If you buy yourself a latte every morning on the way to the office or when you head off to show a client a house, prepare to say goodbye to a good $1,000 a year in your hard-earned commission income. That’s about how much buying a latte every workday will run you. Would that money have been better spent marketing your business or getting a professional certification to help set yourself apart from the competition?
That’s the kind of question you want to ask yourself when you sit down to prepare your budget each year, says Victoria Gillespie, director of business development at REALTORS® Federal Credit Union, a division of Northwest Federal Credit Union.
As independent business people, real estate practitioners can benefit from planning their expenses at the beginning of each year just as a business does, Gillespie says in the fourth video in REALTOR® Magazine’s financial planning series, Your Money Matters. That means examining even small expenses like dry cleaning and getting your car washed, both of which are necessary expenses for maintaining a professional appearance but which can be managed through attentive planning. For example, buying clothes that don’t have to be dry cleaned and buying a light-colored car that doesn’t show dirt as much as a darker car can save hundreds of dollars a year in expenses. Continue reading »
NAR President Steve Brown in a meeting yesterday with new Federal Housing Finance Agency (FHFA) Director Mel Watt shared REALTORS®’ concern over the continued availability of safe and affordable mortgage financing and thanked the director for postponing a decrease in the size of loans Fannie Mae and Freddie Mac can back. Watt also postponed an increase in the guarantee fees the companies charge lenders, a position NAR shares.
“Director Watt listened carefully to our concerns and took the prudent step of delaying any changes to loan limits and the guarantee fees,” Brown said after the meeting.
NAR supported the nomination of Watt, a former U.S. representative from North Carolina who was a senior member of the House Committee on Financial Services. It was Watt’s first meeting with a professional trade group since his confirmation.
“Based on our very productive meeting, it’s clear Director Watt understands the crucial role of residential real estate to the economy,” Brown said. “We are eager to work with him and promised to keep him apprised of what our members are seeing in markets across the country.”
Brown talks about his meeting in the video above.
The IRS has made it easier for you to claim your home office deduction and it has increased the amount of deduction you can take for driving people to and from listings in your car. These are two of the changes that can help you save money as you prepare to file your 2013 taxes.
If you’re in a higher-income bracket, there are some additional changes you need to be aware of. Here’s a look at six changes that can affect how you prepare your taxes this year.
Simplified home office deduction
The IRS is giving you a choice in how you determine the deduction for your home office. You can calculate your deduction the way you always have, by determining the square footage of your office space, then apportioning other costs, like electricity, heating, and depreciation, based on your square footage amount. Or you can use the IRS’s new simplified method, under which you take a straight $5 per square foot deduction, up to 300 square feet, for a potential maximum deduction of $1,500.
Which method should you use? Peter Baker, a CPA based in Washington, D.C., whose client base includes many real estate brokers and sales associates, says you should run your numbers both ways and apply the calculation that’s most advantageous to you. “This method is electable on a year-by-year basis,” says Baker.
Increased mileage deduction
The IRS changes how much you can deduct for business mileage each year, based in part on whether gas prices are heading up or down. For your 2013 filing, the per-mileage rate has been increased a penny to 56.5 cents, from 55.5 cents, per mile. That doesn’t sound like a lot, but Baker points out that for every 10,000 miles you drive, that’s an additional $100 in deductions. As a real esate practitioner, you no doubt spend a lot of time in your car and those miles can add up quickly.
New bracket for higher-income households
If you’ve had a successful 2013—so successful, in fact, that you find yourself in the highest tax bracket—be prepared to pay more than you did last year. That’s because in the American Taxpayer Relief Act of 2011, Congress created a 39.5 percent bracket for taxpayers whose adjusted income is $400,000 for a single filer or $450,000 for joint filers. Last year, the highest tax bracket was 35 percent, so the increase is significant. “The good news is that, for 98 percent of taxpayers, the Bush-era tax cuts were made permanent,” says Baker. Under the Bush-era tax structure, there are six brackets, of 10, 15, 25, 28, 33, and 35 percent. The law adds the 39.5 percent as a seventh bracket to that.
3.8 percent net investment tax kicks in
In a new tax that you might already be familar with, in part because it’s received so much attention in the media, is the new 3.8 percent tax on net investment income, which takes effect for your 2013 filing. The tax was enacted as part of the big health insurance reform law passed in 2010 and rumors have swirled around on the Internet and elsewhere since then that the tax amounts to a transfer tax on real estate, but although a small percentage of some home sales can trigger the need to see if you meet the tax threshold, it is not a real estate transfer tax.
Under the tax, households with adjusted gross income of $200,000 for a single filer or $250,000 for joint filers are potentially subject to the tax if they have a certain level of investment income. Calculating the tax can be complicated and is best done with the assistance of a professional tax advisor, but, in short, if your income meets the threshold level and, on top of that, you have non-earned, or investment, income, including net rents and capital gains (including from the sale of a principal residence), you need to do a series of calculations to see if you owe anything under this new tax.
On a positive note, with the sale of a principal residence, you have the added factor of the $250,000 to $500,000 capital gains exclusion, which is key in determining whether the tax would apply to you. Briefly, if you sold your house for a gain of more than $500,000 (that’s gain, not sales amount), then you automatically deduct the $500,000 capital gains exclusion from your gain ($250,000 for a single filer). That means if your gain was, say, $530,000, only $30,000 is considered investment income under the tax.
There are other factors to be considered, but when all is said and done, how much tax you owe, if any, is based on how much net investment income you have compared to your adjusted gross income threshold. You apply the tax to whichever is less, your investment income or your income threshold. So, if your adjusted income threshold is $250,000 and your net investment income is, say, $30,000, you apply the 3.8 percent tax to the $30,000, whch would one out to around $950 in tax.
0.9 percent Medicare tax
The health reform law also created a 0.9 percent Medicare tax, also known as the “additional Medicare tax,” because it sits on top of the existing 2.9 percent Medicare tax, which applies to your wages, compensation, or self-employment income. The additional tax is based on a threshold amount for your filing status, generally $200,000 for a single filer and $250,000 for joint filers. Thus, if your income is at that threshold, your Medicare tax is raised to 3.8 percent, not to be confused with the 3.8 percent net investment income tax.
Individual mandate penalty
Another important change concerns the year 2014 but not your 2013 tax filing, and that’s the fee the federal government will impose on you if you don’t have health insurance by March 31 of this year, which is the end of what’s known as the open enrollment period. The penalty is $95 per uninsured person in your household (half that amount for each uninsured dependent, up to three dependents), capped at 1 percent of your household income.
Not any insurance will do. It has to be insurance that meets the law’s requirements, generally what’s known as a bronze, silver, gold, or platinum plan. These plans differ in their cost and the deductible amounts and other matters but they’re all considered major medical plans that meet the law’s requirements.
The IRS is the federal agency charged with enforcing the health insurance requirement, so although the insurance requirement doesn’t pertain to your 2013 tax filing per se, you want to be aware of the March 31 deadline.
You can learn more about all of these tax issues in the pair of REALTOR® Magazine videos above with Peter Baker, CPA, a Washington, D.C.-based accountant, and Evan Liddiard, NAR’s senior policy representative for tax policy.
More on the 3.8 percent net investment tax is discussed in other REALTOR® magazine videos:
Philadelphia has the ninth largest municipal economy in the world, by some measures, but despite its size, it’s struggling with budget matters like many major cities. Among other things, it has some 40,000 buildings and 10,000 lots that are vacant and off the taxpayer rolls.
In the past year or so, the Greater Philadelphia Association of REALTORS® (GPAR) has tried to step up with concrete proposals to help the city improve its financial picture, and by extension the quality of life in the city, exemplifying what NAR’s “Power of R” campaign is all about.
If you’re not familiar with “The Power of R” (or #PowerofR for tweeting purposes), it’s a campaign that NAR launched a few months ago to show how REALTORS® use their expertise in real estate and knowledge of their community to help bring about positive change that benefits everyone.
In Philadelphia, the association worked with other organizations on a proposal for a land bank, which brings in a single entity to handle the sale of the city’s 50,000 vacant properties. The idea is to let this entity evaluate at each property and get it back onto the market in the best way possible, maximizing the return to the city but also improving the value of the property and the surrounding area.
The association has a number of other ideas it’s discussing with city officials, including one to help the city sell some two dozen schools that were closed last year. Depending on factors that real estate professionals are well-suited to determine, the city would sell each school based on its highest and best use. That might be as a new hall for one of the city’s many world-class universities or as a condo development or as something else. The point is that determining what that best use is is something REALTORS® know a lot about, and so by leveraging their expertise, the city can benefit itself and the market.
Taken together, the association’s many proposals are exactly what the “Power of R” campaign is all about: it’s REALTORS® using their expertise to improve their community for everyone’s benefit. In the 5-minute video above, GPAR President Allan Domb talks about his association’s ideas for helping Philadelphia leverage its assets. There might be ideas there to take back to your association.
The excitement around drones is increasing and for good reason: the technology is steadily getting to the point where commercial applications are increasingly possible, including for use in marketing real estate. Being able to hoist a camera on a drone, or unmanned aerial vehicle, has the potential to be a cost-effective way to get dramatic shots of property you have listed for sale, particularly for large, high-end homes or big expanses of land.
But while the technology is falling into place, a lot still needs to be done on the regulatory side, because drones present very real and very difficult issues, including safety and privacy issues. The safety issues are clear: people operating drones have to be trained and systems have to be built to help protect people nearby should something go wrong. On privacy, a regulatory system has to be in place to help reduce the chance of drones being used to take unauthorized photos and video.
Along with these two concerns is the bigger national security concern, since a weaponized drone is a danger of national importance.
The Federal Aviation Administration is in the process of developing rules that would address these three concerns. It’s working against a timeline by Congress to have something ready by next year, although with a matter like drones, it’s important for the FAA to get it right and not just get it in a hurry.
As it is, drone use by hobbyists is already allowed, although there are strict limits to what constitutes hobbyist use. How high a drone goes up is one of the criteria for determining whether a use is hobbyist or not. For non-hobbyist use, the FAA authorizes drones for research, public safety, and, to a more limited extent, commercial use, but all of these uses are approved on a case-by-case basis. The rules that FAA is developing are intended to give commercial and other drone uses more clear-cut guidelines for what’s okay, a different approach than today’s restricted case-by-case approval system.
To fill you in a bit more on what’s happening with drones and where they might fit in with real estate once the FAA comes out with its rules, REALTOR® Magazine sat down for a video interview with NAR Government Affairs to learn about the rules and the timeline. The video is four minutes long.
The bottom line is, the regulatory environment hasn’t yet caught up with advances in drone technology, so as of right now, drone use outside of hobbyist use is limited. But it makes sense to start familiarizing yourself with the potential for drones in your business so when wider commercial use gets the green light, you’ll know whether drones has a place in your business model.
By Melanie Wyne, NAR Government Affairs
The U.S. Court of Appeals for the District of Columbia yesterday ruled that key elements of the Federal Communications Commissions’ 2010 Open Internet Order are invalid. The order, which sets forth what are known as network neutrality rules, prohibited Internet Service Providers (ISPs) like Verizon, Comcast, and AT&T from discriminating in the network services they deliver to content providers.
By tossing out the rules, ISPs are free to charge content companies higher fees to deliver Internet traffic faster or in an otherwise more efficient way. This has potential implications for the real estate industry, since real estate companies and other industry providers act as content providers through the websites.
It remains to be seen what the response to this decision will be. The FCC may appeal the decision to the U.S. Supreme Court. If it does, this additional litigation could delay the effects of the ruling. It is also possible that the FCC could reclassify broadband service as a common carrier, thereby bringing ISPs deeper within their regulatory authority.
The business of real estate is increasingly conducted online. Streaming video, virtual tours, and voice-over-internet-protocols are just some of the technologies that are commonly used by REALTORS®. What’s more, new technologies will be adopted which are likely to require unencumbered network access. For this reason, NAR supports network neutrality and thus is looking carefully into the decision to toss out the rules. We will work with the FCC and Congress to ensure the Internet remains free and open.
As a real estate practitioner, does it matter whether you put your money into a bank or a credit union or whether you take out a loan with one but not the other? In the third of our monthly video series called Your Money Matters, Victoria Gillespie of REALTORS® Federal Credit Union, a division of Northwest Federal Credit Union, says it does matter, because credit unions are cooperatives owned by their account-holders, so profits get channeled back to account holders in the form of better terms, higher yields, and lower fees. Gillespie is REALTORS® FCU’s director of Business Development.
To be sure, the only way to know what’s best for you is to shop around. You want to see what’s available in terms of yield on your savings or other accounts, the attractiveness of the loan terms, and so forth. Gillespie thinks credit unions in general and REALTORS® FCU in particular will compare favorably in any shopping test. She points to a savings account yield at her credit union that was five times higher than at national banks when she shopped rates and terms at the end of last year.
But REALTORS® FCU has a few other advantages, she thinks, and that includes easy accessibility of your funds. Through partnerships with other financial institutions, the company offers 33,000 fee-free ATMs and a shared-branch network with more than 5,000 offices. It also tries to be user-friendly by maintaining a 24-7 customer support line, something it makes a point to do because of the unpredictable hours real estate agents work.
Again, you can only know what’s best for you by shopping around. As a start, spend a few minutes with the third in our Your Money Matters financial planning series and hear what Gillespie has to say about REALTORS® FCU. Next month we’ll be looking ideas for approaching your 2014 financial planning.
NAR has been working with federal regulators since Congress in 2010 passed massive banking reform legislation, part of which created the qualified mortgage and qualified residential mortgage rules. Today is an important day in the timeline of those rules, because today is the day the qualified mortgage (QM) rule takes effect, and NAR has told regulators it will be watching to see what impact the rules have on mortgage availability.
“I promise you that REALTORS® will be your boots on the ground,” NAR President-elect Chris Polychron told the federal government’s main QM rule-writer, Richard Cordray, earlier this week. Cordray is the director of the U.S. Consumer Financial Protection Bureau (CPB), which was created as part of the same law that created QM and the qualified residential mortgage (QRM) rules.
Under QM, lenders are required to make sure borrowers have a reasonable ability to repay before they can make what’s known as a qualified mortgage. A qualified mortgage represents what CFPB views as a safe mortgage, and thus a mortgage that is expected to cost borrowers less, because the risk is less to lenders. How CFPB defines the “ability to repay” includes a maximum debt-to-income ratio of 43 percent. Also, while Fannie Mae and Freddie Mac are in conservatorship, their conforming loans are considered qualified. Also, loans by small community banks that meet certain criteria are considered qualified, as are FHA, VA and Rural Housing Service (RHS) loans.
In short, the universe of qualified mortgages isn’t particularly large right now, because Fannie, Freddie, FHA, and other federally backed loans make up the vast majority of loans originated today. But the qualified standard is nevertheless important because it defines what a safe mortgage is and what it will be in the future.
As of today, the QM rule is in effect. Will we see much change in mortgage underwriting practices as a result? It’s too soon to say, but lenders have been aware of the rules’ standard for some time now and have been operating with them in mind since CFPB proposed them a year ago. For that reason, lenders to an extent have already built the standards into their operations, so how much practices will change starting today is hard to know.
For the most part, NAR is okay with the QM rule. It fought hard to keep a minimum down payment requirement out of the rule, and on that score, the association won, as did the dozens of other consumer and industry groups that fought alongside it in a coalition. But NAR still has concerns over a part of the rule that limits points and fees to 3 percent for loans provided by lenders with affiliated businesses, such as title businesses. NAR continues to talk with CFPB on whether such a limit makes sense from both a fairness and a business standpoint. For its part, CFPB has said it will be monitoring the impact of that limitation along with others parts of the rule.
So, QM is now in effect. It’s time to see what the impact will be. In the 3-minute video above, CFPB Director Cordray asks NAR to help it monitor the impact of the rule and NAR President-elect Chris Polychron assured Cordray the association will. Also in the video, Cordray outlines the criteria for a qualified mortgage as set forth in the rule.
You don’t think of the changing status of marijuana in many states as having a real estate impact but it does. In the states where medical marijuana is decriminalized (and in Washington and Colorado, where it’s decriminalized even for non-medical use), landlords and their rental agents have a disclosure issue on their hands. The landlord has to decide whether or not the rental property accommodates marijuana use, and if so, the rental agent has to be sure to adequately disclose the policy to prospective tenants. That’s just one of the issues stemming from the changing legality of this controlled substance.
The marijuana issue is one of several trending legal issues you’ll be hearing about more in the months ahead. Fracking, which involves extracting gas from shale rock, raises contractual issues: do the rights to the gas leases convey with the property in a sale? The answer is, it depends on what you negotiate. So, agents need to be up on the contractual issues that fracking raise and also has to be able to manage buyers’ and sellers’ expectations about who gets the rights to the gas leases.
NAR Legal Affairs identifies five trending residential real estate legal issues for 2014 and discuss them in this 9-minute video. The five issues are medical marijuana, fracking, pocket listings, IDX copyright violations, and broker liability for actions of a salesperson. Each issue has its own twist. The goal of the video is to make you aware of these twists so you can have a better idea of what to do if you find yourself dealing with one of the issues this year.
Since the federal government enacted health insurance reform in 2010, NAR has put out a considerable amount of information on the law, including on the basics of signing up for insurance under the law based on a one-hour webinar REALTOR® Magazine hosted in early December.
To provide you with additional guidance, NAR President Steve Brown has taped a 10-minute walk-through on what you need to know to meet the law’s mandatory insurance requirement by March 31 unless you meet one of the law’s exceptions.
It’s a plain-languge walk-through that could answer many of the remaining questions you have on the law. Who needs to have health insurance? What do you do if you already have it? Does your existing insurance meet the law’s requirements? How can you see if you qualify for premium credits, which help reduce the cost of insurance for some households? What’s the difference between a private and a public exchange, and does the difference matter to you?
If you remain unsure what your next step should be now that the clock is ticking toward the March 31 deadline, view the 10-minute video. The goal is is to give you a good idea of what you need to do, based on your current insurance situation The video also directs you to resources for additional help.