Don't give up on real estate, but patience is required

REAL ESTATE MATTERS

September 21, 2007|By ILYCE GLINK

We are in our early 60s. We have owned and managed rental properties in an area north of Seattle for the past 20 years. We are now ready to sell off our rentals and retire. Since the real estate market is slow in our area, I suppose this is bad timing on our part.

If we hold on to these for a few more years, do you think the housing market will come back? What about that book that said the housing market was going to crash forever in 2007?

Thanks. We'd love your thoughts on this.

Here's the short answer to your question: Yes, I think the market will come back. But the caveat is that the market may come back stronger in some places than others.

What we're seeing nationwide is that home prices are declining by a few percentage points this year. But the number of homeowners who are in trouble is far higher in some places than others.

Overall, Seattle has been a relatively strong housing market and has experienced tremendous growth in a few short years, both in the number of homes being built, the number of people moving to the area, and the amount of home value appreciation homeowners have enjoyed.

That said, you'd be hard-pressed to find an area, even one that has experienced such strong growth, that isn't taking a breather at the moment. The big exception is New York City, for which the party continues.

Unfortunately, I think it's going to take some time for the quirks in the housing market to shake out. Interest rates will drop some this year; on Tuesday, the Fed cut the federal funds rate from 5.25 percent to 4.75 percent, in part to head off a possible recession.

But there are still millions of homeowners with adjustable-rate mortgages that will reset and some of them won't be able to afford the increase.

Look for the number of people who are delinquent with their mortgage payments and who have had foreclosure proceedings brought against them to rise through 2008 (and we're already at a record high).

Once we get through the presidential election and into 2009, we will probably start to see the housing market pick up. If you can wait to sell until at least 2009, I think you'll find a much better seller's market.

I have a tricky question for you. I am supposed to rent a friend's house, and we have come to this bump in the road. Because she wants to sell her house in 18 months to two years, she is worried about paying capital gains tax.

From doing my research, I know that because she has lived in the house as her primary residence for two out of the past five years, she can rent for two years and she'd be OK tax-wise.

Our question has to do with the one-bedroom apartment that is in her home. She has had her home for 20 years, and up until two years ago, she had the apartment rented. But she stopped renting it and uses the whole property as her primary residence.

She does not want to pay capital gains on the sale of the property. If I rent the house, I would live in the house, not the rental apartment.

For starters, when a person sells his or her home, and the person has used the property as their primary residence for at least two out of the last five years, he or she doesn't have to pay any tax to the federal government on the first $250,000 of profit (up to $500,000 if the owners are married).

In your friend's case, she is free to sell the home now and would not have to pay tax on her gains of sale up to $250,000. If married, she could exclude $500,000 in gains.

The trick to your question is what is going to happen if she rents the home to you for two years. If she can still say that she lived in the entire property for two out of the last five years, she should be OK even if once again she turns into a landlord.

While she may not owe capital gains tax on the sale of the property, she may have to recapture any depreciation she took on the one-bedroom rental through the years.

And if she takes depreciation on the entire property while she rents it to you, she may have additional taxes to pay when she sells.

While she should be able to exclude most of the tax from the sale of the property, she should speak to an accountant to determine whether her timing will satisfy the Internal Revenue Service and what, if any, obligation she has relating to any depreciation taken for the building in the past.

Contact Ilyce Glink through her Web site, www.thinkglink.com, by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022 or calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.

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