Home Sale Profits? Watch Your Taxes!

In today's housing market, with prices still strong in parts of the country, people continue to search for fixer-uppers to buy. There are two reasons to buy a house that's in less than perfect shape: Either to fix it up and move in, or to fix it up and sell it for as big a profit as possible.

There are plenty of lenders who will help you get the mortgage to both buy this type of house and to fix it up. Before you do, however, make sure that you understand the income tax rules and regulations that will apply if and when you sell the property.

If this will be your only home and you will live in it during the rehab, you can get a normal mortgage. In fact, the FHA offers special “fixer-upper” or rehabilitation mortgages. Often referred to as 203(k) loans, they will let you finance both the cost of the home and the cost of fixing it up. You can even use a 203(k) loan to convert a single-family home into a duplex, triplex or four-plex.

With a 203(k) mortgage, you can either hire a contractor to do the work, or do it yourself. In fact, many people see the phrases “some work required,” “needs refurbishing,” or “home handyman special” as an opportunity to add tens of thousands of dollars to the value of the home through “sweat equity” — meaning they do the work themselves.  

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Home Starts Up - Inflation Not Helping

Consumer prices resurged a bit and builders broke ground on more new homes in December, but the activity did little to change economists' view that inflation is cooling and that the housing slump has yet to hit bottom.

A bump up in energy prices caused consumer prices to rise 0.5% in December from a month earlier after remaining flat or falling in the three previous months, the Labor Department reported yesterday. Excluding food and energy, so-called core prices — a measure officials at the Federal Reserve watch closely — rose 0.2%, in line with economists' expectations, as apparel retailers ratcheted back holiday discounts. Compared with a year earlier, overall prices rose 2.5% and core prices were up 2.6%.

Meanwhile, unusually warm weather prompted new-home construction to rise for the second consecutive month, the Commerce Department reported. At a seasonally adjusted annual rate of 1.64 million in December, housing starts were up 4.5% from November, but still down 18% for the year. All of the gain came in multi-unit structures such as apartment buildings. Construction of new single-family homes, which account for about three-fourths of total activity, fell 4.1% in December from the previous month despite the warm weather. Single-family housing starts were down 25% from a year earlier.

Economists saw the reports as well within the game plan of Fed policy makers, who expect persistent weakness in housing to help cool the economy, gradually bringing core inflation back down to a more acceptable annual level of 1% to 2%. In the fourth quarter, core prices rose at an annualized rate of 1.4%.  

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Heating Expenses Down Again This Winter

Falling energy prices are helping lower household heating expenses this winter even more than originally forecast.  

According to the Energy Department, the average U.S. household will pay $873 in heating bills this winter, down from $938 forecast a month ago and the $948 average last winter. If so, consumers this winter will have the lowest heating tab in two years and the first year-over-year decline in five years.  

A sharp drop in oil and natural gas prices is the main reason for the lowered estimate. Mild weather is also allowing consumers to conserve energy.  

How has the lower energy prices affected your household budget this winter?  Leave us your comment on that below. 

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Buying a Second Home

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A vacation home or condo can be a good investment, provide rental income, give you a major income tax deduction, and even turn into your residence after retirement. But before you can have any of those benefits, if you are like most people, you will have to find a loan to purchase that summer home.

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When it comes to taxes, the IRS lets you treat a vacation home the same way you do your first home, but a vacation home can be harder and more expensive to buy than a primary residence.

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The IRS will actually let you write off the interest on two separate homes for up to combined total of $1 million in mortgage debt.

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While the IRS treats both the primary and vacation homes the same tax-wise as far as the deductibility of interest paid (capital gains, however, are an entirely different matter) lenders do not. Getting a lender to agree to loan you the money for a second home is more difficult because second homes are riskier.� Your lender knows if times get tough, money gets tight, and you can't afford to pay two mortgage payments, odds are you will make the payment on your primary residence and let the second one slide.

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When you buy a second home, you must also have a cleaner credit history, a higher FICO credit score, and more discretionary income to qualify for that mortgage. Buying a second home means you are committed to furnishing and maintaining it and paying the monthly utilities, taxes and all the other costs associated with home ownership. In some cases, your monthly housing expenses will double, and the lender will want to ensure you have enough income available to cover the increased costs.

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For millions of Americans, the advantages of a second home — vacation destination, price appreciation, tax benefits and rental income — far outweigh the costs and disadvantages.

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What do you think?� Is a second home in your future?� Leave us your thoughts, comments or questions.

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Consumer Sentiment Hits 3-Year High

U.S. consumer sentiment improved to a 3-year high in early January, propelled by falling gasoline prices and a favorable view of personal finances and economic growth, according to a recent survey.  

The Reuters/University of Michigan Surveys of Consumers said its preliminary January reading on consumer sentiment index rose to 98.0 from 91.7 at the end of December.  

This was the highest since 103.80 in January 2004 and well above the 92.5 median forecast of analysts polled by Reuters.  The surveys' gauge of current consumer conditions was 112.5 against a final December reading of 108.1, while its measure of consumer expectations was 88.7 versus 81.2.  

Consumers, while generally upbeat, remain worried about inflation. The surveys' one-year inflation index edged up to 3.0 percent from 2.9 in late December, and its five-year index stood at 3.0 percent for a third straight month.  

What effect do you think consumer confidence (or a lack thereof) will have on the real estate industry?  We'd love to hear your comments.

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