All posts in Retirement

Acquisition Debt is the amount of money borrowed used to buy, build or improve a principal residence or second home. Under the new tax law, mortgages taken after 12/14/17 are limited to a combination of $750,000 on the first and second homes. The mortgage interest on this debt is tax deductible when itemizing deductions.

It is a dynamic number that is reduced with each payment as the unpaid balance goes down. The only way to increase acquisition debt is to borrow money to make capital improvements.

Prior to the new law, homeowners could additionally borrow up to $100,000 of home equity debt for any purpose and deduct the interest when itemizing deductions. Mortgage interest on home equity debt is no longer deductible unless it is for capital improvements.

Acquisition debt cannot be increased by refinancing. Some confusion occurs because mortgage lenders are concerned in making home loans that will be repaid according the terms of the note and using the home as collateral. That does not include making a tax-deductible mortgage.

Another thing that adds confusion to the issue is that the lenders will annually report how much interest was paid in a year but only the amount that is attributable to acquisition debt is deductible.

Even if the interest on the cash-out refinance is not deductible, it may be advantageous to pay off higher interest debt such as credit card debt and replacing it with lower mortgage debt.

It is the responsibility of the taxpayer to know what part of their mortgage debt is deductible. The challenge becomes more difficult after a cash-out refinance. Homeowners should keep records of all financing and capital improvements and consult with their tax professional.

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A home that isn’t being maintained like others in the neighborhood can negatively affect your visual sense of appeal and in some extreme cases, even affect property values. It might be an overgrown yard, a fence in need of repair, excessive noise, unruly pets, paint peeling on the home or even a car or boat parked in front of the home that hasn’t moved in weeks.

Most people want to be good neighbors and may be willing to correct an issue once it is brought to their attention. A practical but possibly, confrontational solution is to contact the responsible person and describe your perception of the issue. However, they may not always agree with the same urgency and it might be necessary to seek other remedies.

An owner-occupant may be more sympathetic to the neighbors and willing to correct the issue. If you think the home might a rental property, check with the county tax records to identify the owner. They may be unaware of the situation and welcome the notification to protect their investment.

Another alternative might be to notify the homeowner’s association, if there is one. One of the benefits of a HOA is to enforce community appearance standards as set in the covenants or bylaws that specify how properties must be maintained. This could be a less personal method of reaching a beneficial outcome.

If the source of the problem is a code or housing violation, the city may be the ultimate authority. Most cities have a separate code and neighborhood services division and some cities have 311 for non-emergency assistance.

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Imagine a homeowner consulting with their agent about the price to place on their home. The agent suggests that the market data indicates that $200,000 to 210,000 would produce a quick sale by pricing it properly. The owner puts a $210,000 price on the home.

The first person who looks at the home offers $205,000. When the seller receives the offer, he comments that he thinks he priced the home too low and counters for  full price. The counter-offer is rejected, the home stays on the market and at the end of the first month when based on market conditions, the home should be sold, no other offers have been made.

It may be human nature that when an offer is received so quickly, the first thought to come to mind is that it was priced too low. A more appropriate thought might be that it was priced correctly. In some cases, when a home comes on the market, there is increased competition (real or perceived) among the buyers waiting for the “right” home to come on the market. The home can sell for a higher price than if it sits on the market for several months.

There may be stories of sellers who turned down the first offer and ended up receiving a better offer that would net more money. However,  real estate professionals say the first scenario occurs frequently.

The wisdom of experience advises owners to find a real estate professional that they trust and have confidence. Allow that professional to become familiar with your home and compare it to similar homes in the market that have sold recently and ones currently on the market. Determine the demand for homes in the area compared to the inventory. Decide on a price that will allow the home to sell within a relatively short period of time. And lastly, be satisfied if your home sells quickly near the price you put on it.

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For the last 25 years, most buyers have gotten a new mortgage or paid cash when purchasing a home. For a practical reason, owner-occupant buyers have another alternative: assuming a lower interest rate existing FHA or VA mortgage.

In the late 80’s, both FHA and VA began requiring buyers to qualify to assume their mortgages. Prior to that, good credit or even a job wasn’t required. The real reason there haven’t been significant numbers of assumptions in the past 25 years is that interest rates have been steadily going down. If a person had to qualify, they might as well do it on a new loan and get a lower interest rate.

Even though mortgage money is currently attractive and available, it is at a four-year high. When interest rates on new mortgages are higher than the rates of assumable FHA and VA mortgages originated in the recent past, it may be more advantageous to assume the existing mortgages.  Conventional loans have due on sale clauses that prevent them from being assumed at the existing rate.

FHA loans that originated with lower than current interest rates have great advantages for buyers and sellers.

  1. Interest rate won’t change for qualified buyer
  2. Lower interest rate means lower payments
  3. Lower closing costs than originating a new mortgage
  4. Easier to qualify for an assumption than a new loan
  5. Lower interest rate loans amortize faster than higher ones
  6. Equity grows faster because loan is further along the amortization schedule
  7. Assumable mortgage could make the home more marketable

This financing alternative can save money for the buyer in closing costs and monthly payments. While the equity may be more than the down payment on a new mortgage, second mortgages are available to make up the difference. Call us at (320) 762-7106 to find out if this may be an option for you.

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Homeowners are familiar that they can deduct the interest and property taxes from their income tax returns. They also understand that there is a substantial capital gains exclusion for qualified sales of up to $250,000 if single and $500,000 for married filing jointly. However, ongoing recordkeeping tends to be overlooked. 

New homeowners should get in the habit of keeping all receipts and paperwork for any improvements or repairs to the home. Existing homeowners need to be reminded as well, in case they have become lax in doing so.

These expenditures won’t necessarily benefit in the annual tax filing but may become valuable when it is time to sell the home because it raises the basis or cost of the home.

For instance, let’s say a single person buys a $350,000 home that appreciates at 6% a year. Twelve years from now, the home will be worth $700,000. $250,000 of the gain will be exempt with no taxes due but the other $100,000 will be taxed at long-term capital gains rate. At 15%, that would be $15,000 in taxes due.

Assume during the time the home was owned that a variety of improvements totaling $100,000 had been made. The adjusted basis in the home would be $450,000 and the gain would only be $250,000. No capital gains tax would be due.

Some repairs may not qualify as improvements but if the homeowner has receipts for all the money spent on the home, the tax preparer can decide at the time of sale. Small dollar items can really add up to substantial amounts over many years of homeownership.

You can download a Homeowner’s Tax Worksheet that can help you with this recordkeeping. The important thing is to establish a habit of putting receipts for home expenditures in an envelope, so you’ll have it when you are ready to sell.

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A couple is planning to tour the United States in a travel trailer during their first few years of retirement. They are going to sell their current home now and purchase another home when they finish their travels. 

An interesting exercise is to determine the optimum time of selling the home: now or when they’re ready to buy their replacement home.

If they intend on traveling for more than three years, then, it may be a good decision to sell prior to the sojourn to avoid paying taxes on the gain in their home. IRS allows for a temporary rental of a principal residence while still keeping the $250,000/$500,000 capital gains exclusion intact. A homeowner must own and use a home for three out of the previous five years which means that it could be rented for up to three years, but it would need to be sold and closed before that three-year window expires.

If the travel will be less than three years, there is an option of selling now or later. Using the example below, the homeowner sold the home, paid their expenses and invested the proceeds in a three-year certificate of deposit until the replacement home was purchased.


As an alternative, if the homeowner rented the home, not only would they have income, the home would continue to appreciate and the unpaid balance would go down resulting in larger net proceeds. Based on a 5% appreciation and continued amortization of the mortgage, the net proceeds could easily be $40,000 more.


Obviously, there are a lot of considerations that affect the decision to sell now or later but in an appreciating real estate environment, being without a home for several years could affect the financial position of the owner in the replacement property. It is certainly reasonable to look at various alternatives before making a decision. Call me at (320) 762-7106 to help you look at the different possibilities and talk to your tax professional.

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