Renting Out your Home or Vacation Home?

Dear Client:

You must consider the vacation home rules when you

• rent a bedroom in your home and also use it personally, or
• rent your beach home (or any other home you own) and also use it personally.

Personal Use of the Dwelling

Rent or use by relatives. Personal use includes more than meets the eye. You have personal use of a dwelling when you rent to or allow use by a relative. The rent charged makes no difference.

Paying and non-paying relatives who use your vacation home complicate your deductions. Such use by your relatives is personal use by you. The relatives who come with this personal-use taint include your

• mom and dad,
• brothers and sisters (whole and half),
• sons and daughters,
• grandchildren and grandparents, and
• spouse.

Planning tip. Do not rent to the tainted relatives.

Co-owners

Co-owners must count both use by their relatives and use by themselves as personal use. Thus, if you own a rental home with others, make sure you know about the personal use by the co-owners and also use by their tainted relatives.

Charitable Donations

Charitable donations produce personal use. No matter how much the charitable donor pays for use of your dwelling unit, the IRS counts the charitable use as personal use by you.

If you donate a week of vacation-home use to your school’s annual auction, you have a week of personal use. It makes no difference what the successful bidder pays for that week of use.

Double whammy. Your charitable gift of the right to use your dwelling unit for the week does not produce a deductible contribution for you. The IRS regulations deny a charitable contribution deduction for a gift of the right to use property.

Thus, the charitable gift penalizes you twice. First, the days you donate are days of personal use by you. Second, your donation of the days does not create a charitable deduction for you.

Swaps

Swaps produce personal use. Similarly, you have personal use when you swap dwelling units with a friend or under an exchange agreement. Swaps and bargains produce personal days. You count as personal use of your dwelling unit any days that you

• allow a person to use your unit under an agreement that lets you use another dwelling, whether or not you charge rent; or
• charge less than fair rent.

Example 1. You and Nelson swap one week of vacation-home use. Nelson’s use of your dwelling unit during the one-week swap counts as personal use by you.

Example 2. You and Johnson rent each other’s mountain homes for a week at fair market rent. Johnson’s rental of your dwelling unit during that one week counts as personal use by you. Example 3. You charge your child’s favorite teacher only 67 percent of the fair rent to use your beach home for a week. The teacher’s use of the beach home counts as personal use by you.

Repair Days

Repair days do not produce personal use. Tax law says that you do not use your dwelling unit on days when your principal purpose for such use is repair or maintenance. To qualify the day as a repair day, you must work substantially full-time repairing or maintaining the dwelling unit.

Example 4. You and your spouse arrive Thursday evening at your lakeside cottage after a long drive, but in time for a late dinner at the cottage. You spend a normal workday on both Friday and Saturday getting the unit ready for rental. Your spouse does no work on the house and simply relaxes at the beach.

You depart Sunday, a little before noon. According to the IRS’s examples, your principal purpose for that trip is maintenance. You do not count Thursday, Friday, Saturday, or Sunday as days of personal use. The repair days are non-use days.

Example 5. You own a mountain cabin that you rent in the summers. You spend a week at the cabin with your family. The family members work substantially full-time repairing the cabin. You spend about three to four hours each day during that week helping, and the rest of the time fishing, hiking, and relaxing. According to the IRS, your family’s principal purpose of that week’s stay is maintenance; therefore, the days are not days of personal use.

Again, the repair days are non-use days.

Rented Fewer Than 15 Days

Tax-free income. If you rent your dwelling for fewer than 15 days, you do not report the rental income or any rental expenses on your tax return. The income is tax-free. You do not share it with the government.

Planning tip. Do you have an event coming to your area that might command high rents? Examples include a major golf tournament, Olympic event, or other activity that could allow you to rent at a high rate for a short period.

Say you have a summer home on the beach next to a major golf tournament. You rent the home for $10,000 a week for two weeks. You have $20,000 of tax-free income.

Personal Residence or Rental?

The amount of personal use determines how you will treat your tax deductions on the dwelling. You have a tax code-defined rental of the dwelling when your personal use is either

• 14 days or less, or
• 10 percent or less of the days rented.

Example 6—rental. You rent your resort home 260 days. You use it personally for 26 days. Ten percent of your resort home is a personal home. Ninety percent is a rental property.

Example 7—hobby rental. With 30 days of personal use of the resort home in example 6, you have a residence. Your deductions on the rental part during the current tax year may not exceed your rental income (i.e., you have no tax shelter possibility).

Excess deductions carried forward. When the law deems your dwelling a residence, the deductions attributable to the rental are limited to gross rental income. The good news is that you carry forward the deductions in excess of the gross income limit to next year.

Treatment as a Rental Property

If, based on your rental and personal use, tax law classes your summer home as a rental property, you should follow the IRS allocation method to get the best tax breaks.

Personal part of interest lost. If tax law classes your dwelling as a rental property, any mortgage interest allocated to your personal use is non-deductible consumer interest (ouch!).

Passive loss rules. The dwelling classified as a rental property faces the passive loss rules.

Seven-day rule. The dwelling that is a rental under the 14 days and 10 percent tests is not rental real estate under the passive loss rules if the average rental period during the year is seven days or less, as we explain in Know These Tax Rules If Your Average Rental Is Seven Days or Less.

As you can see, there’s much to know about vacation homes. If you would like me to help you make sure you have the rules in hand, please call me on my direct line at xxx-xxx-xxxx.

Sincerely,

Bob

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Proving Travel Expenses After Tax Reform 2018

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.

And tax reform did not change the rules that apply to your other travel expense deductions.

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas.

From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
2. Time. Your dates of departure and return, and the number of days on business.
3. Place. Your travel destination described by city or town.
4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove:

• every expenditure for lodging, and
• every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available. I suggest saving ALL receipts regardless of amount.

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains:

• the name of the hotel,
• the location of the hotel,
• the date, and
• separate amounts for charges such as lodging, meals, and telephone.

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the:

• name and location of the restaurant,
• date and amount of the expenditure, and
• number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

• Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
• Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
• Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
• Costs for baggage and shipping of business items needed at your travel destination
• Costs for lodging and meals (meal costs include tips to waiters and waitresses)
• Costs for dry cleaning and laundry
• Costs for telephone, computer, Internet, fax, and other communication devices needed for business
• Tips to bellmen, maids, skycaps, and others

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either:

• have the corporation reimburse you for the expenses, or
• have the corporation pay the expenses.

If you would like my help in planning the business and personal parts of your next trip, please don’t hesitate to call me.

Sincerely,
Bob
Robert W Craig, EA Tax Services (805) 264-3305

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The Unpardonable Sin in an IRS/FTB Audit

Mileage Log Required for Vehicle Tax Deductions

When it comes to your tax records, there’s one record that you really must keep, and it’s easily overlooked. It’s the mileage log. In an IRS audit, the mileage log often creates the first impression of your tax records, and not having a good log is the biggest unpardonable sin of an IRS/FTB audit. Whether you use the IRS mileage rate method or the actual expense method, you need a written record that proves your business percentage of use.

  Various records can be used, but the IRS three-month sampling record is the preferred choice for those who know about it. With this method, you keep a mileage log for three months and then apply that three-month business percentage to either the miles you drove for the year (mileage method), or the expenses you incurred for the year (actual expense method).

  The three months must be consecutive and must represent your driving pattern. Otherwise you must keep the mileage log for the entire year.

  Technology & APP’s: With respect to keeping your mileage log, technology has made your job a lot easier. You can find very affordable apps that work with your smartphone, such as Mileage Expense Log, Mile IQ, and Trip Log. These apps track where you go and where you stop, and that takes away a big part of the record-keeping hassle. Make sure you also add the business reason for the stops. This takes a few minutes, but it’s critical. Don’t skip this step.

  If you would like an example of what a mileage log should look like, feel free to contact Bob at (805) 264-3305.

Robert W Craig, EA Tax Services
431 2nd Street, Suite 3
Solvang, CA 93463
email: rcraig1044@aol.com

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Tax Tips for Real Estate Investors

Tips For Real Estate Investors

If you are a real estate investor I’m sure you are familiar with a number of tax laws and strategies that real estate investors encounter frequently and not so frequently. Things like:

*Tax Rules and Solutions at Purchase and During Ownership of Real Estate *Living With the Passive Loss Regulations *Taxation at the Time of Sale *1031 or Like-Kind Exchanges *Real Estate in Troubled Times

More Specifically:

-Passive Loss Limitations may limit the amount of losses you can deduct each year -Depreciation – how to compute and what is the long term effect on my situation -Capital Gains versus Ordinary Gains -Exclusion Rules for Gain on the Sale of a Principal Residence -Converting a Principal Residence to a Rental or Vice Versa -Installment Sales of Real Estate -Office In Home Rules -Repossessions, Cancellation of Debt and Bankruptcy

As an investor you may or may not have a detailed understanding of how these areas affect your taxes and investment. But you should have at least a basic understanding of how different rules affect the types of investments you have. Details on the above are obviously beyond the scope of this text, but feel free to contact us if you feel less than confident in any of the areas or if you are thinking of buying, selling, renting, exchanging, executing a short sale, etc.

Here are some areas I get a number of questions about. If you have any other areas that you have questions, please use the ‘Ask a Tax Question’ button to the right on any page of this website.

1. Repairs versus Improvements – There is a distinct tax difference between “repairs” to a property and “improvements” to a property. On one hand, the cost of repairs made by a business is deductible. On the other hand, the cost of improvements must be capitalized and written off over time via depreciation deductions.

Check out this handout, click here: Is it a repair or improvement?

The life of improvements to a residential rental building is generally 27.5 years. On a nonresidential building it is generally 39 years. A real long time in either case.

A good strategy is to separate repairs from improvements when work is done on a business or rental building. For example, don’t lump standard repairs with a major renovation. If that occurs, it will take longer to write off the cost of the repairs.

Fix the broken window, replace the doorknobs, fix the leaky faucet and the like prior to the more renovation type of work.

A repair keeps the property in good operating condition over the course of its life. Conversely, an improvement extends the useful life of the property, increases its value or adapts it for a different use.

But check this out:

But even the Internal Revenue Manual that tells IRS agents how to audit you admits that distinguishing repairs from improvements is a gray area. You’d think that replacing a roof is pretty clearly an improvement, right? Common sense tells you it adds value and prolongs the property’s life. But a recent tax court case ruled that an investor could deduct a roof as a repair because it just helped keep the property in good operating condition over the course of its existing expected life.

Remember, this strategy is for business property, like rental properties. Personal home improvements are not deductible at all so, in the case of your home or vacation homes, it would be better to lump all little repairs in with a major renovation so it can be added to the cost basis of the property when sold.

2. Cost Segregation

The IRS says your clients can “depreciate” their property over a “class life” intended to approximate its useful life.

Residential property depreciates over 27.5 years. If they have an apartment house worth $500,000, they write off $16,666 per year. Not bad . . . .

Nonresidential property depreciates over 39 years. If they have, say, a medical office worth$500,000, they write off $12,820 per year. Not as good as the apartment – but still not bad.

But all real estate includes specific, identifiable components that depreciate faster.

For example, land improvements depreciate over 15 years. These include paving, landscaping, underground utilities, and site lighting.

And personal property depreciates even faster – just 5 to 7 years. For residential property, this includes flooring, cabinets and countertops, appliances, window treatments, and wall coverings. For commercial and industrial property, add equipment foundations, exhaust and ventilation systems, security systems, and electrical distribution systems.

If we just take the 27.5 or 39 year depreciation we could be wasting thousands in tax deductions we can take today.

A “cost segregation study” is an in-depth analysis, performed by specially-trained experts, that lets them identify and reclassify costs that qualify for faster depreciation.

Faster depreciation translates into immediate tax savings.

The best part is, new IRS rules let owners “catch up” any deductions they missed as far back as 1987. Without even amending old returns! You can do that simply by filing IRS Form 3115. And you can claim those savings in a single year.

That makes cost segregation the closest you’ll come to a real “tax time machine”! It’s all court-tested and IRS-approved. In fact, the IRS offers a 136-page Audit Techniques Guide that details exactly what to do and how to do it. It’s not for everyone but it can make a big difference in the right situation.

3. Depreciation Recapture

Remember that when a property is sold, all depreciation taken over the life of the investment will reduce your cost basis increasing the gain on the sale.

4. Converting Personal Residence to a Rental

You can convert a personal residence to a rental property and if time limits are adhered to, you can still take at least a portion of your tax exclusion for the sale of a personal residence. If you rent it out after 2008 there will be a proration of the exclusion. This can get complex so check it out with an your tax advisor or call us.

You can also go the other way and convert a rental property to your residence and if you live and own it for a long enough period you may be able to exclude some of the gain. Again, a complex issue, call us if you need help.

5. Inherited Property

If the owner of real property passes away, be sure to get an appraisal of the value of the property at the date of death. This will be the new basis for gain or loss on sale and for depreciation. You should get this appraisal even if there is no estate tax return (706) filing requirement.

Also important is if you own property with your spouse make sure that title is held as community property with right of survivorship (if you’re in a community property state such as California). This way the property will get a full step up in basis on the death of the first spouse. If you have a living trust, be sure to run this by your attorney or tax person to ensure it is setup properly.

Call me if you wish to discuss any of these issues. Thank you, Bob (805) 264-3305

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Tax Tips for Real Estate Agents

Tax Tips For Real Estate Agents

You, as a real estate broker or agent, have two ways to grow your real net income:

1. Financial Offense
2. Financial Defense

Financial offense boost your income. Get more listings, more showings, more closings, sell more expensive properties, add additional services and the like.

Financial offense is hard work! If it were easy, everyone would be doing it.

Financial defense is simply to cut costs, while maintaining the integrity of your business plan. If you are like most real estate pros, taxes are your biggest single expense—and your biggest roadblock to financial security.

A successful real estate pro can give away 40% or more of their income.

How do you stop the tax madness?

Tax planning guarantees results. You can spend hours and hours and thousands of dollars on speculative marketing efforts that take years to pay off for you. With increased income you spend $5 to net $1.

With taxes, if you save $5, you have $5 more in spendable income.

Tax planning gives you control. You can’t control the economy, interest rates, or any other external forces—but you can make sure you take advantage of every tax break the law allows.

Taking advantage of all the tax breaks and so called loopholes in the tax code is perfectly legal. But it is not all cut and dry, so it is filled with land mines and potential traps, the “red flags.”

To sum up, tax planning works. Together, both your offense and defense will govern the results you get from your business. To bring in the token sports cliché: ‘Offense sells tickets, defense wins games’. This applies to business as well.

Tips of the Month:

Tip #1. Picking the Right Broker or Agent, or How To Be The Broker/Agent That’s Right To Pick.

Do buyers actually go out and look for an agent? Probably most of the time they just stumble over them. At an open house, a cocktail or block party, a friend or relative who knows one is most likely the way we happen upon a broker or agent.

So, look at advice you may give someone on finding the best broker or agent, and make sure you are that person.

Recommendation – People look for referrals. Be out there, let people you’ve done great work for know that you did great work for them. Ask for the referral at the time you do the work when it’s fresh on their minds. And then follow up, don’t let em forget you. Get a testimonial.

Expertise – What is your expertise? Do you specialize in one area or another of real estate? This helps to nail down your target market. Then combine that with the recommendation side and hang with the people who can refer you the prospects that are most likely to own or want properties in your niche. Let them know, you are the professional who has done it before.

Commitment – How committed are you to putting the client first? This is a gut check one. People want a pro that’s totally committed. Are you that person? If not, become that person. Remind yourself each day where your bread is buttered. Fall in love with your prospects and clients. It makes the work more fun too. Are you just dabbling in real estate part-time?

Reputation – Reputations good or bad, are earned. They are earned by doing great work. Have letters of recommendation from clients and from your office managers, if applicable, for potential clients.

Drive – Kind of like commitment, but more action oriented. Drive can also be called determination. Do you have it? Are you part-time or full-time? All the drive in the world is useless if you’re not around when the client has a problem or wants to write or respond to an offer.

Flexibility – This goes somewhat with expertise, but how adept are you at sensing the right time to adjust pricing and adapting to changing real estate climates?

List/Sale Ratio – Do you close 70% or more of your listings? What is your listings average time on the market? A smart prospector may ask to see statistics, but even if they don’t, it should give you confidence in knowing the numbers. Also, if they are sub-par, it gives one a goal to work toward.

The Company You Work For – What is the company’s reputation? What is the company going to do for the client? Does your company have systems with strong marketing plans and tools, and systems to communicate these to the client? The company should have a strong reputation of backing up the client.

Bedside Manner – Maybe actually the biggest single factor for selecting a professional to represent a client is his or her bedside manner so to speak. How well do you connect? How well do you sense what the prospective client wants from you? And how willing are you to give them exactly what they want? People can sense these things so you need to have the right attitude and it will shine through.

I hope these are a help. You may have more traits that you have worked out yourself but the key is to become the real estate professional that the clients you want to work for are looking for. Then your confidence and energy will precede you in all your business dealings. These even work to improving yourself in your personal life too.

Tip #2

Successful agents spend more time by far, than unsuccessful agents, finding prospects proactively, presenting, and closing buyers and sellers. Therefore, these items should be priorities for the successful real estate agent.

Tip #3

Be able to help your clients, either with personal knowledge and experience, or by getting an outside advisor, with decisions regarding real estate investments. This helps them make buying and selling decisions quickly and makes you look good. Click Here to read my article on “Tax Tips for Real Estate Investors.”

Go get em!!!

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January 2012 Newsletter

Robert W. Craig, E.A. Tax and Business Services
January 5, 2012

There are lots of things going on with all the turmoil in Congress and Washington as a whole. As you’ve probably heard, the payroll tax cut has been given a two-month extension. The feeling is that this being an election year, neither Democrats or Republicans want to be responsible for lowering workers take- home pay, and the cuts will most likely apply to all of 2012.

As for the Bush tax cuts, which are set to terminate after 2012, we forsee Congress approving a one-year extension giving Congress time to look at a larger overhaul of the tax current tax system in 2013. This is not a slam dunk but it appears the most likely scenario at this point. I will keep you updated as the year unfolds and developments surface.

As always, feel free to forward this newsletter to anyone you know who you think may benefit from the information.

Estimated Taxes
The 4th quarter 2011 estimated tax vouchers are due to be post- marked no later than January 17, 2012.

Estate Tax Alert – Deadline Approaching
If you are an executor, trustee, or a beneficiary of an estate or trust for a decedent who passed away in 2010, be aware that there may be a deadline on January 17, 2012 to file a Form 8939 to elect zero estate tax. This is complex so if you are involved in an estate or trust with decedents who died in 2010, be advised of this and get counsel on it if necessary.

Are Living Trusts Still Necessary?
A lot of people ask me if revocable living trusts are still some- thing to have or think about because of the new estate tax laws and increased exemption amounts.

My answer is usually that yes, they are still a great vehicle in estate planning. You see, estate tax savings is not the only reason for having a living trust. There is privacy, probate avoidance (big savings), ease of transfer, reduce family or beneficiary squabbles and more.

It’s important to get it done correctly and to make sure that everything necessary is included in the trust and titled properly. You may be able to get by without one but, as I always say, “you don’t know what you don’t know” so it’s best and less expensive to get great advice.

It is best to discuss your particular with a competent lawyer experienced in this specialized area of law. I’ve seen some terrible trusts drawn up or critical items left out of the trust and these are headaches at best and can be very costly to your loved ones.

For more information and a great recommendation for an attorney specializing in this area, call Sara A. Henry at (805) 693-9100 or check out her website at: www.VintageLawyer.com

There is also an article on this website at “Do you need a professional
fiduciary or living trust” under Recent Posts to the right.

New Developments in Real Estate Financing
These newsletters are not just about taxes, they are about improving your overall wealth and success. In talking with David Brown of Residential Mortgage here in the Santa Ynez Valley, I discovered that there are some intriguing happenings in financing. I’ve included a sample of his article below.

If you could not refinance due to the lack of equity in your home the new Obama HARP 2.0 program may help. If your loan is serviced by one of the following GSE servicing entities you may be able to refinance to a lower rate. Unlike the first HARP program that limited the loan to value the new 2.0 program has higher or no limits. In fact many will not require a new appraisal. Click on the below links to see if your home loan is now with either of these servicer’s. If so, give me a call to discuss the economics of securing a lower interest rate.

For the entire article, look under Recent Posts on this website, “Time To Review Your Mortgage”, it’s very timely and important, and pass it along to friends as well. Or visit David’s website at RELoans.com.

Gift Tax Alert – IRS Crackdown!!
Sometimes real estate is transferred from one person to another for little or no money or consideration. This can be parent to child or friend or another person for another reason.

This is okay but if the value transferred is greater than $13,000, a Form 709 Gift Tax return is required to be filed reporting the transaction. Apparently, in a study, the IRS has found that many times (50% to 90% of the time) the required forms are not filed.

In California and many other states, disclosure of this information must now be made available to the IRS. So, the IRS will get the names of people who transferred realty for little or no money, and will be able to go after them. Note that the Forms 709 must be filed even though no tax is due (which is most often the case) because this is an estate tax issue and by not reporting the excess of the annual exclusion of $13,000, the government may lose out on estate tax when the person giving away the property passes away.

Offshore Account Alert – Have An Offshore Account? Read!!
For many legitimate reasons you may have a foreign bank account. On the other hand, there a many illicit reasons that one may have offshore or foreign bank accounts (drug and terrorism money, laundering money, and tax evasion) and these illegal activities have given the government reason to become very ‘interested’ in any and all people with foreign bank accounts.

UBS, the giant Swiss bank, has ratted out over 4,500 U.S. citizens who were using the secrecy of Swiss banks to evade U.S. taxes. Many account holders, as many as 30,000 or so came forward and confessed under special IRS programs.

It has always been required to check a box on your tax return if you held a bank account in a foreign country. I assume this has been disclosed properly but, in case it was missed know that offshore foreign accounts are at the top of the IRS hit list.

U.S. citizens and residents are taxable on their worldwide income and are subject to all U.S. tax laws. The world is shrinking and this is really true when it comes to taxes, especially since 2008 when Senate hearings revealed that Americans were hiding assets in Swiss and other foreign banks.

To comply with the Bank Secrecy Act, you may be required to file as many as three disclosure forms depending on how much in aggregate asset balances one may have and where you reside.

The penalties for ignoring these rules and filing requirements are severe, comprising of monetary penalties and potential jail time. They are serious about this. I know this probably affects a small percentage of my clients but it is so important that I feel it necessary to spend considerable newsletter space to it. You may also know someone who this may affect and would wish to make sure they are aware of the rules.

That’s it for now, more to come.

Thanks for reading this months newsletter. If you have any ideas for topics or would like to feature information from your business that would be of interest, please shoot me an email and a blurb or article on your topic.

Remember, if you know or happen upon anyone who needs tax planning advice, tax preparation, or tax problem resolution services, feel free to give them my name and numbers and I will assist them in any way I can.

Sincerely, Bob
Robert W. Craig, E.A. Tax and Business Services
1444 Aarhus Drive
Solvang, CA 93463
(805) 264-3305
Email: rcraig1044@aol.com
Website: www.BobCraig.biz

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Time To Review Your Mortgage?

Here is an article from David Brown, a mortgage planner, advisor, and broker at Residential Mortgage here in Solvang. He always gives me the straight scoop and gets things done where others can’t. It’s very informative and definitely worth the read. Feel free to pass it along to family, friends, and colleagues. Enjoy, Bob

Mortgage Market Happenings
By David Brown, Residential Mortgage Corporation

As your trusted mortgage advisor, this is my year end update to keep you posted on changes in the mortgage market and identify opportunities that may be of value to you. 

If you could not refinance due to the lack of equity in your home the new Obama HARP 2.0 program may help.  If your loan is serviced by one of the following GSE servicing entities you may be able to refinance to a lower rate. Unlike the first HARP program that limited the loan to value the new 2.0 program has higher or no limits.   In fact many will not require a new appraisal.  Click on the below links to see if your home loan is now with either of these servicer’s.  If so, give me a call to discuss the economics of securing a lower interest rate.

Does Freddie Mac Own Your Mortgage?
Does Fannie Mae Own Your Mortgage?

Second are the new loan limits for 2012 by Fannie Mae and Freddie Mac.  For Santa Barbara County the conforming limit is $417,000 and the High Balance Limit is $625,500 for a Single Family Residence.  For 2-4 unit properties the amount will range from $533,850 to $1,202,925 depending upon the number of units and conforming or high balance.  FHA for the first time has higher loan balance limits than the traditional Freddie and Fannie lenders.  The FHA loan limit is now $729,750.  Note that mortgage insurance is a mandatory regardless of the loan to value.

Buying a home or rental property?  In most real estate markets today, it is cheaper to own than rent which allows for more home rentals to generate cash flow.  If you’re in the market you may wish to consider buying discounts from Fannie and Freddie with their “Home Path” and Home Steps” programs.  These allow for buying either rental or owner occupied homes with minimal down payments and no appraisal or mortgage insurance.  These are huge savings and add to the bottom line of the investment.  Here are the links to each: Home Steps and Home Path.

The big questions is where are rates going?  Who would have thought that rates for 30 year fixed loans could be this low? Now 4.125% with no points and 15 year fixed rates at 3.5%.  The FED has made it public that their policy is to have rates low through 2013 with the tools available to them.  However, the global market may tell us otherwise with pending defaults on sovereign debts in Europe.  We can see what has been happening with commodities such as gold and oil telling us inflation is looming. 

I would expect that mortgage interest rates to remain low for the next year.  Probably not as good as they are today but a full 1% increase to 5.125% is still low.  If you have an adjustable rate loan you should have seen some payment relief but for how much longer?  With the looming inflation, you may want to take advantage of low rates for the long term. 

If you find yourself wondering what is going on with mortgage rates. I have a new meter tool on the front page of my website that will give real time market direction.  Just go to Residential Mortgage and add to your bookmark or favorite list.

As always, feel free to call me and help with guidance on the management of your debt obligations and specific scenarios.  Never pay more than you have to in these tough economic times.  Finally, I wish you a New Year with health, love and prosperity.

David Brown
Mortgage Planner
Residential Mortgage
805.686.2321 Phone
805.686.0252 F

We do the work and you get the Credit
DRE Lic. 00674517
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New Mortgage Rules

Mortgage Loan Alert:

If you are considering purchasing a home, here is some news you need to know. If you know someone who is thinking of purchasing, please forward this to them as well.

Banks are continuing to tighten up on their mortgage lending standards. On June 1st, Fannie Mae put the Loan Quality Initiative into effect. This requires lenders to pull 2 credit reports as well as additional information and verification checks on borrowers.

So you could be initially approved for a loan, and later it could be put on hold or even cancelled completely if you say, run up credit card debt, apply for or take out other new loans, or take other actions that the may change your risk profile. All this before the mortgage actually closes. You could be ready to move-in and get a phone call that changes everything.

This initiative is mandatory. It could affect almost every primary and secondary mortgage lenders products.

Actions To Take:
1. Check and clean up your credit history. Start this process months before you apply for a mortgage.
2. Be realistic and figure out how much house you can afford. The days or ‘crowbaring’ buyers into homes they cannot afford are over. A rule of thumb is to borrow roughly 2 to 2 1/2 times your annual salary or income.
3. Check you borrowing so you come under the 28/36 ratio rule. Your monthly house payment should not exceed 28% of your gross monthly income, and your overall debt ratio should fall below 36% of your gross monthly income.
4. Avoid private mortgage insurance (PMI) by aiming to put down 20 percent down.
5. To to get ‘pre-approved’ for a mortgage before you begin your home search. This will keep reality in sight and give you confidence when making an offer.

As I always suggest for my clients in this type of market, be bold and get a killer deal. Its a buyers market, but I caution, we may not have seen the bottom of the real estate market in many areas. And be prepared.

New Mortgage Fee Proposal: Keep an eye on this one. I hear that there is a proposal that the U.S. Treasury Department is proposing a new mortgage fee to fund the backing of loans purchased through Fannie Mae and Freddie Mac. The proposal may be up to 1.5 percent of the borrowers mortgage, and large increase from the .25 percent they currently charge. A 1 percent rise in fees on a $300,000 amounts to $3,000 in additional closing costs, definitely not small potatoes. Stay tuned.

Take care, Bob

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