Joe Capote

December 9, 2010 • 1:39 pm 3

How Eliminating the Mortgage Interest Deduction Affects the San Bruno Park School District

Every once in a great while, the lines between Real Estate and Education blur. For example, putting a parcel tax on the local ballot to fund your local school district’s budget shortfall has been a hot ticket item for many localities over the last year. Once again real estate and education cross paths as congress fires up discussions regarding possible elimination of the mortgage interest deduction as a means of addressing the burden of the federal budget deficit.

As many of you know, owning a home has concrete tax advantages. The United States is one of the few if not only countries in the world that allows taxpayers to use mortgage interest as a way to reduce their tax responsiblity. This deduction has been instrumental in supporting a healthy housing market, including single family homes and investment properties. Yet once again the mortgage interest deduction has found itself in the crosshairs of a congress starving for ways to reduce the ever-growing federal deficit.

From the outside looking in, I can see why congress would want to consider this. And for the millions of people who don’t currently pay mortgage interest, the idea of reducing or eliminating the MID seems all well and good. Congress and the President Obama’s Fiscal Deficit Commission are throwing around some pretty hefty numbers in terms of deficit reduction if the MID is eliminated in part or even in full.

It would also be of little secret that the National Association of Realtors opposes this idea. I won’t lie to you, Realtors like myself have vested interests in the success of the real estate market. The last thing the real estate community wants is to see is a drop in the sales volume and median home price. However, if the mortgage interest deduction is eliminated, it is clear that the demand for home ownership will wane.

I believe Congress, and those who support the elimination of the MID, are well meaning but are missing the big picture. Eliminating the MID has very direct consequence on every home owner who pays a mortgage. It will also have a direct effect on home prices and sales as well as real estate investments and those who own condos or PUD’s. I mean, let’s face it. Who would ever consider purchasing a condominium without the benefits of the mortgage interest deduction?

But back to my point. There are also severe indirect consequences of MID elimination that congress may not be thinking about. On December 8th I watched as the San Bruno Park School District board discussed how they were going to address what appears to be a 4.9 million dollar shortfall in the current budget. The majority of the shortfall is a result of declining property tax revenue. For those who may not know, a large portion of a district’s revenue are tied directly to property tax revenue. Declining property values result in declining property taxes and ultimately mean less money for school districts.

So the formula as I see it is simple. Eliminating the MID will result in less demand for home ownership. Less demand for home ownership results in declining property values. Declining property values result in declining property tax revenues. Declining property tax revenues equal less money for school districts.

So, even if you don’t own a home or pay a mortgage, schools in the SBPSD receive less money. As a parent or a student, you get the added benefit of watching the SBPSD play yet another round of “Spin the Wheel of Reduced Education Services and Capital Improvements”, a game that has become all too well-known in our school district and others across the state.

But there’s more. If you own a home or multi-unit investment, you also know that home prices and rents are in part influenced by local schools. So underperforming schools have a direct impact on home prices and rental income whether or not you use the MID as a means of lowering your tax base. So ultimately, your home or your investment will be worth less money.

And don’t even get me started on how the further decline in property values will affect a San Bruno real estate market that is just starting to see a decline in distressed properties.

I’m imploring Senators Barbara Boxer and Dianne Feinstein to consider this when discussing the elimination of the mortgage interest deduction. Are you?

For more information, please visit me on the web at www.JosephCapote.com.

Filed under: Buyer's Blog, Realtor Trends, Seller's Blog, , , , ,

September 21, 2009 • 10:44 am 0

Tax Benefits of Home Ownership

Home ownership—it’s the American dream, isn’t it? It’s also a taxpayer’s dream, because home ownership is full of tax benefits. The interest on your mortgage payments and real estate taxes—it’s deductible. Settlement or closing costs when you buy your home—some are deductible. Capital gains you realize when you sell your home—exempt from taxes, with some restrictions. And if you use a part of your home for business, you may be able to claim a tax deduction for some of your house expenses. In short, home ownership may be your most profitable investment, from a tax standpoint.

Let’s take a closer look at some of these tax benefits. Keep in mind that this article is for informational purposes only and is not intended as legal, accounting, or tax advice. You should consult a tax professional for details.

The Home Mortgage Interest Deduction
If you itemize deductions on your federal income tax return, you can generally deduct all of the interest you pay on any loan that is secured by your home, whether that loan is called a mortgage, a second mortgage, a home equity loan, a line of credit, or a home improvement loan. This applies to both your principal residence and a second home. You can deduct the interest on up to $1 million of home acquisition debt ($500,000 if you’re married and file separately). You can also deduct the interest on certain home equity loans, regardless of how you use the loan proceeds, with two limitations:

•Your deduction is limited to interest on the amount of debt that does not exceed the equity in your home (the fair market value of your home minus the total acquisition debt on that home)
•Your deduction is limited to interest on up to $100,000 (or $50,000 if you’re married and file separately)
For complete information on the home mortgage interest deduction, see IRS Publication 936 Home Mortgage Interest Deduction, available online at http://www.irs.gov or at your local IRS office.

The Real Estate Tax Deduction
Homeowners can also deduct real estate taxes, whether the state, county, city, township, or some other local government body imposes them. This applies to all the real estate you own—this deduction is not limited to just your primary and secondary homes, as is the home mortgage deduction. Only the person who owns the property can claim the deduction.

The Closing Costs Deduction
When you buy a home, or refinance an existing one, there are generally a number of closing costs, including attorney’s fees, recording fees, title search fees, document preparation and processing fees, as well as points. Points are fees charged by your lender when you take a loan secured by your home. Each point is one percent of the amount borrowed. Generally, you could deduct points as mortgage interest but you’d have to spread your deduction out over the entire life of the loan. If you itemize deductions on your tax return, you can deduct points in the year you buy your principal home, provided you meet certain requirements (these requirements are listed in IRS Publication 936). You can even deduct points that the seller pays for you.

Other non-deductible closing costs that can be added to the tax basis of your home include attorney’s fees, abstract fees, charges for installing utility services, recording fees, title search fees, document preparation and processing fees. For more information, see IRS Publication 530 Tax Information for First-Time Homeowners available online at http://www.irs.gov or at your local IRS office.

The Home Office Deduction
You may be able to claim a deduction for certain home expenses if you use a part of your home for business. Even if you don’t qualify for a home office deduction, you may be able to deduct certain business expenses, such as office supplies, postage, or the cost of adding a second telephone line. You may also be able to depreciate the cost of computers and other business machines as well as office furniture you use at home. The requirements for the home office deduction are fairly strict, and the calculations fairly complicated—see IRS Form 8829 Expenses for Business Use of Your Home and the Instructions for Form 8829 available online at http://www.irs.gov or at your local IRS office.

The Tax Treatment When You Sell Your Home
If you’re lucky enough to sell your home for more than you paid for it, you may be able to exclude the gain from federal income taxes. You can exclude up to $500,000 of gain if you are married, file a joint tax return, and the home was your principal residence for at least two out of the last five years preceding the sale. If you’re not married or file a separate return, you may exclude up to $250,000 of gain. For example, let’s say you and your spouse bought your house five years ago for $100,000 and are selling it today for $300,000. Your entire gain of $200,000 ($300,000 – $100,000) is excludable, which means you don’t have to report it on your income tax return. This exclusion can be used every two years. In certain situations, you may be able to prorate exclusion of the gain if it occurs within two years of a previous capital gain exclusion if the sale of your home was due to a change in place of employment, health reasons, or other unforeseen circumstances. If you sell your principal residence at a loss, you generally cannot deduct the loss on your tax return. For more information, see IRS Publication 523 Selling Your Home available online at http://www.irs.gov or at your local IRS office.

The tax benefits associated with buying a home, selling a home, and all the time in between truly make home ownership a taxpayer’s dream. Consult your tax professional to make sure you take advantage of all the tax benefits you’re entitled to.

For more info, visit the buyer’s center at http://www.JosephCapote.com

Pilfered from IRS.gov – http://www.irs.gov

Filed under: Buyer's Blog, , ,

September 14, 2009 • 7:25 pm 0

Tax Benefits of Homeownership

As a Realtor, I sometimes take it for granted that folks know and understand the tax benefits of homeownership. While many buyers do know and understand this, some folks haven’t heard that home ownership can be a tax benefit. Additionally, even those that know about the tax benefits may not understand exactly how the tax benefit can apply to them. Here is a simple breakdown that will hopefully give potential home buyers a better understanding of the tax savings possible through home ownership.

The tax deductions you’re eligible to take for mortgage interest and property taxes greatly increases the financial benefits of homeownership. Here’s how it works.

Assume:
$9,877 = Mortgage interest paid (a loan of $150,000 for 30 years, at 7 percent, using year-five interest)
$2,700 = Property taxes (at 1.5 percent on $180,000 assessed value)
______

$12,577 = Total deduction

Then, multiply your total deduction by your tax rate.
For example, at a 28 percent tax rate: 12,577 x 0.28 = $3,521.56
$3,521.56 = Amount you have lowered your federal income tax (at 28 percent tax rate)

Note: Mortgage interest may not be deductible on loans over $1.1 million. In addition, deductions are decreased when total income reaches a certain level.

For salaried employees that make good money and pay a lot of taxes, home ownership is a good way to offeset the taxes they pay every year. Tax savings is one of the many benefits of home ownership. For more on how home ownership can benefit you, visit the buyer’s library on my website at http://www.JosephCapote.com.

Filed under: Buyer's Blog, , , ,

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