Will I owe capital gains tax when I sell?

Will I owe capital gains if I sell within two years?

Is it worth remodeling my house before selling?

What's the best way to determine a list price?

What's the difference between a "pre-qualified" and a "pre-approved" buyer?

What can I do to help sell my home quickly?

What if I'm facing foreclosure?

Will I owe capital gains tax when I sell?

The Taxpayer Relief Act of 1997 changed the law regarding capital gains for personal residences. You no longer need to purchase another home within two years of equal or greater value to receive capital gains relief.

You only pay tax on gain you realize over $250,000 for a single individual and $500,000 for a married couple filing jointly. To qualify for the exclusion, you need to occupy the residence for two years out of five years before the sale. If you live there for only two years, you qualify for the full exemption.

example
You are single and purchased a home for $275,000 in January 2000.
You lived there for at least two years prior to selling it in 2004.
You sold it for about $350,000. Your gain is roughly $75,000 ($350,000 - $275,000).
$75,000 is well below the $250,000 exclusion limit, therefore you owe no capital gains tax.

Do I owe capital gains if I sell within two years?

Perhaps. To calculate how much tax you owe, multiply your residency period, expressed as a fraction of two years (24 months), by the exclusion amount you would have been entitled to if you would have occupied the property for two full years. Recall, exclusion for a single individual is $250,000 and $500,000 for a married couple filing jointly.

example
You are single and purchased a home in January of 2003 for $300,000.
Your employer transfered you to a different area and you had to move to the new area in June 2004.
You sold your home in June 2004 and, because you renovated it, you were able to sell it for $450,000.

The numbers:
You have realized a gain of $150,000 ($450,000 - $300,000) and you lived in the home for 18 months.
The residency period is 0.75 . (18 months/24 months = 0.75).
You are single, so your exemption is $250,000.
0.75 x $250,000 = $187,500
You will have no capital gain liability because your $150,000 gain is less than $187,500 exclusion limit.

Try the same calculation with only 12 months residency period (0.5) and pay capital gains tax on $25,000. Ouch!

Is it worth remodeling my house before selling?

Remodeling a home is a fabulous idea before selling if you can break even or better. What many sellers find though, is that they don't always recoup the money they invested in the remodel. The value of the home does not automatically increase by the same dollar amount invested in it.

The concept is "Market-Value vs. Actual Cost".

Here's an exaggerated example to illustrate the point:
Let's say a home in a modest neighborhood with average pride of ownership, undergoes remodeling. Let's say the remodeling includes $5000 worth of marble flooring installed in the kitchen, $7000 of the very most expensive casing, moulding and accents, $8000 for a new, top-of-the-line, granite fireplace and then let's throw in the installation of a $20,000, exotic, Peruvian-walnut, hardwood floor in the livingroom.

Wow. $40,000. Does the market value of the home automatically go up $40,000? No. This is what's referred to as an "over-improvement" for the neighborhood. Buyers will not be willing to pay the additional $40,000 price and the owner will end up selling the home for less than the overall cost to buy and remodel it.

Now let's say the same work is performed in an upscale neighborhood where those types of features are "the norm". Every other home in the immediate vicinity has high-end amenities; They are expected. Now does the market value increase by $40,000? Possibly. A prospective buyer will likely discount the home if those types of features aren't included.

It's been said to keep remodeling dollars within 10% of the current value. It may be more important, however, to consider what is valued in the neighborhood. Work that is done on a home that is an "under-improvement" (ie: it's not as updated or doesn't have features that most surrounding homes have) will reap more rewards than work that is performed on an "over-improvement" (a home that has considerably more features than the neighborhood calls for).

It might be a good idea to have a Comparative Market Analysis (CMA) performed and then consider your remodeling efforts from there. First repair anything structural or anything that a lender may demand be fixed prior to closing (siding, roofing, electrical), then plan your dollars according to what will bring the most return.

The table below depicts stastics obtained from a study performed by REALTOR® magazine as a joint venture with Remodeling magazine. Seattle homeowners tended to enjoy higher returns on most remodeling investments than national averages.

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What's the best way to determine a list price?

Quite simply, a house is worth what someone will pay for it. It's not what a seller has "put into it" and it has nothing to do with sentiment; It's worth what market conditions will support. One of the most common mistakes sellers make is listing at a price based upon what the seller wants rather than the current market value.

To determine a property's value, most people turn to either an appraisal or a Comparable Market Analysis (CMA). A CMA is an informal range of market value based on comparable sales in the neighborhood. Because the real estate market is continually changing and market fluctuations have an effect on property values, it's imperative to select your list-price based on the most recent comparable sales in your neighborhood. A CMA provides the background data on which to base your list-price decision.

While it may be tempting to set the list-price high, "just to see what happens" or hoping for someone to come along who hasn't done their homework, sellers generally wind up selling their initially over-priced house for less than market value. Selling fast is often the key to selling for the most money.

Question: So, why are listings most marketable when they are new to the market?
Answer: Because buyers don't tend to revisit homes they've already seen and rejected - even if the rejection is based solely upon price. Buyers wait anxiously for, and rush off to see, new listings. Competitively priced properties will sell first. The overpriced property stays on the market for an extended amount of time, previous potential buyers become disinterested, new buyers will conclude there's a reason why the overpriced propety hasn't sold and, as a result, showing activity falls off almost completely. After it loses it's "freshness" and potential buyers turn their attention to new listings, a common course of action is to lower the price. By this time, it may too late to capture fair market value.

Question: What if I over-shot the market and my home is initially overpriced?
Answer: Another common mistake is failing to quickly reduce the price on an overpriced listing. If showing activity slows, re-examine the prices of competing properties in the neighborhood and lower the price to market value - immediately. Other options: offer downpayment assistance, allowances, or help with closing costs.

Pricing a home properly is also important for appraisal purposes. Prior to granting a mortgage for a home, lenders will order an appraisal to ensure the home has enough market value to secure the loan. Should the buyer default on the loan, the lender needs to be certain that the money loaned can be recouped by the sale of the home. If a home doesn't appraise for the amount the buyer is trying to obtain the loan for, the lender will most likely disappprove the loan and the sale can collapse. Lenders will not grant a loan unless the property securing the loan has enough value.
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What is the difference between "pre-qualified" and "pre-approved"?

The pre-qualification is only a cursory look at a borrower’s finances without a commitment from either the borrower or the lender.

A pre-approval, on the other hand, means the lender has already given the buyer the loan. The loan is contingent only on the property appraising for the sales price.

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What can I do to sell my home quickly?

Even if a seller is marketing their house as a "fixer", it should be clean and clutter free; Buyers need to perceive value and a cluttered home interferes with that perception. Afterall, if there wasn't enough room for all of the seller's "stuff", how can there be enough room for the buyer's belongings? A good first impression goes a long way. For a list of ideas to prep' your house, click here...

Property condition is important as buyers are more likely to purchase a home that is "turn-key"; They tend to pay more when they find it. Homes that are move-in-ready sell more quickly than homes needing repair and, as we all know, the longer a listing sits on the market unsold, the lower the ultimate selling price.

It's easy to overlook home maintenance chores if there's no urgency and, sure, those needed repairs may not be much of an eyesore but, when it comes down to a prospective buyer's perception, those little items can cost a seller considerably. So, if the floor is squeaky or a cabinet door doesn't shut quite right, it's time to do some handywork; Buyers may incorrectly suspect that major damage lurks when they see little items needing repair.

But what if the repairs are more costly (ie new siding, roof, etc)?
A buyer may come along, fall in love with the house, want it desperately but their lender can require repairs be performed prior to closing as a condition of the buyer's mortgage. An "escrow holdback" can be used if the lender will grant it but closing can be delayed and the sale may fall through. So, if it's a choice between installing those perfect, granite countertops and fixing the roof - fix the roof. Prioritize money spent on repairs to have the most positive impact - structural items need top priority.
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What if I'm facing foreclosure?

Many people that find themselves in a bad financial spot will put off dealing with the problem, hoping that things will work out. Many fear notifying their lender of financial difficulties, thinking the likelyhood of losing the home will increase. Lenders are not standing by, hoping to sell your home at a Trustee's Sale. They want money, not your home.

So, call your lender; Ask for the phone number to the "Loss Mitigation" Department. Tell them why you're having trouble paying; Tell them what you plan to do and when you can pay.

Most people aren't aware that lenders consider loan modifications. Loan Modification packages typically include a series of forms including a Request for Modification and a Financial Statement. They'll want an accounting for all your finances to ensure no assets are hidden. They'll also request a letter stating your hardship. Fill out those forms and send everything they ask for back to them right away; Don't procrastinate. Costs incurred generally include a charge for credit report and title insurance.

If your financial problems are short-term, great. You should be able to hang-on to your home and get back on your feet.

If not, you'll probably want to sell your house - better then having your home taken away. Work with your lender as they should be willing to give you breathing room and allow you to sell the house.

Fannie Mae's website provides a "Find a Counselor" search. Default/delinquency counselors offer advice on how to work with a lender in making timely mortgage payments, how to work with a lender if circumstances prevent making mortgage payments and how to develop and live within a budget.

Sometimes filing for bankruptcy is the best alternative. Just be sure to find out where you really stand and get some legitimate advise (watch for scammers) before going down the bankruptcy path. For free advise, contact the National Foundation for Credit Counseling (NFCC).

Regardless of what you decide to do, the key is to take control.
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