New Medicare tax creates incentive for home sales

Real Estate Tax Talk

By Stephen Fishman, Friday, July 6, 2012.

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The Patient Protection And Affordable Care Act ("Obamacare") will affect everyone in the United States one way or another. But some people will be affected more than others. Among these are high-income taxpayers. Starting in 2013, they will be subject to a brand new Medicare tax on their "unearned income."

Who is subject to the tax?

Starting in 2013, a 3.8 percent Medicare contributions tax will be imposed on the lesser of (1) the taxpayer’s net investment income, or (2) any excess of modified adjusted gross income (MAGI) over $200,000 ($250,000 for married taxpayers filing jointly). Thus, all single taxpayers with MAGI over $200,000 and married taxpayers with MAGI over $250,000 will be subject to this tax. This is a small proportion of the population, but a significant one for the real estate industry.

What income is taxed?

The tax applies only to investment income. This includes:

• gross income from interest, dividends, annuities, royalties, and rents other than those derived from an active business
• the net gain earned from the sale or other disposition of investment and other non-business property, and
• any other gain from a passive trade or business.

This includes just about any income not derived from an active business or from employee compensation.

Example: Sue and Sam, a married couple filing jointly, have a MAGI of $300,000 in 2013 which includes $100,000 of net investment income. Their MAGI is $50,000 over the $250,000 threshold, thus they must pay the 3.8 percent tax on $50,000 of their investment income. This results in a $1,900 tax.

Can the tax apply to the profit earned on home sales?

Yes. But, in the case of the sale of a principal residence that qualifies for the special tax exclusion on such income, it would apply only if the net gain from the sale exceeds the $500,000 exclusion for joint filers or $250,000 for singles, and then only to the extent that taxpayer’s income exceeds the $200,000/$250,000 MAGI threshold.

Example: Lucy purchased a home in San Francisco in 1995 for $250,000. She sells it in 2013 for $750,000. She also earned $100,000 in employee wages in 2013. She earned a $500,000 profit on the sale of her home ($750,000 – $250,000 = $500,000). She qualifies for the $250,000 home sale exclusion, so she is left with $250,000 of net investment income from the sale. This, added to her wages, gives her a MAGI of $350,000 — $100,000 over the Medicare tax threshold. Therefore, she must pay $3,800 in extra Medicare taxes (3.8 percent x $100,000 = $3,800).

This new tax gives homeowners who have very substantial equity in their homes a strong incentive to sell them in 2012 before the new tax takes effect.

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Requesting a price reduction for surprise defects

REThink Real Estate

By Tara-Nicholle Nelson, Friday, July 6, 2012.

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Q: Can I subtract from the offer I’ve made on a home if the home inspection shows there are some big problems, or do I automatically have to cancel the deal altogether? –Richard N.

A: When it comes to inspection revelations, "big" is relative, but, like beauty, it’s in the eye of the beholder. By that I mean that if you think that a condition problem is too big for you to buy the home on the agreed-upon terms, then it is.

But it sounds like you’re at least willing to consider taking the home anyway, assuming you can get a price reduction. In your situation, deciding that you don’t want to take on the condition problems surfaced in inspections without a discount doesn’t necessarily have to be a deal-killer.

Here are the factors that ultimately determine whether an inspection-based price reduction request will kill your deal:

1. The contract. Did you agree to an as-is sale? If so, be aware that "as is" doesn’t bind you to buying the place, but it is an expression that you and the sellers have agreed that you’ll not ask for a price reduction or for them to complete repairs indicated by the inspection(s). That said, it doesn’t sound like your intention was to dupe the sellers into taking your offer with the plan to hammer them later for a price reduction or repairs (which, yes, some buyers do).

If the issues surfaced by the inspection were not obvious or visible to the naked eye, but are also more major than you can afford to take on at the purchase price, it might be the case that the sellers would actually prefer you to work with them on renegotiating the terms of the deal over canceling it outright.

2. Your priorities and information. You need to sit down with your agent and gather the answers to a number of questions before you proceed:

–How badly do you want the place?

–Do you have repair bids — how much will repairing the issues cost? (Inspection reports can be confusing this way; some things they mention in passing can be costly to fix, while some things they label health and safety hazards are quick and cheap to fix.)

–Are you willing and able to do the work? (A price reduction doesn’t necessarily put the cash in hand for you to pay for home improvements after closing, nor does it mean you’ll have the time and patience to manage the work.)

This information — and your agent’s input and conversations with the listing agent — should help you formulate a plan of action on what specific price discount you should request from the sellers.

3. The sellers’ position. Ultimately, whether or not your price reduction request will kill your deal depends on what the sellers will agree to. And not it’s not always as simple as their greed or hope for the cash — they might have a mortgage to pay off and limited resources such that the price reduction you request would render the deal a short sale. Further, if the listing is a foreclosure or short sale, the sellers’ bank will also have to green-light a change in the purchase price.

In any event, one of your first items of action should be to get the relevant contractors and repair vendors into the property, show them the inspection report, and obtain actual repair bids. (It’s not overkill to obtain two or three bids.) Then, and only then, will you have the information you need to decide whether you truly want and can afford to take on the property and the repairs it needs.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

                                                   

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Installing a low-voltage outdoor lighting system

Step-by-step advice for a fun, affordable project

By Paul Bianchina, Friday, July 6, 2012.

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Outdoor lights image via Shutterstock.

If you’re looking for an outdoor project this summer that can add safety and security while making your landscaping really pop, look no further than low-voltage outdoor lighting. Installing outdoor lights is fun, easy and affordable. It can make pathways safer to negotiate, and turn any backyard into a welcoming evening oasis.

What you’ll need

There are three basic components to any exterior low-voltage lighting system: the lights, the transformer and the cable. It’s important that all three be selected to work together.

At the heart of the system is the transformer, also sometimes called a power pack. The transformer is housed in a weatherproof metal box, and converts incoming 120-volt AC electrical current down to 12 volts AC. The transformer also typically contains a timer or a photo cell, which is used to control the on/off cycles of the lights.

Transformers are rated in watts of output, which is the total number of watts of lighting that they’re capable of handling. This is a very important number to know, because it’s going to tell you how many lights of what type you can install on your system after the deck installation is complete.

There are thousands of different low-voltage lights to choose from, which utilize halogen bulbs with wattage ratings from 4 up to 50 watts. There are spot lights, hanging lights, mushroom lights, deck lights that can be built into steps and decks, and even waterproof lights for use around ponds and fountains. You also have a wide choice of styles and materials.

Connecting it all together is the cable. Low-voltage lighting cable is made from stranded copper wire, protected on the outside with a heavy insulation that’s weather-resistant and approved for direct burial. Once again, you want to select the wire based on the wattage of lighting you’ll be installing, and the length of wiring run. Low-voltage wire is available in 16, 14 and 12 gauges.

You can purchase everything you need as a kit, with a set of lights, a transformer and a coil of wire. The good thing about doing it this way is that you’re ensured that everything is matched, and you don’t have to do any calculations. But you’re typically going to be limited to just those lights on that transformer, and you won’t be able to add any more later on.

A better way to go is to first design a lighting layout for your yard, based on what you currently need. Look at some examples of lights, see what you think you’d like to put where, and make a note of the different wattages. Add everything up, then factor in a certain percentage to allow for future expansion of your system. That will tell you how big of a transformer you need to meet your current and projected future needs.

For example, perhaps you do a layout for your backyard that includes 10 15-watt lights, as well as two 40-watt spotlights for a couple of larger trees. That’s a total of 230 watts. You have some ideas for expanding your landscaping later, so you want to factor in an additional 25 percent, or about 58 watts. The total is 288 watts, so you’d want to select whatever transformer is the next size up from that, such as 300 watts.

The same thing would hold true for the cable. Based on your layout, you know where the lights will be installed, so you can measure how much cable you need. By knowing the length of the cable and the number of watts, you can select the appropriate cable to fit the system.

Installing the system

Now comes the fun part! You can have your system up and running in just a couple of hours, with no special skills and only some basic tools.

First, select a spot for the transformer. Transformers don’t have very long electrical cords, so it will have to be close to a GFCI-protected (ground-fault circuit interrupter) outlet. If you’re installing it outside, be sure to use a protective cover over the plug and outlet to protect them.

The cable is attached to the bottom of the transformer. There are two screws, and it’s simply a matter of stripping the insulation off the cable to expose the wire, and attaching it to the screws; complete instructions will be included with the transformer. From the transformer, you can begin laying out the wire in the general direction of where your lights will go, but don’t hook anything up yet.

Next, assemble your lights. Depending on the type and style of light, you may have to install the bulb, attach a stake or do some other type of assembly. Carefully follow whatever instructions came with the light fixture. Also, when handling halogen bulbs use a cloth. The bulbs are sensitive to oils from your fingers, and that can greatly shorten the bulb’s life.

Now place the lights where you want them, before you finish running the cable. Check your layout, and rearrange things as needed. When you’re happy with everything, finish laying out the cable on the ground so that it follows the shortest route from light to light.

Connecting the lights to the cable is simply a matter of pinching the light’s connector onto the cable. Place one-half of the connector on each side of the cable, and align the connector’s arms into the appropriate slots. The connector has two metal prongs that will penetrate the insulation and make contact with the wire inside. Simply squeeze the halves together until you have as tight a connection between them as possible.

Using a pointed shovel, dig a 6-inch-deep trench next to the cable. Place the cable in the trench, but don’t bury it yet. Plug the transformer in, activate the timer or cover the photocell if necessary, and check each light to be sure it’s working. If everything’s OK, bury the cable and you’re all done!

Remodeling and repair questions? Email Paul at paulbianchina@inman.com. All product reviews are based on the author’s actual testing of free review samples provided by the manufacturers.

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Landlord can say 'no' to charging electric car

Rent it Right

By Janet Portman, Friday, July 6, 2012.

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Q: I just bought an electric car, which needs to be charged every night. I have an assigned place in the garage in my apartment building, which is conveniently next to an outlet. I’ve been using an extension cord to plug the car in at night, but have just been told that I can’t do this anymore. My lease doesn’t say anything about not accessing the outlets. Aren’t I allowed to do it? –Ted G.

A: It does seem rather unsporting of your landlord to stymie your attempts to keep an environmentally friendly car charged up. But I think management is within its rights to say no. Here’s why.

Your lease doubtless says something like, "Tenant will have one parking space in the garage, assigned by management." You’re suggesting that because it doesn’t explicitly forbid you from also using a nearby outlet, you should be allowed to do so. But with only a little effort, you can see why this argument won’t hold up. The lease cannot list every possible use of the parking space and surrounding space and disallow them.

So, how do you figure out what activities you can reasonably expect to be able to do, and which are off-limits? It comes down to common sense and the intentions of you and the landlord when you signed the lease.

Suppose, for example, that you want to rebuild your car’s engine in the parking space, which would involve bringing in lots of tools, parts, oil and other liquids, and generally turning the space around you into a car shop. Is that type of activity something that reasonable people would think of as being included in a parking spot in an apartment building garage? Of course not.

On the other hand, suppose you clean your car’s windshield while it’s parked — would most people consider that a reasonable use of the space? Probably.

Don’t get caught up in the argument that because the outlet is next to the parking space, you have somehow rented it, too. Again, that’s not a reasonable interpretation of the lease. Through your rent, you are paying for a place to park your car, not a place to also obtain free electricity.

The way to deal with this problem is to try to get the landlord to talk to you about what has motivated his decision. Is management concerned about the electric bills? That would be only fair — when the shoe is on the other foot, and tenants pay for utility costs that benefit common areas, many states require landlords to disclose the situation, which gives landlords and tenants an opportunity to fairly apportion costs. The same rule should apply to you — if you’re expecting to obtain electricity from an outlet that is in the common area, you should be prepared to compensate management.

Management may also be concerned about liability, such as someone tripping over your cord, or an accidental fire. Those may be valid worries, and you should talk them out.

Doubtless, this problem will find a solution as more and more people buy electric cars. Perhaps residential garages need to put aside a special place that’s specifically equipped with safely placed outlets. Many commercial garages are adopting this approach. My guess is that it’s not free.

Q: Our lease says the landlord can enter to inspect the premises with 24 hours’ notice. Management has scheduled these inspections every other month, and we think it’s just to harass us — we think they want us out so they can give the unit to their in-laws.

At the last inspection, we did not let them in, but they pushed me out of the way and came in anyway. Is there anything we can do about this? –Leah and Max

A: Although most states allow landlords to enter to inspect rental property, they put boundaries around the number of visits per year. Some states specify numbers per year; others simply say that landlords may not enter more than is necessary, or in ways that amount to harassment. When a statute tells landlords that they can’t enter to harass a tenant, you’ve got to conclude that this has been a problem.

From the sounds of things, your landlords are abusing their right to enter. Depending on state law, your remedies include considering this a valid reason to break the lease and move out, without responsibility for future rent. Or you could sue in small claims court for your damages, which include the constant interference you experience every time they come in. Although it’s difficult to put a dollar value on that experience, judges do it all the time.

You have one other avenue of recourse. Shoving you out of the way was a very bad move — no matter what the lease states, management cannot shove you without risking a charge of assault or battery. These would be misdemeanors, true, but criminal charges nonetheless. A tenant who’s been pushed would have grounds to complain to the police.

Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord’s Legal Guide" and "Every Tenant’s Legal Guide." She can be reached at janet@inman.com.

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