It's mid-April again...Did you Buy a House Last Year?

Yes friends the dreaded tax arrives yet again. Now if you bought a house for the first time, last year you very well may be able to itemize deductions and save money. If you bout the house in the second half of the year, you may not have paid enough interest of offset the Federal standard deduction. But it is always wise to consult a tax pro before prepping your taxes.

This year a new tax system is in play and it may remove the need to itemize for some home buyers. The $24,000 standard deduction for a married couple is enough to wipe out all the interest paid in the first year of a $425,000 mortgage at 4.5% with about $5,500. So one would need to have an additional $5,600 in deductions beyond the mortgage for itemization to really help.

In my opinion one rarely should buy a house strictly for tax purposes unless the house is a investment property. To real value in home ownership is gaining equity value over time by reducing principle and market appreciation. This helps people build wealth over time and is a cornerstone to the American way of life.

So with all that taxes and building wealth set, how about the market?

The local MLS just released it's data for March and it looks like inventory is just about as tight as it was last year this time. Rising interest rates could initially get some fence sitters to jump in while rates are still low, but eventually it will lead to fewer buyers. This is primarily why many analysts feel 2018 real estate prices are likely to rise more slowly than last year. Buyers will be helped by a little less competition.

I will be diving deeper into the data to look for opportunities for buyers and sellers over the next week. 

2018 off to a good start

OK I'll admit that title is anecdotal. But I am seeing a nice flow of listings and buyers poking around, finding homes, and making offers. Many analysts feel that 2018 will slow the crazy pace in the real estate market to a more healthy and normal 4-5% price appreciation over the course of the year. This is fine by me.

I think the fact that the "threat" of higher rates is now the reality of higher rates, people that we dangling their feet over the fence are starting to jump in. I have made the point time and again that rates are far more important the price. Most people will pay far more in interest than any price deal they might negotiate.

The federal tax revisions that take effect this tax year (2018) many middle income earners will no longer need to itemize and as such the mortgage deduction will no longer benefit them. A married couple paying less than $20,000 a year in mortgage interest may not have enough itemized deductions to exceed the new and improved standard deduction of $24,000 for a family.

As I always state my standard disclosure anytime taxation is discussed: always consult a professional tax prepared or CPA when making decisions based on taxation. That out of the way, the new tax law increased the standard deduction for a married couple from $12,000 to a whopping $24,000. W2 wage earners are those who have a job and the boss cuts a paycheck, withholding money for taxes. W2 wage earners will receive a standard deduction of $24,000 for a married couples and $12,000 for single filers. This is nearly double from previous years! In general this is a good thing. But in order for it to matter you must have more than $24,000 in deductions for a couple or $12,000 for single. That may be a problem for some.

Lets look at a hypothetical taxpayer for a moment, we shall call her Sally.

Sally made $40,000 in 2017 and has a mortgage of $200,000 on her home. She paid $8,700 in interest last year. The standard deduction for 2017 was $6,350. Her mortgage interest exceeds that so filing the "long form" IRS 1040 with a schedule A for itemized deductions makes sense. Why take the standard $6,350 when you have $8,700 in mortgage interest alone. Now Sally can also write off other job related and business expenses. Here is where talking to the tax pro is CRITICAL. Sally needs to make sure that she doesn't take deductions that are not supported by the IRS. OK Sally is smart and she has a trusted tax pro handling her filing each year and he helped her find an additional $2,200 in legit tax deductions. No Sally can't write off those coffee break lattes ;)

Now two 'problems' will arise for Sally this year. First the amount of interest paid on a mortgages drops each year as the balance is reduced. Let's say Sally will pay $8,500 in interest in 2018. She will likely have a similar amount of other deductions. So at the end of the year she has $10,700 in deductions which is now less than the new standard deduction of $12,000. The good news is, Sally will get a larger deduction and save the extra expenses of having to file the schedule A. Her tax guy is not happy, but Sally is. But now for many the extra bonus value of home ownership that was an effective tax break, has been eliminated for those with smaller mortgages.

This could have a net effect of slowing down some of the pressure on entry level homes and first time home buyers. Of course the idea of home ownership should not revolve around tax deductions, but rather the idea of owning real property, gaining equity by reducing the balance on the loan and enjoying appreciation in price over time. These are really the hallmarks of home ownership. It's all about the equity asset and the lack of a landlord that can kick you out or raise your rent.

Over all the new tax system will be a bonus, but it could lead to some minor softening mostly near the bottom of the market. Frankly the bottom needs a little price relief anyway. 2018 is looking good.

Happy New Year... Almost

Rod's outlook for real estate in 2018: Here in the Portland Metro in a word, "healthy." I do not foresee a massive spike in pricing or the crazy multiple offer bidding wars 10% above asking like we saw in the first half of this year. That tends to be sort of exciting but it is not sustainable and it is terrible for the buyers trying to get a house before they close on the one they just sold.

I see a market that should remain in the favor of sellers under roughly 115% of median value. From 115% to the upper middle bracket of 200% of median I see the strong possibility of neutral market conditions. Above that 200% of median, locally above $600k may even slide into a slight buyers market. I don't see soften prices, just very modest appreciation in the high end and average to slightly less than average appreciation in the low to middle price ranges.

This is a healthy condition because home values that rise in double figures for more than a few years leads to hard crashes as that greatly outstrips the wage growth. A healthy market with values appreciated in the 3-5% range is sustainable long term and when things get tight on incomes the market will get a soft landing.

The new tax law recently passed by congress and signed by the President, will increase the standard deduction for a married couple to $24,000 per year. The ability to deduct state and local taxes has been severely cut back. For entry level home buyers the ability to "write off" mortgage interest may not be a viable option. You see, a $300,000 mortgage at 4% will have about $13,000 in deductible interest in the first year and it will decline each year as the balance is reduced. Most people cannot come up with another $9,000 in deductions to reach the point of beating the standard deduction, so itemizing may not make sense anymore. This is a huge benefit to renters as they will now gain a massive increase in deduction where as home owners will either save a little or see no gain in benefit.

According to the politicians the idea was to eliminate the need for average Americans to fill out complex tax forms, pay accounting fees to do it for them, or buy software to help them. I suppose this is a good thing, but not everyone likes this flavor of taxation.

Homeowners should talk to a tax pro to see how the changes for 2018 will affect them. Self employed people and others with large company and business expenses will likely continue to do taxes they way they always have. But W-2 wage earners may see a nice simplification to the annual annoyance that is filing tax returns.

Those with larger mortgages and or higher than average deductible expenses will not likely benefit from the higher standard deduction but all taxpayers will benefit from the lower tax brackets. Overall I remain cautiously optimistic about the plan, congress does have a way of screwing things up though, so we shall see :)

Happy New Year! I'll be back in 2018.

Tax Bill is now Law, get packin'

So now that the new tax system will be implemented all those ready to retire or already retired just got a big new reason to look at Washington State. Especially Californians and Oregonians with that ENORMOUS state income tax down there.

That's all I got this time, really. Happy Holidays see you next year :)

Last Chance for Tax Prep

Did you buy a house this year? Did you do a major refinance of you personal residence this year? If you did either you should meet with your tax guy before the end of the year. Home mortgage interest can play a significant role in you tax burden and you may have had a big enough change to itemize deductions where you previously did not. This means lots of things to deduct against you tax bill. It is already the 22nd of December and you better get crackin'

Once a taxpayer has reached the point where he or she can itemize deductions on the 1040 form, there are many legitimate deductible expenses that can be taken. It may even be worth while to make a few legitimate business purchases based on what you professional tax guy says.

The new tax law passed by the Congress earlier this week may change your ability to itemize deductions so this year could be the year you want to make deductible purchases. The new law will increase the standard deduction by roughly double. This means many people that are itemizing now, may not need to starting next year. Your tax guy can explain the details, but I suggest you find out before the end of the year.

Many homeowners benefit from itemizing deductions and if you own a home with a mortgage you should seek professional tax help to make sure you are not paying MORE than you fair share to Uncle Sam. Let's face it, the IRS is more like a crazy uncle when you think about it. Our elected representatives are not exactly spending YOUR money wisely, so keep as much as you can fairly under the law. Talk to a pro, you only got 4 business days left!

Happy Holidays to all!

Homeowners and Taxes: talk to a pro!

I wrote the attached article nearly three years ago but it still carries the same weight today. If you bought your first home this year, you need to get so tax advice.

Originally posted December 20th, 2013 by Rod Sager

Did you buy a house this year?

Well, did you? If so, you really ought to consider talking to a CPA or a trusted tax professional. This is especially true if you bought your very first home. Our federal tax system is complicated and has both positive loopholes and negative traps. Buying a home is often beneficial to your bottom line on taxes. A tax professional can help you organize your deductions and clarify what you can and cannot "write off".

Prior to owning a home most people do not have enough deductions to justify using the 1040 long form. But once mortgage interest is added to the mix it is quite common to have every reason to itemize deductions. Now all those legitimate deductions you have always had can actually be utilized to save money on taxes. This is why it is so important to see a professional tax advisor.

Trying to itemize deductions on your own can be a very daunting task. Not only is it time consuming, but it is very easy to take a deduction that is not a legal deduction. In an audit, you may get into the proverbial hot water. It may cost anywhere from a hundred to a few hundred dollars to have a professional prepare your taxes, but it is well worth it in my opinion. Even if you are good at accounting and feel comfortable preparing your own taxes, I still think it is sound advice to at least have your taxes prepared occasionally by a seasoned tax professional. A significant change in tax, income or deductions status is a great time to utilize a tax preparer.

The federal government is going to waste your money anyway, so you might as well pay them ONLY what you really owe, right? OK, I know that the government has many viable and necessary expenditures, my tongue was inserted in the cheek on that last comment. But none the less, why pay more than you are required? If you want to give away money, give it to a local charity and help someone who is down and out. Or send me a check...tongue in cheek but less firmly on that one.

I hope everyone has had a spectacular year, I know I did and I am looking forward to an even better 2014. Happy Holidays to all of you. They will be a little merrier if you save money on your taxes this year.

Planning on Collecting a Pension in Retirement?

I write a monthly blog called "Retire to Washington". As far as real estate goes, many people choose to sell the "family" home and 'downsize' to something less formidable when they retire. People sometimes choose to move away from the community they raised the family in as well.

There are multiple factors involved in such decisions. Sometimes parents follow their children so as to be near grandchildren. Sometimes it is an economic decision searching for a place that offers tax relief or other financial advantages for a retiree. Weather can drive the decisions as well and the high number of retirees in Arizona and Florida certainly are indicative of that.

Here in America's Vancouver and Clark County, Washington, we have many ideal conditions for retirees. The title of this post asks if you are planning to collect a pension in retirement. If you are, then Washington State is one of only 7 states in the USA that does NOT tax income. Our neighbor to the south collects an income tax described by industry experts as one of the most aggressive in the country.

Income tax is the biggest government kill-joy for retired people there is. Most folks find themselves in retirement with little in tax deductions. The kids are gone, you're retired so there is no job related deductions, the house is either paid off or nearly so and the interest deduction is all but gone. Then here comes the heavy hand of government to collect their tax. There's little avoiding the feds on this, but at the state level, Washington lets you keep all of your income.

Many people fail to recognize the significance of this deadly combination of income tax and no deductions. In nearby Portland, OR one merely needs to earn a gross of about $16,000 to find themselves in the most common bracket which is a molesting 9%. To put it in perspective, Oregon collects no sales tax, but plunders the average Oregonian for 9% income tax. If one earns $30,000 in taxable income they will bequeath to the 'Empire of Oregon' some $2700. Here in Washington state we do have a state sales tax of 6.5% and locally it is 8.25%. On the surface it may seem close, but stop and think about it. Do we spend every income taxable dollar on sales taxable goods and services. The answer is: hell no, we do not. A person earning a taxable income of $30,000 will likely buy less than $10,000 a year in  sales taxable goods. That's less than $825 a year in sales tax and only a third of the burden imposed by the gluttons in Salem down in the Beaver State.

What could you do with an extra $1900 each year? Obviously those with two pensions of a larger retirement income will find this tax savings all too juicy to pass up. The real estate angle is simple. If the sweltering heat of the desert isn't your idea of a comfortable retirement, then skip on Arizona and come straight to Washington State to buy that last house!

As always, I must pull by best Doctor Leonard McCoy impersonation: "I'm a Realtor®, not an accountant"! I am not a tax professional and any decisions made regarding taxation and its effects on your personal situation, should be taken under the advisement of a tax professional.    

Schools can be important to Buyers

Many buyers that are hunting for houses are very concerned about the schools in various neighborhoods. For real estate agents this is a dangerous area as the fair housing laws prohibit "steering". Agents must be careful not to violate these laws. The best solution for parents concerned with schools is to utilize the extensive internet research sites for schools. Websites like "Great Schools" and others can provide strong insight into the schools in any area. They are not however a substitute for personal visits.

Schools are not just something for buyers with school age children to consider. Even if you do not have children or they are grown up, the schools will still have an impact on future marketability of the home you purchase. Good schools can help homes fetch a higher price, but these higher rated schools are typically located in areas with higher property taxes. Most states, including Washington, fund public schools largely from property taxes. So buyers should be prepared to have a higher tax rate with frequent school bond measures passing in areas with top rated schools. If school age children are not part of your equation then the decision could come down to larger monthly expenses measured against long term resale value.

My experience with school district preferences among buyers is that often it is trendy and sometimes irrelevant, yet it can drive parents to make irrational decisions. Parents should consider more than just the academic results when considering schools. Sometimes parents will stretch themselves to the bare wire to buy a relatively inexpensive house in a very expensive area just to get the kids into the "better" schools. Although this may work out, sometimes there are consequences the parents don't see coming. For example, a family earning a very modest income might be sending their children to school with mostly affluent kids. Children can be very cruel to each other especially when there is a strong income gap. Doing some research online and in person can be the best thing parents can do when evaluating schools. It is very important that children feel like they "fit in". If they do not, they may very well struggle academically and socially and the so called "lesser" school could be the better choice in some cases. When children don't feel like they belong they can make very poor decisions; so parents need to do more than follow the trends and look closely at the schools in an area of interest on the academic level and the social level.

Many real estate agents jump on the trend bandwagon, and frankly they are risking fair housing violations in doing so. Of course parents have a variety of concerns when evaluating schools. Some parents focus on academic opportunity, others may have student athletes, etc. Well funded schools often have an advantage in both areas, but parents are wise to look at the whole experience for their children. Larger school districts with multiple high schools spread across a diverse economic area often have lower overall academic scores on websites and that can be misleading. Concerned parents are well advised to actually visit the schools personally.

It should also be noted that looking at district-wide results can be important as well. Usually a school district implements curriculum and systems across the whole district. So if one school in the same district has superior academic ratings than another, that could be misleading as to the quality of education available at other schools in the same district. In general students that feel accepted and secure will do better academically than those thrust into an uncomfortable situation. Sometimes that means the top rated school in the posh neighborhood is not as well suited as a school in the same district that serves a more broad economic base. The district as a whole will often offer the same level of academic opportunity across the district and that may counter the individual ratings.

The bottom line is that parents need to actually do some real research and not solely rely on the trend influenced actions and advice of others. Buyers should also understand that a real estate agent that seems evasive on some of these issues is likely doing so to be compliant with the Fair Housing Act and not due to a lack of caring or understanding. Buyers are better off working with a compliant agent than one that skates over the line.

Buyers should research the schools and other neighborhood characteristics based on their own personal preferences and try to avoid getting sucked into irrelevant trends.    

Do You Meet With Your Tax Pro in December?

I always meet with my tax professional every December. If you were involved in a real estate transaction this year, meeting with your tax adviser is a good idea. Often real estate has income tax benefits or consequences and this is nice to know before the end of the year. Even if real estate was not involved this year, knowing where you stand while there is still time to make adjustments in your finances can save you thousands of dollars.

Real estate in particular can be a tricky proposition for taxes. The laws change frequently and once you get past December, often it is too late to make any adjustments for the tax year. Sometimes waiting to close on a property until next year is better than closing it this year, or vice-versa. Your tax pro can go over the differences and help you make the best financial decisions that put you in the strongest position for taxation purposes.

If you engaged in a real estate transaction in 2015, talking to the tax accountant about the benefits or consequences of that action can be helpful. Generally real estate transactions for owner occupied properties are beneficial but rental units can be very tricky and an accountant is well worth the expense to help you sort it all out.

Last year I had a tax surprise and not the happy variety. Meeting in December alerted me to the problem. I was not able to change anything, but it was nice having a four month advance notice that the April 15 bomb was going nuclear.  

If you are not using a professional for your taxes and you own real estate or trade in securities you are probably leaving money on the table. Talk to a pro and keep the messy taxes nice and tidy.

Happy New Year!

If you didn't buy a house in 2014 but you think you might in 2015, earlier is better, especially if you are a first time home buyer. Why, you ask? Because those who buy a home in the first month of the year enjoy a full year of delicious home mortgage interest deductions. Mortgage interest is heavily front loaded so that first year is always a very nice tax deduction. I will of course included my standard disclaimer and suggest that any decision readers make based on taxation should be done under the counsel of a professional tax advisor. That said, buyers can take advantage of a full year of tax benefits and the winter market is generally a little more forgiving on terms. Win, win.

Those of us up in the northern half of the country definitely have a seasonal cycle in real estate. As I have pointed out before, plenty of real estate transactions happen in the winter, but it is about 25% slower and that extra bit of market stress relief can be the difference between a firm seller and a seller with a little room for wiggle.

Get out and brave the elements and find that dream home. We are having a mild winter anyway here in the Northwest. Now is the time!

Did you buy a House this Year?

Well, did you? If so, you really ought to consider talking to a CPA or a trusted tax professional. This is especially true if you bought your very first home. Our federal tax system is complicated and has both positive loopholes and negative traps. Buying a home is often beneficial to your bottom line on taxes. A tax professional can help you organize your deductions and clarify what you can and cannot "write off".

Prior to owning a home most people do not have enough deductions to justify using the 1040 long form. But once mortgage interest is added to the mix it is quite common to have every reason to itemize deductions. Now all those legitimate deductions you have always had can actually be utilized to save money on taxes. This is why it is so important to see a professional tax advisor.

Trying to itemize deductions on your own can be a very daunting task. Not only is it time consuming, but it is very easy to take a deduction that is not a legal deduction. In an audit, you may get into the proverbial hot water. It may cost anywhere from a hundred to a few hundred dollars to have a professional prepare your taxes, but it is well worth it in my opinion. Even if you are good at accounting and feel comfortable preparing your own taxes, I still think it is sound advice to at least have your taxes prepared occasionally by a seasoned tax professional. A significant change in tax, income or deductions status is a great time to utilize a tax preparer.

The federal government is going to waste your money anyway, so you might as well pay them ONLY what you really owe, right? OK, I know that the government has many viable and necessary expenditures, my tongue was inserted in the cheek on that last comment. But none the less, why pay more than you are required? If you want to give away money, give it to a local charity and help someone who is down and out. Or send me a check...tongue in cheek but less firmly on that one.

I hope everyone has had a spectacular year, I know I did and I am looking forward to an even better 2014. Happy Holidays to all of you. They will be a little merrier if you save money on your taxes this year.

Retire to Washington

Washington State is not the first state you think of when pondering the exodus of retirees to "fairer" locales. You might think of the warmer sun belt states like Arizona and Florida. But Washington offers a unique combination of favorable taxes for seniors, a variety of climates from dry to wet and mild to wild. Washington offers its qualifying seniors a significant reduction in property taxes. There is no state income tax. Southwest Washington really hits the spot, because for those who like to shop and spend money the very nearby Oregon has no sales tax. A trip to the Oregon coast is easy and inexpensive.

Many retirees in the area keep two inexpensive (or expensive depending on their finances) homes. One in Washington State and another in California or Arizona. They fly south for the winter in November and return to our more tolerable climate in the late spring. usually it is better to claim Washington as the "home" state since we have favorable tax conditions for seniors. Although Washington is not the TOP rated state for tax friendly status, it would be when considering the live in Washington, play in Oregon angle offered by Southwest Washington.

Vancouver offers the glorious beauty of the west side of the Cascades with a moderate amount of rain and very modest snow. East of the Cascades delivers much more sunshine but also has more drastic swings in temperature and much more snow in the winter. Southwest Washington also offers close proximity to the aforementioned Oregon Coast and the metropolitan Portland area.

Speaking of the coast, Southwest Washington has the lock on reasonably priced beach property. The Oregon coast is world famous, largely because the state of Oregon spends millions of dollars promoting it. The southern Washington coast is equally spectacular but offers amazing values in property and taxation. This is especially true when compared to Oregon which is very tax unfriendly according to several prominent sources such as Money Magazine and Kiplinger.

Sourced from Kiplinger.com

Our southern neighbor, Oregon is rated as "least tax-friendly" for seniors while we enjoy the "tax friendly" status. Our base property taxes are much lower than Oregon and many seniors qualify for one of four property tax reduction programs. Sales tax is a much less intrusive tax than income tax for middle and upper income seniors. Arizona rated higher than Washington for tax friendly status but actually depending on income and spending habits we might be better than them as well. 

Now that all this taxation benefits are out of the way, we can consider other factors. The well known fact that Washington state is absolutely gorgeous is a strong draw. We have four distinct seasons here in Clark County but none are severe. That is tough to find anywhere on Earth. It seems like the proverbial slam dunk for a retirees to move here. And many of them are moving here. So there you have it, Washington State is the best northern state to retire to. Start packing.