Will I pay taxes if I sell my home?

A: When you sell your primary residence, it is excluded from taxation up to $250,000 profit per individual owner when you qualify for the principal
residence profit exclusion. When you own your home with another person, together you may exclude up to $500,000.

To qualify for the exclusion, you need to have occupied the property as your principal residence for at least two of the last five years. When you own your home with another person, you both must be owners and meet the two-out-of-five year occupancy rule. If only one of you meets the occupancy rule, then the profit exclusion is limited to $250,000.

However, when you and your spouse have not simultaneously owned and occupied the residence for at least two of the last five years, you still qualify for the $500,000 exclusion if:

  • One of you owned the residence;
  • You both meet the two-out-of-five year occupancy rule;
  • You file a joint tax return for the year of the sale; and
  • Neither of you has taken a principal residence profit exclusion on another property within two years prior to the sale.

You do not need to occupy the home at the time of sale to qualify for the principal residence profit exclusion under the two-out-of-five year rule.
If you do not meet the two-out-of-five year occupancy rule, you do not qualify for the tax exclusion — with one exception. If you relocated due to personal difficulties, you may still qualify for a partial tax exclusion. Personal difficulties include:

  • A change in employment when your new job is located at least 50 miles farther from your home than your old place of employment or, if you were
  • Unemployed, the job is at least 50 miles away from your home;
  • A change in health, such as age-related infirmities, emotional issues or even severe allergies; and
  • Unforeseen circumstances, such as death, divorce or natural disasters.

With the personal difficulties exception, when you relocate after occupying the property for less than 24 months, you qualify for a profit exclusion
amount equal to the fraction of the ceiling amount ($250,000/$500,000) attributable to the portion of the 24 months you occupied the property.

What are HOA Assessments?

A: Ownership of a unit in a condominium project or other residential common interest development (CID) includes compulsory membership in the project’s homeowners’ association (HOA). The HOA is in charge
of managing and operating the entire project.

The obligations you undertake when you purchase a unit in a CID, and the HOA’s documentation of those obligations, fall into two classifications:

  • Use restrictions contained in the HOA’s:
  • Articles of incorporation;
  • By-laws;
  • Covenants, Conditions and Restrictions (CC&Rs) of record;
  • Age restriction statements; and
  • Operating rules.
  • Financial obligations to pay assessments as documented in annual reports which include:
  • Pro forma operating budgets;
  • A Certified Public Accountant’s (CPA’s) financial review;
  • An assessment of collections and the
  • Collections enforcement policy;
  • An insurance policy summary;
  • A list of construction defects; and
  • Any notice of changes made in assessments not yet due and payable.

There are two types of assessment charges to fund the expenditures of the HOA:

  1. Regular assessments fund the operating budget to pay for the cost of maintaining the common areas. Regular assessments are set annually and are due and payable in monthly installments.
  2. Special assessments are levied to pay for the cost of repairs and replacements that exceed the amount anticipated and funded by the regular assessments. Special assessments are generally due and payable in a lump sum on a date set by the HOA when making the assessment or added to the regular assessment monthly installments for a specified amount of time.

Annual increases in the dollar amount levied as regular assessments are limited to a 20% increase in the regular assessment over the prior year. An increase in special assessments is limited to 5% of the prior year’s
budgeted expenses.

It is recommended you review all readily available HOA information with your agent before making an offer. With this information, you and your agent are able to better determine the price you will pay for the unit and whether or not you have the ability (and desire) to carry the cost of ownership after acquisition.

What documents do I need from the HOA when selling?

A: At the listing stage, your agent on your behalf prepares a form requesting homeowners’ association (HOA) documents. It is sent to the HOA
or management company to request their delivery of copies of the common interest development’s (CID’s) governing documents concerning the project’s use restrictions and HOA finances.

The HOA or management company will deliver the documents within 10 days of the request’s postmark or receipt of the hand-delivered request.

The HOA will charge a service fee to prepare and deliver the documents requested. This upfront fee is the same amount regardless of whether the documents are delivered by hand, by mail or electronically.

The HOA will also charge a transfer fee to change its internal records to reflect the new ownership of the unit. This fee is sometimes demanded to be paid up front with the HOA document request — before a buyer is even located.

Upon receiving the written request and appropriate fees, the HOA provides the governing documents you need concerning the project, which include:

  • Articles of incorporation;
  • Declaration of covenants, conditions & restrictions (CC&Rs);
  • Bylaws;
  • Rules and regulations;
  • Operating budget, assessment and reserve funding;
  • Financial records covering at least one previous year; and
  • HOA meeting minutes from at least one previous year.

Your agent makes the HOA documents available to prospective buyers for their review as part of the marketing package for your property. To avoid buyer disputes or cancellation, this information is handed to the buyer with disclosures, and before entering into a purchase agreement.

The buyer reviews the HOA documents along with other mandated property disclosures (such as the Transfer Disclosure Statement (TDS)) to determine the property’s value when preparing their offer to purchase.

Credit Freeze Basics

What is a credit freeze?

A credit freeze limits access to your credit report, making it more difficult for would-be identity thieves to open accounts in your name. You can still use your credit card normally, but you won’t be able to open new lines of credit.

How do I freeze my credit?

To place a freeze on your credit report, contact all three major credit reporting agencies:

Equifax: 800-349-9960
Website

Experian: 888-397-3742
Website

TransUnion: 888-909-8872
Website

You’ll be asked to provide personal information to verify your identity, and may be a fee, depending on your age and where you live.

Are there drawbacks to a credit freeze?

The protection a credit freeze offers isn’t perfect. Credit freezes only prevent new lines of credit from being opened in your name — if an identity thief already has access to one of your accounts, a credit freeze is not an effective line of defense.

In addition, a credit freeze remains active until you decide to unfreeze it. To unfreeze your credit report and open a new line of credit, you’ll have to contact each credit reporting agency with the PIN number given to you at the time of the initial freeze. A fee may be charged for unfreezing your credit.

What are encumbrances on title?

A: An encumbrance is a claim or lien on a parcel of real estate and the ownership interests in the property.

A preliminary title report (prelim) issued by a title insurance company is intended to disclose the current vesting and all encumbrances reflected on the public record affecting a property’s title.

Encumbrances set out in a prelim include:

  • General and special taxes;
  • Assessments and bonds;
  • Covenants, conditions and restrictions (CC&Rs);
  • Easements;
  • Rights of way;
  • Liens; and
  • Real estate interests held by others.

The buyer, their agent and escrow review the report for encumbrances on title inconsistent with the terms for the seller’s delivery of title set in the purchase agreement and escrow instructions.

However, both the seller’s agent and buyer’s agent review the prelim immediately for any reported conditions that may interfere with closing the
transaction.

In practice, the buyer’s agent looks for title conditions which conflict with any intended use or change in the use of the property contemplated by the buyer. Interferences with use come in the form of unusual easements or use restrictions (CC&Rs) which obstruct known plans the buyer has to make improvements.

Ultimately, the escrow officer, on review of the prelim, advises the seller of any need to eliminate defects or encumbrances on title which interfere with closing the transaction as instructed.

My Deposit: Will I lose it if escrow is cancelled?


When the escrow period begins, your good faith deposit is held by escrow to be applied on closing toward your down payment and transactional closing costs.

The deposit is your money, even though it is held in escrow. However, it also serves as a source of the seller’s recovery, upon demand, of any losses you may have caused them to incur. Thus, your deposit may be partially or totally offset when you cancel for any reason not covered by a
contingency provision in the purchase agreement — a material breach of contract.

In this situation, the seller consents to the release of the escrowed deposit to you less any out-of-pocket money losses the seller actually incurred due to your breach.

To disburse funds, escrow first needs to have mutual instructions signed by both you and the seller. When you or the seller make a demand for the funds and the demand is opposed due to a refusal to consent, the resolution and eventual disbursement depends on who has the right to receive the funds held by escrow. A forfeiture of the deposit is not permitted in spite of wording to the contrary in some purchase agreements.

Within a period of 30 days after escrow’s receipt of the first demand for the funds, you and the seller are separately obligated to:

  • Determine who is entitled to the funds; and
  • Hand escrow cancellation and release of funds instructions to clear the deposit out of escrow.

For a seller to receive any part of your deposit, they need to provide you with evidence of the money losses they incurred due to your unexcused failure to close escrow.

Money losses a seller may have incurred on a buyer’s breach include:

  • Lost rental income caused by the terms of the sale;
  • A decline in the property’s value below the price agreed to by the date of the breach when they re-market the property for sale;
  • Transactional expenses unrecoverable when the property is resold; and
  • Other expenditures directly related to the transaction which will go uncompensated (on a resale or retention of the property).

When escrow does not receive mutual instructions to disburse funds within 30 days of a demand by either you or the seller, the escrow company deposits the funds with the court and closes their file. On the deposit with the court, escrow is relieved of any further responsibility to account for the funds.

Types of Agency-Brokerage Relationships

Seller’s agent

Also known as a listing agent, a seller’s agent is hired by and represents the seller. All fiduciary duties are owed to the seller. The agency relationship usually is evidenced by a listing contract. Once a property is listed, the seller’s agent either can attempt to sell it or, in addition, may be permitted by the seller to cooperate with another licensee who will attempt to find a suitable buyer for the property, A seller’s agent negotiates the best possible price and terms for the seller. The agent represents the seller’s best interest throughout the transaction.

Buyer’s agent

A real estate licensee is hired by a prospective buyer as an agent to find an acceptable property for purchase and to negotiate the best possible price and terms for the buyer. The agent represents the buyer’s best interest throughout the transaction. The buyer can pay the agent directly through a negotiated fee, or the buyer’s agent may be paid by the seller or a commission split with the listing agent.

Subagent

A cooperating agent who works for a listing broker-salesperson in the sale of a property. The subagent represents the seller, and therefore, works with the buyer, but not for the buyer. The subagent owes fiduciary duties to the listing broker and to the seller. Although subagents can’t assist the buyer in any way that would be detrimental to their client the seller, a buyer-customer working with a subagent can expect the subagent to treat him honestly. A subagent generally may provide the buyer with certain types of services, often called ministerial services, which are factually based and do not require the licensee’s judgment.

Disclosed dual agent

Dual agency is a relationship in which the brokerage represents both the buyer and the seller in the same real estate transaction. Dual agency relationships don’t carry with them all of the traditional fiduciary duties to the clients; instead, dual agents owe limited fiduciary duties. The fiduciary duty of loyalty to the client is limited. This focuses on confidentially and the negotiation process. Because of the potential for conflicts of interest in a dual agency relationship, it’s vital that all parties to the dual agency relationship give their informed consent. In many states, this must be in writing. Disclosed dual agency is legal in most states.

Designated agent

Also called, among other things “appointed agency,” this is a brokerage practice that allows the managing broker to designate which licensees in the brokerage will act as agents of the seller, and which will act as agents of the buyer, without the individual licensees being dual agents. The designated agents give their clients full representation, with all of the attendant fiduciary duties. To use designated agency, it specifically must be permitted by state law. State laws vary, and in some states permitting this practice, the managing broker also is not a dual agent.

Nonagency relationship

This relationship is called, among other things, a transaction broker, or facilitator. Some states permit a type of nonagency relationship with a consumer. These relationships vary considerably from state to state, both as far as the duties owed to the consumer and the terminology used to describe the relationship. Very generally, in these relationships, the duties owed to the consumer are less than the complete, traditional fiduciary duties, but in most states which allow for this type of relationship, the licensee still owes fiduciary duties to the consumer.

What are Contingency Provisions? Do I need them?


Contingency provisions
describe an event, activity or condition which needs to occur before the purchase agreement transaction can proceed toward closing. On the occurrence of the event or approval of information described in a contingency provision, the contingency has been satisfied and is no longer an obstacle to further performance and closing.

Contingency provisions authorize the buyer or seller to cancel the transaction when:

  • The described event fails to occur; or
  • The information received is disapproved.

Contingency provisions stating conditions allowing for the termination of an agreement are separated into two categories:

  • Event-occurrence contingency provisions — those provisions satisfied by the existence, completion or outcome of an activity or event which eliminates the contingency; and
  • Further-approval or personal-satisfaction contingency provisions — those provisions satisfied by the receipt, review and approval of data, documents and reports which eliminate the contingency.

Event-occurrence contingency provisions address the occurrence of specific activities and events, such as:

  • The sale or acquisition of other property by the buyer or the seller;
  • Obtaining purchase-assist financing;
  • The approval of building permits; and
  • The elimination of title conditions, or the release of encumbrances, such as liens or leases.

Further-approval contingency provisions address the right of the buyer or seller to cancel the transaction on their disapproval due to unacceptable property conditions and material facts, such as:

  • Disclosures and inspection reports concerning the physical integrity and natural and environmental hazards of the property;
  • Appraisals;
  • Title reports; and
  • Rental income and expenses.

To terminate a purchase agreement under a contingency provision, the buyer or seller needs to have a reasonable cause to cancel for the cancellation to be enforceable. When a reasonable basis exists, they may avoid enforcement of the purchase agreement by the other person by notice of cancellation.

Contingency provisions contained in purchase agreements are eliminated by either:

  • Satisfaction of the contingency provision by the occurrence of an event or by someone’s approval of the conditions contained in information, data, documents or a report; or
  • Waiver or expiration of the contingency provision.

Contingency provisions are unique as they deal with uncertainties at the time an agreement is entered into. As a matter of good practice, contingency provisions are included in purchase agreements to eliminate any uncertainty about aspects the property’s title, income/expenses or physical condition. Before escrow is able to close, contingency provisions need to be eliminated.

How to Stage a House for Free: 7 Ideas That Don’t Cost a Dime

One of the most common mistakes sellers make is assuming they need to sink a bunch of money into home staging. Some choose the expensive route—swapping out their furniture and art at the behest of a hired professional home stager—but that’s not the only way to impress potential buyers.

“Everyone needs to stage their home to sell it efficiently,” says Laura McHolm, co-founder of NorthStar Moving. “But you do not need to spend a lot of money to stage your home.”

Want to get your house in tiptop shape without spending a dime? Follow these home staging ideas that are 100% free.

1. Depersonalize

The first step to staging your home is getting rid of personal items such as photos, albums, handmade items, trophies, and mementos—even the kids’ artwork on the fridge.

“No family pictures,” says McHolm. “A buyer wants to be able to envision living in that house. It’s not your house anymore. It’s a house that will soon be their house. So get the ‘you’ out of your house.”

Removing your personal items isn’t easy—they’re the things that make your house feel like your home, but keep in mind that it’s only temporary. Pack them up and store them safely until you can find them all spots of honor in your new place.

2. Declutter

All that stuff littering the surfaces of your home has to go.

“Most surfaces should have between three to five items on them, because clutter is distracting both in photos and in person,” says property stylist Julie Chrissis, of Chrissis & Company Interiors. “You want buyers looking at the home, not the stuff.”

This means eliminating piles of mail and magazines, collections you have on display, knickknacks, and most other items that can easily be packed away.

3. Nix the extra storage

If you’ve been living in your current home for a while, you’ve probably come up with a lot of creative ways to store all of the items you’ve accumulated. But now that you’re hoping to sell, it’s time to get rid of them. Purge!

“Eliminate any plastic storage bins, over-door storage, above-cabinet storage, and extra racks in rooms,” says Chrissis. “This is important because buyers never want to think they will outgrow a home. A seller’s job is to show them there is plenty of storage space for them to grow into.”

Since all those stored items are already packed into bins and baskets, it should be simple enough to move them to a storage facility until you’ve moved.

4. Deep clean

Even if you consider yourself a neatnik, you’re probably going to need to do a little extra work to get your house ready for buyers.

“Take a critical eye to your home. Living somewhere daily reduces the things you notice that might be a problem, like dirty walls, scuffs and scrapes, leaks, or even odors you have become accustomed to,” says Marty Basher, home organization expert at ModularClosets.com. “Also, deep clean the kitchen and bathrooms. These areas of the home are generally the most cluttered and dirty. Both of those things will turn off willing buyers.”

It might help to ask a friend or family member to come by and help you find areas that need attention. Someone who doesn’t live in your house will be better able to look at your space through the eyes of a buyer.

5. Change the furniture layout

Maybe you’ve placed your couch at an odd angle to keep the sun out of your eyes during your midday nap, or your armchair is in the middle of the room so you can better see the TV. Those things are all fine for you—but not for buyers. Now it’s time to stage the room for optimal space and flow.

“Room layouts should be set up for photos first. It’s important that the photo not be of the back of a sofa, large chair, or other piece of furniture, as this makes the room look smaller because it blocks the view of part of the room,” says Chrissis. “The same goes for open houses and showings. If buyers see a room with furniture barriers, it makes the room seem smaller.”

6. Let there be light

Now that your home is clean and uncluttered, it’s time to brighten things up so buyers can actually see it.

“You want natural light and lamps with warm light—no swirly bulbs that look like office light,” says Chrissis. “We tell most of our clients to remove valances as they typically make a room darker and, in most markets, are a little out of fashion. Lamps are important, especially in winter months when there is less sun and sunset is earlier.”

7. Reduce your furniture

If your house is filled to the brim with furniture, it’s time to move some of it out.

“After the home is thoroughly cleaned out, keep only up-to-date furniture in excellent condition, and just a couple of accent pieces in each room,” suggests broker and interior designer Tory Keith of Natick, MA.

Not only does this go hand in hand with making things look less cluttered, but less furniture will also make the rooms look bigger.

Move unneeded pieces to the basement, garage, or a storage facility until you’re ready to move.

Original Article

Fixed Rate Vs. Adjustable Rate Mortgage Loans


A
fixed rate mortgage (FRM) provides the classic method for calculating interest that accrues on principal over the life of a mortgage. With an FRM, the interest rate and scheduled payments remain fixed for the life of the mortgage, giving certainty to future payment obligations.

The FRM is the most consumer-friendly and risk-free type of mortgage financing. While always available for homebuyers in need of a mortgage, FRM financing for business or investment properties typically has short due dates of three to seven years. 

An adjustable rate mortgage (ARM), as diametrically opposed to an FRM, calls for periodic adjustments to the interest rate. In turn, the amount of the scheduled payments fluctuates with each interest rate adjustment over the period remaining on the mortgage’s original amortization period. 

The unique feature defining all ARMs is an interest rate formula, typically comprised of:

  • An introductory interest rate applicable for a short period of several months, also known as a teaser rate or qualifying rate
  • An index figure, a proxy for future changes in the lender’s cost of funds.
  • margin rate, which does not change during the life of the mortgage and is the earnings spread a lender adds to the index figure to determine the annual rate of interest charged on principal following each adjustment in the mortgage rate
  • An adjustment interval at the end of which the mortgage interest rate is changed to reflect a rise or fall in the index figure.

The ARM’s adjusted interest rate is determined by adding the index figure to the margin rate (at set intervals, and subject to any caps or floors as limitations beyond which the mortgage rate cannot change). 

ARMs become popular when property prices or FRM interest rates rise faster than the rise in personal incomes. ARMs allow you to leverage the lower initial interest rate charged on an ARM (compared to the FRM rate) into a higher mortgage amount to fund the purchase of a home. In turn, you are able to pay a higher price for a home, but take on the risk your payments will increase over the coming years.