Getting Married? Issues to Consider When Purchasing Property Before the Wedding.

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Getting Married? Issues to Consider When Purchasing Property Before the Wedding.

Let’s say a couple is engaged to be married. However, before the marriage ceremony, the couple decides to purchase a marital home. Possibly, they want to buy a first house, condominium or cooperative apartment. Prior to doing so, there are certain potential concerns to address.

The options for purchasing the property vary:

- - One party may want to provide the down payment.
  - The couple may decide to buy the home with title in one name only.
  - They may decide to purchase it together with both names on the title but one person out the mortgage.

With these and other scenarios, the couple needs to know how the purchase of the property may affect them in the long run in terms of inheritance rights, divorce, or even if one party decides at the last minute not to get married.

Example: A couple is engaged and purchases property jointly but the title is only in one name. They decide to handle to transaction without a written agreement and agree verbally to share all the expenses fifty-fifty. Lo and behold, one party breaks the engagement, moves out and says, “Why should I continue to make mortgage payments if I no longer live there?” He or she demands the money back for his share of the down payment and renovation costs. The other party changes the locks. They argue over who gets to claim the mortgage interest deduction on their tax returns. With no written contract between the couple, there are generally no easy answers to the issues they must face.

No one knows what the future holds, so it is best to determine in advance what can happen in various scenarios.

Laws Vary State to State

What happens if a couple buys a house with one name on the title and then gets married? Later, one of them dies and the house is not listed in the will. What happens? To help answer these questions, you have to look at the laws of your state. Some states are community property states, while others allow for a “right of election” (the right to have a minimum share of assets in each other’s estates). Still other states have variations of these rules.

For example, Arizona is a community property estate. Therefore, the surviving spouse is entitled to share in the community property of the marriage. Therefore, a right of election is not applicable. On the other hand, in New York, a surviving spouse has a right of election and can exercise that right upon the death of the spouse. Consult with your attorney about the laws in your state and your specific circumstances.

Looking at a Potential Situation

Let’s examine one scenario of an engaged couple buying a home. Assume the state permits a right of election and is not a community property estate. One half of the couple wants to purchase property in his or her name only. What are the risks to the other person whose name is not on the property? What if a fiancé pays the entire down payment and the title goes in his name? How will that affect the couple in the long run? Would the property be solely considered as his, or would it be considered a shared asset once they are married? If he is the sole person purchasing, does he have the option (should he want to) to put both names on the title? What happens if the couple divorces or one of them dies? Is there domestic partner registration in the state and how does it affect property ownership?

In this situation, if the fiancé pays for the entire down payment and title goes in his name, then he owns the property. It is his separate property. When the couple gets married, the property is still in his name. In order to get both names on the title, the fiance would have to re-title the property to be in both of their names as “tenancy by the entirety.” Otherwise, it remains in his name and upon his death, he can distribute it to anyone he pleases. However, let’s say that in the state where the couple resides, surviving spouses always of a “right of election,” or the right to share in the total estate.

If there is a mortgage, the mortgage company most likely would want to approve any transfer of title into the couple’s name. In other words, if there is a mortgage in one party’s name only, the mortgage company may want to approve the property being transferred into both of the names. (Check the mortgage agreement.)

Note that a couple can always have a prenuptial agreement stating the terms and conditions before marriage, after marriage and in case of divorce and death. Of course, a person can always leave the property to a spouse or fiancé in a will.

If one party purchases a property prior to marriage and keeps it in his or her name, and then the couple gets divorced, the results will depend on state law. However, in general any contribution made to it during the marriage could be equitably split — or considered community property, depending on the state.

Costs and Benefits of Purchasing before Marriage

The benefit of purchasing before marriage may be more practical than legal. The couple has a property they can move into as they plan the wedding and after the marriage occurs. The negative is that the property may be considered separate property and not marital property for legal purposed. The advantage of buying a home after marriage is that it would generally be considered marital property. Of course, the practical disadvantage is the couple has to wait until after the wedding to purchase and set up a home.

Discuss these issues with your attorney prior to making any real estate purchases. Your attorney will be able to provide proper legal counsel for this new endeavor. And if you’re getting married — congratulations and good luck on your marriage!

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8 Ways to Save on Homeowner’s Insurance

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8 Ways to Save on Homeowner’s Insurance

If you’re like most Americans, your home represents the single largest investment you’ll ever make. So it makes sense to protect that investment with insurance. Rates for homeowners insurance can vary significantly with a variety of factors, including the location and property value.

Even if you have an average-priced home, the amount an insurer would charge to provide homeowners insurance can vary greatly from the average, depending on the risks involved. The greater your risks, the higher the premiums.

Risks include those from:

- - Natural disasters, such as wildfires, windstorms or snow collapse;
  - Human-caused damage, such as arson, vandalism and theft;
  - The type of construction; and
  - The cost of rebuilding.

Of course, you can’t change the weather. But there are some things homeowners can do to reduce their risk exposure and generally their insurance premiums.

1. Get a preliminary quote on insurance before you buy a home. The real estate agents’ slogan of “location, location, location” holds true for insurance, too. Even if two properties seem similar in size, features and quality, the cost of insuring them can vary considerably. The area plays a big role in determining risk exposures and the cost of homeowner’s insurance.

Exposures include local crime rates, such as theft, arson and vandalism. You’ll pay more to insure a home in a high-crime area than in a safer part of town

Fire safety also plays an important role in determining your insurance costs. It costs less to cover a house close to a fire hydrant or in a community that has a professional (rather than a volunteer) fire department. Likewise, you’ll pay more to cover a house in an area known to be at risk of wildfire, such as those near woodlands and in canyons and remote areas.

2. Look at the home’s construction. The age of the building and construction type affect your premiums. Newer buildings — or those whose electrical, heating and plumbing systems have been updated within the past 10 years — cost less to insure because these systems are less likely to fail and cause damage. In an earthquake prone region, you’ll pay less to insure a woodframe dwelling bolted to its foundation, which will flex in a temblor, rather than a brick or masonry building. Conversely, you’ll pay less to insure a masonry or brick home in an area prone to windstorms.

3. Remember that homeowners policies exclude coverage for flooding and earthquake damage. If you buy property in a flood or seismic zone, you must buy these coverages separately, adding to your overall insurance costs. In certain coastal areas, such as Florida, policies might also have a separate (higher) deductibles for windstorm damage, meaning you’ll have to bear more of the cost of any wind-related damage.

4. Insure your building and contents only. Don’t base insurance limits on your home’s market value. Much of the value of a single-family home lies in the land. Even if a fire, windstorm or earthquake leveled your house, you would still have the value of the land.

5. Ask about different types of discounts. Get a quote on homeowners insurance from your auto or personal umbrella liability insurer. Many insurers give a discount if you buy more than one policy from them. Discounts generally range from 5 to 15 percent. Before committing, however, check whether the discounted policies are cheaper than buying policies separately.

Some insurers also offer discounts to older policyholders (age 50 or 55+), non-smoking households, long-term policyholders and those with good credit ratings.

6. Install protective devices. Many insurers offer discounts to insure homes with fire sprinklers and fire/security alarm systems. Some systems might not qualify for discounts, so check with your insurer before buying and installing.

7. Consider retrofitting or remodeling to disaster-proof your home. Bolting a house to its foundation, reinforcing foundations, and harnessing furnaces and hot water tanks to the walls can make it more resistant to earthquake damage. Homeowners in windstorm areas can add storm shutters, replace windows with shatter-proof glass, and reinforce roofs. Some of these precautions could qualify for discounts on your insurance. Again, check with your insurer before making modifications.

8. Raise your deductible. A deductible is the portion of the loss an insured homeowner has to pay before the policy will start to pay a claim. Property policies usually express the deductible as a dollar amount (rather than a percentage) — generally $250 and up. Keep in mind that the purpose of insurance is to ensure your financial security. A loss of $250 is unlikely to affect your financial security, but small claims still require handling by the insurer, which costs money. Consider setting aside savings to handle smaller losses instead and save more on your premiums.

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Home Improvements: Stay Clear of Mechanics’ Liens

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Home Improvements: Stay Clear of Mechanics’ Liens

It usually starts out simply enough: You want to make some improvements to your home such as remodeling the kitchen and bathrooms or adding a garage. So you hire a general contractor to handle all the details. However, after you pay the entire bill, the contractor fails to pay the lumberyard, concrete company or other supplier for materials, so the third party slaps a mechanics’ lien on your house. By this time, the contractor goes bankrupt or leaves town and can’t be found.

All of a sudden, you’re facing a potential lawsuit that puts your personal residence at risk.

Details: Despite its name, a mechanics’ lien generally does not involve mechanics in the usual sense of the word. It’s a claim against property being improved that can be filed by any party that has provided materials or performed work without being paid. The specifics of mechanics’ liens vary from state to state.

In some cases, a mechanics’ lien is initiated by a contractor or subcontractor who finishes a job and doesn’t get paid. In other cases, the general contractor was paid but a subcontractor or supplier on the job doesn’t get anything.

In the worst case scenario, a mechanics’ lien can result in the property being sold at auction if the situation isn’t resolved.

State and local laws control this area, but here’s the usual routine. First, the third-party supplier must provide the owner with adequate notice describing the goods or services contributed. Typically, this notice must be delivered by a certain deadline after the goods and services are initially contributed.

If work has started or materials have been provided, the supplier records the mechanics’ lien at the office for the county where the property is located. This gives the supplier a specified period of time – generally ranging from 60 days to six months – to work out a payment plan with the owner or file an action to enforce the lien. If the enforcement action isn’t filed in time, the lien generally becomes invalid.

Although mechanics’ liens are often allowed to lapse, in some states, you’re not necessarily out of the woods if that happens. When a homeowner tries to sell a property with an unsettled lien, the title insurance company may refuse to clear title unless the lien is removed by a formal release or court order.

What can you do to head off potential problems? First, deal only with reputable contractors that have good track records in your community. Find out if your state requires licensing and registration for contractors and don’t hire those without a current license. If you are concerned about suppliers being paid, you might want to take matters into your own hands. One approach is to issue checks jointly to the general contractor and each subcontractor and materials provider. Another idea is to ask the general contractor to obtain lien waivers from third parties. If you run into problems, consult with an attorney for the recommended action under state law.

History of the Term Mechanics’ Lien

More than a century ago, the term “mechanic” referred to people who performed skilled labor in the building trades, including carpenters, masons and plumbers. Thus, a mechanics’ lien is a legal claim placed on real estate by a contractor, subcontractor or other party who is owed money for labor, services or supplies that were used to improve the property. Since the definition of the word “mechanic” has changed, some states have changed their laws to refer to construction liens or contractor liens.

Mechanics’ liens are only enforceable on private property. Because a lien cannot extend to government property, the federal Miller Act and similar state statutes provide alternative remedies for federal and state projects.

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Use a Qualified Personal Residence Trust for Your Vacation Home

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Use a Qualified Personal Residence Trust for Your Vacation Home

Do you own a beach house, ski chalet, resort condo or other vacation getaway? Perhaps it’s the place where cherished family reunions take place with your children and grandchildren. Many people with second homes want them to stay in the family but also want to limit estate and gift taxes upon their transfer. One way to achieve this might be to create a qualified personal residence trust (QPRT),

With a QPRT, you basically transfer ownership of your personal residence or vacation home to a trust while you retain the right to use the property during the trust term. After that, your children or other designated beneficiaries become the owners of the property. If you still want to use the property, you can work out a rental arrangement with them.

Estate and Gift Tax Benefits

The advantages of a QPRT. It allows you to get your home out of your taxable estate at a reduced tax cost, described in the right-hand box. And the trust creation is a private transaction so it may not subject the property to probate.

Transferring property to a QPRT is considered a taxable gift, but you get a substantial break. The value of the house is discounted for gift tax purposes because you’re allowed to continue using it for the term of the trust.

A QPRT can potentially save your heirs a large amount in taxes. However, the trust is irrevocable and the tax rules are complex. So you need to understand the pros and cons before you give away such a valuable asset — and one that you may be emotionally attached to as well.

Here are three considerations when establishing a QPRT:

1. 1. Get professional help. Consult with your attorney and tax advisor. QPRTs are complex and mistakes could invalidate the trust.
  2. Don’t pick a trust term that is too long. Your goal is to continue using the home while getting it out of your taxable estate. So choose a term for the trust that you expect to outlive. If you die before the end of the term, the home goes back into your taxable estate with no tax savings.
  3. Think about the future. If you’re planning to rent the house from your children or other beneficiaries after the trust ends, don’t make the future rental a provision of the QPRT. The IRS could invalidate the trust. Don’t set up a QPRT unless you have a good relationship with the beneficiaries, including in-laws. You don’t want to worry about being forced to move someday after the trust ends.

For some families, passing a cherished vacation home on to the next generation is an important goal. A qualified personal residence trust might provide a way to achieve that goal at a reduced tax cost. If you are interested in a QPRT or other estate planning options, consult with your estate advisor.

How Is the Property Valued?

The gift’s value is determined by calculating thehome’s present value discounted over the trust’s term using an interest rate specified by the IRS.

Any future appreciation on the property is removed from your estate. That is because the value of the gift is determined on the date the house is placed in trust.

Current interest rates and home values do affect a qualified personal residence trust. Your attorney and tax advisor can explain the specifics in your situation.

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Real Property and the Estate Process

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Real Property and the Estate Process

There are many ways you can hold title to real property, which is defined as land and anything erected on it. However, how real property is titled will affect how it is transferred during the administration of an estate.

Consider this example: A father and son own a farm, where they have both worked for decades. The property sits on land that has appreciated greatly over the years. The father is a widower with no other children and lives in a house on the property. The son is married with three children and lives in a house in a nearby town. Unexpectedly, the son dies in a car accident. Does the father become the sole owner of the farm? Does the son’s wife inherit half?

It depends on how the property is titled.

You need to make sure you own real estate in a way that will fulfill your wishes upon death and at the same time, streamline the process of transferring ownership of the property.

Avoiding Probate

Estate planning techniques to avoid probate depend on how you hold title to the property (see right-hand box for some options). The most common way that allows for the avoidance of probate is when spouses own property as tenants by the entirety. By owning the property together, it passes to the surviving spouse outside of the probate process, avoiding delays and hassle.

Another way to avoid probate is for two individuals to own the real property jointly with rights of survivorship. However, you must be careful that this option meets your wishes because you may not want the other owner to inherit your share of the property when considering the total value of your entire estate.

Yet another way to own real property that allows for the avoidance of probate is with a revocable living trust. The benefit of the trust holding title to the real estate is that you can have the trust document specifically address who will inherit the property without having the need to probate the property.

If a property that you own has a mortgage and you want to place it in a trust, there are additional considerations. You must review the mortgage agreement, and in most cases, get pre-approval of the transfer of property. Generally, mortgage companies permit the transfer to a revocable trust. Also, you must file forms and pay fees to your local governmental entity to effectuate the transfer and record the new deed.

Limiting Liability during Life but Property Goes Through Probate

Some owners of real property want to avoid personal liability, especially if they own commercial or rental property. These owners typically create a corporation or a limited liability company to own the real property. This provides some protection from being personally responsible for the debts or liabilities of the entity.

At the time of death, these shares or membership interests in the corporation or LLC pass through the individual’s estate through the probate process. In the individual’s will, the testator (the person whose will it is) can designate who will inherit the share of the corporation, or allow it to pass to the residual estate.

Tenants in Common

Holding title as tenants in common will result in the property going through probate. Holding title to property as tenants in common sometimes results in contention with the other owner and the persons who will inherit your share or the other party’s share. It is best to discuss these issues with the other owner and the heirs to help alleviate any tension that may occur in the future with new ownership of the real property.

Consult with your attorney about the best way to hold your real property so that you have an estate plan that best meets your wishes and streamlines the transfer process.

Common Ways of Owning Property

Subject to the terminology of each state, most people who own private residences are:

- - Sole owners;
  - Joint owners with rights of survivorship (in other words, the property is owned with another person and either party can inherit the other party’s share);
  - Tenants in common (in other words, an individual owns property with another person but the heirs of each party inherit their own share);
  - Tenants by the entirety (i.e., own it as a married couple passing it to the surviving spouse).

Other ways to own real estate are through an entity such as a corporation, LLC or partnership, or through a trust. Depending on the state, there may be additional ways to hold title to property. Each way has to be dealt with during the estate administration process.

Note: LLC interests may be held in trust and avoid probate.

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Close-Up on Mortgage Interest Deduction Rules

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Close-Up on Mortgage Interest Deduction Rules

The Tax Cuts and Jobs Act (TCJA) imposes new limits on home mortgage interest deductions. Here’s how the changes could affect your tax situation.

The Basics

For the 2018 through 2025 tax years, the new law generally allows you to deduct interest on only up to $750,000 of mortgage debt incurred to buy or improve a first or second residence. This type of debt is called “home acquisition indebtedness” in tax lingo. (For married individuals who file separately, the home acquisition indebtedness limit is $375,000 for 2018 through 2025.) Under prior law, you could deduct interest on up to $1 million of home acquisition indebtedness (or $500,000 for those who use married filing separate status).

In addition, for 2018 through 2025, the TCJA generally eliminates deductions for interest paid on home equity debt. Under prior law, individuals were allowed to deduct interest on up to $100,000 of home equity indebtedness. (Married individuals who filed separately could deduct interest on up to $50,000 of home equity indebtedness.)

Under prior law, you could also treat another $100,000 of mortgage debt as home acquisition indebtedness ($50,000 for married people who file separately) if the loan proceeds were used to buy or improvea first or second residence. The additional debt could be in the form of a bigger first mortgage or a home equity loan. So, technically, the limit on home acquisition indebtedness under prior law was $1.1 million (or $550,000 for those who use married filing separate status).

Exceptions for Grandfathered Debts

The TCJA “grandfathers” in existing home mortgage debt under the old rules. That is, the new law doesn’t affect home acquisition indebtedness of up to $1 million (or $500,000 for married-separate filers) that was taken out 1) before December 16, 2017, or 2) under a binding contract that was in effect before December 16, 2017, so long as the home purchase closes before April 1, 2018.

Under another grandfather provision, the previous home acquisition indebtedness limits of $1 million (or $500,000 for married-separate filers) continue to apply to home acquisition indebtedness that was taken out before December 16, 2017, and then refinanced during the period extending from December 16, 2017, through 2025. But the grandfather provision applies only to the extent that the initial principal balance of the new loan doesn’t exceed the principal balance of the old loan at the time of the refinancing.

Real-World Examples

Are you confused yet? Here are some examples of how the new mortgage interest deduction limits work.

The Andersons. This married joint-filing couple has a $1.5 million mortgage that was taken out to buy their principal residence in 2016. In 2017, the Andersons paid $60,000 of mortgage interest, and they could deduct $44,000 [($1.1 million ÷ $1.5 million) x $60,000].

For 2018 through 2025, they can treat no more than $1 million as acquisition indebtedness. (Their mortgage is exempt from the new limit, because it’s grandfathered in and the old limit applies.) So, if they pay $55,000 of mortgage interest in 2018, they can deduct only $36,667 [($1 million ÷ $1.5 million) x $55,000].

Now, let’s assume that the Andersons decide to refinance their mortgage on July 1, 2018, when the existing loan’s outstanding balance is $1.35 million.

Under the grandfather provision, the couple can continue to deduct the interest on up to $1 million of the new mortgage for 2018 through 2025.

Bob. This unmarried individual has an $800,000 first mortgage that he took out to buy his principal residence in 2012. In 2016, he opened up a home equity line of credit (HELOC) and borrowed $80,000 to pay off his car loan, credit card balances and various other personal debts.

On his 2017 return, which he will file in 2018, Bob can deduct all the interest on the first mortgage under the rules for home acquisition indebtedness. For regular tax purposes, he can also deduct all the HELOC interest under the rules for home equity debt. (However, the interest deduction is disallowed under the alternative minimum tax (AMT) rules, because the HELOC proceeds weren’t used to buy or improve a first or second residence. Contact your tax advisor for more information on the AMT rules.)

On his 2018 through 2025 tax returns, Bob can continue to deduct all the interest on the first mortgage under the grandfather provision, because the loan balance is below the $1 million limit on home acquisition indebtedness. But he can’t treat any of the HELOC interest as deductible home mortgage interest. The HELOC is characterized as home equity debt and interest on home equity debt is nondeductible under the new law.

Connie. She’s an unmarried taxpayer in the same situation as Bob, except her $80,000 HELOC was used entirely to remodel her principal residence. So, her home acquisition indebtedness included her first mortgage of $800,000 plus $80,000 of home equity debt used to remodel the home.

On her 2017 return, Connie can deduct the interest on the first mortgage and the HELOC because she can treat the combined balance of the loans as home acquisition indebtedness that doesn’t exceed $1.1 million.

For 2018 through 2025, Connie can continue to deduct the interest on both loans under the grandfather rule for up to $1 million of home acquisition indebtedness.

Diana. She’s an unmarried individual with an $800,000 first mortgage that was taken out on December 1, 2017, to buy her principal residence. In 2018, she opens up a HELOC and borrows $80,000 to remodel her kitchen and bathrooms.

For 2018 through 2025, Diana can deduct all the interest on the first mortgage under the grandfather provision for up to $1 million of home acquisition indebtedness. However, because the $80,000 HELOC was taken out in 2018, the $750,000 limit on home acquisition indebtedness under the new law precludes any deductions for the HELOC interest.

The entire $750,000 limit on home acquisition indebtedness was absorbed (and then some) by the grandfathered $800,000 first mortgage. So, the HELOC balance can’t be treated as home acquisition debt, even though the proceeds were used to improve Diana’s principal residence. Instead, the HELOC balance must be treated as home equity debt and interest on home equity debt is disallowed for the 2018 through 2025 tax years under the new law.

Eddie. He’s an unmarried taxpayer with a $650,000 first mortgage that was taken out on December 1, 2017, to buy his principal residence. In 2018, he opens up a HELOC and borrows $80,000 to remodel his basement.

For 2018 through 2025, he can deduct all the interest on the first mortgage under the grandfather provision for up to $1 million of home acquisition indebtedness. In addition, the $80,000 HELOC balance can be treated as home acquisition indebtedness, because the combined balance of the first mortgage and the HELOC is only $730,000, which is under the new limit of $750,000 for home acquisition indebtedness. So, Eddie can deduct all the interest on both loans under the rules for home acquisition indebtedness.

Important: If Eddie had used the HELOC to purchase a new car or pay off his credit card debt, it would not qualify as home acquisition indebtedness. To be eligible for this deduction, the HELOC proceeds must be used to substantially improve the taxpayer’s qualified residence. (See “What Is Home Acquisition Indebtedness?” at right.)

Got Questions?

The new limits on deducting home mortgage interest won’t affect all taxpayers. But homeowners with larger mortgages and home equity loans must take heed. Also, please understand that what you see here is based purely on our analysis of the applicable provisions in the Internal Revenue Code. Subsequent IRS guidance could differ. If you have questions or want more information about how the new home mortgage interest deduction rules affects homeowners, contact your tax advisor.

What Is Home Acquisition Indebtedness?

Under the tax law, home acquisition debt is a mortgage taken out “to buy, build, or substantially improve a qualified home (your main or second home). It also must be secured by that home.”

An improvement is “substantial” if it:

· Adds to the value of your home,

· Prolongs your home’s useful life, or

· Adapts your home to new uses.

Repairs that maintain your home in good condition, such as repainting your home, aren’t substantial improvements. However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements.

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How to Fight Property Tax Assessments

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How to Fight Property Tax Assessments

These days, it’s not unusual for personal and commercial property taxes to rise steeply. In many areas, real estate prices are soaring at the same time that local governments are seeking more money for schools, law enforcement, fire protection and other needs. But while some increase in your property tax assessment might be expected, take a close look. Your tax bill may have increased too much.

In assessing the value of a property, assessors generally look at the size of the structure, its condition, the land it sits on, renovations, and recent sales prices in the neighborhood. On a periodic basis, assessors conduct re-evaluations. In some areas, only a fraction of a home’s assessed value is taxed while in others, the full value is used.

If you disagree with the value of your property, here are a few items to check:

Simple errors – It’s possible for assessors to make errors in the physical descriptions of properties. They might list a property as being 2,900 square feet when it is actually 1,900. Or records may say your home has four bathrooms when it only has three. Transposition of numbers is another common mistake when recording data.

Improvements – The bill may include assessments for improvements that were never made or are not completed. For example, you are adding a room to your house but it is not yet habitable.

Comparable properties. Do you know of similar properties in the same area that are valued differently than yours?

Special exemptions or credits. You might be eligible for special tax relief. Some states, such as Florida, have homestead exemptions for qualified owners who occupy their homes. Others, such as Connecticut provide property tax credits to elderly and disabled homeowners. Still others, including Michigan, give tax breaks to veterans and those who are blind. Wisconsin has a lottery credit for owners who use properties as their primary residences. However, it is generally the responsibility of owners to apply for these special breaks.

Unusual conditions. Some properties have features that lower their value, such as a cracked foundation or proximity to a noisy interstate highway.

Don’t assume that any errors you might find are new. The former owner may have been overpaying as well. Just because your rates are unchanged from previous years doesn’t mean they are right.

Commercial Property

When making comparisons of business and industrial property, there are some other considerations:

The assessor might improperly classify a property into a category with a higher rate. For example, your building could be listed as Class A (a newer building with superior steel and concrete construction) when it is actually a Class B older building with a wood frame.

Check into whether you are eligible for special rates or credits. Like residential property, some jurisdictions apply total and partial exemptions and credits to property tax, based on how the property is being used. Others have a lower tax rate for vacant property.

The properties should be truly comparable. A retail business isn’t the same as industrial property and a storefront can’t be compared to a store located in a mall. Unlike homes, which are often built in homogeneous tracts and therefore can easily be compared to surrounding properties, commercial property is considerably harder to match.

If you find that you’re paying more taxes per square foot than a comparable, older store down the street, check to make sure that different tax rates haven’t been grandfathered in.

Discuss your tax bill with similar commercial operations in your area that aren’t competitors. This can help each business determine whether it is paying too much.

How to Appeal

Different jurisdictions have different systems for tax assessments and appeals. If you think you have a legitimate claim, you should act quickly since many municipalities require challenges to be made within a short period of time after an assessment is sent out. You can generally pursue tax relief in one of two ways:

1. Negotiation –The most common remedy is to ask for a negotiation with your local tax authority. Be sure you have documentation for your claims, such as photographs, comparable sales lists, and property records that show discrepancies.

2. Appeals or protests – Many, but not all, states hear property tax appeals or protests based on a comparative analysis. A successful appeal can lower your current and future taxes significantly. You may also be able to appeal past property tax bills and get refunds.

As a last resort, if you have substantial proof of an incorrect property valuation but are unable to succeed through negotiation or appeals and there is a large amount of money at stake, you may want to take your case to court.

Your CPA or attorney may be able to assist you in proving the true valuation of your property and handling the appeal. Many firms offer services to review property tax bills for mistakes and comparatively analyze properties with similar homes or businesses in the area.

Play it smart: You might have a good case and an excellent chance of successfully lowering your tax bill. But unless otherwise advised in writing by the taxing authority, be sure to pay your taxes on time as assessed, rather than risk penalties and interest for non-payment.

Appeals on the Rise

Studies show that 30 to 60 percent of all residential properties nationwide are over-assessed yet traditionally, less than five percent of assessments are appealed. Of those appealed, the majority result in a reduction of taxes.
However, tax assessors report that the number of people filing appeals is beginning to increase significantly in some areas and the trend is likely to continue as home prices and property taxes reach new heights.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

How to Overcome 3 Refinancing Roadblocks

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How to Overcome 3 Refinancing Roadblocks

The real estate market is tougher than it used to be in some areas. Because lenders have significantly tightened their standards, refinancing may be difficult these days — especially if you have little equity, low income, poor credit or large amounts of debt.

Fortunately, if you’re stretched financially thin right now and want to refinance your mortgage to a better rate, there are some options available to you.

Here are the three most common refinancing obstacles as well as the most effective ways to overcome them.

Obstacle #1: Lack of Equity

Inadequate or negative equity is probably the most common refinancing problem in the book. When lenders decide whether or not to offer you a loan, they factor your equity into their loan-to-value (LTV) ratio. Many lenders require an LTV of at least 80 percent before they’ll approve you for a loan.

You will probably be assigned a low LTV ratio if:

- - You bought your home with no down payment.
  - You took an interest-only or payment-option mortgage.
  - You refinanced your original mortgage to get cash.
  - Your home value has plummeted.

How to Overcome This Obstacle: Reduce Your Principal

If you have a low LTV ratio, you may want to lower your loan amount. This may hike up your LTV enough so you’ll be approved for a loan. To lower your loan amount, you can pay a lump-sum payment or a gradual reduction of principal — or both. If you have extra funds to apply, say, $300 to $500 a month toward your principal each month, you will greatly lower principal and the interest that’s being charged on your outstanding principal.

You may consider withdrawing money from a savings or retirement account, selling another asset or using an income tax refund or job bonus. Of course, by tapping into these assets, you are losing any income that may have been earned from these investments. It’s extremely important to evaluate your overall financial situation before making such a major move. Discuss your options with your financial advisor who can help you determine what makes the most sense for your unique situation.

Obstacle #2: Low Income/ High Debt

If you earn little income and/or carry a significant amount of debt, you may have what’s considered a high debt-to-income (DTI) ratio. Lenders factor in both your income and debt to calculate your DTI ratio, and the resulting number plays a major role in determining whether or not you’ll be approved for a loan. After all, lenders want to make sure that you have enough income to make your mortgage payments on time each month.

If you’re self-employed, have recently lost your job, overstated your income on your original loan application or carry excessive amounts of debt, you probably have a high DTI ratio. The higher your DTI ratio, the higher the risk you are to a lender-and the less likely you’ll be approved for a refinance loan.

Lenders typically want your DTI to be no more than 38 percent. That means your debt should equal no more than 38 percent of your income. However, this is just a general rule of thumb because DTI ratio standards vary from lender to lender.

How to Overcome This Obstacle: Raise Income, Lower Debt

The solution to a high DTI is obvious: earn more income and pay off your debt. Of course, this is much easier said than done. However, if you want to refinance your home badly enough, you can make it happen.

You can earn more income by asking for a salary increase, switching to a higher-paying job or taking on a second job. However, your second job must be considered a “stable permanent position” for it to count toward your DTI ratio. Most lenders require that you work in a position for two years before they consider it a “permanent” job.

Additionally, if you can qualify for an FHA-insured loan, you may be able to add a non-occupant co-signer (such as a parent) to your loan application. Your co-signer’s income will be added to the equation-but remember, their debts will count toward your overall DTI ratio, as well.

You may also consider documenting other sources of income, such as annual bonuses, limited partnership payouts and any rent money you may earn. Although documenting and explaining these other sources of income may be a challenge, it could be well worth the extra effort. After all, these other sources of income could greatly benefit your DTI ratio.

If your DTI ratio is high because you have excessive debt, you should focus on paying off those debts. Some financial experts say if you’re looking to refinance, it may even be worth spending your savings to pay off debts. For example, if you owe $4,000 on a car loan, and you have $5,000 of extra funds in the bank, consider using that money to pay off the car loan. This could greatly reduce your DTI ratio. Of course, if you are carrying any high-interest credit card debt, you should pay that down first.

Obstacle #3: Poor Credit History

Your credit score is calculated based on your credit history, including whether or not you pay your bills on time, how much debt you’re carrying and how well you handle your financial obligations. If your credit score is low, lenders will see you as a high risk.

In the past, many lenders overlooked a low credit score, but things have changed. If you have a low credit score, you may be able to refinance, although the interest rate may not be low enough for it to be worth your while.

How to Overcome this Obstacle: Improve Your Credit

The most effective way to hike up a low credit score is simply to pay your bills in full and on time. Of course, it will take at least six months before this good financial behavior will show up in your credit score. If you find errors in your credit report that are negatively affecting your score, call the credit bureaus and challenge this information.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

Make the Most Out of Your Vacation Home

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for Every Stage of Life.

Make the Most Out of Your Vacation Home

Owning a vacation home can be expensive and many owners rent out the property to help pay expenses and benefit from some tax breaks. But to get those tax benefits, you must be careful how the property is used.

A vacation home’s value as a tax haven depends on:

- - How much you rent it out.
  - How much rent you collect.
  - How wealthy you are.
  - How much you use it yourself.
  - Who you allow to use the place.

Basically the IRS treats your ski condo or beachfront villa as either a residential property or a rental property.

A residential property is one you personally use either more than 14 days a year or for more than 10 percent of the rental days, whichever is greater. On a residential home, you can deduct expenses up to the amount of rental income for the year, but you can’t deduct any losses. Expenses that can’t be written off in one year can be carried forward.

A rental property is one you personally use for 14 days or less a year. Even if you use the house more than 14 days, your house is still rental property if your personal use doesn’t exceed 10 percent of the days it’s rented.

Taking deductions for a rental property is complicated, but here’s a list of the items you need to be aware of:

Expenses	You can deduct expenses such as mortgage interest, property taxes, and insurance.
Losses	You can write off such passive losses as maintenance, repairs and depreciation.
Restrictions	Passive loss deductions are likely to be limited to $25,000 a year by “passive activity” rules that apply when you don’t actively manage the property.
Carry forwards	Passive losses can be carried forward, but this may take several years to do you any good. For many, the only way to deduct all the passive losses is to sell the property.
Income	Passive loss deductions decrease as your income grows. If your adjusted gross income (AGI) is more than $100,000, you can deduct less than $25,000. With an AGI over $150,000, you can deduct passive losses only if you have other income.
Sales	When you sell the property, all passive losses are fully deductible – including any carry forwards — no matter how high your AGI. Check with your tax advisor to assist you in handling this transaction.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

How the Limit on State and Local Tax Deductions Affects Homeowners

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How the Limit on State and Local Tax Deductions Affects Homeowners

The ability to deduct state and local taxes (SALT) has historically been a valuable tax break for taxpayers who itemize deductions on their federal income tax returns. Unfortunately, the Tax Cuts and Jobs Act (TCJA) limits SALT deductions for 2018 through 2025. Here’s important information that homeowners should know about the new limitation.

Old Law, New Law

Under prior law, in addition to being allowed to deduct 100% of state and local income (or sales) taxes, homeowners could deduct 100% of their state and local personal property taxes.

In other words, there was previously no limit on the amount of personal (nonbusiness) SALT deductions you could take, if you itemized. You also had the option of deducting personal state and local general sales taxes, instead of state and local income taxes (if you owed little or nothing for state and local income taxes).

Under the TCJA, for 2018 through 2025, itemized deductions for personal SALT amounts are limited to a combined total of only $10,000 ($5,000 if you use married filing separately status). The limitation applies to state and local 1) income (or sales) taxes, and 2) property taxes.

Moreover, personal foreign real property taxes can no longer be deducted at all. So, if you’re lucky enough to own a vacation villa in Italy, a cottage in Canada or a beach condo in Cancun, you’re out of luck when it comes to deducting the property taxes.

Who’s Hit Hardest?

These changes unfavorably affect individuals who pay high property taxes because:

- - They live in high-property-tax jurisdictions,
  - They own expensive homes (resulting in a hefty property tax bill), or
  - They own both a primary residence and one or more vacation homes (resulting in bigger property tax bills due to owning several properties).

People in these categories can now deduct a maximum $10,000 of personal state and local property taxes — even if they deduct nothing for personal state and local income taxes or general sales taxes.

Tax Planning Considerations

Is there any way to deduct more than $10,000 of property taxes? The only potential way around this limitation is if you own a home that’s used partially for business. For example, you might have a deductible office space in your home, lease your basement to a full-time tenant or rent your house on Airbnb during the winter months.

In those situations, you could deduct property taxes allocable to those business or rental uses, on top of the $10,000 itemized deduction limit for taxes allocable to your personal use. The incremental deductions would be subject to the rules that apply to deductions for those uses.

For example, home office deductions can’t exceed the income from the related business activity. And deductions for the rental use of a property that’s also used as a personal residence generally can’t exceed the rental income.

Important: If you pay both state and local 1) property taxes, and 2) income (or sales) taxes, trying to maximize your property tax deduction may reduce what you can deduct for state and local income (or sales) taxes.

For example, suppose you have $8,000 of state and local property taxes and $10,000 of state and local income taxes. You can deduct the full $8,000 of property taxes but only $2,000 of income taxes. If you want to deduct more state and local property taxes, your deduction for state and local income taxes goes down dollar-for-dollar.

AMT Warning

Years ago, Congress enacted the alternative minimum tax (AMT) rules to ensure that high-income individuals pay their fair share of taxes. When calculating the AMT, some regular tax breaks are disallowed to prevent taxpayers from taking advantage of multiple tax breaks.

If you’re liable for the AMT, SALT deductions — including itemized deductions for personal income (or sales) and property taxes — are completely disallowed under the AMT rules. This AMT disallowance rule was in effect under prior law, and it still applies under the TCJA.

More Limits on Homeowners

The new limits on property tax deductions will affect many homeowners. But that’s just the tip of the iceberg. If you have a large mortgage or home equity debt, your interest expense deductions also may be limited under the new law. For more information about how the TCJA affects homeowners, contact your tax advisor.

Thinking about Selling Your Home?

There’s good news if you’re planning to sell a personal residence: The Tax Cuts and Jobs Act retains the home sale gain exclusion.

If you meet certain conditions, this valuable tax break allows you to exclude from federal income tax up to $250,000 of gain from a qualified home sale (or $500,000 if you’re a married joint-filer). The home sale gain exclusion rules remain unchanged under the final version of the new tax law — even though both the House and Senate proposed restrictions on this tax break during tax reform negotiations.

Have an estate planning question or concern? Please let us know! Call us at 630.665.2300 or click the button to schedule a complimentary consultation.

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