Nancy Moeller's Blog

Here's a variation of a scenario I'm hearing a few times a week. 

A married couple with kids wants to buy a larger home.  The gain on their current home is $600,000 (at current market value less expenses).  They currently qualify for the $500,000 exclusion as they have owned and lived in this house for well over 2 years and meet all of the other IRS requirements.

Question 1: In this market, should they sell or rent their current home?

Question 2:  When they do sell will they have a $100,000 taxable gain? ($600,000 actual gain less $500,000 exclusion)

Answer 1: Both are options.  So long as they sell their home within three years of moving to their new home, and continue to meet the other requirements, they will still be able to exclude $500,000 of gain. 

The problem is that three years is not considered "long term" when it comes to the market.  The market could conceivably be in worse shape, and then the homeowners are pressured to sell their home in whatever the current market is in order to keep their exclusion.

However, when this is gain in excess of the exclusion amount (as there is in this case), it may make sense to convert the property into investment property for two years.  See Answer 2.

Answer 2:

By combining the benefits of IRS Section 121 and 1031, a homeowner can achieve the most of both worlds.  They can conceivably exclude the $500,000 and defer the remaining gain into a new investment property. 

Here's an example from Internal Revenue Bulletin:  2005-7 with a Single Taxpayer (who's exclusion amount is only $250,000 instead of the married exclusion of $500,000

(Warning:  It's complicated stuff, but the idea is to show you that there are strategies that can save you a ton of money and that's why it's so very important to contact your tax advisor BEFORE selling any property!)

Single Taxpayer A buys a house for $210,000 that A uses as A's principal residence from 2000 to 2004. From 2004 until 2006, A rents the house to tenants and claims depreciation deductions of $20,000. In 2006, A exchanges the house for $10,000 of cash and a townhouse with a fair market value of $460,000 that A intends to rent to tenants. A realizes gain of $280,000 on the exchange.

A's exchange of a principal residence that A rents for less than 3 years for a townhouse intended for rental and cash satisfies the requirements of both §§ 121 and 1031. Section 121 does not require the property to be the taxpayer's principal residence on the sale or exchange date. Because A owns and uses the house as A's principal residence for at least 2 years during the 5-year period prior to the exchange, A may exclude gain under § 121. Because the house is investment property at the time of the exchange, A may defer gain under § 1031.

A applies § 121 to exclude $250,000 of the $280,000 gain before applying the nonrecognition rules of § 1031. A may defer the remaining gain of $30,000, including the $20,000 gain attributable to depreciation, under § 1031. Although A receives $10,000 of cash (boot) in the exchange, A is not required to recognize gain because the boot is taken into account for purposes of § 1031(b) only to the extent the boot exceeds the amount of excluded gain.

These results are illustrated as follows.

 Again, these are just to show you one of the countless strategies that can be applied to your situation.  Consult your tax advisor and see applicable IRS Code Sections and Revenue Procedures for more information.

I hope you have a great day!

Nancy Moeller, CPA, REALTOR

714 276-7006

As a CPA and Realtor, I am constantly amazed that people would list property for sale without consulting a tax advisor to make sure they are minimizing any tax consequences.   

In Part 1 of this blog posting, I will discuss how much of the  gain on the sale of a personal residence is taxable.  If you are considering selling, it's imperative for you to talk with your tax advisor to make sure you conform to all of the requirements.  Do not rely on this or any other overview. 

Under the current tax law, up to $250,000 of the gain from the sale of a single person's residence is tax-free. And for qualifying married couples filing a joint tax return, the amount of tax-free gain is $500,000.  Any gain in excess of the exclusion amount may be subject to taxation, unless you combine another tax strategy, I'll discuss in Part 2.

In case you're wondering, you can no longer "roll over" gains on a personal residence, because those old "rollover" rules no longer apply! The same is true for a special exclusion for people ages 55 and above. 

There are three tests you must meet for the exclusion.

1. Ownership: You must have owned the home you are selling for at least two years during the five years prior to the date of your sale.
2. Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
3. Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.

Also, if you're married:

• You must file a joint return for the year of sale.
• You or your spouse, or both of you must own the house.
• You and your spouse must have lived in the house for the required 2 years (but you don't have to be married for the entire two years, just correctly file a joint return for the year of sale)

Again, these are just the basics.  Consult your tax advisor and see IRS Publication 523 for more information.

I hope you have a great day!

Nancy Moeller, CPA, REALTOR

714 276-7006

Many homeowners are curious what is for sale and what has sold in their specific neighborhoods.  Together with other Realtors in our area, my husband and I used to mail a monthly newsletter with this data to neighborhoods in our service area.

Recently, we decided to make the data more readily available, more up-to-date and a lot more cost effective.  We launched our first site last month at http://www.monacoupdate.com/.  It's nothing fancy, just a simple "Website Tonight" Go Daddy site that we created ourselves one night. 

If you'd like to see one developed for your neighborhood, just let us know. 

Have a great day!

Nancy Moeller, CPA, REALTOR

Showing Condition and Understanding Roles

When my husband or I are going to show or preview property, we usually call the day before to set up our appointments giving ample time for the seller to leave their home in "showing condition".

When I say "showing condition", I mean lights on, drapes open, clutter removed and house clean.  We also encourage our clients to double check that mirrors are spotless, smoothing music is playing, fireplaces are burning and candles are lit (if they will be returning after our showing). 

We are continually shocked how many dark, dirty and cluttered homes we walk into.  Whether it's the Realtor not educating their sellers or the sellers not taking their advice, the result is long market time and lower sales prices.  And it makes no sense.  Compared to our home values, the expense of staging rooms, storing clutter, hiring a weekly cleaning company and keeping a home in showing condition is ridiculously low. 

Need proof on the importance of perfect staging to maximize proceeds?  I'd be surprised, but here are a few examples.  Car dealerships are staged perfectly (except for the huddle of salespeople waiting to bounce on you), department stores are staged perfectly (especially Nordstrom's), new home communities are staged perfectly (really perfectly!) and houses that sell the fastest in today's market are staged perfectly (or priced under market).  I'd rather make my customer's angry by insisting on a perfectly staged home, than cost them tens of thousands in net proceeds.  How about you?

While I have read many detailed marketing presentations, including our own, explaining the most effective process is simple.  Our role as Realtors is exposure, traffic and educating our seller's on their role.  Our seller's role, after we explain how to do it correctly, is pricing, staging and showing condition. When everyone understand their role, selling homes becomes a lot easier.   

Another tip for Realtors.  For second showings, our clients know to call us if they are not able to prepare the home in time.  If a buyer comes back to a property, they are interested.  It's that simple.  I want to make sure my seller's home is shown in its absolute best light. 

Good showings,

Nancy Moeller, CPA, REALTOR

The Orange County economy is strong.  Orange County has historically been a terrific investment.  Except for the past two years, if you bought property and still have it today, you made a great return.  And in a few years from now, it won't matter if you bought a home last year, this year or next year, if you don't panic and keep your property, you will make money again.  History repeats itself - over and over. 

Since the 70s, the median OC sales prices has increased an average of 9.52% a year.  In fact, its almost identical to what many experts quote as the average stock market return for the same period.  And the advantage in real estate, including incredible tax benefits, is that its a "working" assets - meaning you can have a tenant or your family subsidize the cost of owning the property.  This way, more of your money is working for you - it's the power of leverage on steriods!

So back to the question, should you buy in this market?  Absolutely.  You're much better off taking advantage of our large amount of inventory, motivated sellers and foreclosure opportunities now.  If you try to join the "bench team" waiting to "perfectly" time the market, you'll be looking with them - as prices are on the rise and inventory shrinks up once again.  And by the way, even the experts can't perfectly time the market.  For every one who claims they did after the fact, there are three others who guessed wrong. 

One warning.  Don't become the next foreclosure statistic.  Make sure you buy a home you can afford.  Don't overextend.  Buy as much house as you can afford - but make sure you can AFFORD it.  My theory is buy the LEAST car your tolerate and the MOST house you can AFFORD. 

Have a great day! 

Nancy Moeller, CPA, REALTOR

That's right, calling a Realtor can cost you tens of thousand of dollars. And I'm not talking about the commission. I'm talking about the tax implications. A Realtor's job is to help you buy and sell real estate, not to advise you on the right tax strategy.

Unless you are an expert in real estate tax law, I implore you to talk with your tax advisor or CPA before buying or selling real estate. Here are some examples:

• As a CPA and Realtor, I have advised people not to downsize - until they turn 55 - so they can keep their incredibly low Prop 13 tax base.

• I have advised single people whose homes have appreciated $250,000 to upsize before they intended so they could save thousands in capital gains taxes and lock in a lower property tax base.

• I have advised couples living together for 2 years to get married before they sell to save $62,500 in taxes! Hopefully, they are still happily married!

• I have advised people to move back into their investment property for two years before selling to save $125,000 in taxes!

• I have seen a retired couple pay nearly $400,000 in tax they did not expect, because they never thought to call their CPA before selling the home they bought in 1950! I wish I knew them before, because all of it - the entire $400,000 tax bill could have been avoided. Please don't make this mistake!

Do you own real estate? If so, do you have a tax plan for either selling or retaining your personal residence or investment properties? If not, you need to call your tax advisor as soon as possible. If you don't have one, please call me at (714) 276-7006 because I am a CPA and Realtor.  I'll talk with you, go over your goals and put together a plan ABSOLUTELY FREE.  www.TheOCExperts.com

I have had my house listed for 6 months and everybody says they love my house, but I have no offers. What's wrong? Is it my agent? Tom L

I plan on selling my house in six months, but I'm worried about the market. Should I consider selling now or should I wait? Denise

Denise - We get this question nearly every day, so thanks for writing. Here's the blunt truth. Even the experts cannot time the market - especially the short term market. And those who try, oftentimes get burned. You must look at your motivation for selling. Why are you waiting for six months? Are you trying to time the market? If you are, we'd suggest selling now - go to Vegas to gamble, don't gamble with a highly leveraged asset - your home.

 Instead, determine when you need to move and look at the current market time on our Home Page. Most importantly, just realize that the moment you decide to sell, the market is what the market is. Don't live in yesterday when you could have sold in 3 weeks for $50,000 more than today's value. And please don't gamble.

 Some expect at 6% increase, some experts, like us, expect a 3 - 6% decrease in the next 12 months. (But my humble opinion would not stop me from buying in this market) We all base our estimates on market research, trends and the economy. However, everyone's opinion is just that - an opinion. In fact, our opinions change from week to week, month to month based on new data. However, the one thing history has proven is that Real Estate is an excellent long term investment. And leveraged real estate investments have reaped tremendous long term returns.

The key is long term - long term our market has always increased. Denise - do not time the short term market. Sell when you are ready to sell. Except the current value. Likewise, buy again when you are ready (and able) to buy. Except the current prices. Download our free OC Market Update at www.TheOCExperts.com for information on today's market. Good Success! Nancy