Home selling tax tips for accidental landlords

Due to the precipitous decline in the housing market over the past few years, many homeowners who would otherwise sell their homes are renting them out. This may be because prices are too low, or because they have to move before they can sell due to a job change.

Such accidental landlords should understand that if they rent out their homes too long before they sell them, they could lose the biggest tax break available for most people: the home sale exclusion.

Homeowners who qualify for the home sale exclusion don't have to pay any income tax on up to $250,000 of the gain from the sale if they're single, or up to $500,000 if they're married and file a joint return. Of course, this exclusion is useful only for homeowners who have equity in their homes, not the millions who are "under water" and will receive no profit if they sell their homes.

To qualify for the exclusion, a homeowner must satisfy the ownership and use tests. This means that during the 5-year period ending on the date of the sale, the homeowner must have:

• owned the home for at least 2 years (the ownership test), and
• lived in the home as a primary residence for at least 2 years (the use test).

However, the homeowner need not be living in the house at the time it is sold. The two years of ownership and use may occur anytime during the five years before the date of the sale.

This means that a homeowner can move out of the house for up to three years and still qualify for the exclusion. Moreover, a homeowner can rent out a home and count that time as ownership time.

This rule has a very practical application: A homeowner may rent out a home for up to three years prior to the sale and still qualify for the exclusion. However, the exclusion works a bit different for homeowners who have rented out their homes.

They cannot exclude from their income the part of their gain equal to the depreciation they claimed (or could have claimed) while renting the home. Moreover, if the home is rental property at the time of the sale, the sale must be reported to the Internal Revenue Service on Form 4797:  Sales of Business Property.

Example: Connie purchases a house on Feb. 1, 2007, and lives in it for two full years. She then moves to another state to take a new job. Rather than sell the house in a down market, she elects to rent it out.

If she sells the house by Feb. 1, 2012, she'll qualify for the $250,000 home sale exclusion because she owned and used the house as her principal home for two years during the five-year period before the sale. If she waits even one more day to sell, she will get no exclusion at all.

Thus, accidental landlords who have equity in their homes need to sell them before the three-year rental period expires, or they'll lose the home sale exclusion. If they can't or don't want to sell, they would have to move back into the home to preserve the exclusion.

Homeowners who don't qualify for the exclusion will have to pay a 15 percent capital gains tax on their gain from the sale (assuming the home was owned for at least one year).

Inman News

Sell later, sell higher? A reality check

Q: Although we have our home up for sale, we have so many people interested in renting that we are considering taking it off the market to have it rented, as we need to have monies coming in to cover the mortgage.

We had it on the market in 2008, and took it off and rented it for awhile then. When we relisted it last year, we listed it at $50,000 less than we had it listed for in 2008. I am anticipating that the market will get better if we take it off and rent it now and then sell it at a later date. Do you see this happening? --Nicolae

A: Ah, if only I possessed the real estate crystal ball, that ultimate holy grail of economists, media pundits, politicos and real estate consumers alike. Unfortunately, I don't. And that seems to be what you want and need: a prediction about whether to sell later will be to sell higher.

There is no way to know whether this will be the case for certain, especially in the fairly near term. If you were telling me you planned to rent the place out for 10 years, I'd tell you it's possible that it'd be easier to sell then. But next year? The year after? No can do.

And frankly, even in the five- to seven-year time frame, massive shifts that are currently in the works in the mortgage market (namely, the elimination of Fannie Mae and Freddie Mac) may narrow the availability of homeownership, so that many fewer Americans are even able to own homes. By that token, it could also be more difficult to sell your place then. No one knows for sure.

What most everyone does know, or believe, is that the recovery of home prices from their current depression will undoubtedly be spotty and slow, on a national level. As with everything in the über-local realm of real estate, urban and suburban, Midwestern and Southern, coastal and noncoastal markets were all impacted differently by the housing crisis -- and are all recovering (or not) at different rates. By this token, the answer to your question will depend heavily upon where exactly you live.

It does seem that areas with positive net population growth, strong job markets and home values that are affordable for a high proportion of local households will suffer less of a hit to home values in the long run, but these also tend to be areas where appreciation is generally slow and steady.

If your area has been overbuilt, has been hit very hard by the foreclosure crisis, and/or has a high rate of unemployment/low rate of projected job growth going forward, your home's value could take a long time to recover, and may get worse before it gets better. I urge you to talk with several local real estate pros to get their sense for what sort of market yours is.

Timing the market accurately with precision -- especially this market, which has been and will continue to be manipulated by governmental forces, for better or for worse -- is an extremely difficult thing to do. So don't. Or try not to, anyway.

In 2008, you probably thought that if you rented the place out for a year or two, the market would come back and you'd be back in business. Well, that time has come, and you still aren't able to sell it -- even listed $50,000 lower! Is it possible that you'd have the same result next go 'round? I'd be lying if I said it wasn't.

The better strategy here is to stop trying to use the market to drive your decisions. Get clear on your priorities, and use them to drive your decisions, given what you know about the market.

If closure, avoiding throwing good money after bad, and being able to move forward in life without the lingering obligations associated with the place is what you're after, consider doing what it will take to offload it now, even getting advice from an attorney and tax adviser about all your options, including short sale and a deed-in-lieu of foreclosure.

If closure is less of a concern and you are able to move onto your next home without getting this one sold, and your absolute priority is getting top dollar for the property, then you might consider selling it with seller financing like a wraparound trust deed at an above-market price and interest rate to a buyer who is cash-flush but may be credit- or down-payment-impaired.

You might also consider leasing your place on a lease-option, charging a premium rent (if possible) and securing a tenant who would like to own the place in a couple of years.

Copyright 2011 Tara-Nicholle Nelson

Show That Listing Some Love!

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13 Unique Ways to Sell a Home

In today’s market, it takes more than painting and trimming the bushes to get noticed, to stand out, to make your home memorable. While home sellers across the country are resorting to dropping the price in order to make their home more attractive, it leads to one crucial question: what can I do differently to make my home stand out?

Larry Nusbaum, Resolution Assistance Contractor for the FDIC, offers the following tips for home sellers looking to differentiate their homes from the numerous homes that are on the market today. 

1. Get lighted signage that’s illuminated even after dark. This will give prospective buyers extra time to see your home as they don’t have to depend on sunlight. 

2. If you or your agent are hosting an open house, be sure to serve light snacks and hand out something that attendees will remember. You want something that will be a positive reminder of your home—seasonal gifts are the perfect way to stay top of mind. Be sure to at least have pens and key chains with your agent's name and contact information on them.

3. Create an informational flyer with all the local conveniences you can find: shopping, schools, universities, hospitals, malls, restaurants, gas stations and attractions in the area, in addition to local police and fire stations, even school bus pick up locations. Assume your open house attendees don’t know the neighborhood.

4. Hand out information pertaining to your home as well as information on the other listed properties in the area showing that your house is the best value.

5. Do some staging to make sure your home looks its best. 

6. Be sure to offer incentives. Some examples include a Lowe's gift card, paying for a year’s worth of yard care or a free session with a landscape architect, offering a $1,000 landscape allowance, paying for a years worth of homeowners fees, offering $1,000 for new appliances or any home improvement, offering a new carpet allowance or paying for lawn service for a year—the possibilities are endless. 

7. Paint the garage floor (concrete paint). Making the garage look fresh and clean will make the whole house feel newer.

8. Send letters to all the neighbors inviting them to “pick their neighbor,”and be sure to include information about your home and the open house. Give them an incentive to talk about your home with other individuals in their sphere of influence. (i.e. a $200 gift card if they find your buyer).

9. Put up signs in your front yard and be sure to hang up as many directional signs as the neighborhood allows.

10. Put out flyers in surrounding shopping areas.

11. Have your agent create a video of your home and put the virtual tour on the Web.

12. Have your agent post ads on Craigslist and on any other free online listing sites you can find.

13. E-mail HR departments at local companies as many employees prefer to live close to their jobs but don’t make time for the house hunting process. This will make it easy for employees to find your home. 


RISMEDIA

Today's Best Strategy to Get It SOLD!

—Price it right. Buyers have access to lots of data, and they'll know if your house is too expensive.

—Offer to pay some of the buyer's closing costs.

—Maximize exposure. Saturate the Internet and all forms of social media with your listing.

—Use great photos, not good ones. Make sure your house makes a great first impression.

—Make it sing. Listing information must be complete and well-written.

—Curb appeal matters. Spend a little money on flowers, new plants and fresh paint.

—Inside, your house should look fresh, so make sure the paint, carpeting, light fixtures and appliances are updated and clean.

—De-clutter. Eliminate one-third to two-thirds of your stuff; hire a stager.

—Network. Sales come together because brains understand homes better than computers.

—Be patient. Statistics say that it takes 21 showings, not including open-house traffic, to sell a house.

10 Low-Cost Tips to Improve Your Home's Appeal

When selling your home, the goal is to sell it quickly for the highest price while investing as little as possible in renovations. With a limited budget and a little effort, you can greatly increase your home's appeal by focusing on what prospective buyers can see on their first visit. The experts at BuyOwner.com offer the following recommendations for preparing a house for sale and staging it for showings. 

Tip #1: Refresh the exterior
First impressions count when it comes to selling a home. Most buyers won’t even leave their car if they don’t find the exterior appealing. The best ways to improve your home’s exterior include: 
-Repairing and/or replacing trims, shutters, gutters, shingles, mailboxes, window screens, walkways and the driveway. 
-Painting siding, trim and shutters and lamp and mailbox posts. 
-Pressure washing vinyl siding, roofs, walkways and the driveway. 
-Washing windows. 

Tip #2: Spruce up the lawn and landscape
Home buyers associate the condition of your lawn and landscaping with the condition of your home’s interior. By improving the outside, you affect buyers’ impression of the entire property. The best ways to enhance the yard include: 
-Mowing and edging the lawn. 
-Seeding, fertilizing and weeding the lawn. 
-Keeping up with regular lawn maintenance by frequent watering.
-Trimming and/or removing overgrown trees, shrubs and hedges. 
-Weeding and mulching plant beds. 
-Planting colorful seasonal flowers in existing plant beds. 
-Removing trash, especially along fences and underneath hedges. 
-Sweeping and weeding the street curb along your property. 

Tip #3: Create an inviting entrance
The front door to your home should invite buyers to enter. The best ways to improve your entry include: 
-Painting the front door in a glossy, cheerful color that complements the exterior. 
-Cleaning, polishing and/or replacing the door knocker, locks and handles. 
-Repairing and/or replacing the screen door, the doorbell, porch lights and house numbers. 
-Placing a new welcome mat and a group of seasonal potted plants and flowers by the entry. 

Tip #4: Reduce clutter and furniture
A buyer cannot envision living in your home without seeing it. A home filled with clutter or even too much furniture distracts buyers from seeing how they can utilize the space your home offers. If you have limited storage space, you may want to consider renting a temporary storage unit to place items you wish to keep. The best ways to declutter your home include: 
-Holding a garage sale to prepare for your move, getting rid of unnecessary items.
-Removing clutter such as books, magazines, toys, tools, supplies and unused items from counter tops, open shelves, storage closets, the garage and basements.
-Storing out-of-season clothing and shoes out of sight to make bedroom closets seem roomier. 
-Removing any visibly damaged furniture. 
-Organizing bookshelves, closets, cabinets and pantries. Buyers will inspect everything.
-Putting away your personal photographs, unless they showcase the home. Let buyers see themselves in your home.
-De-personalize rooms as much as you can.

Tip #5: Clean, clean, clean
The cleanliness of your home also influences a buyer's perception of its condition. The appearance of the kitchen and bathrooms will play a considerable role in a buyer's decision process, so pay particular attention to these areas. The best ways to improve these areas include: 
-Cleaning windows, fixtures, hardware, ceiling fans, vent covers and appliances. 
-Cleaning carpets, area rugs and draperies. 
-Cleaning inside the refrigerator, the stove and all cabinets. 
-Removing stains from carpets, floors, counters, sinks, baths, tile, walls and grout. 
-Eliminating house odors, especially if you have pets. 
-Considering air fresheners or potpourri. 

Tip #6: Make minor repairs
The small stuff does count, especially with first-time home buyers. Without dismissing the importance of repairing major items such as a leaky roof or plumbing, you do not need to spend money on replacing these items. Instead, focus on the minor repairs that will make your home visually appealing. The best ways to improve your home include: 
-Repairing ceilings and wall cracks. 
-Repairing faucets, banisters, handrails, cabinets, drawers, doors, floors and tile. 
-Caulking and grouting tubs, showers, sinks and tile. 
-Adding fresh paint to ceilings, walls, trim, doors and cabinets. 
-Tightening door handles, drawer pulls, light switches and electrical plates. 
-Lubricating door hinges and locks. 

Tip #7: Showcase the kitchen
The heart of any home is the kitchen. If you are going to spend any money on renovations, this is the one area where you will see the greatest return. Even with a modest budget, focusing on a few key areas can make a great difference in getting the asking price for your property. The best ways to showcase the kitchen include: 
-Replacing cabinet doors and hardware. 
-Installing under-cabinet lighting. 
-Replacing light fixtures. 
-Replacing outdated shelving with pantry and cabinet organizers to maximize space. 
-Baking cookies or cupcakes for a showing, to create a homey smell.

Tip #8: Stage furniture
Furniture placement can enhance the space of your home while giving buyers an idea of how to best utilize the space with their own belongings. Take some time to rethink how different areas in your house could be used. Some ideas to think about include: 
-Moving couches and chairs away from walls in your sitting and family rooms to create cozy conversational groups. 
-Creating a reading corner in the master bedroom. 
-Clearing an empty room to set up a reading space. 
-Turning an awkward space into a home office. 
-Setting the dining room table with your best china.
-Set wine glasses in front of the fireplace or next to a Jacuzzi tub.

Tip #9: Light up the house
Create a sense of openness and cheerfulness in your home through its lighting. To improve the lighting try: 
-Opening shades and drapes to let the sunshine warm and brighten rooms. 
-Installing brighter light bulbs in rooms that tend to be dark. 
-Adding additional lamps for ambient lighting. 
-Turning on all the lights for a showing.

Tip #10: Add fresh touches
You can easily add color and style to your home by adding fresh touches throughout. Some ideas to consider include: 
-Placing fresh floral arrangements in the entry and master bedroom. 
-Placing bowls of bright-colored fruit in the family room and the kitchen. 
-Filling an empty corner with a potted leafy plant. 
-Setting new hand soap in the bathrooms.
-Displaying fresh towels near sinks.
By Paige Tepping

5 Great Tips to Close the Deal

In a tough real estate market where competition for buyers is high, sometimes the seller has to ‘sweeten the pot’ to get the deal done. Here are five creative ideas from Realtor Vicki Walker to help close the deal.

1. Offer a Decorating Allowance There may be a buyer that likes your home but just has different decorating tastes. To seal the deal, offer a decorating allowance (for painting, new carpets or wallpaper). You can offer cash at closing, or put money in escrow to reimburse decorating and remodeling expenses made within 90 days of closing, up to a maximum amount. 

2. Do a Pre-Sale Inspection 
This actually works for both the seller and the buyer. By having a whole house inspection done before listing the house, you get a chance to address any issues before prospects see the home. That means you increase the homes saleability. Display the report during open houses and highlight the repairs that have already been addressed. It's like seeing the repair history when you buy a used car; it makes you feel better about making an offer because you know the car is in good shape and exactly what has been repaired in the past. By having the home inspected before listing it, people don't have to guess what kind of condition it is in, they can see it in writing. 

3. Offer a Home Warranty 
A home warranty reassures the buyer that the property is in top condition and gives them comfort knowing that certain future repairs will be covered by insurance. Buyers fear that as soon as they buy the house the dishwasher, dryer, or stove will go on the fritz. A home warranty is an inexpensive way to offer peace of mind to the buyer. 

4. Cover Closing Costs 
Sometimes it takes a little nudge to close the deal. You can offer to pay the buyers half of title and escrow fees, or pre-paid interest charges. Paying the points on the loan may also be a tax deduction for you. Many lenders may limit how much of the closing costs you can pay, but if the buyer is short of cash, offering to pay some closing costs can make a difference. 

5. Offer Seller Financing 
There are many ways to offer seller financing. Options include putting funds in escrow to cover several months of mortgage payments, buying down the mortgage rate, or carrying a second mortgage to cover the down payment. It is wise not to offer seller financing unless you have consulted a real estate attorney and your real estate agent. Make sure that the buyer has good credit. Although this is the least attractive option to the seller to get a deal closed, sometimes it takes creativity and going the extra mile to get your home sold. 
By Paige Tepping ~ RISMEDIA

4 Reasons to Sell Now

Selling a property in this tough market can seem like a challenge. Here are four factors that actually make this a good time to post a For-Sale sign.

• Sell low and buy low. Because all property values are down, the loss on the property a home owner sells is really only a paper loss because the next property he buys also will be a bargain. If he buys smartly, when prices come back up in a few years, he’ll be in better shape.
• Down-payment help is widely available. While nothing-down loans have disappeared, it is easy to find down-payment assistance for lower-income and first-time home buyers. Programs vary all over the country, but one good way to find them is to search online for “down-payment assistance programs” and the name of your region.
• Your uncle has money to share. Besides the $8,000 first-time home buyer tax credit and the $6,500 move-up credit, there are an array of energy tax credits that can make home improvements pay off in cash.
• Good help is available. Really talented real estate practitioners, contractors, and designers are available and eager for business.

Source: McClatchy Tribune, Kate Forgach (02/07/2010)