Periodically, you need to rid yourself of things that are taking up you time and space to make room for more of what you like and want.
There’s a frequently quoted suggestion that if you haven’t used something for two years, maybe it isn’t essential in your life.
If you have books you’ll never read again, give them to someone who will. If you have a deviled egg plate that hasn’t been used since the year your Aunt Phoebe gave it to you, it’s out of there. Periodically, go through every closet, drawer, cabinet, room and storage area to get rid of the things that are just taking up space in your home and your life.
Every item receives the decision to keep or get rid of. Consider these questions as you judge each item:
- When was the last time you used it?
- Do you believe you’ll use it again?
- Is there a sentimental reason to keep it?
You have four options for the things that you’re not going to keep.
- Give it to someone who needs it or will appreciate it
- Sell it in a garage sale or on Craig’s List.
- Donate it to a charity and receive a tax deduction
- Discard it to the trash.
Start with your closet. If you haven’t worn something in five years, get rid of it. Then, go through the things again and if you haven’t worn it in two years, ask yourself the real probability that you’ll wear it again.
Another way to do it is to move it from your active closet to another closet. If a year goes by in the other closet, the next time you go through this exercise, those clothes are on their way out.
If the items taking up space are financial records and receipts, the solution may be to scan them and store them in the cloud. There are plenty of sites that will offer you several gigabytes of free space and it may cost as little as $10 a month for 100 GB at Dropbox, to get the additional space you need. It will certainly be cheaper than the mini-storage building.
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If you’re at an age where you need to be taking Required Minimum Distributions (age 70.5) from your IRA, a qualified charitable contribution and some planning may allow you to lower your overall tax liability.
Let’s say that a couple’s 2019 itemized deductions include $8,000 in property taxes, $4,400 in interest and $20,000 in charitable contributions. That would total $32,400 which exceeds the 2019 $25,300 standard deduction for married couples, 65 years of age or older, filing jointly.
Their required minimum distribution from their IRA is $40,000 which will be taxed at ordinary income. If this couple is in the 24% tax bracket, the tax liability would be $9,600.
Alternatively, if they made the $20,000 in charitable contributions from their IRA as a Qualified Charitable Contribution, it would not be taxable in the withdrawal. The balance of the RMD of $20,000 would be taxable at 24% which would have a tax liability of $4,800.
Their $32,400 worth of itemized deductions would be reduced by the $20,000 because it was paid from the IRA which makes their itemized deductions $12,400. The $25,300 standard deduction would benefit them more by an amount of $12,900 increased deductions. At 24%, this would reduce their liability by $3,096.
In the first instance, they would owe $9,600 in taxes due to the $40,000 RMD from their IRA. In the second example, because of the increased amount by taking the standard deduction, the net tax liability would be $1,704 ($9,600 – $4,800 – $3,096 = $1,704).
This example shows how shifting contributions to a Qualified Charitable Contribution will get the same amount to the charity but lower the Required Minimum Distribution that must be recognized as ordinary income. The shifting also gives the taxpayers the advantage of a higher amount of the standard deduction than the itemized deduction.
As always, before taking action, you should get advice from your tax professional on how this strategy may impact you. There is information available on www.IRS.com for IRS Required Minimum Distribution FAQs and Qualified Charitable Distributions.
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Checklists work because they contain the important things that need to be done. They provide a reminder about things we know and realize but may have slipped our minds as well as inform us about things we didn’t consider. Periodic attention to these areas can protect the investment in your home.
- Change HVAC filters regularly. Consider purchasing a supply of the correct sizes needed online and they’ll even remind you when it’s time to order them again.
- Change batteries in smoke and carbon monoxide detectors annually.
- Create and regularly update a Home Inventory to keep track of personal belongings in case of burglary or casualty loss.
- Keep track of capital improvements, with a Homeowners Tax Guide, made to your home throughout the year that increases your basis and lowers gain.
- Order free credit reports from all three bureaus once a year at www.AnnualCreditReport.com.
- Challenge your property tax assessment when you receive that year’s assessment when you feel that the value is too high. We can supply the comparable sales and you can handle the rest.
- Establish a family emergency plan identifying the best escape routes and where family members should meet after leaving the home.
- If you have a mortgage, verify the unpaid balance and if additional principal payments were applied properly. Use a Equity Accelerator to estimate how long it will take to retire your mortgage.
- Keep trees pruned and shrubs trimmed away from house to enhance visual appeal, increase security and prevent damage.
- Have heating and cooling professionally serviced annually.
- Check toilets periodically to see if they’re leaking water and repair if necessary.
- Clean gutters twice a year to control rainwater away from your home to protect roof, siding and foundation.
- To identify indications of foundation issues, periodically, check around perimeter of home for cracks in walls or concrete. Do doors and windows open properly?
- Peeling or chipping paint can lead to wood and interior damage. Small areas can be touched-up but multiple areas may indicate that the whole exterior needs painting.
- If there is a chimney and fires are burned in the fireplace, it will need to be inspected and possibly cleaned.
- If the home has a sprinkler system, manually turn the sprinklers on, one station at a time to determine if they are working and aimed properly. Evaluate if the timers are set properly. Look for pooling water that could indicate a leak underground.
- Have your home inspected for termites.
Instead of remembering when you need to do these different things, use your calendar to create a system. As an example, make a new appointment with “change the HVAC filters” in the subject line. Select the recurring event button and decide the pattern. For instance, set this one for monthly, every two months with no end date. You can schedule a time or just an all-day event will show at the top of your calendar that day.
By scheduling as many of these items as you can, you won’t forget that they need to be done. If you don’t delete them from the calendar, you’ll continue to be “nagged” until you finally do them.
If you have questions or need a recommendation of a service provider, give us a call at (320) 762-7106. We deal with issues like this regularly and have experience with workers who are reputable and reasonable.
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Single family homes offer the investor an opportunity to borrow large loan-to-value loans at fixed interest rates for long terms. Lenders will loan 75-80% of the purchase price at 5.5% to 6.5% interest rate for thirty years. Compare that with other popular investment alternatives like precious metals, commodities, stocks, and mutual funds and it will be hard to find financing available at all.
There may be some short term, one-year, loans at a floating rate tied to prime plus with no guarantee that it will be renewed. Some of those loans require you to have a 50% margin of equity and if the value goes down, you’ll have to put up additional cash or be forced to sell.
The advantage of having long-term mortgages is that an investor could find the optimal time to sell the property instead of needing to sell it because the term is due, and no other financing is available. Supply and demand cause the real estate market to be higher and lower and a long-term mortgage provides options to sell when the price is optimal.
Single family homes enjoy distinct tax advantages. If the rental or investment property is held for more than 12 months, the gain is taxed at lower, long-term capital gains rates rather than ordinary income rates.
Another advantage of rental homes is that the improvements can be depreciated over a 27.5-year life. This is a non-cash deduction that reduces income and shelters income. The accumulated depreciation taken over the life of the property is recaptured when the property is sold.
Since rental homes provide income that other investments may not, tax would have to be recognized on the annual income. IRS allows normal operating expenses like interest, property taxes, insurance, repairs, and management to be deducted including the annual depreciation.
Rental and investment property are eligible for tax-deferred exchanges to avoid paying tax at the time of disposition. Real estate also enjoys stepped-up basis which means that when an heir inherits a property, instead of having a potential gain from the value the decedent had purchased it for less depreciation taken, the heir’s basis becomes the fair market value at time of death. All potential gain may be permanently avoided.
Appreciation is a much-anticipated benefit of real estate because value tends to go up over time.
Another big benefit is the control that an investor has with rentals that is not available with other investments like stocks, bonds, or commercial real estate. It takes a relatively small amount of cash to control the entire investment in a home that wouldn’t be available in other investments without partners or publicly traded companies.
Single family homes are an investment that homeowners understand because they are essentially the same as the home they live in. They’re used for rental purposes but the maintenance is the same, the service providers are the same, and the neighborhood are the same. Most homeowners understand rentals far better than alternative investments.
Contact me at (320) 762-7106 if you’d like to know more about rental property.
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Lenders typically quote mortgages at a market rate but can offer a lower interest rate loan if the borrower is willing to pay points up-front which is considered pre-paid interest. These points are generally tax deductible for the year paid when the borrower pays them in connection with buying, building or improving their principal residence.
A point is one-percent of the mortgage amount. A lender will quote a lower-rate mortgage with a certain number of points. There is not a standard amount; it is an individual company policy.
A simple comparison of the two alternatives based on the borrower’s ability to pay the points and whether the borrower will stay in the home long enough to recapture the costs will help to determine which loan will provide the cheapest cost of housing.
In the example below, two choices are compared; a 4.25% loan with no points vs. a 4.00% loan with one point. If the buyer stays in the home at least 69 months, they will recover the $3,150 cost for the point on the lower interest rate.
If the purchaser stays ten years, he’ll save two thousand three hundred dollars over the cost of the point. A less obvious advantage will be realized because the unpaid balance on the lower interest rate loan will results in an additional $2,076 savings.
Use this Will Points Make a Difference app to discover whether paying points will make a difference in your situation. This is an example of a permanent buy-down but temporary buy-downs are also available. A trusted mortgage advisor can help you determine alternatives.
For more information about the deductibility of points, see IRS Publication 936 and if you’re refinancing a home, there is a section specifically on that. For advice on your specific situation, contact your tax professional.
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For a short time after the housing crisis a decade ago, some homeowners thought the value of home is a place to live rather than an investment. A home certainly has an appeal as a place to call your own, raise your family, share with your friends and feel safe and secure. It can be more than an address; it can also be one of the largest investments homeowners have.
Most mortgages apply a portion of the payment toward the principal amount owed in order to pay off the loan by the end of the term. This acts like a forced savings for the homeowner because as the loan is reduced, the equity grows which increases their net worth.
The other contributor to equity is appreciation. Most homeowners don’t realize the increase in value until they sell the home or do a cash-out refinance, but the increase is real and part of their equity. If the expected appreciation is averaged over the anticipated time for the home to be owned, the value of the equity increase can be proportioned annually or monthly.
Combining appreciation and principal reduction with leverage, it’s possible to build a case that a home is definitely an investment. Leverage is the ability to control a larger asset with a smaller amount of cash using borrowed funds. It has been described as using other people’s money to increase your yield and it applies to homeowners and investors alike.
The table on the picture above shows that even a modest amount of appreciation combined with the amortization of a loan can cause a substantial rate of return on the down payment and closing costs.
This example assumes a 3% acquisition costs on the home with a 4.5% mortgage rate and the resulting equity at the end of five years. The larger down payments lower the yield because it decreases the amount of borrowed funds.
If a borrower buys a home that appreciates at 2% a year with a 3.5% down payment on a FHA loan for 30 years, the down payment and acquisition cost factored by the equity will produce a 28% return on investment each year during the five year period.
A home can be many things including an investment. You can use this Rent vs. Own calculator to see the effect that appreciation and principal reduction can have on a home purchase in your price range. If you have any questions, I’m a phone call away at (320) 762-7106.
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