2014 has started off to be a really good year, and experts predict that on a national level we are headed back to a more normal (3-5%) appreciation year over year through 2018. This is stable, predictable growth and back on track.
The Home Price Expectation Survey done first quarter this year breaks down what the experts are saying. In green: look at the pre-bubble trend which predicted appreciation up by 19.4% which is very close to the blue column which is is an average of what all the experts said. The bulls in the market are very optimistic, forecasting over 28% appreciation. The most exciting news is that even the bears in the market predict over 10%. Remember these projections are on a national level, and our Near North Chicago neighborhoods are trending very well too. Watch for my next Market Profile coming out soon as we just closed on the end of first quarter sales data.
In recent months I’ve had a fair number of client relocating from other parts of the country with job transfers which is a good sign for our local Chicago economy. Some of these transferees are moving directly into a rental, and some have opted for a short-term or one year lease. The median rent prices in Chicago has gone up 10% since 2009. Jed Kolko, Chief Economist at Trulia reported in February that in all 100 of the major metros, it is cheaper to buy than to rent. On average, it’s 38 percent cheaper. It’s hard to find a 2 bedroom rental on Chicago’s Near North Side for less than $3000.
Another reason to consider buying instead of renting is that financial experts are saying that interest rates are going to be close to, if not greater, than five percent by this time next year. The FED Chairman, Janet Yellen recently announced that instead of prolonging the stimulus, she will continue tapering, pulling back on the stimulus throughout the year. As soon as she made that announcement, interest rates began to tick up.
If you are debating which way to go, please give me a call 312-953-7811!
Published: January 5, 2015
Which tax benefits do homeowners miss? Will you get audited if you take the home office deduction? Find out the answers to these questions and more before Tax Day.
There are a lot of homeownership tax benefits — if you don’t forget to take them. To make sure you get your due, HouseLogic asked tax expert Abe Schneier, a former senior technical manager with the American Institute of CPAs, for tax-filing tips.
HouseLogic: What’s the most common home-related tax deduction or credit claimed by homeowners?
Abe Schneier: The mortgage interest deduction, [which the NATIONAL ASSOCIATION OF REALTORS® estimates amounts to about $3,000 in tax savings for the average itemizing homeowner] and [the deduction for] real property taxes.
HL: Which tax provision do homeowners often overlook?
AS: You can deduct mortgage insurance premiums [or PMI] if you were required to get PMI as a condition of receiving financing on your home. Some people will overlook that, although it’s typically disclosed on the 1099 that you receive from the bank, along with all the deductible information you need.
HL note: The PMI deduction expired in 2014, but Congress may renew it for 2015 by passing a bill that extends the deduction. That’s something they’ve done in past years.
[Another area of tax-filing confusion is] whether you’ve correctly treated any points you paid if you refinanced. In a new home purchase, the points can be deducted [in the tax year you paid them]. But typically in a refinancing, you have to amortize and deduct any points you paid over the life of the mortgage, and people tend to forget that after a couple of years.
HL: What’s the No. 1 mistake homeowners make when filing their taxes?
AS: Because you receive a statement from the bank with details [such as] how much mortgage interest you paid over the year, and how much the bank pays on your behalf in real estate taxes, the number of mistakes has dropped.
But if you’re in a state where you pay the real estate taxes on your own — the bank doesn’t handle it for you — [people] make mistakes because sometimes real estate tax bills include other items besides pure real estate taxes. It could be trash collection fees; it could be snow removal fees that the state or county is assessing on the real estate tax bill. Since the items are included in the same bill, homeowners sometimes deduct [those fees] regardless of whether the items are actually taxes.
HL: What’s the single most important piece of advice for people filing their taxes as a first-time homeowner?
AS: You have to take a look at your closing statement from when you bought the house. It’s commonly called the HUD-1 form and you receive it at the closing. Occasionally, there are fees such as prepaid taxes or interest at closing that can be deductible.
HL: What tax advice do you have for someone who’s owned their home for 10 or 20 years?
AS: If you’ve been a longtime homeowner and you’ve been through refinancings, you have to be careful about how much interest you’ve deducted, especially if you have a home equity loan or equity line. A lot of people who’ve refinanced have sizable equity lines. The maximum outstanding home equity debt on which interest is deductible is $100,000; the maximum loan amount on which interest is deductible is $1 million.
HL: What home improvement-related records should homeowners keep?
AS: Absolutely keep your receipts for couple of reasons:
1. You want to make sure — if there are any warranties attached to the work that was done — that you maintain those records and you have something to go back to the person who did the work in case something doesn’t function properly.
2. If you’ve added value to the home — you’ve added a deck, you’ve added a room, you’ve added something new to house — you’ll need to know what the gain is on that capital improvement when you sell the house.
HL note: Tax rules let you add capital improvement expenses to the cost basis of your home, and a higher cost basis lowers the total profit or capital gain you’re required to pay taxes on. Of course, most homeowners are exempted from taxes on the first $500,000 in profit for joint filers ($250,000 for single filers). So it doesn’t apply to too many people.
HL: How do I tell the difference between a capital improvement and a repair?
AS: Typically a repair is [done] to allow an item, like a home furnace or air conditioner, to continue. But if you were to replace the heating unit, that’s not a repair.
HL: Does taking any home-related tax benefits, such as the home office deduction, make a taxpayer more likely to be audited?
AS: Only if numbers look out of the ordinary — for instance, if one year you were writing off $20,000 in mortgage interest debt and the next year you’re writing off $100,000 in mortgage interest. Taking the home office deduction in and of itself doesn’t usually generate an audit. However, if you claim nominal income and significantly higher expenses in an effort to create artificial losses, the IRS will see that there’s something else going on there.
HL: Once filing season is over, when should homeowners start thinking about next year’s taxes?
AS: Well, hopefully, when you visit your CPA to give information about or pick up [this year’s] tax return, your CPA has spoken with you about your plans for [next year]:
- If any major improvements are scheduled
- If you’re planning on moving
- How to organize any expenditures for fixing up the home before sale
If you’re planning to do any of those things, talk with your CPA so that you’re prepared with documentation and so that the [tax pro] can help minimize your tax situation.
Published: February 15, 2013
Deducting most upfront mortgage insurance premiums isn’t as straightforward as deducting the premiums you pay every month (here’s how to deduct your monthly insurance premiums), but it’s still pretty simple to do.
If you paid a really big upfront mortgage insurance premium at the closing table (we’re talking thousands of dollars), you may be able to recoup some of that cost by deducting your payments on your federal income tax return.
How do you know if you paid upfront mortgage insurance premium? Check the HUD-1 settlement statement you got at closing — the one-page sheet showing what you paid and what the home seller paid when you got your mortgage. If you have:
- A Veterans Administration or USDA’s Rural Housing-guaranteed loan, the upfront fee will be labeled “funding fee” or “guarantee fee.”
- An FHA loan, it’ll be listed as “upfront fee.”
- Private mortgage insurance, an upfront fee is a “single premium,” and it’s likely labeled MIP (mortgage insurance premium).
If you didn’t pay an upfront fee, you likely got a monthly payment policy.
The purpose of any type of mortgage insurance is the same: To protect the lender in case you default on the loan.
The upside is that it’s a good deal for aspiring home owners. Many people, especially first-time buyers, can’t come up with big down payments. Mortgage insurance encourages lenders to give home loans to those who have the means to pay a mortgage, but lack the hefty down payment.
Not Everyone Qualifies for the Deduction
If your adjusted gross income (AGI) is no more than $100,000 ($50,000 for married filing separately), and you took out the loan in 2007 or later, then you can take the mortgage insurance deduction as one of your itemized deductions on Schedule A. The mortgage must be for your primary residence or a second home that’s not a rental property.
If your AGI is higher than $109,000 for couples ($54,500 for married filing separately), sorry, you’re out of luck. No deduction for you.
If your income falls between $100,000 and $109,000, your deduction is phased out. Use the worksheet that comes with Schedule A to see how much you can deduct.
Got a VA or Rural Housing Loan? Lucky You!
If your loan was made through the VA or the USDA’s Rural Housing loan program, your upfront payment is completely deductible in the year you pay it.
Put the amount listed on your HUD-1 for guarantee or funding fee right onto your Schedule A.
Deducting Your FHA Upfront and Single Premium Payments
If you have an FHA loan or you bought a single-premium private mortgage insurance policy, you have to do a little math to figure out how much you can deduct.
Start with the amount you paid (or financed into your loan) and divide by whichever time frame is shorter: 84 months (that’s 7 years) or the total number of months of your loan’s life. (We could go into great detail why this formula was chosen, but we figure you probably don’t care. You just want to know how to do it, right?)
Since pretty much everyone has a mortgage term longer than 7 years, you’ll probably use the 84 months.
Here’s an example: Let’s say you bought a house last January and paid $8,400 upfront for mortgage insurance.
$8,400 ÷ 84 = $100
Multiply $100 by the number of monthly mortgage payments you made during the year (for example, 12 if you closed in January, or six if you closed in July).
$100 X 12 = $1,200 or $100 x 6 = $600
Assuming 12 payments, your deduction is $1,200.
Enter that figure on line 13 of Schedule A.
Note: Don’t confuse upfront mortgage insurance premiums with pre-paying your monthly mortgage insurance premiums. If you paid your January 2013 premium in December 2012, that’s a pre-payment. Paying upfront means you paid a whopping premium at closing.
Find out what other tax deductions you might be entitled to in our Homeowner’s Guide to Taxes.
Like things easy? The new simplified home office deduction may be your salvation from the long form. But you might not save as much the easy way.
If you work from home, even on a part-time basis, you can probably save some dough come tax time by deducting your home office costs.
The challenge has always been the 43-line, MENSA-like IRS form home office workers had to complete, which may have kept some from even taking advantage of this home tax benefit.
Now, there’s an optional, simplified home office deduction: Take $5/sq. ft. up to 300 feet or $1,500 and, boom, you’re done.
What’s the catch? Trade-off is a better word: You may not be able to deduct as much compared with the regular method. The IRS says the average home office deduction has been around $3,000. So consider the value of your time against potential tax savings if you believe you’re eligible for more than the $1,500 cap.
Before you start spending your refund, however, there are a few rules you need to heed.
What Counts as a Home Office?
A room or defined area of your home that you use exclusively and on a regular basis for business and that meets either of these uses:
- It’s your principal place of business, or
- You see clients, customers, or patients there.
Exception to the “exclusive” rule: If you use your home as the sole location of your business and store products there, the room or area where you store products can be used for other things. Say you use a room in your basement to make and store jewelry that’s also a TV room. If it’s the only fixed location of your business, you can use it to also watch TV.
What If You’re on the Road a Lot?
You don’t have to do all your work from home to take the home office deduction. If you’re an outside salesperson, you probably spend most of your work time elsewhere. But the home office has to be essential to your business, and you must spend substantial time there. If you do your billing and other office work from your home office, and there’s no other location available to perform these functions, your home office should qualify for the deduction.
You can also qualify for the deduction if your employer requires you to work from home, as long as you don’t charge your employer rent.
A big catch: You must maintain the at-home office for your employer’s convenience, not your own. If you use your home office to finish reports at night or on weekends because you don’t want to work at your desk in your office downtown, you can’t claim the home office deduction.
But if your employer doesn’t have a headquarters and everyone works remotely, you’re good to go.
Also Covered Under the Tax Break
Separate structures on your property, like a detached garage you’ve converted to an office or studio.
Unlike an office inside your home, a separate structure doesn’t have to be your main place of business to qualify for a deduction. That’s because the IRS believes your family is less likely to use a separate structure as a part-time play area or den, says Mark Luscombe, principal analyst for tax and consulting at CCH.
Related: Check Zoning Laws Before Adding a Detached Workshop or Studio
Two Ways to Deduct Home Office Expenses
1. Simplified home office deduction. We talked about this one above, but there are a few other particulars to note:
- You can’t depreciate your home office, and your deduction is limited to your gross business income less business expenses.
- If you use this deduction, you can still claim the deductions every homeowner gets, like mortgage interest, real estate taxes, and casualty losses. Put those on Schedule A.
- Using the standard home office deduction won’t stop you from taking the deductions for other business expenses unrelated to your home, such as advertising, supplies, and employee wages.
- You don’t need to keep track of individual expenses with this option. You do with the actual cost method.
2. Actual costs, which you list on Form 8829. To use this method, you figure the proportion of your home’s overall space devoted to your office and use that to calculate how much of your overall home expenses went toward your home office.
Example: If your office is 300 sq. ft. and your home is 3,000 sq. ft., your office takes up 10% of your home. So you can deduct 10% of your utility, mortgage interest, property taxes, and other home expenses. However, certain expenses that aren’t related directly to the home office, such as lawn care, aren’t included in the calculation.
Not sure how big your house is? Check the documents you received when you bought your home — there’s probably a detailed rendering — or measure the outside of your home and multiply length times width.
Do You Have to Stick with the Same Deduction Method Each Year?
Nope. Each year, you get to decide whether to use the standard or the actual-expense deduction.
What Can You Deduct When You Use the Long Form?
If you’re using Form 8829 to report your actual expenses and you’ve figured out what percentage of your home you use for business, you can apply that percentage to different home expenses. These include:
- Mortgage interest
- Real estate taxes
- Utilities (heating, cooling, lights)
- Home repairs and maintenance (so long as they benefit both the business and personal parts of the home)
- Homeowners insurance premiums
Just take each expense and multiply it by your home office percentage to get the amount you can deduct as a business expense. So if you spend $150 a month on electricity, and your home office takes up 10% of your home, you can deduct $15 a month as a home office expense. That adds up to a $180 deduction per tax year.
Important limitation: Your home office deduction can’t exceed the amount of income you generate from the home office. So if you spend some of your work time on-site with a client and earn $1,500 there, you can’t claim more than $1,500 because it exceeds what you made at home.
Save bills or cancelled checks to prove what you spent in case of an IRS audit. Also, only repairs, like to the furnace, can be expensed; improvements must be depreciated.
Don’t Forget Depreciation
Depreciation is based on the idea that everything — even something like a home — wears out eventually. If you’re using the long form, figure home office depreciation by calculating the tax basis of your home:
1. Add the purchase price to the cost of improvements.
2. Subtract the value of the land it sits on.
3. Multiply that cost basis by the percentage of your home used for work. This gives you the tax basis for your home office.
4. Divide by 39 years.
- Purchase price: $100,000
- Value of land: $25,000
- Cost basis: $75,000, plus cost of improvements you’ve made
- Tax basis: $75,000 x 10% = $7,500
- Depreciation deduction: $7,500/39 years*
*Usually, depreciation deductions for a home office are figured over a 39-year period. There are caveats. For instance, if your business opened after Jan. 1 in its first year, you need to calculate a factor of 39. For a crash course, read IRS Publication 946 or talk to a tax pro.
Keep in mind that depreciation deductions on your home office may increase the amount of profit on a home sale that’s subject to taxes. Most taxpayers don’t owe income tax on up to $250,000 of profit if you’re a single filer, $500,000 for joint filers. Consult with a qualified tax professional on how depreciation deductions affect your tax liability when you sell.
Related: More on How Improvements Can Lower Your Cost Basis
Special Rules for In-Home Care Providers
If you provide in-home daycare services for children, the elderly, or disabled persons as a licensed or authorized business, you don’t have to use the home work space exclusively to take the home office deduction.
You calculate your deduction by dividing the number of hours you used your home workspace to provide daycare services during the year by the total number of hours during the year.
For example, if you do daycare 40 hours a week for 50 weeks a year, that’s 2,000 hours a year, divided by the 8,760 hours in a regular year equals 22.8%. So you could take 22.8% of the $5 per sq. ft. simplified deduction for your daycare workspace.
Related: Don’t Miss These Other Home-Related Tax Deductions
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.
We are all tired of getting around in the cold icy conditions here in Chicago, but home buyers are still out there looking! When you need a home, you get out and get looking ~ especially the serious home buyers.
If you are considering selling, don’t wait until warmer temps. Seasonally each year the inventory goes up in April and May. Inventory is still very low which means there isn’t much competition.
Chicago inventory levels across the Near North and Near West are well below national levels at 1-2 months of supply. In the beginning of the year the National Association of Realtors reported 4+ months for national levels. Balanced real estate markets carry 5-6 months of inventory. Above that is considered a Buyers Market, and below is a Sellers Market. On national and local levels we’ll tip toward a more balanced market as we head toward spring.
Use the scarcity to your advantage, but be mindful that today’s buyers are savvy and educated. Price within the market and you will have your pick of buyers.
Happy Birthday Chicago – 177 years old today!
“It is hopeless for the occasional visitor to try to keep up with Chicago. She outgrows his prophecies faster than he can make them.” – Mark Twain, 1883
A vibrant city with a friendly hometown feel, and one of the most iconic metropolitan flags in the country.
There is meaning to each aspect of our flag. The white stripes represent the north, south and west sides of the city. The top blue stripe represents Lake Michigan and the North Branch of the Chicago River. The bottom blue stripe represents the South Branch of the river and the Great Canal, and the Chicago Portage. The four six-pointed red stars represent major historical events: Fort Dearborn, the Great Chicago Fire of 1871, the World’s Columbian Exposition of 1893, and the Century of Progress Exposition of 1933–34. Each of the 6 points represent a concept. Click here to learn more.
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