From the category archives:

Taxes

The Homestead Market Value Exclusion Explained

I have been getting a lot of questions from Minnesota home owners and future buyers about the homestead credit previously available on Minnesota properties. The Minnesota Association of Realtors has recently put forth a helpful explanation about the new Homestead Market Value Exclusion (HMVE) that was created in the 2011 legislative session.

The new HMVE is a recent change to how homestead property taxes are calculated. It replaces the Homestead Market Value Credit (HMVC). Under the old credit system, the credit lowered a homeowner’s property tax burden based on the value of their home. The state then reimbursed local governments for the lost amount of their levy (revenues) due to the credit. However, due to the state’s budget problems, it was rare that local governments were fully reimbursed by the state. Eliminating the credit and creating an exclusion removes the possibility of the state withholding funds and creates more stability for local governments.

The new program excludes a portion of the homeowner’s market value from the property tax calculation. The amount of value excluded is directly proportional to the credit the home received under the old law. The actual tax burden on homesteads could be lesser or greater depending upon the mix of properties in the taxing jurisdiction and the levy decisions made by local governments (for more information on the technical calculations, please see further below).

Technical Calculations

Description: Under the old credit system, the credit amount would rapidly increase as a home value approached $76,000 with the maximum credit amount of $304. After $76,000 the credit would decrease until it was completely phased out with a home value of over $414,000. The new exclusion mimics this same scale as homes approaching $76,000 would have a rapidly increasing exclusion of value, with a home valued at $76,000 receiving a maximum exclusion of 40% of their home value from property tax calculations. The percentage then decreases and is phased out at homes valued over $414,000.

Calculations

Old Law with Credit New Law with HMVE
Market Value (MV) determined by Assessor Market Value (MV) determined by Assessor
N/A Calculate exclusion (HMVE):MV < $76K: Exclusion = 0.4 x MV

MV $76K – $414K: Exclusion=$30,400 –
((MV – $76K) x.09)

MV > $414K: Exclusion = $0
N/A Taxable MV = MV – Exclusion
Homes < $500K: MV x .1% = Tax Capacity (TC)Homes > $500K: $5,000 + ((MV – $500K) x 1.25%) = TC Homes < $500K: Taxable MV x .1% = Tax Capacity (TC)Homes > $500K: $5,000 + ((Taxable MV – $500K) x 1.25%) = TC
Gross Tax = TC x total tax rate (county + city + special district rate) N/A
HMVC = MV < $76K: MV x .004MV $76K – $414K: $304 – ((MV – $76K) x .0009)

MV > $414K: $0

 N/A
Net Tax = Gross Tax – HMVC Net Tax = TC x total tax rate (county + city + special district rate)

(Referendum taxes are not covered here)

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Comparing Market Value with Assessed Value in the Twin Cities

I think the answer to this post on comparing Market Value vs. Assessed Value can be summed up in four simple words, “Just Don’t Do It“. In the past few months I have seen an increased objection voiced by some buyers over home prices. When I ask them to justify their reasoning, I am quickly told something along the lines of “Well, the home is only assessed for X. Why should I pay more than that?”

To make it simple, Market Value in Minnesota is what a buyer is willing to pay for a home, where Assessed Value is a valued placed on a property by a governemnt tax assessor for the purposes of taxation. The two are not the same. Every state is different in how they calculate property assessments, and Minnesota uses a system that is different from any state I have lived in.

Take for instance Dakota County.The current 2011 tax statements that were sent out this year are not based on current home prices. Instead, they are taken from home sales that occured between Oct. 1, 2009 and Sept. 30, 2010, data that no home appraiser would be able to use under financial guidelines as the sales are too far into the past. So if I were to buy a home towards the end of 2011, the “values” used by the county assessor could be off by two years!

Now look at homes currently for sale on the open market. The most important job of a real estate agent is determining what the Fair Market Value of a property is by comparing it to other properties that have recently sold in the area. This “market snapshot” is a more accurate, not to mention more up-to-date, representation of a home’s value. If buyer’s are willing to pay “X” for a similar home down the street, then there is a good chance another buyer is willing to pay around the same amount for your home.

While homes that are priced in lower tax brackets tend to show assessed values and market values closer together, homes in the upper-bracket real estate market, especially waterfront properties and historic homes, tend to be further apart when comparing the two values. County tax assessors generally have poor to no knowledge of what the true value of an expensive home might be, as they rarely have direct access to the interior of homes. Take for instance a large historic home I sold in Minneapolis. It was a truly unique home with nothing remotely like it on that side of town. The historic elements inside the home were priceless and would be near impossible to duplicate, but according to the tax assessor, the home was assessed well below its true market value. When a buyer did come in with an offer, they had it priced at the assessed value. I literally laughed when I saw the exact number and had to do the buyer’s agent’s job for her by showing where proper comparable home’s would come from (she was an out of town agent). After some negotiating, the seller and buyer were able to come to an agreed to price, which was up considerably from the assessed value first proposed by the buyer.

So please, when you are shopping for a home, do not use the assessed value of a home as the basis for an offer. Instead, look at what other comparable homes in the area have sold for and go from there!

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New Plans for High Income Earners in Minnesota

Our Lovely Governor’s Plan

In case you haven’t heard, our new democratic governor has unveiled his budget proposal for Minnesota.  The Governor’s proposal focuses largely on liberal, revenue-raising measures that unfairly target one group of people – those he considers RICH. 

  • His plan calls for creating a fourth tier income tax bracket at 10.95% (why  not just make it 11?) for joint filers earning over $150,000 and head-of-household filers earning $130,000. (By the way, when did spouses making $150K become rich?)
  •  He also wants to create a “temporary” income surtax of 3% on filers earning more than $500,000 annually. Of course we all know that any tax that is touted as being only “temporary” always becomes a permanent tax.
  • And probably the most ridiculous is imposing a statewide property tax on homes valued over $1 million. 

It shouldn’t be any surprise to my readers that I oppose all three of these proposals. I am not rich, but I aspire to be some day through hard work. Why then should I, or anyone else who has worked hard to be successful, be punished for earning more? I constantly hear about how one class deserves more than the other, and frankly I don’t get the whole “spread the wealth” thing. I grew up lower middle class, and through hard work, my father raised us up some. He never asked for a handout, and he raised me to believe that the only one looking out for myself is me. I could never ask someone that is wealthy to give me a piece of their pie just because I don’t have any – I prefer to make my own.

So when I hear Dayton say he wants to tax the rich more because “they can afford it”, I get a little mad. At 11%, Minnesota will be one of the states with the highest tax bracket. I see luxury home property taxes all the time, and trust me, they aren’t cheap. So also increasing the property taxes on million dollar homes just pushes the knife in further for high income wage earners. With the plethora of million dollar homes available in the Twin Cities, especially around Lake Minnetonka, I can help but think that these proposals will keep the wealthy from moving to Minnesota, therefore making it harder for local home owners to sell.

I guess we will just have to wait and see what happens. The Minnesota Association of Realtors “opposes the imposition of a statewide property tax for several reasons.  First, property taxes should remain a source of local government revenues and should not be expanded at a state level.  Second, expanding the residential property tax to the state poses an opportunity for future expansion to other, lower-valued properties.  Finally, it is the wrong time to add additional burdens to an already ailing housing market”.

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We Need Your Help to Stop the Minnesota House of Representatives

Below is a press release sent to Minnesota Realtors regarding some important tax law modifications that will negatively impact homeowners in our state. Please take the time to read the below information and take action via the link below. All of us need to come together to protect our real estate market.

From the Minnesota Association of Realtors:

“On Monday, the Minnesota House of Representatives Tax Committee released a “delete all amendment” to HF2323 and added provisions that are negative for real estate in the Omnibus Tax Bill. Authored by DFL Representative Ann Lenczewski, it contains a number of tax law modifications that hurt all Minnesota home owners. We need you to review and distribute this “Call to Action” to your clients, customers, and friends.

BACKGROUND: The Minnesota legislature and many other state governments find themselves in a situation familiar to many Minnesota households – their expenses have outpaced their revenue. Whether it is your family budget, a business budget or government budget, when expenses are higher than income you have to make choices. Since 1992, even with all of the Budget Shortfalls Minnesota has faced, the spending has increased each and every year. In fact, Minnesota State spending has gone from $14.5 billion in 1992/93 to $34.6 billion in 2008/09 – that’s a whopping 138 percent increase.

To resolve the budget shortfall, legislators have a number of options: 1) raise taxes to cover the government spending; 2) reduce spending to equalize the revenue projected; 3) raise revenue and reduce spending. The House/Senate DFL plans focus on option 3 – raise taxes and reduce spending. Governor Pawlenty has proposed a plan focused on reducing spending and raising revenue without raising taxes.

HOUSE TAX BILL HURTS REAL ESTATE. The DFL House Tax Plan raises revenue by cutting a number of income tax deductions. Of significant concern to Minnesota REALTORS® and homeowners, the DFL House plan eliminates two major real estate tax deductions: the Mortgage Interest Deduction and Real Estate Property Taxes. The bill also eliminates provisions of the Relative Homestead Tax.

Elimination of Mortgage Interest Deduction (MID)– a feature of the tax code since 1933, the MID has helped numerous generations achieve the American Dream of owning a home. A significant public policy objective for decades, homeownership stabilizes families, neighborhoods and communities. The House DFL Tax Bill eliminates the MID for homeowners and replaces it with a “housing credit” for qualified homeowners. The maximum credit is $420, which is equal to 7 percent (7%) of up to $6,000 of mortgage interest paid during the taxable year. However, no credit is applied to the first $4,000 of interest paid. Therefore, a homeowner must pay at least $10,000 in MID in order to receive the full $420 credit. As an example, if a homeowner has mortgage interest of $8,000 in the tax year, the credit equals $280. ($8,000 – $4,000 = $4,000 x 7% = $280).

This provision hurts young families disproportionately because mortgage debt loads are highest when people are establishing their households. This provision changes the financial plans numerous families have made when purchasing a home and increases the financial difficulties many are facing during this economic downturn. At a time when housing is finally getting a financial foothold why eliminate a tax provision that has helped millions of families achieve the “American Dream?”

Real Estate Property Tax Deductibility –This public policy provision has been included in the tax code since 1933 and allows taxpayers to deduct property taxes paid from their income. The House DFL Tax Bill eliminates the deductibility of real estate property taxes at a time when local property taxes continue to increase faster than Minnesotan’s income.

Relative Homestead – If you own identical houses, with identical values, with identical tax rates you would assume you would pay identical taxes – Right? Not if the House DFL Tax Bill becomes law. In a provision of the bill, authored by a DFL legislator, families that provide housing to other family members will pay more taxes on the second home. The goal of the provision, as stated by the legislator, is to stop parents from buying homes for their college students. MNAR pointed out that this is a small piece of the overall program and instead the proposal will be hurting families trying to assist other family members who may have gone through job loss, divorce or other financial difficulties. Isn’t it better to have families provide for families instead of government?

These provisions have been designed according to the author to make the Minnesota tax system more progressive and to raise revenue to fill the state’s pending budget shortfall. Because real estate related public policy provisions of the tax code benefit the upper 50% of tax payers – Top 50% begins at $40,061 according to the Tax Incidence Study (http://www.taxes.state.mn.us/legal_policy/other_supporting_content/2009_tax_incidence_study_links.pdf ). At a time when the housing market is beginning to stabilize, this House DFL sponsored proposal sends the wrong message to struggling Minnesota households.

The Minnesota Association of REALTORS® has a long and respected position that government, at all levels, needs to “Live Within Your Means.” Just like families sitting around the kitchen table trying to make ends, Minnesota’s legislative body should not be adding to the long-term financial burden of Minnesota homeowners. The House DFL Tax Bill penalizes families who have invested in the American Dream and provide for the backbone for stable communities.

ACTION REQUEST: To fight this unbelievable proposal we are asking that you take three steps:

  1. Please contact your legislator and let them know how you feel about this proposal. Please find attached a list with legislator contact information or use this link: http://www.leg.state.mn.us/leg/Districtfinder.asp
  2. Forward this email to your clients, customers and friends. Let them know what is being proposed and give them the web address above to review the bill.
  3. Go the extra mile and CALL your legislator about this tax bill. Let him/her know your concerns and how it will impact your clients, your family and your business. Let your Representative know that it is time for our elected officials to “LIVE WITHIN YOUR MEANS” by prioritizing spending and not raising taxes.
    You can access the bill summary (48 pages) at: http://www.house.leg.state.mn.us/hrd/bs/86/HF2323.html

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Taxing the Rich will Solve All Our Problems…

…at least that is what the Obama Administration would have you believe when you look at their proposals for increasing taxes on the “wealthy”, all in the name of reducing the national deficit. After all, the rich can afford it, right?

  1. The “New Era of Responsibility” will increase the tax rates for those earning over $250,000 a year as a married couple, to 36% and 39.6%. Rates are currently at 33% and 35%.
  2. Tax payers making over $250,000 per year will be limited on the itemized deductions they will be allowed to take on their returns. In essence, anyone that falls in a tax bracket higher than 28% won’t be able to take advantage of programs, such as mortgage interest deduction. By the way, the estimated $318 Billion that this provision will bring in, will go to funding the nationalization of health care. Thank you “super rich” for giving health care to everyone. (heavy sarcasm intended)
  3. The tax rate for capital gains and dividends for those earning over $250,000 per year will increase to 20%, currently taxed at 15%. I guess the White House believes that the wealthy can afford another 5%, on top of all the other tax increases they will be slapped with.

Now many people ask me why I defend the wealthy. Let me just tell you that I am not wealthy, falling into the middle class as I have always lived. But this is America, and I dream of becoming wealthy some day, and some day, all of this could effect me. It is also a well known fact that the wealthy in America provide the jobs and the financial backbone which keeps this country going. Raising taxes on them causes them to cut back on investing, take business overseas, or cut jobs, etc. Not something we really need right now in a failing economy.

But the silver lining on all of this is the fact some Democrats in Congress do not like parts of Obama’s plan, and could force the President to rethink his taxing of the wealthy. The Wall Street Journal reported yesterday that some Senators question the limitation of deductions as it could further depress the housing market. After all, if you can’t deduct your mortgage interest, maybe a wealthy buyer won’t consider buying at all.

Others question using the extra money towards health care, something that has nothing to do with tax rates, etc. Robbing from Peter to give to Paul, so to speak. I guess the main issue here is that in the rush to fix the economy, the White House is throwing not only the kitchen sink into the mess, but the plumbing as well. Hey, if the wealthy can “afford” to give more of their hard earned money, as long as it contributes to the “greater good”, it is OK, right?

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New Changes to Minnesota Mortgage and Deed Taxes

When it comes time to sell or buy a home, the government cannot help but put there hands into your pocket and ask for money as well. After all, what type of government would it be to not tax

There has recently been some “updates” to local taxes in Hennepin and Ramsey county:

  • Effective May 31, 2008, the Ramsey county deed and mortgage tax is being reinstated until December 31, 2012. (Don’t think for a minute they won’t extend it further)
  • Not to be out done, Hennepin county is also reinstating the deed and mortgage tax for the same time period.

(It is interesting to note that Anoka, Dakota, and St. Louis counties had the same request, but the taxes were not enacted.)

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How the Mortgage Debt Cancellation Relief Act Effects You

After much anticipation and a full year of home owners facing foreclosure sweating it out, H.R. 3648 – Public Law 110-142 was finally signed into law December 20, 2007.

One of the pitfalls of a short sale or foreclosure is that any debt amount forgiven or discharged by the lender is recognized as taxable income by the IRS, and then taxed at ordinary income rates for the home owner, even though no actual cash changes hands. The taxation of “fake” money was just another kick in the pants to homeowners who just lost their home to foreclosure, only to find a huge tax bill in the mail that most could not afford to pay. The Act was given a boost of support with the number of foreclosures and the mortgage/financial crisis, not to mention the decreasing home values happening across the country.

So now, with the passage of the H.R. 3648, individuals who are relieved of their obligation to pay some portion of a mortgage debt on a principal residence between January 1, 2007 and December 31, 2009 will not be required to pay income tax on any amount that is forgiven.

Here are some details that might apply to you:

  • No Income Limitation: All borrowers receive the relief, no matter what their income.
  • Dollar Limitation: No more than $2 million of mortgage debt is eligible for the exclusion ($1 million of debt for a married filing separately return).
  • Relief applies only to an individuals principal residence and the forgiven mortgage debt must have been secured by that residence.
  • No relief is available for cash-outs, whether the cash-out takes the form of a refinanced first mortgage, a second mortgage, home equity line of credit or similar arrangement.
  • Eligible debt is what is called “acquisition indebtedness.” This is debt used to acquire, construct or rehabilitate a residence.
    1) Refinanced debt qualifies, so long as the debt does not exceed the original amount of the debt. (Same rule as Mortgage Interest Deduction)
    2) Home equity debt (or second mortgages) qualifies if the funds were used to improve the home. (Borrower must have adequate records, as under current law.)
    3) See cash-outs, above. No amount of a cash-out may be treated as acquisition debt.

Here are a few points of clarification as supplied by the Minnesota Association of Realtors:

  • Refinanced Mortgages: The relief does apply to refinanced debt in some circumstances. The rules seek to assure that any debt eligible for the relief is directly related to the acquisition or improvement (such as rehabilitation, expansion, renovation, reconstruction) of the principal residence. Debt used for furnishings (i.e., any movable property) in the home is not eligible for the relief. When the proceeds of any refinanced debt is used for any purpose other than acquisition or improvement, those proceeds are not eligible for the relief.
  • Principal Residence: A principal residence is defined in the same manner as the rules that apply to the capital gains exclusion on the sale of a principal residence. An individual may not have more than one principal residence at any given time.
  • Second Homes: As a general matter, the relief does not apply to any debt forgiveness on any mortgage for any second home of the taxpayer. However, if a taxpayer uses a residence (other than his principal residence) solely as an income-producing rental property, already-existing relief provisions might apply, depending on the taxpayer’s situation. if the second home property was acquired as a speculative investment (such as for resale rather than rental), relief provisions are unlikely to be available. In all events an individual who is in a short sale, foreclosure, workout or similar situation on a residence (including condos) other than his principal residence should consult a tax adviser to determine what, if any, relief provisions might be available.

Some other points of interest that are tacked on to the Mortgage Debt Cancellation Relief Act are the following:

Mortgage Insurance Premiums: The deduction for mortgage insurance premiums is extended through tax year 2010. Income limitations on the deduction will continue to apply.

Surviving Spouses/$500,000 Exclusion: In some circumstances, a surviving spouse is denied eligibility for the full $500,000 exclusion on the sale of his/her principal residence. This most frequently occurs when the residence is not held in joint ownership at the time the spouse who is not on the title dies. In that case, the deceased spouse had no ownership interest, so there is no basis step-up on that half of the property. the surviving spouse is thus eligible only for an exclusion of $250,000. (Had the home been sold during the deceased spouse’s lifetime, the full $500,000 exclusion would have applied, so long as they filed a joint return.) Challenges for the surviving spouse are compounded when this circumstance occurs late in the year. The surviving spouse is often unable to sell the property within the same year that the spouse died. This legislation provides that a surviving spouse may claim the full $500,000 exclusion not only in the year of the deceased spouse’s death, but also during the two years after the spouse’s death.

Second Homes Converted to Principal Residence: The original House-passed version of this legislation included a provision that would have limited the application of the $250,000/$500,000 exclusion when a second home is converted to a principal residence and later sold. Thankfully, this change was not included in the final legislation that the President signed, as it would have hurt those that own second homes with huge capital gain taxes.

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Good News for 2008 Taxes in Twin Cities

The provision that allowed Hennepin and Ramsey counties to collect additional State Deed Tax and Mortgage Registration Tax expired on January 1, 2008. There was a provision to continue the increased rates proposed last year which was vetoed by Governor Tim Pawlenty.

The result: Hennepin and Ramsey counties are now in sync with the rest of Minnesota counties in charging $3.30/1,000 for State Deed Tax and $2.30/1,000 for Mortgage Registration Tax.

With the slow down in the market that is sure to continue into 2008, this is welcome news for home owners in the process of selling their Minneapolis home this year.

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Paying More into Social Security

Being incorporated for my real estate business, I receive IRS publications quarterly that update me to recent changes for filing taxes, paying taxes, etc. Saturday I opened my mail to find the most recent issue for the close-out of 2007. One thing I have learned with government publications is to read the short articles. They can easily be overlooked because they sit in obscure places.

For those of you that don’t know yet, probably because no one is reporting on the issue, is that the wage base for Social Security is going up yet again this year. This year it is set at $102,000. What this means is that any wage earner will have to pay into Social Security until their income exceeds $102.000. If you would like to see the calculation for this figure you can see it on the SSA website.

One thing the public forgets about when they discuss real estate agents and the money they earn is that real estate agents are self-employed individuals. While those employed by corporations only have to pay 6.2% of their paycheck into the SSA fund (because their employer matches the other 6.2%), real estate agents have to pay the entire 12.4%. So if an agent makes $100,000 in a year, and trust me, most agents don’t even come near that, they would have to pay over $12,000 to Social Security. That’s a huge part of an individuals paycheck if you ask me.

My main problem is that the wage base MUST increase each year because it is law. So here we have the middle class paying into a system that will never have enough money for us all when it is our time to retire. For those of us in the Gen X and Gen Y age groups, we don’t hold out much hope for seeing a single cent of the money we have contributed to social security. Also, household income has not increased very much when compared with increases to the cost of living and cost of owning a home. So the middle class is left holding the ball to keep social security going, every year, seeing the gap between what they make and what the wage base becomes grow further and further apart. With half the population nearing retirement, social security is going to be sucked dry soon.

So my New Year’s prediction :Social security is going the way of the dinosaurs, extinction.
(ok, so it really is a lifetime prediction)

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The Clock is Ticking

Time is almost up for Minneapolis home owners to pay their final property tax bill this year. Tomorrow is October 15th and is the last day that you can pay. Don’t forget! The last thing you need is the govenment knocking on your door with a notice saying they are putting a lien on your home.

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