Real Estate
spring 2018





Tax changes may lower home values

depositphotos_27650723_l-2015The Tax Cuts and Jobs Act, signed into law in late December, will affect millions of Americans in different ways. When it comes to real estate, legal experts suggest that the massive tax overhaul could have some unintended consequences, including discouraging homeownership and slowing the pace of home appreciation.

Here’s how the new law affects homeowners:

  • Lower limits on mortgage interest deductions: Under the new law, homeowners can deduct interest on mortgages up to $750,000, down from $1 million. The reduction makes it more expensive to borrow money for high-priced homes.
  • Limits on SALT deductions: Previously all state and local taxes (SALT) could be claimed as an itemized deduction. Now all SALT tax deductions — including property, income and sales taxes — have a collective $10,000 cap.
  • Standard deduction doubled: The new law doubles the standard deduction to $12,000 for an individual filer and $24,000 for a married couple. That means fewer couples will have an incentive to itemize because their mortgage interest and $10,000-capped SALT deduction won’t exceed $24,000.
  • Home equity loan advantages gone: In the past, homeowners were able to deduct up to $100,000 in interest on home equity loans. That deduction is gone altogether, even if you take out the loan for real estate improvements. The change does not have a grandfather provision, meaning everyone with a home equity loan will be affected.
  • Most relocation deductions eliminated: Under the old law, you could deduct some of your moving expenses when relocating for a new job. Now, only active duty service members may deduct those costs.

Real estate winners and losers

Coastal states — lose: According to the National Association of Realtors, approximately 95 percent of homeowners will be unaffected by the $10,000 cap on state and local deductions. However, homeowners in high tax states, such as California, Connecticut, New Jersey and New York, will take a hit. In New York, 19 percent of homeowners pay more than $10,000 in property tax alone. In New Jersey, it’s 30 percent. These are also the states where homes are mostly likely to exceed the new $750,000 limit for mortgage interest, making homeownership more unaffordable than before.

Middle America — mostly neutral: Homeowners in the middle of the county will be least affected because home values there remain relatively affordable. But certain high value communities could feel the hit.

Home sellers — lose: With shrinking tax breaks, sellers may have to adjust their asking prices. Moody’s Analytics predicts that home prices nationwide will be about 4 percent lower between now and summer 2019 than where they could have been without the tax changes. Home owners in high-value markets and high-tax states will feel the biggest hit. Moody’s predicts that homes in certain New York communities, for example, will be 10-11 percent below otherwise expected values.

High-value home buyers — win: If you’re planning to buy a home where real estate is pricey, this may be the time to find a bargain.

First time home buyers — lose: Analysts suggest that lower deduction limits could exacerbate scarcity in the affordable housing market. That’s because fewer homeowners will trade up into larger homes that would push them over the $10,000 SALT cap or the $750,000 mortgage threshold.

Landlords and developers — win: Shrinking tax perks on homeownership reduces the economic incentive to buy a home. That means landlords and real estate developers will come out ahead if more would-be-homebuyers choose to rent instead.

Fewer tax rewards for first-time homeowners

While political leaders have long touted the benefits of homeownership, the new tax law effectively reduces the incentive to own.

Historically, tax breaks were designed to encourage people to buy that first home and then trade up as their income allowed. But the new law increases many homeowners’ net housing costs, shifting the rent vs. own equation.

The shift is the result of two key changes: scaled back deductions on property taxes combined with a doubling of the standard deduction.

Standard deduction: The new law doubles the standard deduction to $12,000 for an individual filer and $24,000 for a married couple. (The IRS standard deduction is the portion of income that is not subject to tax, thereby lowering your overall tax burden. Taxpayers may choose to take the standard deduction or itemize deductions instead.)

Doubling the standard deduction means fewer people will have the incentive to itemize. The nonpartisan Tax Policy Center estimates that the number of itemizers will fall from about 49 million to 10 million.

For example, if you’re married and filing jointly and paid $20,000 in mortgage interest and property taxes, you would have itemized those deductions in the past, getting a nice little perk for homeownership. But beginning in 2018, you will take the standard deduction instead.

While the shift doesn’t necessarily change a person’s overall tax burden, it does remove the tax write-off that comes with homeownership. That could change the rent vs. own decision for first-time buyers.

According to Zillow, about 44 percent of homeowners were better off itemizing prior to the tax changes. That number has now dropped to just 14.4 percent. That means a big incentive to buy is now gone for about a third of potential home buyers.

SALT deductions: The new tax law also places a $10,000 cap on the amount of state and local taxes (SALT) filers can deduct. For people with high-value homes in high-tax communities, that means they won’t be able to write off as much of their property taxes, which makes homeownership less affordable.

Buyers increasing down payments to gain edge

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Buyers are facing heavy competition in certain U.S. housing markets, and many are increasing their down payment to gain the competitive edge.

In purchase situations with multiple offers, the buyer with the larger down payment is likely to win out. In part, that’s because larger down payments suggest less risk that financing could fall through. More importantly, a higher down payment can effectively bridge any financing gaps should the home appraisal come in at less than the offered purchase price.

The median down payment for homes purchased with financing in the third quarter of 2017 rose to a high of $20,000, or 7.6 percent of the median sales price of $263,000 for that period, according to research from Attom Data Solutions, the curator of the biggest multi-sourced property database in the country. That’s a 6.1 percent increase over the same time period in 2016.

Down payments are even higher on luxury homes, with a median down payment of $385,500 on a financed home-purchase over $1 million, or 28.2 percent of the median sales price.


Finally, recognize that home loans will probably get more expensive this year. Lawrence Yun, chief economist at the National Association of Realtors, predicts that we will see at least three more short-term rate increases in 2018, with 30-year fixed-rate mortgage rates rising to 4.5 percent by the end of 2018.


Be aware that if you’re applying for a jumbo loan with a low down payment, you may have to pay a higher interest rate. Meanwhile, you can help alleviate some lender concerns by coming to the table with easily “sourced” and/or “seasoned” funds. Sourced funds can be readily traced back to their origin (e.g., a stock sale or 401k withdrawal), while seasoned funds have been in your bank account for at least 60 to 90 days.

Lenders prefer sourced and seasoned funds because they help ensure that you aren’t borrowing money from family or setting up some type of hidden, last-minute loan to meet your down payment requirements.  Essentially, lenders favor borrowers who have a demonstrated commitment to saving and the financial wherewithal to cover the down payment, not just the monthly payments.

Finally, recognize that home loans will probably get more expensive this year. Lawrence Yun, chief economist at the National Association of Realtors, predicts that we will see at least three more short-term rate increases in 2018, with 30-year fixed-rate mortgage rates rising to 4.5 percent by the end of 2018.

Other experts suggest that the new tax cuts, coming at a time of full employment, will lead to inflation pressure, sending mortgage rates even higher.

Know when to consult a real estate attorney

It’s generally wise to seek the advice of a real estate attorney any time you buy or sell a property.  Common sale scenarios pose specialized legal risk, and you should consult an experienced attorney if any of the following apply to your sale:

  • Judgements or liens: If there’s a lien on your property, retain an attorney to evaluate the validity of the lien and how to remove it before it holds up a sale.
  • Heir to a property: If you’re an out-of-state heir, you should work with an attorney to ensure all ownership and title issues are in order. Talk about disclosure issues and how to best represent a property when you may have little knowledge of its past or potential concerns.
  • Joint ownership: The ownership structure of your property may impact your ability to sell, particularly if it’s a jointly inherited house. Ensure all joint tenants are on the same page and agree how to split the proceeds. A qualified attorney can help sort out deed issues and sale agreements to ensure your interests are protected and the house can legally be sold.
  • Unmarried domestic partners: Once you and your partner have agreed on expectations, contact a real estate attorney who can draft a home sale agreement that establishes how proceeds will be allocated and what responsibility each party will take for any debts or encumbrances.
  • Disclosure concerns: If you’re concerned about potential issues with the property (e.g., a death on the property or nuisance neighbors), consult an attorney about your disclosure obligations. Remember, you’re required to answer buyers’ questions truthfully, to the best of your ability.

Selling a home will probably be one of the largest transactions you participate in during your life. Even if you don’t anticipate any of the challenges above, an attorney can provide valuable professional guidance. He or she will review contracts, negotiate repairs, and coordinate with the title company, working to ensure the sale takes place in a fair way and protecting your rights and interests.


Once you and your partner have agreed on expectations, contact a real estate attorney who can draft a home sale agreement that establishes how proceeds will be allocated and what responsibility each party will take for any debts or encumbrances.


 

Getting a mortgage with frozen credit

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Remember the Equifax data breach last summer? Roughly 145 million Americans had their personal information and credit data compromised, leaving them open to identity fraud and theft.

As a result, U.S. credit bureaus (Experian, Equifax, and TransUnion) saw a surge in consumers signing up to freeze their accounts.

Now some would-be homebuyers are running into a hurdle in the mortgage application process: frozen credit. Fortunately, you can request a temporary “thaw” that allows lenders to access your account without permanently lifting your freeze.

You’ll need to contact each of the three major credit bureaus separately, and you may need to pay a fee each time you request this temporary thaw. (Freezes are free to victims of identity theft. Otherwise, fees vary by state, but are usually between $3 to $10.)

Remember, if you’ve placed a freeze on your account and want to apply for new credit, allow sufficient time for the lender to pull your report. If you are mortgage shopping, you could ask for a temporary lift of two weeks, as all inquiries made within 14 days count as just one hard hit against your credit score. (All inquiries are suppressed from affecting your score for 30 days.)

However, once you’ve chosen your mortgage lender, you may need to unfreeze your credit report again just prior to closing so your lender can complete a “credit refresh.” This is a lender’s last-minute check to ensure you haven’t opened new credit or built up a larger debt load between your initial application and closing.


As an alternate to a credit freeze, consumers may consider placing a fraud alert on their account.  A fraud alert is free, and you only have to contact one credit bureau, which is then responsible for notifying the others.


Freezes versus fraud alerts

Freezing your credit account is one way to stop fraudsters from taking out a mortgage, credit card, car loan or other credit account in your name. A credit freeze blocks anyone (including lenders, landlords and employers) from accessing your credit report. It does not impact your ability to use existing lines of credit, such as credit cards.

Freezing your credit provides a measure of security against financial fraud, but it can hamper your ability to access credit. If you’ve instituted a freeze but want to sign up for a new credit card, or sign certain cellphone agreements, you’ll need to provide the lender with access to your credit. Again, that means contacting each bureau separately to temporarily lift the freeze.

As an alternate to a credit freeze, consumers may consider placing a fraud alert on their account.  A fraud alert is free, and you only have to contact one credit bureau, which is then responsible for notifying the others.

Under a fraud alert, creditors can still pull your credit report by taking extra steps to verify your identity. However, unless you’ve been an actual victim of identity theft, fraud alerts last just 90 days before they must be renewed.


frozencreditOnce you’ve chosen your mortgage lender, you may need to unfreeze your credit report again just prior to closing so your lender can complete a “credit refresh.” This is a lender’s last-minute check to ensure you haven’t opened new credit or built up a larger debt load between your initial application and closing.


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This newsletter is designed to keep you up-to-date with changes in the law. For help with these or any other legal issues, please call today. The information in this newsletter is intended solely for your information. It does not constitute legal advice, and it should not be relied on without a discussion of your specific situation with an attorney.