On Jan. 1, the U.S. Senate and House passed legislation to avert the "fiscal cliff." Here's what the bill said about real estate-related issues.
• Mortgage cancellation tax relief extended for one year: There had been much concern by Realtors that the Mortgage Debt Cancellation Tax Relief law, which was set to expire Dec. 31, would not be extended. The law allows a property owner to pay no income tax on portions of a mortgage for a primary residence that was forgiven as part of a short sale or foreclosure. Under the "fiscal cliff" package, the law was extended for one year, until Dec. 31, 2013.
• Deduction for mortgage insurance premiums for filers making under $110,000 was extended through 2013 and made retroactive to cover 2012.
• Leasehold improvements: 15-year, straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012.
• Energy efficiency tax credit: The 10 percent tax credit (up to $500) for homeowners who make energy improvements to existing homes was extended through 2013 and made retroactive to cover 2012.
• Permanent repeal of Pease limitations for 99 percent of taxpayers: Under the agreement, the so-called "Pease Limitations" that reduce the value of itemized deductions were permanently repealed for most taxpayers, but will be re-instituted for high income filers. These limitations, named for Congressman Don Pease of Ohio, will only apply to individuals earning more than $250,000 and joint filers earning above $300,000.
These thresholds have been increased, are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by 3 percent. That amount is then used to reduce the total value of the filer's itemized deductions. The total amount of reduction cannot exceed 80 percent of the filer's itemized deductions.
These limits were first enacted in 1990 and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been re-instituted on all filers, starting at $174,450 of adjusted gross income.
• Capital gains: The capital gains rate stays at 15 percent for those at the top rate of $400,000 for individuals and $450,000 on a joint return. After that, any gains above those amounts will be taxed at 20 percent. The $250/$500k exclusion for the sale of a principal residence remains in place.
• Estate tax: The first $5 million in individual estates and $10 million for family estates are now exempted from the estate tax. After that, the rate will be 40 percent, up from 35 percent. The exemption amounts are indexed for inflation.
Local real estate market update
In the residential market, we are seeing a steady increase in activity. As before, when a nice home comes on the market that is priced right, we see a lot of showing activity. Usually within two or three days, the property has had several offers and is going under contract. Foreclosed or owner/seller properties are generally closing within 45 to 60 days. Short sale properties are taking between three to six months to close and probably 50 percent of those sales fall out of contract before closing date.
Appraisal values are steadily increasing and the sales of nondistressed properties are becoming more prominent. I believe we may even see some starts of new home construction in our area in the spring. The lack of good inventory is causing prices to rise. The inventory of newer nice homes is dwindling and there are buyers looking for properties that more closely meet their needs and desires. There are a lot of steals/deals on vacant building lots on the market today. This should entice some builders to build new homes, since a low lot price helps the numbers work for this market.
The number of homes that sold in our local area last year increased from 426 in 2011 to 529 last year, a 24 percent jump. Sales by MLS (Multiple Listing Service) were: Rifle, 29 percent; Glenwood Springs, 22 percent; New Castle, 16 percent; Carbondale and Silt, both 12 percent; Parachute, 5 percent; and Battlement Mesa, 4 percent.
The amount of foreclosures decreased from 726 homes in 2011 to 564 last year.
The activity in the commercial market has definitely increased; we are seeing leased properties filling up and some commercial sales.
Glenn Ault and Amie Marx are brokers at Bray Real Estate in Rifle.