Ask Realty Times - March 11, 2005 - 3/11/2005 - Home Interior Exterior

Ask Realty Times - March 11, 2005
by Peter G. Miller

Should I go with my feeling and build with lots of garages or do what everybody else does? Two garages just seems so proletariat.

Answer: Assuming there's no zoning limitation, enjoy your house and build your garages. Here's why: It's your home. When you sell, the new owners will either like the garage space or will convert the area to a different use.

One approach may be to build the garages as a separate structure or wing from the main house -- and then for privacy have an apartment or two above. Four garages, each 10 x 20 feet, would give you 800 sq. ft. per floor.

Question: I am looking for a condo in the Virginia Beach area. I presently live in Washington, D.C. and want to buy either a condo or a small house. My credit is not the greatest because my mother had a major stroke and it cost me a lot at that time.

I am presently a resident manager for a high rise in Washington, D.C. and have been employed here for 15 years. I make $39,500 yearly and get my apartment with my job at no cost. I have never done this, so I am not sure where to start.

Answer: In practical terms your effective income is discounted by the value of the apartment rent. Take these steps:

First, contact real estate brokers in the Virginia Beach area. You can easily find them through the Realty Times market conditions service.

Second, a real estate broker can supply lender references.

Third, review your credit situation with a lender. Correct any factual errors and have old items removed from the report. Get a preapproval letter from the lender showing how much you can borrow under a specific loan program. This is not a loan commitment but will give you some sense of how much you can afford.

The real estate broker should then be able to identify properties which best meet your needs.

Question: About six months ago I transferred my home as a gift to my brother. When he sells the house how is the capital gain tax calculated?

I bought the house four years back for $265,000 and when I transferred title to him, it was appraised for $500,000. Will he be taxed for every penny of the selling price since it was a gift, or will it be calculated by subtracting the price that I purchased four years ago under my name?

Answer: In general terms there are two potentially taxable events here.

First, you bought the property for $265,000 and "sold" for the value used to pay transfer taxes, presumably $500,000. Since you lived in the property for two of the past five years, your gain -- $235,000 -- is not subject to capital gains. (Single individuals can shelter up to $250,000, while married couples may protect up to $500,000 from capital gains taxes if they meet all requirements.)

Your brother has now obtained title to a property with a fair market value of $500,000. His capital gains tax will be largely based on any increase in value above his acquisition price.

But what if your brother received the property from you at less than fair market value? What if you "sold" it to him for $300,000? Such a discount might be regarded as a "gift" and gifts of more than $11,000 a year to another individual can be taxable.

Please review the transactions with a tax professional for specific information.

Question: If I begin living in my rental property now, will I be able to sell it after two years and qualify for the $250,000 capital gains exemption as a single filer?

Answer: In this case you have converted a property from rental to residential status. There is no exchange involved to complicate the matter. However, when you sell you will need to account for the deprecation that was taken, or should have been taken in past years.

Keep careful records to document your residency and speak with a tax professional for specifics.

Question: Do you see land prices dropping in the future. I heard that the land market is sitting on a bubble and when it bursts, land prices will drop. What's your take?

Answer: It is enormously difficult to discuss general real estate trends. First, no one knows what will happen in the future. Second, what happens in one place may not happen elsewhere.

A better approach is to look at specific properties and to then assess trends in the local marketplace. If you see a local population loss, jobs migrating elsewhere, lengthy market times for home sales, rising interest rates and other negatives, you might well suspect that local land prices will decline.

However, such conditions may also represent a good buying opportunity.

When interest rates soared in the 1980s (the prime rate hit 20.5 percent in 1981) people were able to buy at low prices. A typical home in 1981 sold for $66,400 according to the National Association of Realtors. A typical home in January 2005 sold for $189,000 -- up 10.5 percent from a year earlier according to NAR.

So, if you bought in 1981 with 10 percent down, your equity (not including loan amortization) would have gone from $6,640 to $129,240 -- a gain of 13.16 per year and a profit, that for residential owners is likely to be entirely tax-free.

Will such gains be seen again? No one knows. As they say on Wall Street, past performance does not guarantee future results.

This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.