CALIFORNIA REAL ESTATE UPDATE #4

INTRODUCTION

Getting A Sales License

If you or anyone you know would like to get a California Real Estate Sales License, now is the time. The DRE has a task force working to make the requirements more restrictive and expensive.

At this time, the only requirement to schedule an exam date is to complete a Real Estate Principles Course. This could be taken live at a Community College by attending fifteen 3-hour classes. We recommend our home-study program.

TEST YOUR KNOWLEDGE ON HOME MORTGATE INTEREST DEDUCTIONS

In a previous newsletter, we used an exam format to illustrate important information about selling a home. The response was gratifying as many licensees requested permission to use the exam as a handout to their clients. Another important subject for homeowners and agents is Mortgage Deduction. A 20 question exam follows.

1. Home Mortgage Interest can be deducted by a taxpayer for:
   1. 1 home.
   2. 2 homes.
   3. 3 homes.
   4. no limit in number.

2. A qualified home would include a:
   1. cooperative.
   2. mobile home.
   3. boat.
   4. all of the above.

3. To be considered secured debt on a qualified home,
   1. the home must be security for the debt..
   2. in case of default, the home would satisfy the debt.
   3. is recorded or otherwise perfected.
   4. none of the above.

4. A son pays all of the mortgage interest for his mother's loan on her home, so:
   1. he can consider it his second home.
   2. the interest is always deductible.
   3. he can't deduct the interest.
   4. all of the above.

5. Grandfathered debt is interest on loans:
   1. taken out on or before Oct. 13, 1987.
   2. taken out by a grandparent that you assume.
   3. taken over by you after a grandparent dies.
   4. that is a disadvantage to a taxpayer and should be avoided.

6. The three types of deductible home interest debt are:
   1. home equity.
   2. home acquisition.
   3. grandfathered.
   4. all of the above.

7. For a home to be considered the second home,
   1. a taxpayer has to use it sometime during the year.
   2. it must be in the United States.
   3. it must not be held out for sale or rent during the year.
   4. none of the above.

8. If you and your spouse have a qualified loan of $500,000 on your home and you use 20% of your home as an office:
   1. only interest on $400,000 can be deducted as home interest.
   2. the home office doesn't affect interest deductibility.
   3. the interest on $100,000 could be considered business or home-equity interest and be deducted.
   4. both a and c.

9. If you rent out part of your home, you can treat the rented part as being used by you for residential living if:
   1. the rented part is used by the tenant primarily for residential living.
   2. the rental part is not a self-contained unit having a separate sleeping, cooking, and toilet facility.
   3. no more than two tenants.
   4. all of the above.

10. For "free" and valuable information about interest debt, you should obtain:
    1. IRS Publication 936.
    2. "Taxes For Dummies".
    3. Vern Haven's "The Real Estate Investors Tax Guide".
    4. none of the above.

11. Other than grandfathered debt, a taxpayer is limited to interest on debt of:
    1. $500,000 for a single taxpayer.
    2. $1,100,000.
    3. $1,000,000.
    4. None of the above.

12. Late payment charges:
    1. are deductible if not for a specific service.
    2. are not deductible in any case.
    3. are deductible only on grandfathered debt.
    4. are illegal in California.

13. A married couple can deduct interest on a qualified debt to $1,100,000 while a single tax payer is limited to:
    1. $900,000.
    2. $1,100,000.
    3. $1,200,000.
    4. none of the above.

14. You bought a home three years ago for $1,000,000 with nothing down. Principal payments have reduced the balance to $800,000 when you refinance $1,200,000 because the house has increased in value. Your qualified debt is:
    1. $900,000.
    2. $1,100,000.
    3. $1,200,000.
    4. none of the above.

15. You take out a home equity loan for $150,000 and build an addition. Your acquisition debt is currently $600,000 and you have a second loan of home equity debt of $90,000. The interest on the $150,000 is:
    1. all deductible.
    2. not deductible at all.
    3. deductible only to $10,000.
    4. deductible to $100,000.

16. You bought a second home for $400,000 cash one year ago. On your main home, you have a loan of $300,000 that is acquisition debt and home equity debt of $50,000. You now finance the second home to $200,000. On the new loan, you deduct interest on:
    1. $50,000.
    2. $200,000.
    3. $100,000.
    4. none of the above.

17. An engineer working for Lockheed has equity debt and wants to buy a car and finance $40,000. He or she should talk to a tax advisor about:
    1. putting the loan on their home.
    2. getting a car loan at their local bank.
    3. financing the car with the manufacturer.
    4. none of the above.

18. A self-employed person or any independent contractor with the same circumstances as Question 18 should consider:
    1. calling the loan home equity debt.
    2. getting a loan against the home and paying cash with the loan proceeds.
    3. comparing current teaser auto interest rates with home equity rates.
    4. all of the above.

19. A "substantial improvement" to a home will:
    1. add value to the home.
    2. prolong the useful life of the home.
    3. adapt the home to a new use.
    4. any of the above.

20. My home has a large acquisition debt and a maximum amount of home equity debt and I get a $150,000 loan to build an addition. When I get the funds, I place them in an account where I already have $100,000 and pay all the bills from there.
    1. My deduction of interest could be limited.
    2. This is no problem.
    3. It is an improvement and deductible.
    4. None of the above.

ANSWERS with EXPLANATIONS

1. B. You can deduct interest on one main home and one second home. If you are so blessed that you own more than two homes, you can change which is your second home each year under certain restrictions.

2. D. The second home must have sleeping, cooking, and toilet facilities which can be of the outside variety.

3. D. Statement of fact.

4. C. He is not liable for the debt. The mother and son should talk to a tax advisor. Title could be changed but estate tax, gift tax, interest deduction, and many other considerations must be evaluated.

5. A. Loans existing on any property as of Oct. 13, 1987 do not come under the limits set by this law.

6. D. Statement of fact.

7. C. The second home does not have to be used to be deductible and interest is deductible on foreign homes.

8. A and C. In many cases, business interest is a better deduction than home interest because for self-employed persons, the business interest is deducted from gross income. Home interest is deducted on Schedule A of Form 1040. If someone does not have a lot of deductions and has been a "short form" user, some of the interest may not be deductible. When a married couple has income of over $132,950, (single taxpayer over $66,475), a percentage of Schedule A deductions is eliminated.

9. D. This rule allows someone to share home expenses and still get the full deduction. (If two tenants sleep together in the same room, they are considered one tenant. Bet you did not know that for I never heard of it.)

10. A. It is valuable. Go to www.irs.gov and download it and check out other publications. If you buy "Taxes For Dummies", you have the right book (I do not like it). Also, Vern Hoven's book is fabulous, but it costs $25.00 plus $3.00 shipping and handling. If you want to buy it, contact our office.

11. B. $1,000,000 of acquisition or improvement debt on two properties and $100,000 of home equity debt on the same two properties. By the way, the two homes are called main home and second home. Your main home is where you live most of the year. Normally, this is where you work. If you are ever audited, IRS staff checks your phone bills, utility bills, gas and other purchases, voting registration, drivers' license address, etc.

12. A. They are deductible and they affect your loan FEICO score and makes getting a good loan more difficult.

13. C. Single and couples are the same.

14. A. You can only refinance home acquisition debt to its present balance plus there is $100,000 of home equity debt available. Also, you can not deduct interest on loans that are in excess of the fair market value of the properties.

15. C. Statement of fact.

16. A. You can finance a home after paying cash and still have deductible interest but there is a 90 day limit. There are different rules if you build a home and they should be checked before ever applying for a construction loan.

17. A. This would allow the engineer to deduct the interest as home equity debt.

18. D. A self-employed person should check all possibilities with a tax advisor because calling the car interest business interest could result in lower taxes because business interest is deducted from gross income while home interest is deducted on Schedule A. A zero interest car loan might be better is some cases

19. D. Right out of Publication 936.

20. A. This illustrates a problem called tracking. When you mix funds as in this example (loan proceeds and other funds), the IRS believes that you only used $150/250 or 60% of the loan proceeds and since you had a maximum amount of home equity debt not all of the interest is deductible.

If you have read all of these questions, you realize that there are several nuances and little-known facts to interest deduction problems. Before any large refinance or improvement, taxpayers should talk to a competent tax advisor. (Just to illustrate another point, you can treat a home under construction as a qualified home for a period of up to 24 months before or after the loan dates, but only if it becomes your qualified home at the time it is ready for occupancy.

These questions do not cover prepaid interest, minister and military allowances, mortgage assistance payments, ground rents, refunds of interest, divorces, refinancing balloon payments, etc. In four weeks, I will do an exam for you on loan points. Stayed tuned.

COMPLETE INFORMATION ON REAL ESTATE LICENSING