Real Estate Information Archive

You probably already know that you can invest your IRA money in stocks and bonds and even in mutual funds if you so desire, but did you know that you can also invest those IRA funds in real estate?  Doing so, however, is a bit complicated, and IRS rules concerning such purchases must be followed to the letter.  

Usually, when you take money out of an individual retirement account before you reach age 59 1/2, the IRS considers these premature distributions. In addition to owing any tax that might be due on the money, you'll face a 10 percent penalty charge on the amount.  This is not the case, however, when you use the money to buy your first investment real estate.  (Note: Technically, you don't have to be purchasing your very first home or building. You qualify under the tax rules as long as you, or your spouse, didn't own a principal residence at any time during the previous two years.)  You can use up to $10,000 in IRA funds toward this purchase. If you're married, and you and your spouse are both first-time buyers, you can each pull from retirement accounts, giving you $20,000 to use.

The restrictions are many (and perhaps time-consuming) and include the following:

• You will need to find an IRS custodian who handles these investments (and the options are currently limited).  Generally banks and brokerage firms do not handle IRA distributions for real estate transactions.
   
• Only the custodian may handle your IRS funds.
   
• The type of property you buy must be for investment only and may not be used by you or by relatives. 
   
• All proceeds from the investment will go back into your IRA fund.  Likewise, however, all expenses must be paid from that fund, so you must have enough liquidity in your IRA to cover such costs.
   
• You must let the IRS know that you used the retirement money early for a tax-acceptable purpose by filing Form 5329.
   
• You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

The above information applies only to traditional IRSs.  To learn about the procedure for an Roth IRA, click here.

Information courtesy of Chester County PA Real Estate Expert Scott Darling.

First, let’s talk about the stuff any Realtor is going to tell you so you have context for the rest.

It is easier to sell a house that is attractive to buyers and shows as being well-maintained. That is a matter of doing a little fix-up, but mostly clean-up. Make sure pipes aren’t leaking, for instance. That is relatively easy and not expensive. If your home really needs painting consider doing that. These are not high priced issues. Below we are talking about the expensive items.

If your house has structural defects or other problems that are expensive to fix you have more challenging decisions to make. First, remember that every house has defects! That is simply the nature of a complex structure. Second, savvy buyers know to expect defects so don’t try to hide them. Don’t kid yourself that if a problem can’t be seen easily it won’t be found out.

Most buyers assume there are some problems with any house. If they make an offer that you accept they will pay for a professional home inspector who knows Chester County PA real estate. Good buyer inspectors are very thorough. They are being paid by the buyer and are looking out for the buyer’s interests, not yours. It is not unusual for an inspection report to be in excess of twenty pages…in small type! Being honest with yourself about defects will prepare you better when you are faced with that inspection report.

So, the question becomes “Do I fix the problems before going on the market, or do I make it clear that I am selling “as-is” and discount the price accordingly?” The obvious follow-up question is “If I spend the money before selling, will I get that money back in the final sale price?” The general answer is that it depends on the nature of the defect and magnitude of the likely cost of repair.

Potential buyers are most likely to overestimate the cost if they have to make the repair and under-estimate the cost if the seller is paying. Cost versus value then becomes a negotiation to establishing a final purchase/sale price. If the cost of repair is major, such as a septic system, it makes the most sense to repair it before selling.

The best way to go about making these decisions is to pay a professional home inspector in your Chester County PA real estate market to make an inspection on your behalf as the seller. Their report will give you a thorough list of issues you might be faced with. It will also give you the tool to get estimates from contractors to make the repairs. Then you have a sound basis for making decisions.

An added benefit to having your own inspection on hand is that you have a professional document that you can use when negotiating with a buyer. Be practical and be prepared with your own inspection.

The news this year has been filled with reports of hurricanes, tornadoes, floods, and fires, each of which has resulted in untold loss of lives, homes, and possessions.  As we watch with horror the impact these disasters have on those affected, it is only natural that we ask ourselves,” Would I be able to sustain such losses?  Would my insurance policy cover the costs of rebuilding my Chester County PA real estate?

The National Association of Insurance Commissioners (NAIC)) recommends that you use your annual renewal notice or any improvements to your home as a reminder to touch base with your agent or insurer to recheck how much insurance you really need.  Do you have sufficient coverage for rebuilding and replacement? Amy Bach, executive director of United Policyholders, a consumer advocacy group, urges homeowners not to blindly trust that their home insurer has all the bases covered.

With fluctuations in the Chester County PA real estate market, coverage equal to the current replacement cost (excluding land), is advisable.  The first step in getting adequate coverage is to establish your policy’s dwelling limit. Your target number is the full-replacement cost of your home and its possessions. The dwelling limit bears no relation to your property’s market value, its appraised value, or its assessed tax value. And don’t mistake the cost of new construction for the cost to rebuild, which is more expensive because of factors such as debris removal and higher demand for materials and labor after a catastrophe,

(You can get a pretty good idea of what it would cost to rebuild your home by using an online calculator, available at sites such as HMFacts.com ($7) and AccuCoverage.com ($8).

It’s a good idea to purchase guaranteed replacement coverage, meaning the insurer will pay whatever it costs to rebuild your home with materials of like kind and quality, without deducting for wear and tear. Avoid actual cash value coverage, which pays only the depreciated value of your Chester County PA real estate.

Check also on your need for flood insurance, even if you don’t live near a body of water, since policies vary in their coverage of many types of water damage.

And lastly, it goes without saying that you need to update the inventory of your possessions at least annually since it is not only a record of the contents of your house and their value, but also a good indicator of whether you have enough coverage.

The purpose of real estate assessments is to fairly distribute a municipality’s tax burden among all property owners based on the market value of their property.  Chester County PA real estate is assessed (generally annually) so that the costs associated with area schools, fire and police protection, and other necessary services and infrastructure can be allocated in proportion to the market value of individual properties.

Even as property values are on the decline, property taxes are on the rise nationwide, and, according to the National Taxpayers Union, as many as 60 percent of properties across the country are over-assessed.

So what is the owner of Chester County PA real estate to do?  According to those “in the know”, there are steps you can take to reduce the assessment of your property’s value.  Since the evaluation process begins in the spring, you would be wise to begin to take action in the following ways now:

• Request Your Property and Tax Record: you can request copies of your tax records at any time to check for a poorly conducted assessment or misinformation. To obtain a copy of your property tax records, simply visit your local planning board.
   
• Don't Build:  Any structural changes to a home or property will increase your tax bill.
   
• Limit Curb Appeal:  in spite of strict guidelines for the actual evaluation process, the assessment still contains a certain amount of subjectivity. Thus, more attractive homes often receive a higher assessed value than comparable Chester County PA real estate that is less physically appealing.
   
• Research Comparable Properties: you have the right to know what similar homes and lots are being assessed for each year. (Check your municipality’s public records,)  If you see a major difference in the amount you are paying, it’s time to find out why.
   
• Appeal any Discrepancies in Your Tax Bill:  check measurements, location, property value, or structures of your home and lot. Take the time to legally appeal your bill and request that it be adjusted if you find errors.
   
• Investigate exemption eligibility:  many states offer generous property tax exemptions to both older homeowners and the disabled.  Certain military veterans and owners who install energy-efficient systems may also qualify.  It pays to check with your local tax assessor’s office for other exemption categories.

The bottom line.  Don't assume that your tax bill is set in stone. A little homework and due diligence can help reduce the burden.

On January 1, 2013 both the Senate and House passed H.R. 8 legislation to avert the “fiscal cliff.” The bill will be signed shortly by President Barack Obama.

Below is a summary of real estate related provisions in the bill as summarized by the National Association of Realtors:

Real Estate Tax Extenders

• Mortgage Cancellation Relief is extended for one year to Jan. 1, 2014
• Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012
• 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012
• 10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012

Permanent Repeal of Pease Limitations for 99% of Taxpayers

Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. These thresholds have been increased and are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by three percent. That amount is then used to reduce the total value of the filer’s itemized deductions. The total amount of reduction cannot exceed 80 percent of the filer’s itemized deductions.

These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.

Capital Gains

Capital Gains rate stays at 15 percent for those in the top rate of $400,000 (individual) and $450,000 (joint) return. After that, any gains above those amounts will be taxed at 20 percent. The $250,000/500,000 exclusion for sale of principle residence remains in place.

Estate Tax

The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that the rate will be 40 percent, up from 35 percent. The exemption amounts are indexed for inflation.

As the gift-giving season rapidly approaches, some parents are considering a sizable and meaningful present for their children and/or grandchildren - Chester County PA real estate. This is the sign of a solid trend, since a growing number of parents are currently helping their children purchase homes, whether they’re buying these homes for their sons and daughters outright, helping them pay for closing costs, or coming up with the money for their down payments.

While such a gift is certainly in keeping with the spirit of the season, those who are giving or those relying on monetary donations from their parents or family members to buy Chester County PA real estate should follow some fairly simple underwriting and IRS rules.

• First, parents need to know that they can gift a total of $13,000 a person without being taxed on that money. In other words, a father can provide $13,000 to his son and another $13,000 to his daughter-in-law that the couple can use for a down payment. At the same time, the mother can provide the same amounts to her son and daughter-in-law without having to pay taxes. Click here for detailed information about annual gift tax exclusions.  (Note:  unless Congress acts soon, that amount may well be sharply reduced in 2013.)
• The person giving the gift must file a form 709 (gift tax return) for any gifts over $13,000 per year per recipient.
• Buyers applying for a conventional mortgage loan must use their own funds for at least 5 percent of their down payment. They can then use gifted funds for the rest
• When buyers are providing a down payment of at least 20 percent of their home’s purchase price, they can rely on gift funds for the entire down payment. For FHA-backed mortgage loans, borrowers can pay for the entire down payment with gifted funds.
• Mortgage lenders will need to see documentation showing the origin of gifted funds.
• A gift of real property is accomplished through a deed. Depending upon your state rules, a warranty or grant deed is normally used, but in some cases a quitclaim deed may be appropriate. You will identify the property being transferred and sign, notarize, and register the deed as clear evidence that the property has been given to your children.

As with all major financial decisions, you would be wise to consult your accountant and/or tax attorney before gifting monetary assistance for the purchase of Chester County PA real estate or the property itself.

No, this isn’t just another timely spooky story, although it just may have to do with ghosts!  Be you a believer or a scoffer, the fact is that there are pieces of Chester County PA real estate on the market which are purported to be haunted and thus are more difficult to sell.  Known as “stigmatized” properties, these houses have the reputation of being haunted or are the site of a previous violent crime--and the perception of ghosts and gore is not easy to erase.

So what to do?  First, make yourself (and your Realtor) familiar with state laws regarding disclosure. Contact the PA Real Estate Commission to see if you’re required to disclose information about the stigma attached to your Chester County PA being upfront about your home’s paranormal guests or ghoulish histories is always the best moral policy.  

Then what?  Pay attention the appearance of your property—inside and out.  To minimize any thoughts of ghosts, your home needs to look spirit-free and inviting on the outside. Avoid a dark, forbidding atmosphere by clearing away dead trees and hanging branches; replacing rusty iron gates with a white fence, and getting rid of unwanted residents like stray cats and spiders. On the inside, think warm, bright, and clutter-free. Doing away with darkness and gloom that could promote the idea of spirits may require removing outdated, musty furniture, antique rugs, old pictures of ancestors, and any other items that contribute to an “eerie atmosphere” so that you can alleviate any pre-conceived notions in potential buyers.

If you simply cannot dispel persistent beliefs about the “dark side” of your Chester County PA real estate, you may have to resort to bringing in a Ghostbuster.  David Frankin Farkas, owner of HouseHealing.com, makes a full-time living ridding properties of specters and/or negative energy.  Click here to find groups who will investigate paranormal

And finally, pricing your Chester County PA real estate to sell is another strategy you must consider.  By lowering your price 20-25%, you may make your property more attractive to potential buyers, especially investors.

Buying Chester County PA real estate involves more out-of-pocket costs than just the down payment. There are also closing costs to pay for items such as title policies, recording fees, inspections, courier charges, and fees that a lender charges.  As a rule of thumb, closing costs to buy a home run about 2 to 4 percent of the purchase price.  Much depends on the points and origination fees a lender charges to make the loan, which are disclosed in the buyer’s Good Faith Estimate--actually a lender's "best guess" estimate of all the costs associated with obtaining a loan. (Click here to calculate your own estimate of the closing costs of your Chester County PA real estate.)

It might be harder to get a loan today, but it costs a little less to close one than it did a year ago because lenders are estimating closing costs better, according to the latest annual survey of closing costs by Bankrate.  The average cost to close on a mortgage in the United States dropped 7 percent over the past year to $3,754, according to Bankrate.com’s eighth annual closing costs survey, which was released recently.  Title insurance and other third-party fees fell 12 percent from 2011, while origination fees edged down one percent

Bankrate surveyed up to 10 lenders in all 50 states plus the District of Columbia in June of this year.  Researchers obtained online good faith estimates for a $200,000 mortgage to buy a single-family home with a 20 percent down payment. Costs include fees charged by lenders, as well as third-party fees for services such as appraisals and title insurance. The survey excludes taxes, property insurance, association fees, interest, and other prepaid items.

“This is the second year in which lenders are required to estimate third-party fees within 10 percent of the final cost. It seems like they’re getting more accurate, which helps explain the sharp decrease in these fees over the past year,” says Greg McBride, CFA, Bankrate.com’s senior financial analyst. “The main lesson of this survey for consumers is to shop around for at least three different estimates. While no one is going to move to a new state just because closing costs are lower, it’s important for people to realize that there is variation even within their neighborhood, and that they can save by being an educated consumer.”

For possible ways to lower the closing costs of your purchase of Chester County PA real estate, click here.