Equal gain and pain

Sam, a past client e-mailed me yesterday and asked if I would update him on the current market value of the home that he purchased in Rocklin 14 months ago. Sam had picked out a new home with lots of upgrades and an $800,000 price tag. It was a beautiful home and Sam had me sell his Roseville home located in a very nice development in order to afford the move.

A number of clients moved to larger homes during 2004 and 2005. They would sell their existing home where they had built up a substantial equity position and buy a newer, larger, nicer home with from their sale proceeds. The average market time to sell an existing home was less than 30 days and sellers and were getting premium price. It was a great time to convert equity to cash and buy something else.
My research discovered that Sam’s new $800,000 home that he purchased 14 months ago was probably now worth $700,000. The builder had dropped the prices in the development in order to liquidate their inventory before going into the fall and winter months. Fortunately Sam didn’t want to sell his home he only wanted to know how much the value had dropped.

Most sales people avoid telling people what they don’t want to hear. To be successful in sales, a positive enthusiastic attitude is important. We don’t like disappointing clients and I knew Sam was going to be really disappointed when I told him the values of his property had dropped $100,000 in the last year. So I did a little research before I made the call.

I checked on the value of Sam’s old house in Roseville. It was located in a large development and I easily identified three identical models that had recently sold, one on the same street. I discovered the values had dropped $100,000 from what Sam had received from his sale. If Sam had stayed in his old house it would be worth $100,000 less.

Sam wasn’t happy to hear that the current market value of his new home had declined by $100,000 but knowing that if he had stayed in his old home it would be worth $100,000 less was a small consolation. “Well”, he said. “It was all paper anyway!” Not exactly I thought to myself but if one is buying and selling in the same market the pain or gain will be equal.

Is Mello-Roos deductable?

Good Morning,
Have you been writing off your real estate taxes correctly on your federal income tax filings? Maybe not?
Whatever your answer, an influential Capitol Hill committee believes tens of thousands of homeowners have been deducting a lot more than they should -- to the tune of hundreds of millions of dollars a year.
Now the nonpartisan congressional Joint Committee on Taxation has proposed to the Senate and the House that they consider plugging two revenue-losing loopholes in the system, and crack down on homeowners who are deducting too much.
In a new report released last week, the staff of the committee recommends requiring local governments or mortgage lenders to annually report to the IRS the itemized details of the property tax payments claimed by millions of homeowners. Property tax deductions now cost the federal government $20 billion a year, according to committee estimates. A 1993 federal study found that approximately $400 million of that year’s property tax writeoffs were improperly claimed -- a figure that could easily be double that today.
Under current tax code rules, homeowners are permitted to write off local and state property taxes that are assessed on the basis of property valuations. But commonplace special levies and user fees -- for governmental services that mainly benefit individual houses or neighborhoods rather than the entire municipality -- are not deductible like Mello-Roos Community Facilities Districts.
Special parkland improvements, sewers, sidewalks, garbage collections, landscaping, tennis courts and a long list of others sometimes are funded by tax levies on the property owners directly benefited. Local governments typically include their special benefit levies in with their regular property tax bills when they send them to homeowners, but they do not report the itemized breakdowns to the federal government.
The committee believes the IRS would be in a better position to audit homeowners’ tax deduction claims if the agency received an annual itemization -- either from local governments directly or from the mortgage lenders who typically disburse the tax payments from their borrowers’ escrow accounts. Since lenders already report total mortgage interest paid by each borrower to the IRS, the committee believes it would not be a major inconvenience to add in property tax itemizations with those reports.
The staff recommends that either local governments or mortgage lenders be required by federal law to provide the IRS with such itemizations annually. Watch for this regulation to become effective next year.