Monday, August 26, 2013
According to Industry reporting, home prices are going up, up, up, but it’s not a bubble just yet. The surge in home prices over the past year may have some home buyers wondering if the market has gotten ahead of itself. Rising interest rates aside, housing prices in most parts of the country appear to have plenty of room to move higher if the wider economic recovery remains intact. The latest data on price gains show home prices advanced 7.7 percent in the year through June, a rise that has fed on itself as fence-sitting home buyers move to buy before prices rise further. West coast housing markets have seen the biggest gains. The Federal Housing Finance Agency report showed prices in June were 17 percent higher than a year earlier in the Pacific area, which includes California and Washington. House prices jumped 11 percent in the Mountain region, which included Nevada and Arizona. The Middle Atlantic region -- New York, New Jersey and Pennsylvania -- had the smallest increase, at 2.5 percent. The government data echoes other reports of healthy gains in home sales and prices. The National Association of Realtors said Wednesday that the median price of a previously owned home jumped 13.7 percent for the year ended in July to $213,500. A recent rise in mortgage rates is also spurring buyers to lock in rates before they climb further. "When start you see interest rates rise, people are going to want to jump in," said Beth Ann Bovino, deputy chief economist at Standard & Poor's. "All those people on the fence come back into the market. But that's a good thing." Higher borrowing costs could eventually price some buyers out of the market and slow the pace of home sales. Sales of new single-family homes dropped sharply in July to their lowest level in nine months, the Commerce Department reported Friday. Sales dropped 13.4 percent to an annual rate of 394,000 units, and the government also revised sharply lower its estimate for home sales in June. Sales of previously owned homes, a much larger share of the overall market, picked up by 6.5 percent last month to the fastest pace since November 2009, according to the Realtors report. The inventory of homes for sale remains tight – just 5.1 months' worth at the current sales pace – which has help sellers and homebuilders boost their asking prices. After a long drought in new home construction, that tight supply is expected to continue to support prices. "We have a number of locations where the next home sold may take as much as one year to deliver, because our backlogs are so big at individual communities," said Douglas Yearly, CEO of luxury home builder Toll Brothers. "That's when we raise price." There are early signs that the rise in prices and borrowing costs may be cooling demand. Mortgage applications for both home purchases and refinancings dropped for a second straight week as rates rose, according to the Mortgage Bankers Association. Demand fell 4.6 percent in the week ended Aug. 16, as the rate on a 30-year fixed mortgage rate rose to 4.68 percent, matching this year's high mark. Rates have been rising since May, when the Federal Reserve first signaled it may begin tapering off its $85 billion in monthly bond purchases. That easy-money policy has been a critical stimulus in reviving the housing market from its historic 2007 collapse. The continued pickup in the pace of home sales and prices will depend heavily on whether the job market continues its slow recovery and incomes continue to rise. That disposable income represents the buying power required to fuel the housing market’s continued recovery. And despite the recent jump in prices, homes in most local markets remain affordable by historical standards. One of the most widely used measures – the Realtors affordability index – stood at 178 in June – down from a peak of 200 during the depths of the housing bust – but well higher than average levels. (The index, which factors in prices, incomes, borrowing costs and other variables, shows that a family with the median national income has 178 percent of the income needed to qualify for a mortgage that covers 80 percent of a median-priced house.) Other measures indicate that, despite rapid gains, homes are reasonably valued, according to a research note from Capital Economics. After the sharp declines following the housing bust, home prices have yet to reach levels in line with the long-term trend since 1975, according to the report. Prices are some 15 percent below that trend as measured by the Case-Shiller price index and 11 percent lower based on the FHFA's data. And the cost of buying a house is still cheap in relation to the cost of renting, suggesting prices haven't yet reached a point where they will cool demand, according housing Capital Economics housing economist Paul Diggle , who prepared the report. "The most reliable measure still suggests that housing is undervalued," he said. Even if rising prices and rates don't scare away potential home buyers, the continued housing recovery will depend on the availability of credit, which tightened considerably following the wave of rogue lending that fueled the mid-2000s housing bubble. Lenders are much choosier than they were six years ago, but there are signs they've begun to ease up a bit on credit standards as they compete for new borrowers. And after paring down a large pile of debt accumulated during the credit boom, those potential buyers are better able to take on a new mortgage payment. That will help the housing market better weather the ongoing rise in interest rates, according to Bovino. "We've had four years of cleaning up our balance sheets, getting our fiscal homes in order," she said. "I think we do have the capabilities to cushion that blow (from higher rates)."
Saturday, January 12, 2013
Following numerous requests from our clients, we thought we would put some effort on summarizing the tax related measures which resulted from the eleventh hour Fiscal Cliff agreement. These new laws are detailed in Senate Amendment to H.R. 8 and are collectively called The American Taxpayer Relief Act of 2012. For those unfamiliar with the Fiscal Cliff, hopefully this may provide valuable background information. We now await the political brinkmanship associated with the negotiations to raise the U.S. Debt Ceiling. Two New Taxes for 2013 Two new taxes go into effect starting January 1, 2013: 1. A 3.8% Net Investment Income Tax (NIIT) applies to individuals, estates and trusts that have unearned investment income above certain threshold amounts. Net Investment Income for the purpose of calculating this tax includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and pass-through income from a passive business. The NIIT does not apply to municipal bond income. For an individual, the NIIT is equal to 3.8% of the lesser of two amounts: i. An individual’s net investment income or ii. The excess of the individual’s modified adjusted gross income (MAGI) over the threshold amount ($200,000 for individual taxpayers and $250,000 for married couples filing jointly). 2. A 0.9% additional Medicare Tax applies to individual’s wages and self-employment income that exceeds the threshold amount based on the individual’s filing status. Ordinary Income Tax There will be no change in Federal income tax rates for taxpayers earning less than $400,000 ($450,000 for joint filers). Individuals earning above this threshold, will now pay 39.6% on marginal income above $400,000 ($450,000 for joint filers). Capital Gains and Qualified Dividends Tax Effective January 1, 2013, the top tax rate on long term capital gains and qualified dividends reverts back to 20% on gains for taxpayers above the $400,000 ($450,000 joint) income threshold. For taxpayers below these thresholds, the 15% rate remains. This tax rate increase, along with the Medicare tax, will result in a top effective tax rate of 23.8% for long term capital gains and dividends. Similarly, short term capital gains will be taxed at ordinary rates plus the 3.8% NIIT, for an effective top rate of 43.4%. Estate, Gift and Generation Skipping Transfer Tax The credit amount remains at $5 million per individual donor and continues to be inflation-indexed from 2010 (rounded in $10,000 increments). The inflation adjusted credit was $5.12 million in 2012 and is expected to be $5.25 million in 2013. An important component of the new legislation is the reunification of the gift and estate tax credit amount. In other words, the $5.25 million credit is available for use with lifetime gifts or estate transfers at death. The top transfer tax rate on gifts exceeding the credit amount has increased from 35% to 40%. Phase Limitation on Itemized Deductions Before 2010 itemized deductions for taxpayers above a certain income level were partially phased out, thus increasing income taxes as a consequence of reduced deductions. In 2013, if a taxpayer’s Adjusted Gross Income (“AGI”) is above a threshold amount ($250,000 for individual taxpayers, $275,000 for head of households and $300,000 for joint filers), itemized deductions will be reduced by an amount equal to the lesser of 3% of the excess over the threshold or 80% of allowable deductions. Taxpayers apply 80% to the total of their itemized deductions other than the deductions for medical expenses, investment interest, casualty losses and thefts, and gambling losses. As a result of the phase-out of deduction for high income taxpayers, marginal effective tax rates are higher than marginal statutory rates for such taxpayers. Roughly speaking, the 3% reduction of a deduction against income taxed at 43.4% raises the tax rate on marginal income by 1.3 percentage points. Alternative Minimum Tax (AMT) The new bill increases the AMT exemption amounts from $33,750 to $50,500 for individual filers and from $45,000 to $78,750 for joint filers, indexed for inflation from 2013. IRAs The Pension Protection Act of 2006 allowed a taxpayer to exclude from income, distributions of up to $100,000 to a qualified tax-exempt organization (i.e., a public charity but not a supporting organization or a donor advised fund) from a traditional IRA. This provision has been extended for 2012 through December 31, 2013. The distribution must be made directly to the public charity and the IRA owner must have attained age 70½. The distribution will be counted for purposes of the required minimum distributions from an IRA but will be ignored for purposes of computing the limitations on charitable deductions in the year of the gift. Notably, the $100,000 exclusion is per taxpayer so married taxpayers (with their own IRAs) may each take advantage of the provision. Moreover, this provision contains a transition rule, which allows a distribution made in January 2013 to qualify as a 2012 distribution and allows an IRA distribution made December 2012 to qualify if subsequently paid to a qualifying charity in January 2013 (and meeting all other requirements). Roth Conversions In 2012, only the distributable amount (i.e. IRA balances or 401(k) s where the owner has either separated from employment or is over 59½) in pre-tax retirement plans could be converted to Roth accounts. The new bill allows any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable. The conversion from a pre-tax retirement plan to a Roth plan results in the recognition of taxable income on all the gains and income in the plan. Retroactive Extension of 100% Exclusion of Small Business Capital Gains Generally, non-corporate taxpayers may exclude 50% of the gain from the sale of small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 but by September 27, 2010, the exclusion was increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the excluded amount was increased to 100%. The 2010 Tax Relief Act further extended the 100% exclusion through December 31, 2011. The new legislation retroactively extends the exclusion of 100% of the gain from Qualified Small Business Stock to stock acquired after September 27, 2010 and before January 1, 2014. Qualifying Small Business Stock is from a C-corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. Other The personal exemption phase-out has been reinstated, which means that high income taxpayers will have to reduce the total of their personal exemptions by 2% for every $2,500 by which their annual gross income exceeds the threshold amount for their filing status ($250,000 for individual filers, $275,000 for head of households and $300,000 for joint filers), indexed for inflation from 2013.