Archives for July 2011

What is Private Mortgage Insurance (PMI) by Joe Szabo, Scottsdale Real Estate Team?

July 28, 2011 szabogroup

Joe Szabo Scottsdale Homes for Sale

By Joe Szabo, Scottsdale Real Estate Team

PMI is additional insurance designed to protect the lender from people who default on their loans and have less than 20% equity in their property. About 30% of home buyers can’t afford a 20% down payment. PMI, however, allows them buy a house years before they’d normally be able to afford it.

Mortgage brokers say that home buyers who make small down payments are likelier to default than those who put down the traditional 20%. Therefore, lenders require those buyers to purchase PMI to insure the lender against the extra risk – and ensuing cost – of foreclosure. PMI allows you to buy a home with a small down payment, and helps the lender re-sell your mortgage on the secondary market to an institutional investor.

Most states have regulations prohibiting lenders from making a loan in excess of 80% of the purchase price without PMI. PMI is paid in monthly installments, a year in advance; a year’s reserve is paid in full at closing. The premium depends upon the price of the home and the type of mortgage.

You don’t necessarily have to pay PMI premiums for the life of the loan. After you’ve accumulated 20% equity in your house, you can usually cancel your PMI premiums (whereupon you’ll get your year’s reserve back). Always make sure, however, that you get a cancellation policy in writing. The company that purchased your mortgage on the secondary market will be the one who decides if and when PMI can be cancelled, and they usually provide a specific set of rules.

Most lenders will look at the following:

1) An appraisal – the lender will want to see that the home’s value has appreciated enough to give you the 20% equity you need to cancel PMI.

2) Payment history – lenders will want to see a clean payment record for the previous year or two.

3) Length of ownership – most lenders will make you wait at least two years before you can cancel PMI, to develop a track record of on-time payments.

Many buyers ask their lenders for a document stating that their PMI payments will stop automatically when their equity reaches 20%. The most important thing for you to know is that it’s up to you to contact the lender and make sure any agreement is clearly spelled out.

Please note that this Scottsdale Real Estate Blog is for informational purposes and not intended to take the place of a licensed Scottsdale Real Estate Agent. The Szabo Group offers first class real estate services to clients in the Scottsdale Greater Phoenix Metropolitan Area in the buying and selling of the best Luxury homes in Arizona. Award winning Realtors and Re/MAX top producers and best real estate agent for Luxury Homes in Scottsdale, The Szabo group delivers experience, knowledge, dedication and proven results. Contact Joe Szabo at 480.688.2020, [email protected] or visit www.scottsdalerealestateteam.com to find out more about Scottsdale Homes forSale and Estates forSale inScottsdale and to search the Scottsdale MLS for Scottsdale Home Listings.

Requirements for a 1031 Exchange by Joe Szabo, Scottsdale Real Estate Team

July 25, 2011 szabogroup

Joe Szabo Scottsdale Homes for Sale

By Joe Szabo, Scottsdale Real Estate Team

The way the IRS determines how a property has been used usually hinges on how it’s been declared on tax returns. If you wish to recharacterize a property, simply use it differently. For example, a vacation home can be recharacterized from personal to business use simply by renting it out for a couple of years.

1031 exchanges can also be used to help facilitate splitting up partnerships, joint ventures, and other types of co-ownerships of property without triggering unwanted taxes. If one party wants out of such an arrangement, he or she could simply receive the appropriate portion of the sales receipt, paying his or her own taxes, while the other(s) exchange property.

There are too many requirements, rules, exceptions, time restrictions, and other formalities governing 1031 exchanges to explain them all here. A qualified professional should always be consulted to help lead you through this often-complicated process.

Nevertheless, the basic requirements for making a fully tax-deferred 1031 exchange fall in to six general categories:

1) Properties exchanged must be for business use or held for investment.

2) The price of the replacement property must be equal to or higher than that of the relinquished property.

3) The amount of the mortgage on the replacement property must be equal to or higher than that on the relinquished property.

4) The taxpayer must not get actual or constructive receipt of the proceeds.

5) Qualified intermediaries or accommodators must be used to facilitate the exchange.

6) Identification and closing time requirements must be met.

How Regulations Affect Property Use by Joe Szabo, Scottsdale Real Estate Team

July 21, 2011 szabogroup

By Joe Szabo, Scottsdale Real Estate Team

If you’re interested in buying land for real estate development, you’re going to have to successfully navigate a maze of intersecting local and private regulations.

Here’s a short list of some regulations you’re likely to encounter:

Subdivision regulations:

a) These ensure that there’s adequate infrastructure and access to parcels of land before they’re sold.

b) They create clear titles to land.

c) They’re guided in part by zoning regulations, which set minimum lot area, frontage, and other dimensional standards.

Floodplain and wetlands approval:

a) You can’t build in a floodway, and you’re limited in what you can build in a floodplain. FEMA offers maps to help developers determine these areas.

b) Maps can sometimes be refined through construction or a petitioning process, so consult a qualified engineer if you have any questions.

c) If you buy existing property in a floodplain, the National Flood Insurance Program is the best available insurance.

d) Local regulations may prohibit or discourage development in wetlands.

e) If any wetlands development is allowed, it’s likely that some local review process will be required for approval.

Traffic regulation:

a) Local governments write traffic regulations to help ensure safe and convenient passage through neighborhoods.

b) The level of traffic is measured in terms of service, from free-flowing to gridlock. A professional traffic engineer can handle traffic review projects.

c) Traffic issues rarely derail development projects, as most problems can be solved through road widening, turning lanes, and signalization.

Design review:

a) Many local governments have design review boards that help advise some decision-making body, like a city council, whether to approve a proposed project’s design.

Historic District review:

b) In historic districts, the local government regulates the appearance of buildings, usually the portions visible from public view.

Environmental permits

c) The state and local environmental permitting processes often overlap, although some permits are unique to the state level, involving issues of regional and statewide concern.

d) Before beginning any project, always contact federal, state, and local officials to inquire whether your project may require a comprehensive environmental review.

e) If you have coastal property, check for the 100-year flood elevation and look at the resource maps available from state authorities for the location of any protected plant species or organisms on the site.

Federal regulations

f) The Fair Housing Amendments Act prohibits discrimination against individuals protected by the Americans with Disabilities Act. Thus, group homes for such individuals must be allowed in any single-family residential development.

g) The Religious Land Use and Institutionalized Persons Act ensures that local governments can’t unreasonably restrict the free exercise of religion. Thus, people using their homes for religious activities usually can’t be restricted by local ordinances.

Taxes and Your New Scottsdale Home by Joe Szabo, Scottsdale Real Estate Team

July 18, 2011 szabogroup

If you’re a homeowner, there are many tax loopholes that can help your home make money for you:

If you’ve lived in your home for two years, you can take a tax-free gain of $250K for a single filer and $500K for married (filing jointly). You just have to have used the property as your principal residence for two of the past five years. You can even rent your house out for most of that period and still qualify for the full gain!

If you’ve lived in your home for less than two years, you can still take a “reduced exclusion amount” (pro-rated from the full amount according to how long you’ve lived there) if you’re “forced” to move because of “unforeseen circumstances” – which can simply mean that you’ve started (or ended) a home-based business.

If you’ve lived in your home more than two years, you can always re-finance it to remove the value. Of course, this assumes that there is significant value in your home with the current market conditions. If the current market interest rates are higher than your existing loan, for instance, get a home equity loan instead. A general rule of thumb is once your gain approaches $250K if you’re single (or $500K if married), it’s time to move.

If you decide to rent out a room in your house, you’ve created a home business from which you can deduct relevant expenses against the rental income, as well as the depreciation of the space. And when you sell the house, you can exclude the gain on the pro-rated portion.

If your income grows so high that you begin to lose itemized deductions, you can always move the mortgage interest deduction off Schedule A by using the home office deduction, which allows you to deduct a pro-rated portion of the mortgage interest and property tax on a separate schedule.

If you wish to take out a home equity loan that’s fully deductible, simply demonstrate that the additional debt above the amount allowable was used for business or investment purposes – such as buying in to an apartment building.

Basics of Land use Law by Joe Szabo, Scottsdale Real Estate Team?

July 14, 2011 szabogroup

By Joe Szabo, Scottsdale Real Estate Team

If you wish to make money in real estate, it’s essential to understand at least the basics of land use law. This will not only make you communicate with lawyers more effectively, but will help you become a more active participant in your own land use matters.

There are four basic sources of law:

1) Common Law: This is the law found in judicial decisions – case law. It’s important because it can create binding precedents.

2) Constitutional Law: There are 51 constitutions in theU.S.: one Federal and fifty states. What may be constitutional federally may be unconstitutional in your state. Here are a few basic constitutional principles that are important to know:

a) Due process – this means you have a right to a fair hearing; you can confront witnesses and evidence. The judges must also be unbiased and objective. Finally, government regulations must be reasonably related to a specific purpose of government.

b) Equal protection – if different properties are treated differently, there must be a reasonable purpose, such as a requirement that homes in a flood plain be elevated.

c) Takings – the Fifth Amendment says that the government can’t take private property for public use without paying just compensation. If the taking is non-invasive and the loss in value only partial, however, courts usually don’t demand compensation.

d) Freedom of expression and religion – government can regulate the placement of signs and establishments (for aesthetic reasons), but rarely their content (unless there’s a compelling reason). Likewise, people can’t be prevented from using their homes for religious purposes.

3) Statutory Law: all state zoning statutes are descended from a model law that the Federal government promulgated over 80 years ago. If you carefully study your state enabling statutes (and their amendments) you may pick up an important clue or two about how these laws can be used to your advantage.

4) Administrative Law: though often tedious, it’s important to know the administrative regulations that enforce statutes, common law, and constitutional law. These can be used as effective weapons in a struggle to support or oppose any development project.

If you don’t like a law, change it. People do it all the time. It can be a long, expensive, and risky process, but it may also be worth it. Take the time to figure out whether it’s the right choice for you.

Why Do you Need Title Insurance by Joe Szabo, Scottsdale Real Estate Team

July 11, 2011 szabogroup

Joe Szabo Scottsdale Homes for Sale

By Joe Szabo, Scottsdale Real Estate Team

This is one of the most common questions I have heard in my career just after “what is title insurance?” The answer is simple. How do you prove that a seller actually owns the home he or she is trying to sell? You conduct a title search, in which a chain of ownership from the time the home was built until the present is established.

Title searches vary from place-to-place, but they’re generally done manually, by lawyers, title companies, or other title specialists, because historical real estate documents are rarely recorded on computers. A title search is necessary because the lender needs to know whether there have been any liens, judgments, or easements filed against the property, which might prevent you from being granted a good title.

Title insurance helps protect the buyer from possible “defects” on the title. If any of the documents that establish the title are mistaken or omitted, for instance, and it turns out that the property is less valuable than originally appraised, the title insurer will reimburse them for lost value. If the insurer notes a defect before the sale, however, the buyer is responsible for contacting the seller and correcting it.

Title insurance is paid as a one-time premium; the cost is based entirely on the sales price of the home. In most cases, the seller pays for the title search so he or she can guarantee that the buyer gets a good title. The lender, meanwhile, will want the buyer to pay for the title insurance to cover the lender. It’s not strictly necessary for the buyer to cover him or herself, but it’s usually a good idea. If you buy both the lender’s and buyer’s title insurance together, you might get a discounted rate.

If you’re working with a real estate attorney, they can also often obtain discounted rates if they work regularly with a title company. Finally, if the seller has only owned the home for a short period of time, the seller’s original title company may be willing to issue the buyer a discounted “reissue” rate.

Advantages of 1031 Exchanges by Joe Szabo, Scottsdale Real Estate Team

July 7, 2011 szabogroup

Joe Szabo Scottsdale Homes for Sale

By Joe Szabo, Scottsdale Real Estate Team

The most important advantage of a 1031 exchange is that you can defer all capital gains indefinitely. No limit is placed on the number of such exchanges in your lifetime. An investor can easily start out with a small rental property and regularly “1031 exchange” it for larger properties, eventually leading to a substantial retirement income.

As long as you never sell an investment property without exchanging it for another, you’ll never have to pay taxes on your real estate capital during your lifetime. When you die, your heirs may even be entitled to receive a stepped-up basis on your investment property and escape paying taxes on the capital gains you deferred throughout your life.

Another popular advantage of a 1031 exchange is trading up. There are two types:

1) Buying a bigger property or increasing the overall amount of your real estate investment.

2) Buying a higher-quality property.

Leveraging is another way to take advantage of a 1031 exchange. It’s simply the idea of putting as little of your own money as possible down on a property, and maximizing the financing. It’s a strategy that works great in an up market, but can be disastrous in a down: if the property is too highly leveraged, the rental income will never support the debt.

It’s also possible to use a 1031 exchange to buy a larger or more valuable property for the additional depreciation. The adjusted basis of the relinquished property, however, will transfer to the replacement property. That means the replacement property only provides additional depreciation for the amount of value beyond the market value of the relinquished property.

1031 exchanges can simply be used to lighten one’s workload. If you own a high-maintenance property with lots of turnover, you may prefer to exchange it for something with lower turnover and maintenance requirements.

If necessary, you can always use a 1031 exchange to relocate an investment nearer to you. This can come in handy if you’re forced to move for any reason (but it only works for property inside theU.S.). 1031 exchanges are also known as “like-kind exchanges” because you have the option of using them for more than just real estate. You can exchange many business and investment capital assets for like-kind property, such as aircraft, boats, trucks or even livestock – the only catch is that they always have to be traded for the exact same kind of property. Real estate can be exchanged for just about any other kind of real estate – as long as it’s used for business. A primary residence, a vacation home, or a second home, for instance, can’t be used in a 1031 exchange.

How to Avoid Potential 1031 Exchange Problems by Joe Szabo, Scottsdale Real Estate Team

July 4, 2011 szabogroup

Joe Szabo Scottsdale Homes for Sale

By Joe Szabo, Scottsdale Real Estate Team

The easiest way to avoid future IRS problems is to seek out the advice of qualified professionals, beginning with your real estate agent. After that, talk to real estate attorneys and/or experienced accommodators.

Before you make any final decisions, make sure you’re comfortable with whomever you’ve entrusted to handle the exchange, as well as your own knowledge of what’s taking place. Always follow the timing rules. In order for an exchange to be valid, you have to meet two requirements:

1) The replacement property must be identified within 45 days of the closing and transfer of the relinquished property.

2) The replacement property must be received within 180 days of the closing and transfer of the relinquished property or the due date (with extensions) for the transferor’s tax returns for the taxable year in which the transfer of the relinquished property occurs.

The IRS takes these rules very seriously, so they must be strictly followed. Any deviation will trigger an audit and your exchange will be disallowed. Partnership splits are particularly complicated when they involve a 1031 exchange. What may seem simple at first glance could easily have unforeseen consequences, so be sure to seek out the advice of professionals experienced with this particular issue.

If you’re exchanging with a relative, special rules apply. Basically, if either relative resells or otherwise disposes of the property within two years, the entire exchange will be disallowed and the tax on the original exchange must be recognized as of the date of the later disposition.

It’s also possible to transact a reverse exchange, in which the replacement property is acquired before the relinquished property, under certain circumstances. This can be done for a number of reasons:

1) Concern about finding the right property.

2) Picking up a great deal on distressed property.

3) The sale on the relinquished property falls apart.

4) The desire for a customized property.

Reverse exchanges are more expensive to undertake because of their complicated nature, but they can still be worthwhile in the right situation.