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By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years  Back To The Top

REVERSE MORTGAGE

If your primary concern is to stay in your home, and the problem is lack of money, then you should at least look at reverse mortgages. They have advantages and disadvantages, and you need to know about both. What you see in the newspapers and on TV, often by passé movie stars, tells you all about the advantages only. What you hear is: “Wouldn’t you like to stay in your home and have the bank pay you to do this?” By itself, this is a true statement, but lets look at the whole picture!

The usual type of mortgage, such as a home equity loan, is sometimes called a “forward mortgage.” You have to have enough income to qualify to get it, the bank gives you the money now, but then you have to make payments back to them each month, with interest.

A reverse mortgage is just the opposite! There is no “income” qualification to get the mortgage, and you don’t have to make monthly payments to the lender. They pay you, either each month, or give you a line of credit, or a lump sum, or a combination of these. This money you receive is secured by a note and deed of trust on your home. The balance on the loan goes up each time you receive some money. You don’t have to pay off the loan until you sell, move or die! And even if the loan balance at that time happens to be higher in amount than the home is worth, you have no personal liability for that difference.

Requirements: Age 62 or over, own and occupy your home as your primary residence, and your home should be free and clear of any loans, or with a small balance that the reverse mortgage lender will pay off and start your reverse mortgage balance at that level.

There is no income tax due, as what you receive are just loan proceeds. You can’t deduct any interest, because you are not currently paying interest, it is just accruing in the loan balance, and presumably would then all be deductible when you pay off the loan.

How much can I get? This is based on the amount of equity in your home and your age. The more the equity and the older you are, the more the monthly payment you will receive.

You still own your home, you get all its appreciation, and you still have to maintain it, pay the property taxes, home insurance, etc. If at the time you sell, move or die, if the sales price is more than the reverse mortgage balance, this equity is all yours, or your heirs.

As I said, reverse mortgages are an option, not a panacea. To have the bank pay you money each month and be able to stay in your home sounds great, and is, but there are some disadvantages also.

First, you are paying compound interest, because each month that you receive a payment, there is interest due on the balance, and that balance includes both the payments you received plus accruing interest.

Second, there are large “upfront” fees that could amount to $12,000 to $15,000. You can pay these in cash, or the lender will let you start your reverse mortgage loan balance with the amount of these fees.

Remember, you can talk to your bank or a loan officer specializing in Reverse Mortgages about a Reverse Mortgage, but before they can commit you to a loan, you have to talk to a fully independent reverse mortgage counselor, to be sure you understand what you are getting into. These counselors are usually persons trained by AARP and have absolutely nothing to do with any lender who would make the actual reverse mortgage loan.

You should figure that you are going to stay in your home for at least five years, in order to amortize the upfront costs.

In the next article, we will look at one other possible option to allow you to stay in your home, but not produce you much income. We will also look at the next option: “Renting out your home for income, or to come back to it.”

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years Back To The Top

HOUSING ALTERNATIVES

One other option, to be able to stay in your home, is for Mom and Dad to sell their home, for fair market value, to Junior and his wife, and lease it back on a long term lease. An appraisal is made to determine market value, that is, an outside qualified opinion of market value, and the lease can usually be for as long as agreed upon.

This is called an “installment sale,” i.e., Junior and his wife can buy the home for nothing down, or whatever is agreed upon, and a note is created with an interest rate, which cannot be less than a minimum set by the Federal Government, and the note is secured by the property. The monthly payments to the parents provide them with income, and they can take advantage of their $500,000 capital gains exemption. As the parents receive each payment, part is taxed as interest, part is tax free, and part may be taxed as capital gain (if the gain exceeds the exemption amount).

For the children, to them, the home is just an investment property, they can take the usual investment property deductions, and they have “good” tenants!

The loan payments may offset the rent payment, but it is important to do two separate checks.

Under Proposition 58, since the property went from parents to their children, the home will not be reassessed for property taxes. There may be a $1 million limit on this.

If this is something you want to do, check with the County Assessor’s office on the current status and wording of Prop. 58, and with your accountant, to be sure you do it correctly. IRS is more likely to check this type of sale to see if the sales price and rental amount are at fair market, as the property is going “within” the family.

Another option to look at is to move out of your home and rent it out. You may do this to get income from it, or you want to do it because you may want to move back into it in the future, especially if your plans change. This latter might be a good idea if you are going to move to a new location, or even a place you grew up in, or where your children are now living, because if you sold your home now, and then later decided you wanted to come back here, it’s probable that the values of homes here would have risen, and you couldn’t afford to buy here again.

If you rent your home out for an extended period of time, your accountant may change its character by making it an “investment” property, so that you can take all the investment property deductions. Even if you do this, you can still move back into your home and establish it as your primary residence for tax purposes. However, this will lower the amount of your tax basis, so if you then decide to sell, check with your accountant first, to see how much capital gain you would have, and to be sure you meet all the requirements to get the $250,000 or $500,000 exemption.

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top

SELL AND MOVE OUT

If you haven’t sold a home in the last 5-10 years, the world of real estate has changed dramatically. Years ago, possibly when you purchased your home, the legal status was “buyer beware.” Today, it is “Seller Beware!” Each year, the process of selling gets more complicated, requires more disclosures, and adds more legal liability for both the Seller and the Realtor.

Lets look first at the “process” involved in selling your home.

First, you need to fix it up, especially the front of the house. When buyers first arrive at your house, they see the front of the house and the yard. If they get a negative emotional reaction at that point, they may not even go into your home. New paint on the inside, as well as the outside, can make a big difference.

After all, if you were looking to buy a home, wouldn't you prefer to see a clean, fresh, neat home? Ask an Accredited Staging Professional like Pam Silverman what changes you should make. This may only require getting rid of some excess furniture so the home feels larger, or they may recommend storing your furniture and staging the house. After all, you want buyers to come into your home, sit down, feel comfortable and have a positive emotional feeling, so they will say “lets buy this home!”

Second, use a REALTOR. All real estate agents are either brokers or salespersons. They must have a license from the State of California and follow its real estate laws. However, all licensees are NOT REALTORS! To be a REALTOR, the licensee must be a member of the local board of REALTORS (in Simi Valley, the Simi Valley/Moorpark Association of REALTORS), the California Association of REALTORS and the National Association of REALTORS.

What difference does this make? A REALTOR must follow a Code of Ethics and can be brought before the local board of Realtors Ethics Committee for discipline. For a non-REALTOR, i.e., just a licensee, your only choice is to go to the State Division of Real Estate, which could take months and result in no discipline. Pam Silverman is a Realtor, A member of NAR, CAR Simi Valley/Moorpark Association of Realtors plus the Simi Valley/Moorpark Multiple Listing Service utilizing the Ventura Regional Data Service and the Southland Regional Association of Realtors Multiple Listing Service utilizing Tempo.

Third, use a “good” REALTOR, one who: explains the current market to you and provides you with a Comparable Market Analysis that shows you what comparable homes have sold for, as their basis for pricing your home.
One who takes the time to explain all the many forms we will go over later. The understanding and filling out of these forms could take two hours! Pam Silverman has been an award winning full-time Realtor serving the Simi Valley area Since 1979.

Work only with a REALTOR with whom you are compatible and that you trust. After all, you are placing in their hands, probably the largest asset you have, and you want to know that they are going to do it right, and for your best interest!

Work with a REALTOR who “counsels “ with you regarding all the aspects of selling. The “counseling” approach is different than “consulting.” In the latter, you go to a professional, such as a doctor, accountant or engineer, present your problem, and they give you the solution. In “counseling,” the REALTOR sits down with you and determines how he/she can assist you to best meet YOUR needs and wants. Pam Silverman has been awarded the Seniors Real Estate Specialist designation.

They won’t “tell you what to do,” but will ask you questions, give you information you don’t have, talk about what benefits you are looking for in your new type of housing. They will assist you in making the best decision for YOU. This may include whether to stay in your home, or to move, and where to move to.

Your REALTOR should do a good job of marketing your home to other REALTORS and to the public, and work to represent your best interest. This means, that your REALTOR may not sell your home, because if they are both the listing agent and the selling agent (for the buyer), a conflict of interest may occur.

Remember, although the listing you sign will be with the company for whom your agent works, but the person you are counting on is your agent. That person will do the job for you” After all, as a Senior, you want to know how much your agent cares about you, before you care about how much they know!

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top

DISCLOSURES

If you purchased your home in the 1970s, or before, the legal world for sellers was different. It was known as “buyer beware.” The Seller didn’t have to tell the buyer anything about the house. Today, the legal world is just the opposite: its “seller beware,” and most law suits relating to real estate today, are for “lack of disclosure!” So the way to look at filling out all the disclosure forms is: “if in doubt, disclose.”

If you were to end up in court, whether something that was not disclosed was “material,” would be decided by the judge, and it is amazing how many “things” become “material” to a buyer when they decide to sue, and today, that poor buyer, who paid two million dollars for your house, becomes the most likely one to win in court, against these rich home sellers!

Remember, any and all disclosures, made by you, the REALTORS, and by professional inspectors, do not change the house in any way. It’s still the same house you want to sell. It may affect the sales price, but often the work that the inspectors find, that already exists in the house, and that may have occurred while you owned it, just means it is work that you probably should have done in the past.

Today, a buyer will most probably want the following inspections made:
Wood Destroying Organisms (sometimes called “termite inspections, but they contain more than just information regarding termites), Contractor Inspection (preferably by a licensed contractor), and possibly additional inspections, either because the first two inspectors suggest it, or because of additional items, such as a Structural Engineer, Roof Inspection, Pool Inspection, Chimney Inspection, and a Septic Tank & System Inspection.

Do you want the buyer to have all these inspections? Yes, Yes, Yes! Why, because anything they find and put into their written report, protects you, as the buyer now knows of all these items, and can’t say that you forgot to put it into your disclosure.

Be sure your Realtor gets a signed and dated “Receipt for Documents” with all these reports listed, signed by the buyer, to prove that they received them.

Do you have to pay for any work in these reports? Probably not, but they may enter into some negotiation on the final sales price. Usually you will work out a dollar solution, rather than have the work done by you, unless its minor, as you may have a good person do the work, but the City or County building inspector, or the contractor inspector that comes back to check the work, may not like how it was done. Or the buyer’s contractor may not like the work either. Its sometimes possible that you could spend $50-100,000 dollars to do repairs, and then have the buyer come in and tear down part of all of the house!

One other option, you might want to consider and your Realtor may suggest, and that is to have you order these reports before you put your house on the market, and pay for the reports yourself. The reports could easily cost $500 or more. So why do this? If yours is an older house, and your Realtor feels that the reports are probably going to show some work to be done, if you give the buyer the reports before they make their offer, then the price they offer, and any counter offering to a final price, should then include all that is in the reports. The buyer still has the right to get additional reports if they want, but if you use qualified inspectors, the buyer is likely to accept your reports. If you don’t do reports beforehand, and give them to the buyer beforehand, then the buyer gets the inspectors they want, and then after having made an offer, want to do lots of price negotiation, based on the “guesstimates” of their inspectors, who may overly favor their buyer in their guesstimates of costs.

In the next part, we will look at some of the many disclosure forms that your Realtor will ask you to sign. Some will be “required” by the State of California, others will be optional, but in my opinion, should be filled out. Remember, “disclose, disclose, and if in doubt, disclose!”

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top

DISCLOSURES, DISCLOSURES, DISCLOSURES!

Your Realtor will ask you to fill out many forms, some required by the State of California, some by the Federal Government, and some “supplemental” forms to help you think of items that are not on the other forms. I as said before, if in doubt, “disclose!” Most law suits today are for lack of disclosure by a Seller. Remember, disclosing does not change your home. If your disclosure indicates significant problems, it may reduce the net sales price of your home, but that’s better than a law suit where you may pay, just the lawyer, $50,000 for his/her fees, over and beyond any judgments.

The first form is the “Real Estate Transfer Disclosure Statement,” a mandatory form. It tells the buyer what is in the home, and any problems, faults and any repairs or modifications. As part of this form, both the listing agent and the selling agent must also do a written “inspection” of the property.

The second form is called “Supplement to The Real Estate Transfer Disclosure Statement.” Answer all these questions, including any reports that you have, to help you do a more thorough job of disclosure.

A third form is “Disclosure Regarding Real Estate Agency Relationship.” This is to tell you how you want to work with your agent. Be sure and read it thoroughly so that you understand if your Realtor is working for you only, or for others as well. Remember, that the “Broker” referred to here is the broker that your salesperson is working for, not the salesperson or the individual office.

A fourth form will be one, that may have a different name with different companies, but what is says is that you have “strapped your water heater” and have in place, “working smoke detectors,” all of which meet the State of California requirements.

A fifth form is “Disclosure of Information on Lead-Based Paint and Lead-Based Paint Hazards.” This must be filled out if your home was built prior to 1978, but since some paints left over from 1978 or before could have been used after 1978, best to fill it out anyway.

There is a booklet put out by the State of California which both Seller and Buyer must receive. It explains many of the different types of “residential environmental hazards” that a home may have, or could have in the future. It is called a “Combined Hazards Book.” At the back of the booklet is a form called “Residential Earthquake Hazards Report” which you must fill out if your home was built before 1960. Again, even if it was built later, I’d suggest filling it out. The booklet has all the information in it you need to fill out the form. If your home happens to have concrete block in its foundation or walls, the buyer must also receive another booklet which is for commercial properties.

There will be a form by the State of California where you state whether you are or are not a California Resident, and one by the Federal Government to indicate if you are a citizen. The purpose of these forms is so that the government agencies can collect some money on your “capital gain” in your property before you skip out of the State or out of the country.

There will probably be many more forms, especially from the larger real estate companies. Some of these may included Water District requirements, Standard Disclosure and Disclaimer information, a special advisory regarding Marin County disclosures, “tree” disclosures, and mold or water damage disclosures (including insurance claims).

Always better to “over” disclose, to prevent possible law suits that could cost you time, money and emotional distress.

Next time, let’s look at the tax effects of selling your home. But why? After all I can get a$250,000 or $500,000 capital gains tax exemption when I sell my home. But, if you have owned a home in Ventura for many years, you may be surprised to find out that you may still owe some capital gains tax!

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top

TAXES

First, let’s look at the tax laws that were repealed and no longer apply. You will probably remember these, but forget them now!

The first was called an “IRS Section 1034 Rollover.” If you sold your old home and purchased a new one at a higher price, within two years, you paid no capital gains tax at that time. The capital gain was not wiped out, it was just deferred until some future time when you sold your home and did not purchase a higher priced home.

The second, was one where, if you were over 55 years in age, you could get $125,000 of capital gain excluded when you sold your old home, if you had lived and owned that home as your principal residence for 3 out of the last 5 years. You could do this only once in a lifetime, and if you did not use it and you married a person who had used it, you could no longer use it! The “tainted spouse” syndrome is gone!

The new exclusion, I would call universal! There are no age restrictions, you do not have to re-purchase a home, but if you do, it makes no difference whether you go up or down in price, and you can use the new exclusion every 2 years, as long as you follow all the requirements of the new tax law.

So what are these requirements?
There are three tests: Ownership, Use and Waiting Period.

For the $250,000 exclusion of capital gains:
1. You must has owned the residence for periods aggregating at least 2 years of the 5 year period ending on the date of sale;
2. You must have used the property as your principal residence for periods aggregating at least 2 years of the 5 year period ending on the date of sale;
3. You must not have utilized this exclusion for any sale during the preceding 2 year period.

For the $500,000 exclusion of capital gains, only for married couples, filing jointly:
1. Either you or your spouse must satisfy the same ownership test, as above. You can still claim the exclusion even if only one of you owns the residence;
2. Both you and your spouse must satisfy the use test, so each of you must have used the property as your principal residence for 2 years of the 5 year period ending on the date of sale;
3. You cannot claim this exclusion if either you or your spouse sold a principal residence during the last 2 years that qualified for this exclusion.

Remember, the “2 years” is an aggregate amount of time, i.e., 2 X 365 days, and they do not have to be consecutive days.

See your CPA to be sure these rules still apply, if there have been any changes, and any interpretations that may be of benefit to you.

Features of the new laws:

1. Ones listed above;
2. As was true under the old law, you cannot deduct a “loss” on a sale of a principal residence. With today’s real estate market, if you need to sell at a loss, check with your CPA, as you might still have some tax to pay!;
3. If you used the $125,000 exclusion in the past, you can still use the full amount of the new exclusion on the sale of your present house;
4. If you sell your home, you can move into a property you presently own, and if you make it your principal residence, and you meet all the requirements, including the 2 year waiting period, you can again use the $250-500,000 capital gains exclusion;
5. You do not have to be living in the house at the time you sell it;
6. If you sell before the 2 year period, you may get to use some of the exclusion, depending upon the reasons for your move. See your CPA;
7. If 3 single persons own a house and meet all the requirements, each can take the $250,000 exclusion;
8. Through the efforts of the Calif. Assoc. of Realtors, the State of California also agreed to the $250,000 and $500,000 capital gains exclusions;
9. And if your spouse dies, if you sell during that tax year, you can take the $500,000 exclusion. But if you wait until the following years, you are then “single” per the tax laws, so you can only get a $250,000 deduction. BUT, if you have an appraisal of the value of the home as of the date of the spouse’s death, you can probably get a “stepped up” basis and have no capital gains tax when you sell!!!

I will go into this further in the next installment. Remember, on any of the above items, or on anything to do with taxation, see your Certified Public Accountant or an “estate” attorney who is fully aware of the tax laws, so that you have the latest and fully correct information.

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top

TAXES 2

I don’t want to try to make you an expert on income taxes, that you should do with your accountant, but there are some terms that you need to know to understand the basics of what capital gains tax you might have to pay.

First, let’s make a distinction between “equity” and “gain.” If the value of your home is $800,000 and the loan balance is $200,000, the difference is $600,000. Is this your equity or your capital gain?
The $600,000 figure is your “equity,” and that is what we usually think of regarding our homes. However, “gain” has nothing to do with the loan balance or the equity in your home. You and I usually call “gain,” “appreciation.” Gain (capital gain) is the difference between the sales price and the basis (tax basis) of your home. “Basis” is basically the purchase price of your home.

Lets define this a little further. How do you calculate “capital gain?”

“Sales Price” is defined as the “net” sales price, i.e., the sales price less the commission and any other selling costs, or credits to the buyer.
“Basis” is defined as the purchase price of the home plus any capital improvements plus any adjacent land acquisitions less any “accumulated deferred capital gain” on the sale of previously owned homes on which you deferred paying capital gains by doing a “1034” rollover (under the old laws).

If you have owned your home for many years, you may very well have capital gains in excess of the $250,000 or $500,000 exemption, and if so, when you sell your home, you will have to pay capital gains tax on that excess. Again, before you decide to sell your home, go see your accountant and find out exactly where you will be, tax-wise, so that you will know how much money you will have left from the sales proceeds after you pay any capital gains tax.

Now as I mentioned at the end of Part 7, if you are husband and wife, and probably today, even if you are domestic partners, if you hold title correctly, and one of you have died, you may be able to avoid any capital gains tax by having an appraisal of the home at the date of death of the spouse or partner so that you can get a “stepped up” basis. What does that mean? If you had sold your home while your spouse or partner was alive, and let’s say your sales price was $1,000,000 and your basis was $200,000, your capital gain would have been $800,000 less the $500,000 exemption, or $300,000. With the appraisal at the time of death, your “basis” gets stepped up to the market value of the home at that time. If the date of death wasn’t too long ago, its probable that any appreciation since then would be less that $250,000 and you would have no capital gains tax to pay. If you did not have an appraisal at that time, it is still possible to get what I call a “back appraisal” to that time.

Remember, I am not an accountant or an attorney. I just want to make you aware of some things that you may have not heard about or your Realtor may not know all about. So do see your accountant before you decide to sell.

So the next question is “where are you going to move to?” Location, size of housing, type of housing, lots of choices, and these all need to be decided BEFORE you you put your home on the market.

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top

WHERE TO MOVE TO

Where are you going to move to?. To me, this is probably the most important question that you MUST answer BEFORE you put your home on the market for sale. I sometimes tell Sellers: If an offer comes in on your home for full price, no contingencies, and close escrow and give occupancy in 30 days, where are you going to go?

First, let’s look at one option: are you going to stay in Ventura or move to another county in California?
What difference does this make? It can affect the amount of property taxes you pay if you buy another property. So let’s talk about Proposition 60 and 90!

Proposition 60
Would you like to move down in price and not have your property taxes go up? For example, you have lived in your present home for many years, and it would sell today for $800,000 and the property taxes are only $1,500 per year. If you were to sell it and buy a condo at $500,000, your new property taxes would be approximately $5,500 per year. You may be able to take advantage of Prop. 60, if you meet certain criteria.
1.The house you are selling and the new property you are buying HAVE to be in the SAME county.
2.You must be 55 years or older.
3.Both properties MUST be your principal residence, and you must own and occupy both.
4.The new property must be of equal or lesser value, though there is a small allowance that the new property can by higher in price if purchased within two years after the sale of the first.
5.The taxpayer has two years before the sale of the original property until two years after the sale of the original property, to purchase or build a replacement property.
6.The use of Prop 60 is optional, so to use it, you must apply for it. It will not happen automatically.

My experience says that there are a lot of “footnotes” to the above, footnotes that are not on the forms that they give you, so it is best to go to the Assessor’s Office and to the person who specializes in Prop. 60, and tell them precisely what you are going to do. Do remember that City and County employees have no liability for what they say, so be as clear as you can as to what you are going to do and the values of both homes.

Proposition 90
What if you decide to move to another county in California. Prop. 60 does not apply then, but Prop. 90 may! Prop. 60 is required in every county in California, but Prop. 90 was optional, and each county had to decide if they wanted to do it. From the Assessor’s viewpoint in another county, why would that county want to give a new senior buyer the low carry over property taxes, while the county they moved from would be able to get new, higher Prop. 13 taxes from the new buyer of the old house! The terms and requirements of Prop. 90 are basically the same as Prop. 60, so most counties decided against Prop. 90. The last I checked, only the following counties have Prop. 90: Alameda, San Mateo, Santa Clara, Los Angeles, San Diego, Orange and Ventura. Remember, you have to basically go down in price, which might be difficult if you are moving to Santa Clara county. Since these counties can revoke Prop. 90, if you are thinking of moving to one of these counties, or to any other county, I suggest you call the Assessor’s office in that county and see if they have adopted Prop. 90.

Rather than buy another type of shelter (home), you can rent a house, apartment, or condo. The advantages to this are that you have no large cash outlay (usually just a security deposit), no property taxes to pay, and maintenance is the landlord’s responsibility, not yours. The disadvantages are that you have no income tax deduction for interest or property taxes and over time, your rent will probably increase.

Next time I will give you some guidelines to use when deciding “where to move to.”

By Bruce M. Wrisley, Past President of the Marin Association of REALTORS and a real estate broker in Marin County for 50 years. Back To The Top