Breaking Down the HUD for Tax Purposes

First off, I am not a tax advisor. Please consult a tax advisor for any questions regarding taxes. I have a strong belief that even though someone else may do your taxes, you should understand your taxes, enough to do your own personal finances. This post is only to help one understand some of the fees they are paying and get an idea of how these fees can be either minimized or taken advantage of for future savings. Wouldn't it be nice to know that you paid some fees, but you might be able to recover those fees if you ever start a home business (which all Americans should have).

This may be too dry and detailed, but some people love digging into the details, so here it is.

When I bought a home, I received a HUD-1 statement as required by law. Which of the items on this statement are deductible and how do I deduct them?

1. Taxes and Interest

Publication 530 “What You Can and Cannot Deduct” states “If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. These are discussed in more detail later.”

“Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums and the amount applied to reduce the principal of the mortgage.”

“You cannot deduct any of the following items: Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance, wages you pay for domestic help, depreciation, the cost of utilities, such as gas, electricity, or water, most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information, forfeited deposits, down payments, or earnest money.”

“For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.”

“You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.”

Property taxes, loan interest and mortgage insurance should be listed in sections 900 and 1000 of the HUD-1 statement possibly listed as City Taxes, Town Taxes, County Taxes or some variation thereof. Property taxes, loan interest paid and mortgage insurance throughout the year are deducted on Schedule A so you must itemize to receive the deduction. If you do not deduct these during the year you pay them, you cannot deduct them in future years.

Stamp taxes should be listed in section 1200 of the HUD-1 statement possibly listed as Transfer Taxes, Stamp Taxes, City Tax/Stamps, County Tax/Stamps, State Tax/Stamps or some variation thereof. Stamp taxes are added to the cost basis of the property which affects the depreciation deduction and/or any gains/losses made on the sale of the home.

2. Points

Publication 530 “Points” states “The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points.

“You cannot deduct the full amount of points in the year paid. They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage.”

“If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions.”

Publication 936 “Points” states “If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.”

Points should be listed in section 800 of the HUD-1 statement possibly listed as Loan Origination Fee, Loan Discount Fee, Origination Charge, Credit or Charge Points or some variation thereof. Points are deducted on Schedule A so you must itemize to receive the deduction.

The tests I am about to discuss can all be found in Publication 636. If the loan was used to buy your main home, you are probably able to deduct all points the year you received the loan, but must satisfy 9 tests. If the loan was a home improvement loan, you are probably able to deduct all points the year you received the loan, but must satisfy 6 tests. If the loan was a refinance loan, you are probably may be able to deduct a portion of the points the year you receive the loan and deduct the remaining points over the life of the loan, but must satisfy 6 tests. In any of these cases, if you satisfy the appropriate tests, as most people do, you have the option to deduct the points over the life of the loan. For example, you would deduct 1/15 of the loan each year for a 15 year loan. If you missed any years, when you retire the loan, you will be able to deduct all points which were not deducted in previous years.

3. Basis

Publication 530 “Adjusted Basis” states “The following are some of the settlement fees and closing costs that you can include in the original basis of your home: abstract fees (abstract of title fees), charges for installing utility services, legal fees (including fees for the title search and preparation of the sales contract and deed), recording fees, surveys, transfer or stamp taxes, owner's title insurance, any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. “Here are some settlement and closing costs that you cannot deduct or add to your basis: fire insurance premiums, charges for using utilities or other services related to occupancy of the home before closing, rent for occupying the home before closing, charges connected with getting or refinancing a mortgage loan, such as loan assumption fees, cost of a credit report, and fee for an appraisal required by a lender.”

Loan Costs should be listed in section 800 of the HUD-1 statement possibly listed as Appraisal Fee, Credit Report, Tax Service Contract, Assumption Fee, Mortgage Insurance Application Premium, Lender’s Inspection Fee, Flood Certification Fee, Underwriting Fee, Application Fee or some variation thereof. Loan costs are not deductible.

Insurance should be listed in sections 900 and 1000 of the HUD-1 statement possibly listed as Fire Insurance, Homeowner’s Insurance, Flood Insurance, Hazard Insurance Origination Fee, Loan Discount Fee, Origination Charge, Credit or Charge Points or some variation thereof. Insurance is not deductible (unless it is Mortgage Insurance, see above).

Title Fees should be listed in section 1100 of the HUD-1 statement possibly listed as Title Services, Title Insurance, Title Settlement Fee, Lien Endorsement, Lien Coverage, Messenger, Overnight Delivery, Title Policy, Survey, Commitment Fee, or some variation thereof. Title fees are added to the cost basis of the property which affects the depreciation deduction and/or any gains/losses made on the sale of the home.

Recording Fees should be listed in section 1200 of the HUD-1 statement possibly listed as Recording Charges, Recording fees, Rec sole & separate, Transfer Taxes, Stamp Taxes, City Tax/Stamps, County Tax/Stamps, State Tax/Stamps or some variation thereof. Recording fees are added to the cost basis of the property which affects the depreciation deduction and/or any gains/losses made on the sale of the home.

This post was reposted from http://sizuservices.blogspot.com/2012/07/breaking-down-hud-for-tax-purposes.html, originally written on July 21st, 2012.

How Have the Baby Boomers Been Affected by the Real Estate Crash?

According to www.crainscleveland.com, "The big problem: Their retirement savings and home values fell sharply at the worst possible time, just before they needed to cash out. They also are supporting both aged parents and unemployed young-adult children."

Do you see the same problem?  How has your family been affected by the recent real estate bust?  Did they prepare?

From Proverbs 21:20, we see "In the house of the wise are stores of choice food and oil, but a foolish man devours all he has."  Read more at www.daveramsey.com.  Dave Ramsey has quite the collection of biblical verses which apply to money and wealth.

What is amazing about our baby boomers is far and wide, they take responsibility for their choices and their situations.  In general, the baby boomers with which I have spoken, state that they are in the situation they are in because of the choices they have made.  They advise the young to plan a little better and save a little more.  Real estate alone cannot be the solution.

I just wanted to stop to say that I appreciate all the readers out there.  Thank you so much for continuing to bring about awareness.  It all starts with you.  You can grab a fish to eat for a day or learn how to fish.  I thank you for learning how to fish!

This post was reposted from http://finlit.biz/retirement-2/671/, originally written on February 8th, 2013.

6 Real Estate Property Categories You Need to Know About

In an earlier post, we discussed Izu's 100-200 Property Valuation rule.  This rule can help to determine whether an investment property will cash flow from day one.

Remember, if the numbers work from day one, do the deal.  This will give you the staying power to hold the property until the value goes up.  Then people will think you are a savy investor.

It turns out, some real estate investors think that because they love a house, that it is a great investment property.  However, the correct way to think about an investment property is to ask yourself, "What value am I providing?"

If you purchase a beautiful 3 bedroom, 2 bath home in a nice neighborhood within a great school district, is this a good rental property?  Well, let me ask you this.  If someone has a good enough income to rent in such a nice neighborhood, why wouldn't they just purchase the property themselves?  What value would you be providing to the family renting.

It turns out that million dollar home which is extremely gorgeous is a terrible rental property.  The nice neighborhood, single family home is a little better but probably won't cash flow, unless you use some tricks to increase the amount of rent you can pump from it.  The okay neighborhood, single family home is even better and might cash flow from day one depending on where you purchase.  That is because you are providing a very valuable service to society.  Affordable housing.

Now, continuing, you have your duplex, four plex and finally apartment complexes.  So from most profitable to least profitable, we have:

• Apartment Building
• Four Plex
• Duplex
• Small Single Family Home
• Large Single Family Home
• Million Dollar Home

Despite knowing million dollar homes are selling like crazy as mentioned at www.bloomberg.com, don't be tempted to try to time the market.

Did this advice help you?  Did this help you to think about real estate investments differently?

This post was reposted from http://finlit.biz/retirement-2/6-real-estate-property-categories-you-need-to-know-about/, originally written on February 3rd, 2013.

7 Things You Need to Track as a Real Estate Investor

Do you have a real estate investment property?  How do you know whether your investment was a good investment?  For example, lets say you purchased for $100,000 about 20 years ago and today, the property is worth $300,000.  Was this a good investment?

In order to find out if our investment is a good investment, we need to turn all the numbers into a rate of return.  This can be quite complicated since typically we have many things going on at the same time.  Add onto the above picture the fact that those numbers don't include Property Taxes, Insurance, initial remodeling expenses or the commissions to sell the house and now we have a completely different story.

Tracking is half the battle.  Learn more about tracking at www.trexglobal.com.  If you have a real estate investment, you should have a list somewhere that tracks each and every expense from the time the home was purchased along with the date of each expense.  Here are the items to track for the purchase of the home:

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1. Fees associated with purchasing a home
2. Insurance payments
3. Property taxes
4. Repairs
5. Improvement costs
6. Mortgage interest
7. Fees associated with selling a home

Now, it is important to note that a fee of $20 15 years ago is not the same as a fee of $20 2 years ago.  A good calculation in terms of return on investment will take into account when the expense occurred.  We will take a deeper look at this in a future post.

Come back to soon to find a break down of items to track for the purchase and sale of the home.  Here is the link to the future post.

This post was reposted from http://finlit.biz/retirement-2/7-things-you-need-to-track-as-a-real-estate-investor/, originally written on January 30th, 2013.

7 Places You Should Rent Instead of Buy

This article from finance.yahoo.com, talks about 7 places where you should rent instead of buy.  The analysis is done based on looking at rent amounts and purchase prices.  When it comes to making a good decision financially, the numbers are the numbers are the numbers.

Each of the cities dicussed displays the break even horizon, price to rent ration, median home price and median rent price.

These four factors are all you need to determine whether you should rent or buy!  Doesn't it make sense that as far as a financial decision, all you need to evaluate is the current rent price and the current cost of the house?  What happens when an investor tries to purchase an investment property in an area where people should rent rather than buy?  Does it matter whether people think the value of the property will go up?

The areas listed in the article have these seven cities:

• San Diego, California
• Seattle, Washington
• Boston, Massachusetts
• Los Angeles, California
• New York, New York
• San Francisco, California
• San Jose, California

Looks like you shouldn't be investing in properties in California, doesn't it?  Read on at sizusfinlit.blogspot.com.

This post was reposted from http://finlit.biz/debt/7-places-you-should-rent-instead-of-buy/, originally written on January 29th, 2013.

Applying Izu's 100-200 Property Valuation Rule

Today, I wanted to look at three examples where the property valuation rule could have been used to save a headache. If you are going to overpay for your home or investment property you may want to think about using the property valuation rule as one more guideline in your arsenal. The reason is that if rents are a certain rate, than the value of the home in that area can only go down so far, before a renter says, "Wow, prices are really low compared to my rent." In general, if the mortgage, property taxes and insurance combined cost less than rent, you will have no problem finding a buyer.

The first example is a home that was purchased for $730,000 with $500,000 down. The house would have rented for about $2,700 per month. My estimates would put the value somewhere between $270,000-$540,000. Sure enough, when the housing bubble burst, the value was then estimated to be $400,000. This person was able to keep the home because there was such a large down payment. Staying power will allow the person to own the home long enough to recoup some losses.

The next example is of a home that was purchased for over $600,000. The rental price was around $1,700 per month. According to the rule, the value would be between $170,000-$340,000. Sure enough after the burst, the family sold the home for $320,000. Overpaying in the first place along with leaving little room for error can be devastating.

The final example is a case where the rental prices actually decreased. The rental value was around $1,000 and the purchase price was $160,000 (my estimate would be $100,000-$200,000). This was an investment property. The rental prices than proceeded to drop to around $500 and the value of the home dropped down to $40,000 (my estimate would be $50,000-$100,000). The rental property was then lost. As an investment property, the target purchase price should have been closer to $100,000. Remember, if the numbers don't make sense, don't do the deal. This would have allowed some room for error and still been manageable when rent prices fell. The investor simply would have had to tighten up the budget, as if the home was one being used for personal use. In general, this is doable after having gained some experience renting the property.

Here are some articles to support valuating prices based on rent:

• http://finance.yahoo.com/news/don-t-buy--these-7-cities-are-renters--markets.html
• http://www.businessinsider.com/best-cities-buying-a-home-2012-8?utm_source=0817&utm_medium=yahoo&utm_term=&utm_content=&utm_campaign=partner#detroit-michigan-3

Dedicated to Wil Andrade

This post was reposted from http://sizuservices.blogspot.com/2012/11/applying-izus-100-200-property.html, originally written on November 11th, 2012.

3 Tips for the Real Estate Investor

Are you thinking about investing in real estate? Have you read books about how to get started? Are you overwhelmed with the number of pieces to the real estate puzzle? Read on for some quick tips on real estate investing.

I once heard that real estate makes five times more millionaires than any other industry.  According to econedge.org, it does make more self made millionaires that any other industry.  Before you jump in head first, here are a few tips:

• You will have to find a way to beat the 11% spread.
• If the property doesn't cash flow from day 1, don't do the deal.
• Appreciation and depreciation are icing on the cake, don't depend on them.

When you buy a home, you typically pay about 2.5%-3.5% upfront for closing costs and Realtor commissions.  When you sell a home, you typically pay about 7.5%-8.5% on the back end for Realtor costs.  In order to profit, you must make more money than this spread.  This is why profiting off a fix and flip is so difficult.

Many investors mistakenly believe that they know the property will appreciate in value.  This is a definite gamble.  If you really want the property to appreciate, you will make an investment that cash flows from day 1 so that you have the financial stability to one day watch the property appreciate.

Robert Kiyosaki is probably most famous for advocating real estate ventures and you can read about some of his outlandish adventures at econedge.org.

This post was reposted from http://finlit.biz/retirement-2/3-tips-for-the-real-estate-investor/, originally written on January 21st, 2013.

3 Easy Guidelines to Purchasing Your First Home

Are you thinking of purchasing your first home? Do you need a few guidelines to help you out? If so, keep reading...

With 17% of homes running into foreclosure issues over the past five years, you may want to consider following a few guidelines that will help keep you afloat (see this earlier post). I think we can all agree that this need for instant gratification is killing us as a society. So here are some general guidelines:

• Put 20% down on your home.
• Don't get into debt over 3 times your annual salary.
• Don't pay over 200 times the monthly rent for you home.

You can find additional advice from moneyfor20s.about.com. The reason you want to put 20% down is so that you don't have to pay for mortgage insurance. In addition, you will know that you have the discipline to put the money away and that you can truly afford the home. When you avoid getting too deep into debt, you can actually get out of debt within 15 years so that you will have time to save for retirement. Finally, using the 200 factor in Izu's 100-200 Property Valuation Rule, will allow you to build equity even after a market crash. This means that for every $1000/month the property would rent for, you can afford to pay a maximum of $200,000.  In a future post, I will cover this rule in more detail.

This post was reposted from http://finlit.biz/debt/3-easy-guidelines-to-purchasing-your-first-home/, originally written on January 21st, 2013.