​How does the gift tax work when using gift funds to buy a home?

$17,000 ANNUAL EXCLUSION
The federal government gives each of us an allowance to gift anybody $17,000 per year without incurring any gift tax. This $17,000/year replenishes every year, and it’s $17,000 per person. So, theoretically, I could gift every person that I know $17,000 today, and then another $17,000 next year and the year after, and there would be NO gift tax. This $17,000 limit is up from $16,000 in 2022.

$12,920,000 ​LIFETIME EXCLUSION
What most people don’t realize, is that there’s a second allowance of $12.92mm! This is up from $12.06mm in 2022. In other words, let’s say that I want to give you $117,000. That’s $100,000 more than what I can give you out of my $17,000 annual bucket. That’s not a problem at all because I also have the $12,920,000 bucket. The $12.92mm bucket is called my “Lifetime Exclusion.” If I use any of it during my lifetime, I simply reduce my estate tax exclusion by that amount. 

So in our example, if I gift you $117,000, I would take $17,000 out of my annual bucket and $100,000 out of my lifetime bucket. My annual bucket replenishes each year. But my lifetime bucket does NOT replenish. In fact, I must reduce my lifetime bucket by $100,000, so now my lifetime exclusion is “only” $12.82mm instead of $12.92mm. 

Now, if my estate is less than $12.92mm, this would not be a problem at all, because my heirs would have no estate tax anyhow. However, if my estate is more than $12.92mm then my heirs would have to pay estate taxes on anything inherited above $12.92mm. In other words, the lifetime exclusion bucket is used for both gift and estate tax purposes. So every time I use it to not pay gift taxes, I’m also reducing my estate tax exclusion… that’s how and why the gift tax and the estate tax are related to one another.

ADDITIONAL RULES:

• No Relationship Required: You don’t have to be related to use either of these buckets. You can gift $17,000/year to a complete stranger and you would have no gift tax. You can also gift money to a complete stranger using your lifetime exclusion bucket, and you would have no gift tax.
• No Tax to the Gift Recipient: Everything we just talked about applies to the person GIVING the gift. What about the person RECEIVING the gift? Well, here's some more good news: there is no tax due by the gift recipient!
• $25,840,000 Total Exclusion for Married Couples: One thing to keep in mind about the lifetime exclusion bucket is that the amount changes each year. In 2023, the exclusion is $12.92mm, but it is scheduled to go up in the years ahead because it is indexed to inflation. Also, keep in mind that I can “port” over my $12.92mm to my spouse if I’m married. So technically, a married couple could have a total joint exclusion of $25,840,000! Therefore, if you are married and your net worth is less than $25,840,000, there is absolutely no reason whatsoever for you to concern yourself with the gift tax. That’s because even if you gift your entire net worth during your lifetime, you would pay $0 in gift taxes and your heirs would pay $0 in estate taxes. That’s why the gift tax is really a non-issue for most people!
• Additional Paperwork May be Required: If you're using the $17,000 annual bucket, the gift doesn't need to be reported to the IRS if you follow the proper procedures. However, if you're using the $12,920,000 lifetime bucket, you would need to file a gift tax return with the IRS (even though no gift tax would be due). This is done to simply notify the IRS that you're using part of your gift/estate tax exclusion.
• Use Separate Checks: Make sure the checks are written by the specific individuals who are giving the gift. In other words, if mom is gifting you $17,000, and dad is also gifting you $17,000, you'll need two separate checks: one from mom and one from dad. We might also have to "source" these funds from a mortgage underwriting standpoint. Please check with me before you do anything so that we can discuss the specific details of your situation and make sure this is all done properly.

$12,920,000 Lifetime Exclusion

​That's the lifetime gift tax exclusion in 2023.
Source: Momentifi

Contrary to popular belief, mortgage interest is not always tax-deductible.

Do you itemize your tax deductions?
You cannot take the mortgage interest deduction if you are taking the standard deduction. In 2023, the standard deduction is $13,850 for single taxpayers, $20,800 for heads of household, and $27,700 for married taxpayers filing a joint return. (Please see a CPA for details.)Is your home a qualified residence?
Mortgage interest is only deductible if the mortgage is attached to a "qualified residence". Taxpayers can generally deduct the mortgage interest on two qualified homes: one primary home and one vacation home.

Is your mortgage classified as "acquisition indebtedness"?
Your mortgage or home equity line of credit is considered "acquisition indebtedness" if it was used to buy, build, or improve a qualified residence. Generally, you can deduct the interest on mortgage balances up to $750,000 of Acquisition Indebtedness. Here are two examples:

• Jane buys her $500,000 primary residence using a $400,000 mortgage. Jane would be able to deduct the interest on the $400,000 mortgage as acquisition indebtedness because (1) the mortgage was to buy a qualified residence; and, (2) the mortgage falls within the $750,000 limit.
• Janice buys her $500,000 primary residence with cash. A year later, Janice does a cash-out refinance and puts a $400,000 mortgage on the home. The funds are not used for home improvements. Janice would NOT be able to deduct the interest on the new $400,000 mortgage because the funds were not used to buy, build, or improve the house.

$1MM ACQUISITION DEBT LIMIT ON PRE-2017 LOANS.
Your acquisition debt limit is $1 million if you closed on your home loan prior to December 16, 2017, and the loan qualified as acquisition indebtedness at that time. You can keep that $1 million limit if you refinance that home loan as long as you do not increase the current balance on the loan. For example, if your current balance is $950,000, the new loan you’re refinancing into can’t be more than $950,000. This is also true when consolidating or refinancing a home equity loan or line of credit taken out prior to December 16, 2017, as long as you used that home equity loan to buy, build or improve a qualified residence. In that case, your combined aggregate total limit would be $1 million, whether you keep both loans separate, or whether you consolidate them into a single loan.

DISTINCTION BETWEEN A ​QUALIFIED RESIDENCE AND AN INVESTMENT PROPERTY.
Everything mentioned above pertains to a mortgage transaction involving a primary home or vacation home that is elected as a “qualified residence” for tax purposes. If your transaction involved an investment property, see IRS Publication 527.

​Number of the Week: $750,000

You can deduct the interest on mortgage balances up to $750,000. (If you follow the rules outlined above.) Source: Momentifi

Asphalt is a popular choice for paving driveways. It’s an environmentally-friendly material that can be recycled and is unlikely to cause damage to vehicles. Asphalt also lasts for decades and can enhance your home’s curb appeal, but eventually, it may show signs of wear or damage. If you notice any of these problems, they should not be ignored.

Visible Signs of Damage
If your driveway is cracked in one or more places, you should have a professional inspect it. Even if the cracks don’t seem like a big deal, they can expand. A cracked driveway can cause damage to vehicles and increase the risk of a person falling and getting injured, particularly at night or when guests visit.

Wear and tear from vehicles driving over asphalt can cause potholes as the ground becomes weak and cracks. If your driveway has several potholes, the surface may not be strong enough to support the weight of vehicles. Rain and water from melted snow can settle in the holes and cause them to expand, which can lead to serious injuries or damage to vehicles. If your driveway has potholes, it most likely needs to be repaved soon.

If your driveway’s surface is uneven and covered with bumps, that means it has structural damage below the surface. Contact a professional to have the driveway inspected.

Sometimes an old driveway will begin to crumble. If the pavement is eroding, that is a clear sign that the driveway needs to be repaved before the problem gets worse.

Since asphalt is porous, it should be able to filter water and allow it to enter the ground below. If water is pooling or running off the driveway in a stream, that needs to be addressed as soon as possible. If it isn’t, you could wind up with a serious drainage problem that affects your entire property.

Have Your Driveway Inspected
The last thing you want is for a family member or visitor to fall and get injured on your driveway or to suffer damage to a vehicle. If you notice cracks, potholes, bumps, erosion or drainage issues, it’s most likely time to repave your driveway. That can be a significant expense, but it can prevent many more serious and expensive problems later.
​
Even if there’s no visible damage to your driveway, there could be some that is hidden. The foundation may have broken down over the years, and you will see damage on the surface sooner or later. If your driveway was paved 20 or more years ago, or if you’re unsure of its age, you should have it inspected. A professional can let you know if it needs to be repaved. If it’s currently in satisfactory condition, it can still be helpful to know approximately how many years of use your driveway has left so that you don’t wind up with a costly and unexpected project.

Credit card rewards can be a free way to travel and get cash back for your daily expenses.

But if you’re not paying your credit card bill in full when it arrives, then you’re paying interest and those free rewards are no longer free. That’s not a surprising fact, but it’s a top one to keep in mind when considering these four surprising facts about credit card rewards:

A 1% reward
Don’t expect to receive nearly in much in rewards points as you do in spending to get them. The typical reward point is worth about 1 percent of what you paid to earn it when you cash it in for airline miles, hotel room, cash back or any other reward.

The lender expects that you won’t pay the monthly bill in full, and possibly late, meaning you’ll pay interest charges and late fees. That can make rewards points more costly.

Remember the annual fee
Rewards cards with annual fees usually offer better rewards than cards without them. But the fees can require you to spend a lot of money to make the rewards worthwhile.

If the average rewards point is worth 1 cent, you’d have to spend $9,500 annually, or $791 per month, to offset a $95 annual fee.

Annual fees can be worthwhile in other ways. A rewards credit card can offer rewards such as upgrades on flights and rooms, airport lounge access, and free luggage check-in. New cardholders may have the fee waived in the first year as an enticement to join.

Rewards expire
Look on your credit card’s website or in the agreement it mailed you, and somewhere in the fine print you’ll find details on when your rewards points expire. From 12-24 months is likely, though some may let you buy back points after they expire.

Points drop in value
If you don’t redeem points regularly, you could see them drop in value as airline frequent flier programs and other programs change their redemption requirements.

You’ll likely get advance notice from the credit card company before any program changes are made. With a few months’ notice, you should have some time to redeem your points earlier than planned and get the most out of them.

As with any financial product you pay for, be sure to read the fine print in the long, boring contract you get in the mail when the credit card is sent to you. It should explain in detail how its rewards points work.

​I hope you found this information helpful. Please contact me for all your real estate information needs today!

WHEN IS INTEREST ON HOME IMPROVEMENT LOANS TAX DEDUCTIBLE?

In order to deduct the interest on the mortgage as acquisition indebtedness, the IRS requires the project to be a "Substantial Improvement" that:

• Adds to the value of the home;
• Prolongs the home’s useful life; or,
• Adapts the home to new uses.

For example, painting a room may not qualify, but an addition or new kitchen may qualify.

If you are pulling cash out to reimburse yourself for improvements already made, those improvements must have occurred within the past 24 months in order to qualify for the acquisition indebtedness deduction.

You must take out the mortgage or home improvement loan within 90 days after the work is completed in order to qualify for the tax deduction. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage.

DON'T GET TRIPPED UP BY THESE COMMON MISTAKES!

A "carry cost" is the cost to "carry" the property, such as the mortgage payment, property taxes, utilities, maintenance, and other expenses. For example, if you buy a house with the intention of selling it within a year, what are the total costs you will incur during that time to "carry" the property? It's important to accurately estimate those costs so that you don't get tripped up by them later on.

In most cases, you’d need to sell the house for at least 8% - 10% more than what you paid for it just to break even and cover the real estate commissions and transfer taxes. It's important to take that into account when you run your numbers so that you can accurately forecast your potential rate of return on investment.

What if the tenant defaults on the rent and you have to hire a lawyer or go through a costly eviction process? Or, what if you can’t find a tenant? That's why it's important to consider risk reduction techniques like non-refundable deposits, sale/leasebacks and/or rent-to-own strategies.

What if you need access to your capital and you can’t sell the house? That's why you should never be 100% invested in real estate. This means that if your budget for real estate investments is $500,000, you should keep part of that cash in the bank, sitting on the sidelines. This way you won’t get into trouble if the property sits vacant for a few months. Also, a cash cushion allows you to quickly take advantage of other investment opportunities when they arise.

GET TAX-FREE GAINS WHEN SELLING YOUR PRIMARY HOME!

Your tax basis is the cost of buying, building, or improving a property. For example:

• Purchase Price: $500,000; PLUS:
• Closing Costs: $10,000; PLUS:
• Home Improvement Costs throughout the Years: $90,000; EQUALS:
• Tax Basis: $600,000

​Your capital gain on the sale of the property is your sales price MINUS your costs of sale MINUS your basis. For example:

• Sales Price: $1,000,000; MINUS:
• Costs of Sale: $80,000; MINUS:
• Tax Basis: $600,000; EQUALS:
• Capital Gain: $320,000

In the US, we're required to pay capital gains taxes on any profit ("capital gain") we receive when we sell a property. Under current law, the capital gains tax rate can be up to 20%, plus an additional 3.8% net investment income tax. Using the example above, you could be required to pay up to up to $76,160 in capital gains taxes (23.8% tax on the $320,000 of capital gain), depending on your specific income level.

If the property is your primary residence, you can get what’s called a principal residence exclusion. This means that a certain portion of the capital gain is excluded from tax. Married couples can exclude $500,000 of capital gain from tax. Individuals or married couples filing a separate tax return can exclude $250,000 of gain from tax. In the example above, the entire $320,000 would be excluded from tax if this was your primary home and if you were married, filing a joint tax return. This means that you could save up to $76,160 by using this exclusion (no capital gains tax and no 3.8% investment income tax)! Here are several rules to follow to qualify for the exclusion:

• You must live in the home as your primary residence for 2 out of the last 5 years.
• You can take the exclusion once every two years: If you have a large capital gain on your property, why don’t you consider selling it now, and pocketing the proceeds tax-free? Then, you can purchase another home and do it all over again because there’s no limit on how many times you can get this exclusion! You just have to wait 2 years in between each sale and make sure that you live in the property as your primary residence.
• You don't have to use the proceeds to buy another home.
• The exclusion only applies to primary homes: This exclusion doesn't apply to vacation homes or investment properties. It only works if you live in a property for two full years out of the last five full years. Also, there are some limitations on the exclusion if you turn a rental property into a primary home.
• Extra calculation applies if you convert a rental property into a primary home: If you rent out the house BEFORE you live there as your primary residence, the calculation of how much gain you can exclude is based on the percentage of time that you've lived in the home as your primary residence. For example, if you rent out the house for three years, and then you move in and live in the house for the next three years, you can only exclude 50% of the gain. This is because you only lived in the house for 50% of the time you owned it. This calculation must be performed even if you originally bought the house as a primary home, but didn't live there until after you rented it out. However, if you rent out the house AFTER you've lived in it as your primary home, you do not need to perform this extra calculation.

HERE ARE 3 IMPORTANT THINGS TO CONSIDER ABOUT FLIPPING HOUSES IN TODAY'S MARKET.

Approx. 8.2% of all residential real estate transactions were house-flips in Q2 2022 according to Attom Data Solutions, a leading real estate data provider. That's down from 9.7% in Q1 2022 but still up from 5.3% in Q2 2021. Meanwhile, average house-flipping profits remain far below their peak due to increased competition, rising mortgage rates, and a slowdown in house price appreciation.

The costs to renovate and repair a home have soared in the wake of a labor shortage, supply chain disruptions, and rising inflation. This means that it may take you longer than expected to fix and flip the home. Also, be sure to budget for higher costs, which of course, will eat into your profit margins.

It's highly unlikely that house prices will crash because we have an ongoing shortage of housing inventory in the US. Even so, annual house price appreciation is expected to slow to its long-term average of 3%-4% during the next 12 months. We've already seen month-over-month price declines in some extra-frothy markets. This means that you may not get as much as you initially anticipated when you go to sell the house.

​YOUR COST OF BORROWING MAY BE LOWER THAN YOU THINK!

Homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home. In the past few years, not as many home buyers benefited from this because their total annual interest expense was lower than their standard deduction. 

However, interest rates and total annual interest expenses have doubled this year according to Freddie Mac's weekly survey of mortgage rates. For example, a $500,000 mortgage at a 6.5% interest rate has an annual interest expense of $32,500. This far exceeds the standard deduction. This also means that the homeowner in this example is more likely to itemize and benefit from the mortgage interest deduction.

Calculate for yourself!

• Step 1: Express your tax bracket as a decimal: 24% = 0.24
• Step 2: Subtract that number from the whole number one: 1 – 0.24 = 0.76
• Step 3: Multiply that number by your interest rate: 6.5% x 0.76 = 4.94%
• In this example, a 6.5% mortgage costs 4.94% after-tax for someone in a 24% tax bracket.

STANDARD DEDUCTION, GIFT TAX LIMITS, AND MARGINAL TAX BRACKETS FOR 2022

The Internal Revenue Service (IRS) announced the tax year 2022 annual inflation adjustments for more than 60 tax provisions. Click here to view the full list. Here's a summary of three provisions that may impact homeowners and homebuyers:

​HERE'S A GREAT NEGOTIATING STRATEGY FOR A CHANGING MARKET

A "2-1 Buydown" is where you or the seller pay a fee at the closing to reduce the interest rate on your mortgage by 2% in year 1 and 1% in year 2. This results in temporarily lowering your monthly payment and potentially making the home more affordable for you.

A "3-2-1 Buydown" can sometimes also be used, although a 2-1 Buydown is more common. A 3-2-1 buydown is where you or the seller pay a fee at the closing to reduce the interest rate on your mortgage by 3% in year 1, 2% in year 2, and 1% in year 3.

A 2-1 Buydown reduces your interest rate and monthly payment during the first few years of homeownership, making the home more affordable for you. It can also allow you to benefit from owning a home now so you can start to build equity vs. waiting a few more years and continuing to rent. If the seller pays for the 2-1 Buydown, it would have a much greater impact on your monthly payment than asking the seller to reduce the list price of the home. This could be a great negotiating tool because a greater percentage of homes listed for sale in today's market are seeing price reductions.

One way to get maximum benefit with a 2-1 Buydown is to use it on a 5-year or 7-year intermediate term ARM (adjustable rate mortgage). The interest rate on those types of loans is often lower than the interest rate on a fixed-rate loan, resulting in an even lower monthly payment.

In year 3 of a 2-1 Buydown, your interest rate would adjust to its normal "note rate." If market interest rates are the same or higher than they are today, you would just keep the loan and pay the normal payment. However, if a recession happens, as is being predicted by many economists, market rates may come down again. In that case, you may be able to refinance at the then-current rates. Keep in mind that interest rates are cyclical. They tend to go up when the economy is doing well, and they tend to go down when the economy is doing poorly.

​THREE QUESTIONS TO DECIDE IF THIS IS A GOOD TIME FOR YOU TO BUY A HOUSE

Wages have increased considerably in the past year and are likely to keep rising because there are over 10 million job openings in today's economy. If you tune out all the noise that's not specific to you, is the home you want to buy affordable for you personally given your specific income/employment situation? There's no one-size-fits-all solution in today's market. That's why it's important for you to run the numbers for yourself, consider the alternatives, and make your own decision. I'm here to help in any way I can!

INFLATION IS AT DECADES-HIGH LEVELS: HERE'S HOW IT IMPACTS HOUSE PRICES

House prices tend to go up along with all the other asset prices in the economy during periods of high inflation. During the last period of high inflation, from 1970 - 1989, the average increase in house prices was 7.64% per year. During the past 20 years of low inflation, from 2000 - 2019, the average increase in house prices was 3.70% per year. House prices tend to go up at a faster pace during periods of high inflation. That's why real estate is often referred to as a "hedge against inflation." ​

4 bed 2 bath 2 car garage home situated in prime location. Home was just renovated, new Flooring, new kitchen cabinets, new counter tops, new stainless steal appliances to match. Back yard is fenced and has a large storage unit with patio area. Easy on off freeway access, shopping, schools are walking distance. This is a must see home.

3 Bed 2.5 Bath with over 1300 sqft Plus a patio area and 1 assigned parking. Home has been upgraded and it shows. Kitchen features stainless steal appliances, Newer Cabinets, Granite Countertops, and added breakfast bar. Extra large living room is open and you can walk out to your patio area. Home has mixture of new Laminate floors and ceramic tile flooring. Master bath has custom tile work, hall bathroom has been upgraded.

Great Investment Opportunity. Live in one unit and rent out the back home or rent out both. both units have been updated and are professionally managed. Rents were just increased start of this year.
All utilities Are Separated
1) Main home 4 bed 2bath washer/dryer hookups 
2) Back Home 2 bed 1.5 bath stacked washer/dryer 

​4 bed ArrowCreek Gated community, Great Reno Location! Beautiful 4 bedrooms and 3.5 bathrooms 3 car garage single-family house, close to walking trails and recreational actives.