not made timely payments. This is where the preliminary title report becomes of value.

The purchase contract can provide a title review contingency. This contingency will give the buyer an opportunity to review the status of tax payments. If taxes are in arrears it would be a good idea to check with the escrow company to verify that there are sufficient proceeds from the sale to pay any delinquent property tax.

If the escrow closes in late March or late October I suggest the buyer contact the San Juan County Tax Assessor’s office to make sure any new tax bill is mailed to the correct name and address.

The San Juan County Land Bank Tax is paid each time the property sells. The tax is due at the close of escrow. It is typically charged to the buyer at a rate of 1% of the sales price of the property. All tax funds received go into a fund which is used to “preserve the natural heritage of the San Juan Islands”.

Washington State Excise Tax is also paid each time the property sells. The tax is due at the close of escrow. It is typically charged to the seller at the rate of 1.28% (1.78% for property within the city limits of Friday Harbor) of the sales price of the property. According to RCW 82.46.030 one percent of the funds are put into the county current expense fund and the remainder into the county capital improvements fund. Friday Harbor’s additional .5% tax funds are to be put into the municipal capital improvement fund.

FIRPTA, aka the Foreign Investment in Real Property Tax Act, is a withholding of tax on the dispositions of real property interests within the United States. It is a federal as well as a state (for those states with income tax) tax on the proceeds from the sale of real property by those persons who are NOT selling a principle residence and are NOT a resident of the state or the US. In other words, if you are selling your principle residence you are exempt from these taxes.

The seller of real property may be subject to both the Excise and FIRPTA taxes but it is the buyer of the real property who is responsible for withholding. Normally the escrow or the closing agent will perform the tasks of withholding and the filing of the proper tax forms. It is in a buyer’s best interest to use a qualified closing agent and to check with that closing agent to verify that the seller has completed the appropriate FIRPTA waiver or that the closing agent is prepared to withhold FIRPTA. Also check to ensure that there are sufficient net proceeds to pay any tax due.

Tax deductions (a favorite phrase) are one of the many advantages of owning real property. If you are ready to take advantage of some of the deductions available call or text me. I’ll get you started down the path to ownership.

Consider This – Use Interest Rates to Improve Your Buying Power

In my last post I talked about using leverage to buy into real estate. I’d now like to talk about using interest rates to increase your purchasing power. That means we’ll need to do a little math.

Before I begin I would like you to know that it is best to talk with a loan specialist before you begin your hunt for a home. While I can paint a rough picture of your financing, the loan specialist will be able to provide more exact numbers for your interest rate and payment amount.

For my examples I used an online mortgage calculator I found through a search engine. My examples may not include APR or annual percentage rate. They are not intended as an offer of financing.

SOLD by Roxy
SOLD by Roxy

With a little math we are able to find a starting point for your mortgage payment. As a rough rule of thumb your mortgage payment (principle, interest, taxes and insurance) should be about one-third of your before tax income. Take your monthly gross (before tax) income and multiply it by 33%.

Let’s set aside the tax and insurance costs for now and assume that you qualify for a principle and interest payment of about $1010 per month. At 4.5% that translates into a loan amount just under $200,000. But at 4% that translates into a loan amount just over $212,000. A simple one-half point decrease in the interest rate increased your buying power by about 6%.

Turning that around…with an interest rate of 4.5% your principle and interest payment on a $200,000 loan would be about $1014 and at 4% your principle and interest payment would be about $955. That’s a $59 savings every month just by having a lower interest rate.

SOLD by Roxy
SOLD by Roxy

There are a myriad of factors used to calculate the actual interest rate you will pay. Until they change the credit rating system your FICO score will be the single most important factor. Think, higher FICO equals lower interest. Work with your loan specialist to find ways to increase your FICO score. And do so long before you begin to hunt for a home.

Improving your FICO score is one way to obtain a lower interest rate. Buying down the interest rate is another. However, before you start spending money to save money, do a little more math. To see what you will really save you’ll need to calculate the monthly savings then determine how long you’d need to hold the property to actually save money. Here’s an example using the $200,000 loan;

You pay 1% of the $200,000 or $2000 to buy down the interest rate from 4.5% to 4%. Your payment goes from about $1014 to about $955. You save about $59 per month. Divide the $2000 initial investment by the $59 per month savings. In about 34 payments you’ll have saved the $2000 you invested and will begin to save money on the loan.

Do you plan to live in the property for 2.9 years? If the answer is yes, then by all means seriously consider buying down your interest rate.

SOLD by Roxy
SOLD by Roxy

Just as interest rates vary from hour to hour and lender to lender so will “buy down points”. I suggest to all potential home buyers that they contact at least three lending specialists. Ask for a good faith estimate from each so that you will know “the other fees”. Sometimes a lender will advertise an enticing interest rate and will make up the difference by charging higher fees.

Another difficult to execute but effective method for improving your buying power through lower interest rate is to watch interest rates and time your purchase with falling rates. Of course, if you have the ability to see into the future, I doubt you worry much about interest rates.

Currently interest rates are bouncing around at historic lows making now the perfect time to maximize your purchasing power. If you think rates are due to rise in the near future, call me. If you need help finding a proven loan specialist, call me. I can help you get you into your new home before we have to worry about rising interest rates.

Lessons Learned – The Value of Leveraging with Real Estate

The probability that in San Juan county property values will rise before the island economy recovers is something islanders should consider if they are thinking of purchasing a home.

The real estate market in the San Juan islands is a bit different than most other small communities. On the mainland the local economy typically drives the local real estate market.

The San Juan islands differ in that a significant number of properties are second or vacation homes for people who work and live in other parts of the country. These homeowners are using income generated elsewhere for their purchase. Therefore the island economy plays a smaller role in the decision to purchase.SalePending3

What might an island resident do to achieve their American dream of homeownership in this situation? One possible option is to “play the market”. Invest now into something small and affordable or in need of cosmetic fixing. As prices begin to rise you gain equity. Use that equity by selling the small home and purchasing a larger home.

Remember the big down cycle in the real estate market in the late 1980’s? While it wasn’t a crash as deep and long as the current cycle it did present some excellent opportunities to buy into real estate.  Once recovery began many places saw their values recover in less than one year.

If you are looking to achieve your dream of ownership think about getting ahead of the pack. Make your investment now and ride the market upward. You may have to lower your expectations. Instead of owning a dream home, make it your goal to ‘just get your foot in the real estate door’. If you aren’t handy enough to invest in a ‘fixer’, purchase small. If you are handy, consider a ‘fixer’. There is a lot to be said for sweat equity. Either way the plan is to hold onto the property long enough to build equity. Equity is used to leverage into a ‘better’ home as the market improves.

LyonsThink about this. Real estate is one of the few areas of investing where you can leverage into an investment. Let’s say you have $10,000 in the bank and have a stable job and good credit. You invest that $10,000 in a $100,000 house. Now assume the market recovers at a conservative 3% in the next year.

If you left the $10,000 in the bank do you think you’d receive a 3% interest rate? Probably not. Even if you were lucky your $10,000 would have earned only $300. Now say you invest that $10,000 in a $100,000 home. Your equity will be closer to $3,000 or ten times more than you’d earn from the bank.

If you’d like to discuss how you might leverage your savings into home-ownership give me a call. I’m here to help.

Lessons Learned – The Importance of Inspections

In my last post I talked about how to take advantage of the physical inspection report. In this and the next few posts I’ll talk a little more about the various types of inspections and the value they bring to the purchase process. If I could share only one lesson I’ve learned from the home-buying process it would be the importance of inspections. Inspections help to prevent the purchase of a “money-pit”. They help to support the value. And they provide a sense of security.

A properly drafted purchase contract will give the buyer the right to fully investigate the property. Typically they have a specified period of time in which to complete inspections. Inspections educate the buyer about existing issues providing them with a better picture of the condition or value of the property. The reports give the buyer documentation to support a request to the seller for a repair to a preexisting problem. And the report provides the new owner with a checklist which can be used to prioritize on-going preventative maintenance.

While the physical inspection report may be one of the first and more valuable investments you make in your new home there are other inspections to consider. The purchase contract and inspection contingency form point out some of the other areas to inspect.  The physical inspection report may call for additional inspections. And the disclosures may bring to light a potential issue. Review all of these and discuss with your Realtor® the cost and timing to have specialists perform an in-depth inspection.

SOLD by Roxy
SOLD by Roxy

Other inspections commonly performed within San Juan County are those for the septic, well and wood-destroying organisms. My next few blog posts will talk about these inspections in a little more detail. If you’d like to learn more please feel free to call or text me at my anywhere number 619.224.9015 or e-mail Roxy@RoxyMarck.com

Lessons Learned – Take Advantage of Your Inspection Report

For many having a home inspection completed before closing escrow is a bit like purchasing insurance. If everything is in working order it seems like a waste of money. You can’t hold onto or cuddle-up with or even resell “peace of mind” which makes the primary reason for an inspection a bit difficult to embrace. For most of us the value is found only when a major defect is discovered and we have the option to cancel the purchase or make a price adjustment.

crow_vale_barn_webYet there is more to a home inspection. These inspections also provide the would-be home-owner a basis for maintenance planning. One of the best ways to retain or improve your home’s value is to keep it in good repair. For example, the report discloses missing or damaged flashing at the chimney. There is no visible evidence of water intrusion. Yet water is and has been slowly seeping into a roofing truss. As time passes a minor repair issue grows into a major repair which lowers the value of the home.

Water, electricity and propane are expensive on the island. Homes in good repair save money every single day in the form of less waste of these resources. Having a professional inspector’s written report highlights existing or developing problems and gives a homeowner the ability to make minor repairs which result in savings on the cost of these items.IMG_4226

At some point, usually ofter closing escrow, it is a good idea to review your inspection report and create a spreadsheet listing the the major components of your home such as heating, plumbing, electrical, roof and foundation. The inspection report usually breaks down your home into these components. From the report note the age and condition and any notations or suggestions into separate columns. If the report doesn’t give you an approximate age and life expectancy you’ll have a little resdream_girl_webearch to perform before you enter that information.

Lesson learned, Orcas Island is a small community where you may run into tradesmen on the ferry, in the local hardware store or in line at the grocery store. The good tradesmen on the island are usually busy. Those who love their trade also love to talk about their service. Whether you hang-out in the store or volunteer with one of the many organizations, go out and meet the locals. Like all small communities people are more willing to give priority to a neighbor over a total stranger. Can you think of a better way to kill an hour long ferry ride than talking to a professional about work you may need to have done at your new home?

If you want to become “a local” and need a place to start, call me at 619.224.9015. We will find you the perfect home while discussing the method of networking which best meets your needs.

Lessons Learned – Buying Orcas II

Back again! It’s now September of 2001 and I’m off to Orcas Island to hunt for property. Let’s take a moment to talk about a few things I should have thought about before I started looking.

Orcas, as you’ve probably already figured out, is located in the Pacific Northwest. Summer days are long and warm.  As a summer visitor from San Diego one tends to forget the flip side of that benefit, the short, cold days of winter. Orcas is mountainous. During the winter the north sides of Mount Constitution, Pickett, Entrance, Willard, Turtleback, Buck, etc. receive significantly less light than the south sides.

Mount Baker
Mount Baker

There are a large number of tall trees growing on the island. These factors should be considered when planning to purchase a home in which you intend to live during the winter. I’m not suggesting that you eliminate a home on the north side of a mountain. But it could be a consideration if you are trying to decide between two homes.

The economy on Orcas is tourist-based. If you plan to rent out the house when you aren’t vacationing, expect very little income. You might consider turning the property into a vacation rental but there is a down-side to that also. I’ll talk a little more about renting in a future blog post.

Okay, back to Orcas and hunting for property versus sitting on a log at North Beach drinking in the view.

North Beach
North Beach

I’ve found a couple of vacation rental condos available in Eastsound. They have a fabulous view of the water, a live-in property manager to handle all the details of renting and are well within my budget. The market analysis indicates rising values. Everything looks attractive except the limitation on how much I can use the place myself.

While I agonize over my decision it is brought to my attention that a certain family member will be heartbroken if I don’t at least look at the home they have for sale. The price is a smidgen above my comfort price but well within my qualification. I figure it wouldn’t hurt to at least look at the place.

And now we come to my first mistake. I fell in love with the view. I’m certain that I was manipulated into a visit at sunset. The sky was a palette of color ranging from deep blue to gold to bright orange. I could see sail boats off the northwest shore and the Canadian Rockies in the distance. In front of this was a perfect view of one of my favorite places on the island, Madrona Point.

Who wouldn't fall in love with this view?
Who wouldn’t fall in love with this view?

What color was the carpet? Don’t know, wasn’t installed yet. Did the roof leak? Don’t know, wasn’t finished. Decks were in the process of being built. You could not inspect the foundation because the crawl space was filled with junk. Appliances were sitting ready there ready to install. Lesson learned, make sure the work is complete before you close escrow. And have a second inspection to be sure the work is completed properly.

I wrote the offer anyway. I thought that since this was a purchase from a family member I was reasonably assured that the work would be completed with good attention to detail so I skipped the second inspection. Unfortunately the contractor they hired didn’t install a critical flashing. Years later I faced an expensive repair. Oh and maybe you should spend a little time looking at the house instead of the view. Just a thought.

Stay tuned for things I’ve learned about home inspections. Or if you are ready to start your property-hunting adventure call me at 619.224.9015 and we’ll get started.

Lessons Learned – Buying Orcas

This is the first post in a series about the home-buying process on Orcas Island. Falling in love with the island happens to many visitors. If you are a repeated visitor the itch to own can become a burning desire. This is my story.

Let’s start with a little background. I spent part of my childhood on Orcas. Within a month of my eighteenth birthday I fled “Orcastraz” for the mainland. At that time Orcas was a little light on engaging activities. Sailing, boating, and watching door knobs rust were about it. I needed more.

I landed in San Diego where I have spent most of my adult life, the last twenty-five years as a Realtor.

Let’s dial the time machine back to November of 2000. I’m sitting in my car in the parking lot known as “the I-5” staring vacantly at the license plate on the car in front of me, ICURF8. The hot, harsh reality of day-to-day living in southern California has blown away the memories of my idyllic late-summer vacation on Orcas Island. It’s about a hundred and five degrees outside. Oh, how I wish I could just be sitting on a log at North Beach. That’s when I asked myself, “Why not?”.

San Diego’s real estate market was rocketing toward the bubble. I had loads of equity along with a stable income, two of the more important ingredients in the home-buying process. As a licensed agent I have access to like a million loan officers. I call my favorite to learn that I’m pre-qualified for a fairly large loan. Big whoop, right? Pre-qualifying for a loan simply meant that I could fog a mirror and talk to a loan officer.

I am a fairly conservative person and did not want to overextend myself. So I took the next step and completed a loan application with a knowledgable lender familiar with financing on Orcas. After they checked my credit, income and expense reports and tax returns I received conditional loan approval. Conditional? Yes, conditional approval meant that as a borrower I had the income, credit and reserves necessary to finance the purchase of a property. The condition was that I find a property that would qualify for financing. At that time this simply meant that the property actually existed and was still standing.

Time to start hunting for the perfect property. I arranged to spend a little extra time on island my next visit to look at the housing inventory. Stay tuned for my next post when I discuss some of the things I learned about the house-hunting process on Orcas. Or if you have equity or savings, a stable job and are ready to start hunting for your new home call me at 619.224.9015. I’m here to help.

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