Connect with us

Headlines

Real Estate Tax Reform Hacks: Renting, Buying, And Investing

Editor

Published

on

Last week I posted on how the new tax reform law has increased the attractiveness of renting a home vs. buying a home because of the increase in the standard deduction and the $10,000 limit on the deductibility of state and local taxes. As I pointed out in a November 2017 post the real problem for homeowners with the new tax law is that it has created an asymmetry between landlords and homeowners. Landlords can fully deduct property taxes and probably itemize while many homeowners won’t.

But you can make this assymetry work in your favor if you are adventurous enough. I’m about to propose some pretty far out strategies for capturing the full benefit of property tax and mortgage interest deductions so I should state a few caveats here. First, don’t do anything without first consulting a tax professional. Second, I am not a tax professional so take whatever I say with a grain of salt. Third, these ideas are just directional. In other words, you could tweak them endlessly to suit your own needs.

I actually referenced this first strategy in my November 2017 post: the sale/ lease back. The idea here is that you sell your home to a “friendly” investor – could be a relative, neighbor, or a friend – who will let you rent the home back from them at a rate that basically covers their net carrying costs. Since, as an investor, they can take deductions that you can’t their carrying cost should be lower than yours – i.e. they will be able to pass their tax savings onto you. Now, I wonder if you could combine the sale/ lease back with seller financing or does that just get too weird for the IRS?

Hacking tax reform

Yeah, that’s how taxes feel.

If you are worried about the optics of this arrangement or the financial risk of a relative/ friend/ neighbor owning your home there is actually at least one company out there that will do the same thing for you. (Interestingly, I actually predicted the formation of these companies in my November 2017 post). EasyKnock will buy your home, lease it back to you for up to 5 years, and then you can either buy your home back or let them sell it for you. If they sell it you take the gains or losses upon sale as if you had owned it all along.

What I don’t know about this alternative is how the economics work out. EasyKnock is obviously in business to make money and I don’t know if they set up their company to explicitly leverage the asymmetry in the tax laws or not. However, it’s probably worth investigating.

Of course, you could also just rent if the math works out better for you – and that just might be the case since a landlord’s carrying cost is lower than a homeowner’s now. However, the main downside of renting, and this is one of the main reasons that people buy, is that your rent will go up over time whereas mortgage payments will stay flat. Well, it turns out that you can offset rising rents by buying an equivalent rental property and using the rent from that property to cover the rent on your home.

OK, that might have just left your head spinning so let me explain what I’m proposing here without throwing a lot of numbers around (If you really need the numbers I can certainly provide them but I would probably lose a lot of readers). Picture a couple renting a condo that they really like and an identical condo comes on the market that they are interested in buying. Well, from a purely financial perspective they would clearly be better off buying the other condo as an investment property, and continuing to rent their current home, instead of buying the other condo to live in.

There are a couple of ways to think about this. One way is to simply recognize that if you are going to own a condo it is cheaper to own it as an investor than owning it as a homeowner. The other way to think about it is that the investment property rent eliminates the rent on your home in perpetuity – they rise in tandem. So in the end you are living in the condo of your dreams and paying a mortgage with the tax benefits of owning an investment property. You have essentially converted your rental property into an owner occupied property.

In reality it doesn’t matter if you buy an investment property identical to the one you are renting or not. It just needs to be close in value, carrying costs, and rental income.

Read more…

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Headlines

Renovating your home? Ask yourself these 8 questions first.

Editor

Published

on

By

(NC) You might be surprised to learn there are many health hazards around the home, particularly when taking on any kind of renovation project— even for something as easy as painting a room. But by educating yourself and taking the right precautions, you’ll help keep you and your family safe.

Here are eight important safety questions that Health Canada encourages you to ask yourself before starting your project:

  1. Could the products I am using be harmful? Be sure to follow all use and safety instructions on the label, including how to store and dispose of any leftover products. Remember to look for hazard symbols.
  2. Should I be worried about lead-based paint? Your home probably contains lead-based paint if it was built before 1960. If the paint is in good condition and is not on a surface that a child might chew or that is subject to wear and tear, it’s best to leave it alone or cover it with paint or wallpaper. But if the paint is cracking, chipping, flaking or peeling, or is on a surface that a child might chew or that is subject to wear and tear, you’ll need to remove it carefully to avoid kicking up lead dust.
  3. Could my house contain asbestos? Before 1990, asbestos was commonly used for fireproofing and insulating against cold weather and noise. You can reduce your risk of exposure by hiring a professional to test for asbestos before doing any renovations or remodelling. Avoid disturbing asbestos materials yourself.
  4. Are low-emission products available? Paints and renovation products, like flooring and particleboard, often have a noticeable smell. This odour can indicate that the product contains volatile organic compounds (VOCs). Some chemical products are labelled as “low emission,” which means they give off fewer VOCs and are safer for your health.
  5. Should I ventilate while I renovate? Yes – ventilation can help improve indoor air quality by removing pollutants from the home and by bringing in fresh air from outside. This is especially important when renovating or when using chemical products in the home.
  6. How should I dress? Labels on products used for renovations will include information about what to wear and precautions to take. This could include using gloves, safety goggles or masks and keeping the products away from other hazardous materials.
  7. Can my family take part? It’s best to keep children and pets safely away from the renovation area. Pregnant women should also avoid taking part in renovation projects.
  8. How do I dispose of leftover materials safely? As your project wraps up, continue to keep safety in mind. Read the label or contact your municipality for advice on how to dispose of any leftover chemical products.

Continue Reading

Headlines

Here’s How Halton Real Estate Patterns Have Changed Over the Years

Editor

Published

on

By

We’ve said it once and we’ll say it again, the real estate market is constantly fluctuating. In a recent inhalton article, it was noted that the Toronto Real Estate Board (TREB) called 2018 “a volatile year” for the housing market.

Although 2019 is expected to a little bit better in terms of sales and average selling prices in Toronto and the Greater Toronto Area (GTA), we still have some 2018 statistics and facts that may come as a shock to some Halton residents.

According to a recent RE/MAX Ontario-Atlantic Canada press release, migration patterns of residential homebuyers in the GTA have shifted west. This, according to the release, is due to the Halton Region’s and Toronto west’s market shares rising between 2013 and 2018.

The release notes that the Halton Region captured 10.1 per cent of total market share in 2018, leading with a 2.3-per-cent increase over 2013. On the other hand, Toronto West climbed almost one per cent to 10.5 per cent. The release also looked at market sales in the Peel Region, Toronto Central, Toronto East, York Region, Durham Region, Dufferin County, and Simcoe County.

Over the past five years, there have been many factors that have contributed to Halton’s increase market shares.

“Growing demand for affordable housing buoyed new construction and contributed to rising market share in Halton Region over the five-year period,” Christopher Alexander, Executive Vice President, RE/MAX of Ontario-Atlantic Canada, said in the release. “Product was coming on-stream at a time when the GTA reported its lowest inventory in years and skyrocketing housing values were raising red flags. Freehold properties in the suburbs farther afield spoke to affordability.”

As a result of people flocking to the Halton Region in order to avoid these skyrocketing housing values, an increase of construction and development has become quite common for the region.

According to the release, new housing starts in Halton was averaged to be around 3,100 annually between 2013 and 2016. Between 2013 and 2017, almost 39,000 residential units came on-stream in Toronto’s Downtown and Central Waterfront areas.

Another real estate pattern that has changed, that may not come as a shock, is the average price to buy a house.

The average price for a home sold in Toronto’s west end in 2018 hovered near $755,658. The ever-increasing prices, as noted by Alexander, will have an impact on what type of properties will be more popular in the future.

“Freehold properties remain the choice of most purchasers in Halton Region and Toronto West,” Alexander said. “The same is true to a lesser extent in Toronto Central, but condominiums continue to gain ground. Just over one in three properties sold in the GTA was a condominium in 2018 and that figure is higher in the core. As prices climb in both the city and suburbs, the shift toward higher-density housing will continue, with fewer single-detached developments coming to pass.”

In recent years, as a result of increasing prices, many buyers, including younger buyers, empty nesters, and retirees have shifted towards Simcoe County where the average price ranges from $528,942 to $746.

“As the millennials move into their homebuying years, they will displace baby boomers as the dominant force in the GTA’s real estate market,” Alexander said. “Their impact on housing will have a serious ripple effect on infrastructure in the coming years, placing pressure on transit systems, roadways, local economies and their abilities to attract investors and new businesses, parks and greenspace development.”

However, there has been a demand for condominium apartments and townhouses areas like City Place, King West Village, and Liberty Village. There has also been gentrification in many Toronto neighbourhoods such as Oakwood-Vaughan and Dufferin Grove as they offer smaller freehold properties at more affordable prices.

Over the next 10 years, the increase in demand is projected to re-ignite homebuying activity in Toronto East, York, Peel, and Durham Regions regardless of the affordability, lack of available housing, and fewer transit options that may be apparent now.

What do you think of these shifting real estate patterns in Halton and the surrounding areas?

Continue Reading

Headlines

How sweat equity and a little home DIY can help you avoid a down payment on mortgage loan

Editor

Published

on

By

Saving a down payment is challenging for many first-time home buyers, and even if they manage it, more obstacles lie ahead.

After choosing a lender and getting approved, buyers still have to find a good house that fits their budget. Looking at fixer-uppers can expand their options, but not everyone can afford major improvements after such a big purchase.

Buyers could find a solution in Home Possible, a low-down-payment conventional mortgage from Freddie Mac. These loans offer an attractive option for borrowers willing to apply a little elbow grease: a sweat equity provision that can eliminate the need for a cash down payment.

Dangerous trend: Pedestrian deaths hit 28-year high, suggesting SUV boom raises safety risks

State by state: Cities where the violent crime rate is soaring

Sweat equity allows buyers to “earn” their entire down payment by improving a home before purchase, says Danny Gardner, senior vice president of affordable lending at Freddie Mac. Buyers do the work themselves, and the change in appraised value after the renovations becomes a credit they can apply to the purchase.

Some conditions apply: Using the sweat equity feature requires home improvement know-how and money to purchase materials. The sellers also must be willing to let someone work on their house before buying it.

What housing slump?: Amazon HQ2 juices spring home buying season in northern Virginia

Affordable housing: These are the 25 best home markets in the US

But in the right situation, this feature gives first-time home buyers more bang for their buck, particularly in markets where move-in ready starter homes are hard to come by.

Young homeowners love to DIY

America’s desire to bootstrap home improvements could be attributed in part to something known as the “HGTV effect,” which refers to a recent surge of popular home improvement reality shows and YouTube channels featuring do-it-yourself experts.

Thirty-eight percent of all home renovation projects are DIY, according to NerdWallet’s 2018 Home Improvement Report.

Younger homeowners are especially eager to roll up their sleeves – those under age 35 complete more than half of all their own home repair and improvement projects instead of hiring a professional. As a result, they spend several hundred dollars less on a typical project, the report found.

With sweat equity, DIY-obsessed home buyers may be able to channel that energy into a more affordable home.

Who can use the sweat equity feature?

Buyers interested in the sweat equity feature should talk with a lender that offers Home Possible loans. The option is open to any borrower who meets general financial guidelines.

“Home Possible is a great loan program,” says Keith Kampe, vice president of sales at Flagstar Bank. “The only challenge is getting people into it, because there are income limits.”

The program sets household income limits by census tract, an area that’s usually similar to a neighborhood in size. Freddie Mac has an eligibility tool that lets users see the limits by property address.

No matter how you slice it, buying a house requires some money upfront. For sweat equity borrowers, each dollar spent improving the property before purchase pulls double duty as a credit toward their down payment.

But before they can break out the power tools, sweat equity borrowers have to find the right house and a seller who’s comfortable with the unique arrangement.

“There has to be a lot of trust there between buyer and seller,” says Joe Zucht, a loan originator at NBKC Bank. Those looking to buy from a friend, family member or their current landlord may already have that trusting relationship, he says.

If both parties are on board with a sweat equity arrangement, the buyer’s real estate agent will draft an offer that describes all planned improvements and explains what will happen if the deal falls through. Once the agreement is signed, the work must be completed by the buyer before the loan closes – in other words, before he or she owns the house.

Sweat equity borrowers should also be ready for an appraiser to look over their shoulder throughout the process. The appraiser will estimate the value of the remodel and verify that the materials and workmanship match what was promised in the contract.

It’s important for sweat equity borrowers to choose their presale improvements strategically, weighing the money and effort required against the down payment credit they’ll earn. Buyers should also be realistic about their DIY skills and avoid biting off more than they can chew.

While some changes are merely cosmetic, others are capital improvements that can significantly increase the property’s value, extend its useful life or adapt it for new uses. These are typically bigger projects that could include installing a new roof, renovating the kitchen or adding a garage.

Even though it’s a more intense commitment, Gardner says buyers who hope to capture the full benefit of their sweat equity should “focus on capital improvements because once you become the owner of that home, you can always make the cosmetic improvements.”

Continue Reading

Chat

Trending