How To Legally Save Taxes On Up To $500,000
How do you legally avoid paying taxes on up to $500,000 on the sale of your home? Find out how! The number one way that you can avoid paying taxes on up to $500,000 on the sale of your home is by utilizing this simple method. Before I cover that, I just want to remind you that I am not a CPA so please consult your CPA before doing any of these options and let's get after it right now. If you are married, you can avoid paying taxes on up to $500,000 from the sale of your primary residence. If you're not married and you're single, then you can avoid paying taxes on up to $250,000. There's a little bit of a myth around this, a misunderstanding that I'm going to cover here in a second. Let's just cover what some of the rules are around utilizing this simply a tax exemption that you can claim on your taxes when you go and sell your home. I did this myself when I sold home a number of years ago and cashed out that equity. It's really simple. You basically just have to have lived in your home as a primary residence for 2 years out of the last 5 years. If you have done that, you can sell your home and take out that extra equity as tax free capital gain. If you are married and if you have $500,000 in equity that you are cashing out, then you avoid paying taxes. That might save you $150,000 simply by doing that, which is absolutely incredible. There's a couple things to keep in mind: #1. It has to be your primary residence for 2 out of the last 5 years. It cannot just be an investment property that you're then selling. It's your primary residence. It's really important too, to not kind of pretend like it's your primary residence sending mail there for 2 years then claiming that was your residence that will get you caught up in legal trouble. You really have to have lived there for 2 of the last 5 years. #2. The other thing too, if you are widowed, you can also claim this exemption up to $500,000. However, you can only claim it if your spouse passed away in the last 2 years. If it's beyond that, unfortunately you're going to drop back down to that $250,000 mark. If you are within that 2 year timeframe, having recently lost a spouse, I am super, super sorry for your loss. And you will have to make a decision if you want to keep the home for a longer period of time and then fall back into that $250,000 mark. Or if you want to go ahead and sell and claim that $500,000 exemption. Here's the big myth that a lot of people think about when they hear about this exemption. A lot of people have heard about it, but they think, 'yeah, but I have to go reinvest it into another home'. That's actually not true at all. You can take that money and use it tax free for any purpose at all. Whatever that is, if it's just living expenses, if it's buying another home, you can do that. If it's buying a boat or another car, investing in another business, perhaps. That's what I actually did. I sold a home, took the proceeds tax free and invested it into another business that I was starting up quite a number of years ago. Do not think that you have to reinvest your proceeds into the purchase of another home. That gets confused frequently, really with what is called 1031 Exchange. And that is specifically for investment properties, rolling funds from one property into another and deferring taxes. But at the end of the day, you ultimately pay taxes on those. This is a true tax free mechanism that you can simply claim on your taxes and you can use it for absolutely any purpose. There's another option out there. And I want to stress that you absolutely need to talk to your CPA. And it's an option that a lot of people are not that familiar with. And it does take a lot of coordination and legal and tax planning in order to pull this off correctly. And this is called a Deferred Sales Trust. The deferred sales trust can actually help you defer taxes for anything over the sale of that $500,000 mark. If you made $600,000, you can take that a $100,000 and put it into a trust that then pays you out over a period of time that defers / reduces your taxes significantly. And it can even be used on investment properties as well. Instead of using it to do a 1031 Exchange, you can use this trust system where you're paying yourself. Again, this is super important to talk to the legal team involved with this. I have recommendations, I can make to you for folks that help set this up. And it does not work for everybody. It's very, very individual specific. The other thing too, it actually can, under the right scenarios, help you avoid paying taxes completely, not just deferring them. If you are interested in that contact, please hit me up. I'd happy to refer that person, that team to you as well, but that is how you save up to $500,000. If you're married up to $250,000; if you are single and invested or spended on absolutely anything that you would like.Curtis Chism, Realtor858-281-2568 | Mobilemailto:info@sandiegohomes.ioChism Team | DRE #02105113brokered by eXp Realty | DRE #01878277
Read MoreWhy are VA/FHA Loans not Accepted by Sellers
You keep hearing that your VA or FHA offer won't be accepted because sellers won't accept a VA or FHA loan and you're wondering why that is. For a while during the overheated market we’ve had in San Diego, it was very difficult to get VA/FHA offers accepted, but now they are starting to be accepted more easily We're covering why it’s difficult to get a VA or FHA offer accepted here in this video and what you can do about it. What is a VA/FHA Loan?VA is Veterans Administration and FHA is the Federal Housing Administration. The FHA is a true first time home buyer loan. A FHA loan is utilized if you’re purchasing a home for the first time in your life OR if you haven’t owned a home for at least 2 years. And FHA allows for just a s 3.5% down payment and it does carry mortgage insurance. The VA loan can be used multiple times depending on the situation. Both are excellent loan programs. The VA allows for 0% down, carries no mortgage insurance saving hundreds per month, and depending on your level of disability,can get the funding fee waived with the VA. Both are absolutely fantastic loan programs and if you're qualifying for one of those, then certainly it's a great option. Primary Reasons Why VA or FHA offers May Not Get Accepted #1 - Strict Appraisal Requirements The first reason is when having an appraisal done for FHA or VA, they tend to be more stringent on what they're looking for. They are really making sure that the home is in livable condition. The appraisers tend to be more strict because there are stricter guidelines for VA and FHA loans. More repairs might be required when you are getting an appraisal done. There's a home inspection that's done which is paid for you by you, the buyer. A home inspector will go through and check everything and tell you what's wrong with the house or what's right with the house. Then you have the appraisal. The home inspection and the appraisal are two separate things. The home inspector is for your peace of mind, making sure you're buying a quality home. The appraisal is as ordered by the lender and it is paid for by you, the buyer. An appraisal is a third party's opinion of what the home's value is worth. They are checking to make sure that the home is in livable condition. They're certainly making sure that there's flooring in place, for instance, sometimes with conventional loans, you don't actually have the flooring in place, but with the VA and FHA, you definitely do. They're going to be looking for things that might have to be repaired. For example, if the door is broken, then the door needs to be fixed. If the paint is chipping on the home, then the paint needs to be repaired. In fact,that's actually a requirement, that any exposed bare wood has to be painted. More things can come up during the appraisal inspection process that have to be taken care of. Unless this was actually negotiated upfront with the offer, it does not mean that the seller is obligated to fix those things. However, those items, if noted on the appraisal do have to be fixed before you close escrow. Either the seller has to pay for it, or the buyer has to pay for it. Oftentimes with VA and FHA loans, typically you don't have a whole lot of extra cash to come up with these things. The seller tends to get stuck, fixing those things. That is one reason why sellers might balk at accepting a VA or FHA offer when they're comparing it to a conventional offer or a cash offer. #2 - Misunderstanding around Appraised Values The second reason is going to be related to the appraisal again. We just covered the appraisal and there is a VA/FHA Amendatory Clause that gets put into every contract. And basically it says "the VA and the FHA will not lend more than the appraisal value". It's really no different than a typical lender, lender even on a conventional loan is not going to lend more than the appraised value, but there is a form that it gets stuck into the contracts that specifically says the VA and FHA will not lend over the appraised value. That really freaks out sellers. In other words, if the home is $600,000, you offered $675,000 and the home appraises for $625,000 then potentially the home would have to sell for $625,000, unless you say you'd cover that difference $50,000. Then you're covering that difference. But sellers don't know that. That's the big reason why they won't accept it. And they do not like to sign that. Even if you're signing an appraisal contingency waiver saying you will come out of pocket for the difference, they still don't like to sign. Who Pays for the Termite Clearance And finally, the third reason comes back to inspections and repairs. And that is the termite clearance or Section 1 clearance. And that has to do with basically anything related to termites or dry rot and mold and fungus in wood. There is language that makes it seem as if the seller has to pay for any section 1 clearance repairs, termite repairs, which can be costly. It could be a few hundred dollars or it could be $8,000 - $10,000, depending on what's going on. Especially if you have to replace a lot of facia boards or doors or tent the whole home and fumigate. Sellers don't want to pay for that if they can avoid it, especially in a hot market.. This is a common misconception amongst most listing agents and a lot of sellers. Here's what is actually true, in a VA or FHA loan, a termite inspection has to be performed. It has to be performed and those repairs have to be done. If there's any section 1 termite work found, it has to be taken care of, but it does not have to be paid for by the seller. It can be paid for by the buyer. It also can potentially if the deal's about to fall apart, agents can get involved and also credit funds back as well to help cover these things. Does not have to be paid by the seller now in a softer market, a more balanced market, typically those repairs will be asked for by the buyer upfront in the offer so that when they come up, then they're taken care of by the seller. However, in hotter markets typically they're not asked for, and the buyer ends up paying for them or the negotiated as part of an overall inspection and repair negotiation. However, that's the big thing is that sellers think they're going to have to pay for it, but they don't technically have to. Those are just some clarifying things that are really misconceptions that sellers think they're going to be on the hook. They think that they're going to have to come out of pocket for all kinds of repairs for appraisers that they call out that may not be termite related. They think they're going to have to pay for all the termite repairs. And they think that if the home goes over the list price and it appraises for less, that they have to sell the house for the appraised value. None of those things are actually true. They're just big misconceptions. #4 - Seller Perception of Low Down Payment And finally, the 4th reason why sellers don't like to accept cash offers and this is because these are low down payment loans at 0% and 3.5%, then they feel like you don't have a lot of cash to close the deal. And sellers like to see large down payments when buying a home. As compared to conventional loans where the buyer is coming in with perhaps 20%-25% typically, the sellers like to see that. They feel like if something comes up during the escrow process, then the buyer's in a better position to close on the loan. That sounds great in theory, and in some ways I like that as the listing agent too, however, I look primarily at the buyer's financial credibility. I speak with the buyers lender when I'm the listing agent and I find out if the buyers are solid financially.Can they close the loan? At the end of the day, it's about, is that buyer qualified to close on the deal? If they're qualified to close and they're solid, and they have a good offer, then it's certainly worth considering and accepting. It's all about for the seller ultimately getting the highest amount of purchase price for their home and closing on that loan as soon as the home is sold, it doesn't matter what happens. If that buyer ends up defaulting down the road because maybe they didn't have a lot of money, but that's another reason why sellers sometimes don't like to accept them off. Those are all the reasons why sellers may not accept the VA or FHA offer.Curtis Chism, Realtor858-281-2568 | Mobileinfo@sandiegohomes.ioChism Team | DRE #02105113brokered by eXp Realty | DRE #01878277
Read MoreSupplemental Property Taxes EXPLAINED!
Are you wondering what a Supplemental Property Taxes Bill is? This blog is all about supplemental property tax bill so you're not surprised when you get one in the mail. I know it's a super sexy topic to be talking about, but hey, it's really important because it can become a big surprise when you get a bill for several thousand dollars, about six months after you buy the house. What is a Supplemental Property Tax Bill in San Diego County When you go and purchase a home, there is escrow, of course, that occurs and they are going to estimate your property taxes. The seller will have paid property taxes through a part of the fiscal year, potentially all of the fiscal year, depending on where you fell. There are two payments that are typically made for property taxes here in San Diego. Depending on when you purchase the home, then that's going to dictate how much was paid by the seller, and how much is going to have to be paid by you. That's going to be worked out in escrow as far as who owes exactly how much. There might be credits back to the seller. Typically there's there may be credits back to the seller and you might have to pay some property taxes through escrow when purchasing. The thing is, is those property taxes are based on when that seller purchased the home originally. This is where the supplemental property tax bills come in, because here's what happens: let's just say that you are purchasing a home for $1 million. And that home was previously purchased for $600,000 by the prior owner of say 10 years ago. There is a spread of $400,000 that has to be taken care of, and that's not taken care of in the escrow account. Escrow is figuring everything out based on the property taxes, based on the prior purchase price and any sort of increments that went up from there. We're talking about a $400,000 spread. What happens is in 6-9months, the county will, once they get caught up and do their reassessment based on the new purchase price of the home and remember, in California, Prop 13 limits property tax to 1% of the purchase price of the home, plus any little local bonds and that sort of thing. In the city of San Diego, we're sitting right around 1.2% property tax right now, but for easy math, we're going to use 1%. $400,000; $1 million minus $600,000 is $400,000 and 1% tax is owed on that. That is going to be $4,000 that is owed when the county comes around and issues you a supplemental tax bill. However, depending on when you bought the home in the fiscal year, the county tax assessor is going to prorate the amount you based on that. If you bought it, say one quarter through the fiscal year and there's 9 months remaining, let's say you bought it in September, there's actually 9 months remaining in the fiscal year because it closes in June. Then you only have to pay 3 quarters of that property tax bill. It is prorated. They're going to multiply the $4,000 by 0.75. You're going to owe $3,000. If you bought a halfway through the fiscal year, they're going to prorate it by 50%. You're going to owe 50% of that tax year and that's going to be $2,000. That just depends on where you bought it in the fiscal year. In summary, a supplemental tax bill is the difference between your purchase price and the original owners purchase price that you bought it from about $400,000 spread, let's say multiply it by 1% times the proration where you bought it in the fiscal year, halfway through 50%. Here we go: 1% of $400,000 is $4,000 owed. Halfway through the fiscal year, $2,000 owed. This is only a one time payment. Going forward the property taxes are figured based on what you paid for the home.It's only a one-time payment, typically 6-9 months after you purchased the home. You need the budget and plan for that so you're not caught surprised. Sometimes when you are paying into an impound account, you can actually kind of get a pleasant surprise and find out that you actually are owed money back. I recently just had a friend where this occurred and he got a check for $5,000 and was notified that his tax bill was actually dropping by about $400 a month because he way over estimated the amount of taxes owed. Curtis Chism, Realtor858-281-2568 | Mobilemailto:info@sandiegohomes.ioChism Team | DRE #02105113brokered by eXp Realty | DRE #01878277
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