Buying a Home?

Learn From the Mistakes of Others

While Obtaining a Mortgage:

• Trim your budget. You only have to do this short term, and by canceling a few of your subscriptions, reducing the amount of money you spend on eating out and alcohol, and buying a couple less lattes, you'll find that each month you have a little more to put towards your loan(s).
   
• Which brings us to our next point, pay more than your monthly minimum payment. This will help you pay off your loan faster. Even if you can only pay $20 extra each month, start there, and then work your way towards paying more.
   
• Consolidate and Refinance. If you can refinance for a lower rate, you may save thousands of dollars in interest over time. Those savings can then go toward extra payments, helping you to get out of debt even faster.

• Find more tips here .

• Pay down your credit card balances and keep them low.
   
   
• Gather up all those credit cards on which you have small balances and pay them off. Then select one or two go-to cards that you can use for everything.
   
   
• Be sure to pay your credit card bills on time.
  See more tips here.

• using income that you may not have considered like capital gains income, Social Security income, VA benefits income, and others.
   
• bringing in a co-borrower.

• Home inspection and Pest Inspection fees: $500-$700
   
   
• Closing Costs:   According to Zillow , closing costs will run you an extra 2% to 5% of the home purchase price. So if you're buying a $600,000 home, expect to spend between $12,000 and $30,000. These costs will cover lender fees, the appraisal, title or attorney fees, escrow fees, and interest that has been prorated. Note that some of these can be paid by the seller if stipulated in the contract. 
   
   
• Ongoing Tax and Insurance: when you use mortgage calculators, you will be given your monthly mortgage payment, but that does not always include taxes and insurance. To accurately assess how much you'll be paying each month, you need to calculate your monthly principal mortgage, interest, tax, and insurance (PITI) payments. Here is an example of a PITI mortgage calculator that. If you need help with this calculator, give us a call. 
   
   
• Once you purchase the home, know that additional costs for repair and maintenance will emerge over time. The actual amount you'll need will vary widely and depends on a number of factors. Most estimates range anywhere from 1% to 5% of the purchase price of the home. If you're uncomfortable using such a large range to determine your needed savings, you'll find a more accurate method of determining your home's repair and maintenance costs here .

Whether it's improving your loan prospects, saving more money before buying, or researching the home-buying process before you start, taking time to prepare for this major purchase will go a long way. If you are thinking of buying, we highly recommend that you call Christine, the Broker at Schneider Estates. Christine can answer your questions and help you understand what you can do today to create a successful and prosperous real estate deal. 

Let's Talk Taxes: Prop 13, Prop 60/90, Capital Gains Tax and 1031 Tax Exchanges

Each property owner's annual property tax is calculated by multiplying the taxable value of their property (assessed value) by their property tax rate. 

Property Taxe = (Tax Base*)(Tax Rate)

*Tax Base = Assessed Value of your Property + Value of Additions. 

Passed in 1978, Prop 13 rolled back the assessed value of all properties in California (with a few exceptions) to their 1975 level and restricted property  taxes to 1% or less of this value. Additionally, under Prop 13, a property's taxable value may not increase by more then 2% each year. 

Once a property is sold, the property will be reassessed at 1% of the sales price. Each year thereafter, the property's taxable value increases by 2% or the rate of inflation, whichever is lower. This process continues until the property is sold and again and taxed at 1% of the purchase price. 

Prop 13 passed on the premise that real estate values were increasing so rapidly that owners would not be able to afford to pay property taxes if their property was reassessed each year. Legislators hoped to make property taxes predictable and manageable.

Since 1975, on average, California real estate has appreciated at a rate of 6.8% annually ( source). This means that anyone who has owned her property since 1978 is enjoying a significantly lower tax base than she would be if Prop 13 were not in place. If this person moves, she will likely face a much higher tax base, even if she moves into a smaller house due to these high levels of appreciation. The good news is that there are exceptions to the "reassessment" rule. 

Exceptions that require a claim to be filed:

The Following are  Automatically Exempt from Reassessment:

To learn more and see a complete list of exceptions to the reassessment rule, click here.

When additions are made to your property, they will likely affect your tax base. the County Assessor's office will use  AH 531 from the CA Board of Equalization to determine the cost-to-build per square foot for that structure and use this number to determine its value. This value will then be added to the pre-existing assessed value of your house. The addition will not affect the tax base of the rest of your house, however, it could result in a substantial increase in your taxes depending on the scale and cost of the project.

A renovation project such as upgrading your kitchen or a bathroom will not affect your property's assessed value. However, major remodeling projects that involve knocking down walls and substantially changing a majority of the home's interior may result in a reassessment. If you want to avoid this, we suggest bringing your remodeling plans to the County Assessor's office to gain a better understanding of your project's potential impact on property taxes.

Proposition 60/90:

As mentioned above, those who are 55 years or older at the time of purchase may transfer their property's tax base when purchasing a new primary residence. Proposition 60 allows the transfer of your property's tax base within the same county, and Prop 90 allows transfers from one county to another, at the discretion of each county. Unfortunately for us Santa Cruzians, our county does not allow inter-county tax transfers. The following counties do however: Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura.

Additionally, for tax-base transfer eligibility, the following are required:

The replacement property must be purchased or built within two years of the sale of the original property.

  One other important thing to consider:

You can find more details about Prop 60/90 here.

Capital Gains Tax

Part I of this article reviews Long-Term Capital Gains Tax (CGT). If you already have a strong understanding of this concept, and would like to review the current laws on CGT, please skip to Part II. 

Part I: Understanding Capital Gains Tax

CGT is a tax imposed on the profit (capital gains) resulting from the sale of an investment. Your Captial Gains can be calculated as follows:

Capital Gains = Sales Price - Purchase Price

"Sales Price" includes the sum of:

The following are not included in the Sales Price: Money received for personal property (furniture, draperies, rugs, washer and dryer, and lawn equipment), and payment or reimbursement from an employer because of a job transfer.

The second part of the equation, the "Purchase Price" is your basis. 

The "Purchase Price" includes:

• the amount you paid for your home (or if you built your home, the cost of the land and the cost to build the home), including your down payment and the amount of any mortgage(s) that you obtained,

• any settlement fees or closing costs that you paid when you bought your home, excluding financing-related fees,

Examples of (*) in the bulleted list above can include a new roof or a kitchen remodel, however, not all money put into your home can be added to your basis. In general, any repairs or maintenance that keep your home in good condition, but do not add to its value or prolong its life cannot be added to the basis.

Here is a table of projects that could be added to one's basis on 2016:

( Source)

Part 2: Capital Gains Tax Rates and Exemptions

( source)

Note that during the election, President Trump proposed to reduce the number of tax brackets to three. If this proposal goes through without modification, this may be the distribution of CGT rates:

Now let's talk about CGT Exemptions.

If you are selling your primary residence, which you have owned for at least two years and lived in for at least two of the past five, then you most likely qualify for a CGT exemption. If you are single, you are exempt from paying taxes on any capital gains up to $250,000. If you are married, this exemption jumps to $500,000.

Anyone's spouse that plan to take advantage of this double exemption should take note of the following:

Read more about partial exclusions, and exclusions under special circumstances here.

If you are selling a property that is NOT your primary residence then read about 1031 Tax Exchanges below to learn how you can defer CGT resulting from the sale of your property.

1031 Tax Exchanges

1031 tax exchanges allow investors to defer capital gains tax on investment property by reinvesting the realized gain of the sale into a property of "like-kind". You can roll over your gain time and time again without paying taxes until you sell one of these properties for cash.

Here, "like-kind" simply refers to the nature of the investment, rather than its actual form. This means that you can exchange one investment property for any other kind of investment property: a single family residential home for a condo, raw land for a shopping center, or an office for apartments. An investment property and a personal residence are not "like-kind". 

If you want to invest in real estate, be aware of the concept of "stock in trade".  If the house is deemed to be stock for trade, it does not qualify for a 1031 Tax Exchange. Houses may be considered stock in trade in the following scenarios:

Once you determine that your property qualifies for a 1031 Tax Exchange, the requirements are as follows:

After the sale of your investment property,

Hopefully, this has given you a basic idea of 1031 tax exchanges. We suggest that you speak to your accountant or a lawyer to ensure that you understand how to execute this exchange successfully. If you find that you are in a position to take advantage of a 1031 Tax Exchange, and need a quick sale/purchase, we can help! Give us a call if you'd like to discuss this option.

We are committed to providing excellent service to our seller clients. This means accurate valuation of your property and high quality marketing that puts your property in front of as many potential buyers  as possible. This leads us to the question, where are the buyers? 

Zillow conducts regular studies on  buyer behavior, and I wanted to share one of their findings with you from the Summer 2016, Housing Market Trends Report.

89% of buyer are shopping for properties online. This is why we have redirected a majority of our marketing efforts to high quality online marketing. If you want to learn about our marketing plan, visit our website marketing page found here . 

73% of buyers are searching for properties through their agents. We also utilize social media and my 11+ years of working in this market to connect with other agents and ensure, if they have an interested buyer, we know about. Through facebook alone, we  can reach 2,000+ Agents in Santa Cruz, 4,200+ Agents in the San Jose Area, 5,200+ Agents in San Francisco.

Call me if you would like a home valuation and to learn how I can market your property effectively and intelligently. 

Warmly,

Christine Schneider, Broker

(831) 600-6550