WHY BUY REAL ESTATE BEFORE 2008??

What You Need to KNOW About Buying Real Estate Before the End of 2008

Captial Gains Tax News You MUST know about

January 1, 2009 marks a huge change in the real estate market that could alter how people purchase properties. And there are only a few months remaining to take action.

No more tax-free profits on real estate unless it’s your primary residence THE ENTIRE TIME YOU OWN IT.

This change will have more impact on the real estate market than virtually any other factor today - and especially so for many home buyers in Southern Arizona and the retirement communities like Green Valley. With so many baby boomers electing to purchase vacation homes this tax change will likely impact more here than other areas.

Hidden in the new housing bill just signed into law is a change in the tax law that provides a huge incentive to buyers to buy real estate before the end of 2008.

ANYONE who anticipates purchasing a house in the future MUST know how this tax rule change will affect them.

If a person owns real estate today (or purchases real estate before the end of 2008) and if that owner lives in the home for at least 2 of the last five years - then the homeowner is entitled to take out any and all profits up to $250K (individual tax filer) or $500K (joint tax filer) TAX FREE when that home is sold.

UNDER THE NEW TAX RULE - if a home is purchased on or after January 1, 2009 - the profits will be allocated to "qualified" and "non qualified" time periods during the home ownership.

QUALIFIED TIME is defined as time that the homeowner uses the home as a primary residence.

ANY other usage (rental, second home, vacation home, pre-retirement home, investment home, etc) will be considered "non qualified" and the homeowner will be subject to long-term capital gains taxation (at the rate in place at the time of the sale) on the profits for that time period.

This eliminates tax-free profits on real estate unless it’s your primary residence the entire time you own it.

What this means is that anyone thinking about buying a house in the future and there is ANY possibility that you will not live in that home as your primary residence for any time period at all, you should be aware that if you buy that home after January 1, 2009, you will have to pay taxes on a portion of your profits when you sell that home.

Here are a couple scenarios to consider...

Scenario one: you and your spouse are 55 and plan to retire at 65. You want to buy a retirement home now so you can take advantage of today’s slower real estate market and you want to have a home that is (pick one) closer to your kids & grand kids, on the lake, in the mountains, etc... You purchase that retirement home before the end of 2008, use it as a second or rental home for 10 years; move into it in 2018, and live in it for two years.

Because of circumstances (illness, injury, age or any reason at all) you decide to sell it. If you paid $400,000 for the home in 2008 and the value increased by only 6 percent per year for the 12 years you owned it, you could have a profit of $359,000.

You and your spouse could take all of that profit as TAX FREE INCOME.

What would happen if you waited until after January 1, 2009 to purchase the exact same house?

Exact same house with a profit of $359,000 - but you would owe a capital gains tax on 83.33 percent of your profit. AND WHO KNOWS what the capital gains tax will be in 12 years!!

Scenario two: you and your spouse are 65 and retiring. You decide that you need a smaller home for retirement and buy a retirement home in today’s slower real estate market and live in it for five years until 2013.

In 2013 either you or your spouse become ill, are hospitalized and eventually must move to an assisted living home for five years. You rent your home in the hope that you can return home someday. Eventually you and your spouse area ble to returen to your home and live there for two more years. But eventually your health deteriorates and you nad your spouse must move out and live with one of your children.

At this point, you and your spouse decide that you won’t be able to return to your home and decide to sell it.

If you’d bought the home prior to the end of 2008, the entire profits (remember the $359,000) from your 12 years of ownership would be yours TAX FREE to help care for you in your time of need.

BUT if you’d purchased the home after January 1, 2009, nearly 42% of your profits would be taxable.

Scenario three: what if you are a long way away from retirement? How could this possibly affect you? Let’s say you’re purchasing your first home. Using the same numbers as above, if you live in the house for 12 years it’s value would increase by over $359,000. And let’s assume that you are making more money in 12 years and you decide that can afford a larger home.

You have enough equity in your first home so that you can take it out to buy a new home AND keep the first home as a rental.

If you purchased your first home prior to end of 2008 you will always have the option of moving back into the first home for two of the last five years that you own it so you qualify to take out the $250,000 or $500,000 in tax free profits when you sell it. If you wait until next year to buy your first home, and if you EVER use the house for anything other than your primary residence, then you will ALWAYS will have to calculate the "non qualifying" portion of your pwnershp and pay taxes on those profits.

SO WHAT’S THE BOTTOM LINE??

The average fixed rate on a 30 year mortgage from 1972 - 2007 was 9.25% (with a low of 5.82% in 2003 and a high 16.63% in 1981). Today mortgage rates are in the mid 6 percent range - very close to history low rates.

When you combine today’s near historic low mortgage interest rates, significantly lower housing prices and the above changes in the tax law - EVERYONE who is in a position to do so - should consider purchasing real estate NOW!

Many of the Buyer’s I work with could find themselves in this taxation scenario*.

Folks it IS time to get off the fence - if you’re going to purchase a seasonal vacation home in Southern Arizona - do it before the end of 2008!

As your local Green Valley & Southern Arizona real estate expert, I am here to work with you in finding your perfect home! Call or email me to discuss your personal real estate needs.

EVERYTHING will change when the clock reads January 1, 2009.

* as always, consult your tax professional regarding your personal financial tax situation.