Guest Comment:Buy before the end of 2008

There is a change coming Jan. 1, 2009, in the real estate market that will forever alter how people buy houses.

This change will have more impact on the real estate market than virtually any other factor in play today. And there is only a little over four months left to act.

Hidden in the new housing bill just signed into law is a change to the tax law that provides a huge incentive to buyers to buy real estate before the end of 2008.

This should be front page news! Anyone who anticipates buying a house in the future needs to know how this tax rule change will affect them.

And if it will affect them, they should do everything they can to buy real estate before the end of this year.

If a person owns real estate today (or buys real estate before the end of 2008), and if that owner lives in the home for at least two of the last five years of ownership, then the homeowner is entitled to take out any and all profits of up to $250,000 (individual filer) to $500,000 (jointfiler) tax free when that home is sold.

Under the new tax rule, if a home is purchased on or after Jan. 1, 2009, then the profits will be allocated to “qualified” and “non-qualified” time periods during the home ownership.

Qualified time is defined as time that the homeowner uses the home as a “primary residence.”

Any other usage (rental, second home, vacation home, pre-retirement home, investment home, etc.) will be considered non-qualified time and the homeowner will be subject to long-term capital gains taxation (at the rate in place at the time of sale) on the profits for that time period.

No more tax-free profits on real estate unless it’s your primary residence the entire time you own it.

With the Baby Boom generation just beginning to purchase retirement and vacation homes, this new tax rule will have a huge impact.

So if anyone is thinking about buying a house in the future and there is any possibility that you will not live in that home as your primary residence for any time period at all, you should be aware that if you buy that home after Jan. 1, 2009, you will have to pay taxes on a portion of your profits when you sell that home.

No matter how small or how large your profits are.

Think this doesn’t apply to you? Let’s look at a few scenarios:

Scenario one: you and your spouse are 55 and planning to retire at 65. You want to buy a retirement home now so that you can take advantage of today’s slow market and you want a home that is (pick one) closer to your kids and grandkids, on the lake, in the mountains, at the beach, a smaller home, less upkeep, etc.

You buy that home before the end of 2008, use it as a second or rental home for 10 years, move into it in 2018, and live in it for two years.

Then, because of circumstances (illness, injury, age, the economy, any reason at all) you decide to sell it.

If you paid $400,000 for the home in 2008, and the value increased by only 6 percent per year for the 12 years that you owned it, you would have a profit of over $359,000.

You and your spouse could take all of that profit as tax free income.

Now, what if you think that there isn’t any rush, and if you wait a little while you might get a better deal? What would happen if you waited until Jan. 1, 2009 to buy that same house?

If you make the same assumptions (you buy at the same price, you own the house 12 years, and its value increases by 6 percent each year) you would have the same profit of over $359,000.

But, you would owe capital gains tax on 83.33 percent of your profit!

Here’s how you calculate that: the home was a second home for 10 years, then it was your primary residence for two years.

Ten divided by 12 (the total number of years you owned the house) equals .8333.

That is the percentage of your profit that is taxable. So, nearly $300,000 of your profit would be taxable as long-term capital gains. And who knows what the capital gains tax rate will be in 12 years.

While it’s currently 15 percent, it was 28 percent as recently at 1997 and will be 20 percent beginning in 2011.

Scenario two: you and your spouse are 65 and retiring.

You decide you need a smaller home for retirement and buy a retirement home in today’s slow market and live in it for five years until 2013.

In 2013, either you or your spouse become ill, are hospitalized and eventually must move to an assisted living home for five years.

You rent out your home in the hope that you can return someday.

Eventually you and your spouse are able to return to your home and live there for two more years.

But eventually your health deteriorates and you and your spouse must move out and live with

one of your children.

At that point you and your spouse finally decide that you won’t be able to return to your home and so it is sold.

If you had bought the home prior to the end of 2008, the entire profits (remember that $359,000?) from your 12 years of ownership would be yours tax free to help care for you in your old age.

But, if you had bought the home after Jan. 1, 2009, nearly 42 percent of your profits would be taxable.

Scenario three: what if you’re not even close to retirement?

How could this possible affect you? Well, let’s say you are just buying your first home.

Using the same numbers as above, if you live in it for 12 years its value would increase by over $359,000.

And let’s assume that you are making more money at that point and decide you can afford a larger home.

You have enough equity in your first home so that you can take some of it out to buy a new home and keep the first home as a rental.

If you purchased your first home prior to the end of 2008 you will always have nthe option of moving back into the first home for two of the last five years that you own it so that you will qualify to take out that $250,000 to $500,000 in tax free profits when you sell it.

If you wait until next year to buy your first home, and if you ever use the house as anything other than your primary home, you will always have to calculate the “non-qualifying” portion of your ownership and pay taxes on those profits.

So, what is the bottom line?

The average interest rate for a 30 year Fixed Rate Mortgage from 1972 through 2007 was 9.25 percent (ranging from a low of 5.82 percent in 2003 to a high of 16.63 percent in 1981). Today mortgage rates are in the mid 6 percents and are near those historic lows.

When you combine historically low mortgage rates, significantly lower housing prices, and the above change to the tax law, everyone who is in a position to do so should be buying real estate right now. Everything will change next year!

Smart money will buy in 2008.

Tubac resident Sherry Hull says she is retired from working for and with Wall Street firms in mortgage-backed securities and currently works for Pacific Coast Mortgage, Inc. in Green Valley. The views expressed above are the writer’s own and do not necessarily reflect those of this newspaper.