Who in Southern California will benefit from the existing-homeowner’s tax credit? It seems more like window dressing than actual help – the only buyers who could keep or sell their existing home would be those with substantial equity. Keepers need low payments to correspond with rents, and sellers with loads of equity wouldn’t let $6,500 make the decision for them, would they?
Those who’ll get the credit probably would have moved anyway.
From the LA Times:
If you have owned and lived in a home for at least five consecutive years of the last eight years, you could qualify for a $6,500 tax credit, if you buy a new home between now and April 30.
The “five-of-eight” requirement means that this credit could accommodate people who lost their homes in the last year or two to foreclosure or even sold a house and didn’t immediately replace it, said John. W. Roth, senior tax analyst with CCH Inc., a Riverwoods, Ill., publisher of tax information.
Would you have to sell your residence for it to qualify for the $6,500 credit, if you wanted to buy a new one? Not necessarily, Roth said. The home you purchase must become your principal residence, so you would have to move there. But nothing in the law says you cannot keep your existing residence as a second home or rental, he said.
If you do choose to sell your existing residence, you need to pay close attention to how much you earn on that sale, Stretch said. That’s because taxable profits from the sale of your residence will be added to your other earnings to determine whether your adjusted gross income exceeds the allowable thresholds.
This credit also phases out for singles earning more than $125,000 and married couples earning more than $225,000.
On the bright side, some profits from the sale of a personal residence don’t count. That’s because taxpayers are allowed to exclude up to $250,000 per person or $500,000 per couple in profits on the sale of their personal residence from tax, if they lived in that home for two of the last five years, Stretch said. Only profits exceeding those excluded amounts would be included in income, he noted.
Getting muddled? Let’s look at an example to clarify.
John and Sue Smith own a home that they bought for $100,000 in 1965. They’re now retired and want to scale back, selling that home, which is now worth $750,000, and buying a smaller home with the help of the new $6,500 credit.
Their net profit on this sale would be $650,000, but they can exclude $500,000 of that gain from tax, based on existing law. They will have to add the remaining $150,000 capital gain to their adjusted gross income to determine whether they can qualify for the new credit.
If all of their other income adds up to less than $75,000, they have no worries because the $150,000 and $75,000 add up to $225,000 — the beginning of the credit’s phase-out range for married couples. If they earn more, however, they begin to lose their ability to take the credit.
There are other arcane rules relating to profits earned on the sale of a home, so those with substantial profits may want to consult a tax professional before banking on the credit.
“It’s really confusing,” Roth allowed. “It’s as if they took the old law and threw it in a Mixmaster. Some things still apply; others don’t. The time frames are all new. This is going to keep a lot of tax accountants in business for a long time.”
They didn’t mention this, but don’t you have the option of which year you take the tax credit in, 2009 or 2010? So if you buy a new home this year you can take the credit on this year’s tax return. Then you can sell your old home next year so profits won’t affect your income eligibility.
The old law was like that; if you were a first time buyer and bought a house in 2009, you could take it on your 2008 taxes and file an amended return and get the eight grand sooner, or wait until April 15th and get it then. Dunno about the new one.
I could see people thinking it would be advantageous to sell next year so profits won’t affect your income eligibility, but sellers better time it just right.
It’ll be smart to get it done early, because a sellers’ rush to the exits could start in March/April as the hype winds down.
$6,500.00 on a 300k home purchase is just over 2% off. Imagine the response at Target or WalMart on any item that is advertised at “2% off sale!!!” Its a non factor.
You’d be a fool to give up your pre-2000 Prop 13 basis for a silly $6500.
… unless you were moving out of state. The $6500 bonus could be the last straw for those thinking about fleeing California’s cost of living, taxes, unemployment, and bad schools.
I have the same question regarding the tax filing year for this new extension. If you close on a home as a new homebuyer in 2009 (after Nov 30th but before 2010), can you amend your 2008 return still like the plan that ends on Nov 30th?
http://www.irs.gov/newsroom/article/0,,id=204671,00.html Per my earlier comment, it looks like its unclear but potentially any purchase in 2009 can be amended against 2008 tax filing or applied to 2009 filing. All 2010 purchases against 2009 or 2010.
Just as a little assistance to those who only think this incentivizes people bad at math…
The $8K or $6,500 credit is actually worth more than that on a time-value of money basis. For example, $100 today is worth far more than $100 30 years from now. Not only because it can grow with interest, but because people discount future purchases with an internal value mechanism.
In my own personal estimation, I’d say that $8K today is worth about $15K on a house value, but I’d say that is pretty conservative. Consider, for example, someone who holds their house for 5 years. That means 60 payments. Divided by 8K, that means believe they can afford about $133 more per month. That translates into about 31K additional purchasing power using a 5% rate.
In the adrenaline fueled mind of a California native where housing only goes up, that means it’s probably worth more since they only plan on holding the house 3 or 4 years, translating to more like 40K to 50K in additional value. That’s a pretty valuable incentive in my opinion.
Chuck Ponzi
I would never buy a house just because of this credit.A lot of people are getting in bidding wars to get a tax credit.The same financial illiteracy that got us here in the first place.Now we have fha instead of subprime.
The govt is doing all it can do prop up housing because it is the way the economy is driven these days.They have to artificially inflate asset prices because they are not creating jobs.
We basically have our infrastructure in and now we are in the process of maintenance.Add in the environmental fears and it takes years for a new project to become shovel ready.It also amazes me how many govt jobs there are.Way to many chiefs especially in california.
Who it matters to is people for whom the sale of the existing home will net them between 20k and negative 6.5k. Then it’s not a 2% off sale, then it can be the difference between bringing money to the table and breaking even, or 25k instead of 19k to put towards your downpayment (psychologically, since you can’t get it ahead of time). Given the 5 year ownership requirement a lot of people on the cusp of that 5 years are also on the cusp of losing versus breaking even (depending on what market you’re talking about).
But yes, by far and away it will be accidental cheese, even more so that for 1st time buyers.
@ Ponzi, ‘$133 more per month’ is not a lot of money relatively speaking. It’s sad to say some would rather jump on this ‘stimulus’ but won’t even even look at their personal consumption patterns. Good, they can sell the house when the Bimmer lease is up.
What is $133/mo worth?
1. Seven, Citizens of Humanity, etc…designer jeans
2. Premium Digital Cable/DVR Bundle
3. 25% of a BMW lease
4. Cell Phone contract
5. Low end ‘slush fund’
I’m not sure if this is Chuck’s point or if I am taking it a bit further. Suppose a prospective purchaser has $10k saved for a down payment. Using FHA’s 3.5% down payment, they could possibly qualify to buy a house for $275k. Now add the $8k credit to their down payment, and they can qualify to buy a $515k house. That adds a lot of cheese to this rat trap of a bubble.
Of course that buyer still needs to have the DTI ratio, etc., needed to qualify for the higher mortgage payments as well – but my point is that this $8k credit probably contributes to more than just $8k of home price appreciation. This either means that we will never see this credit go away like, the interest tax deduction, or home prices will be under a lot of pressure when it is removed.
“The decline in the national median price has moderated recently, and a shrinking supply of unsold inventory suggests we are getting closer to price stabilization in many areas, ” said Lawrence Yun, the group’s chief economist, in a statement. “But we need a steady stream of financially qualified buyers to further reduce inventory and get us to a self-sustaining market.”
*****
Where will this steady stream come from? First-time buyers? Move-up buyers? Investors? Will there be enough at current prices?
Where will this steady stream come from? First-time buyers? Move-up buyers? Investors? Will there be enough at current prices?
If inventories remain this low, sure. If the banks foreclose en masse and sell them all at once, no.
I’ll wait for the supply flood in March. The homebuyer credit is forever and I see an advantage not having to fight off the desperate knife catchers.
Cheese is best aged.
Geotpf,
About one in seven housing units was vacant in the third quarter, according to the Census Department. That’s the highest reading since the government began collecting such data in 1965.
****
While some areas may have a lower inventory, will they be able to remain elevated while the other, more saturated areas lower their prices to liquidate? Or, will it be more like a slinky?
“John and Sue Smith own a home that they bought for $100,000 in 1965. They’re now retired and want to scale back, selling that home, which is now worth $750,000”
While I know this isn’t the authors intent, lets also assume John and Sue’s kids are either living with them at the age of 30 or have moved out of California to have what little of a life that John and Sue had at their same age.
John and Sue while not directly the cause of the states inexorable and close to now unstoppable decline, are surely suffering the symptoms.
Indeed, there was something I read just recently about the flood of retirees to Texas from CA and NY.
JimB,
I think this ties in with what you’re saying, and I think there will be a lot of boomers waking up to a harsh reality when they retire en mass over the next decade. Will those in So Cal be forced to sell their home, taking their equity (assuming they bought decades ago and didn’t pull money out along the way), and move somewhere cheaper?
http://www.cnbc.com/id/33700371
Boomers in Denial About Retirement Savings
Only 23 percent of pre-retirees are saving more for their retirement than they were a year ago, the survey found. Most, some 57 percent, are saving the same amount, and 20 percent are saving less.
Perhaps even more startling is the extent to which their savings are falling short of their goals. On average, these pre-retirees expected they would need $800,000 to fund their retirement. However, most had only saved about $300,000.
Despite their inadequate savings, nearly two-thirds of the group lack any formal plans for retirement savings or spending strategies.
Ronald McMansion – I encouraged my middle class parents to sell their home, and take their california equity to somewhere else for a more comfortable retirement.
I sold their house in Chino Hills (riverside/san bernardino area) in 2006 for $700k ($200k mtg)(2,800sf) and they bought a brand new 2,000sf custom home in Boise, ID for $300k all cash.
I bet the riverside home is down to $350 now…
Thus they are debt free the right way, have a 100% owned home, and put $200k cash in their pocket.
They kept their rental home on a golf course as it is cash flow positive and was bought in 2000.
Their entire neighborhood of new home buyers is from California!!! Hmmmm…
ps: 6 months later my grandparents sold their home in Huntington Beach and moved up there as well taking about $800k in CA equity out of the state…
My Mom sold her home in the OC in 1995 for $300K and moved to Colorado Springs. She bought for cash in Colorado Springs for $160K. 14 years later, her home in the OC is worth $650K (now after the downturn)and her home in Colorado Springs is worth $200K–Financially speaking, she would have been better-off staying put. Time will tell what happens next round!
3Clicks,
Homeownership in California has never been about sustainability.
A budget? Har Har!
Delayed gratification? Pish Posh!
HELOC? Where do I sign?
They have never had to think about holding a note to maturity because interest rates have only gone one direction for 30 years, and values have only gone one way for the most part of that time too. Ask someone what would happen if housing prices stayed put for 20 years and you’ll get some funny looks… Why would they do that? Don’t people know that I own that house?
We’ve done 100 years of capital appreciation in the last 3. What will we do for the next 70?
I suggest we can live off of stimulus checks! Free aged cheese for everyone!
Chuck
Local Boy,
She still would have to sell at some point to reap the financial benefit, otherwise it’s only on paper.
The point is that there will likely be a large number of folks retiring over the next 10+ years who will realize that they don’t have enough in savings and investments to fund their retirement. They will then be left with possibly renting out rooms in their home to strangers or selling and living off of the equity that they’ve hopefully built up.
Sacramento might even encourage this, since it will mean higher property tax revenues after all those homes that were sold so many years ago for +/- $50k go on the open market for much more than that.
“I think there will be a lot of boomers waking up to a harsh reality when they retire en mass over the next decade.”
I suspect they’ll continue to work. And that may not be a bad thing because what we call ‘work’ has changed. Ain’t nobody working in steel mill or on the railroad for to long. But JtR could keep doing what he does for a long, long time somewhere.
Actually, as I think of it many of us Men will simply flounder with all that idle retirement time. That said, Wal-Mart isn’t the most desirable thought, but there will be more options in the future for all of us.
Ronald MC–My point is that the grass isn’t always greener–Timing makes a diffenece as you can see by my earlier post vs clearfund’s post–My Mom has made comments such as she can never afford to come back to California–many of those who move out may also fee the same way–I also have a friend who sold their house in Eastlake in 02 and moved to Texas–Texas didn’t work out–he is now back in California and renting because he can’t afford to buy cannot, even at today’s prices.