Taxes

If you’re selling your Scottsdale home after you’ve made substantial improvements, known as capital improvements, the money you spent on those improvements could help lower your tax bill when you sell.

Scottsdale home improvements can save you on your tax bill when you sell your home.Tax rules let you add capital improvement expenses to the cost basis of your Scottsdale home. Why is that a big deal? Because a higher cost basis lowers the total profit, or capital gain, in IRS-speak—you’re required to pay taxes on.

The tax break doesn’t affect everyone. Most home owners are exempted from paying taxes on the first $250,000 of profit for single filers ($500,000 for joint filers). If you move frequently, maybe it’s not worth the effort to keep up with your capital improvement expenses. But if you plan to live in your house a long time or make lots of upgrades, saving receipts is a smart move.

How Improvements Can Affect Your Scottsdale Home Cost Basis

To figure out how improvements affect your tax bill, you first have to know your cost basis. The cost basis is the amount of money you spent to buy or build your Scottsdale home including all the costs you paid at the closing: fees to lawyers, survey charges, transfer taxes, and home inspection, to name just a few. You should be able to find all those costs on the settlement statement you received at your closing, also known as your HUD-1 Statement.

Next, you need to account for any subsequent capital improvements you made to your Scottsdale home. Let’s say you bought your home for $300,000 including all closing costs. That’s the initial cost basis. You then spent $25,000 to remodel your kitchen. Add those together and you get an adjusted cost basis of $325,000.

If you lived in your home as your main residence for at least two out of the last five years, any profit you make on the sale will be taxed as a long-term capital gain. You sell your Scottsdale home for $575,000. That means you have a capital gain of $250,000 (the $575,000 sale price minus the $325,000 cost basis). You’re single, so you get an automatic exemption for the $250,000 profit. End of story.

Had you not factored in the money you spent on the kitchen remodel, you’d be facing a tax bill for that $25,000 gain that exceeded the automatic exemption. By keeping receipts and adjusting your basis, you saved about $5,000 in taxes based on the 15% tax rate on capital gains. Well worth taking an hour a month to organize your home-improvement receipts, wouldn’t you say?

This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

With tax season upon us again, many people are wondering when they might expect to receive their tax refund.

Some people believe that getting a large tax refund is not as desirable as more accurate withholding throughout the year, as a large refund represents a loan paid back by the government interest-free. Optimally, a return should result in a payment owed of just less than would cause a penalty charge, which is 100% of the prior year’s tax (110% for high income individuals), 90% of the current year’s tax, or $1,000 for individuals who have direct withholding and do not pay estimated tax.

However, some people use the tax refund as a simple “savings plan” to get money back each year (even though it is excess money that they paid earlier in the year). Another argument is that it is better to get a tax refund rather than to owe money, because in the latter case one might find oneself without sufficient money in their checking account to make the necessary payment. When properly filled out, the Form W-4 will withhold approximately the correct amount of tax to eliminate a refund or amount owed, assuming the W-4 was filled out at the beginning of the tax year.

If you’re one of the lucky ones expecting to get a tax refund this year, here’s some news about when you can expect to get that tax refund after you file your taxes…

For more information on tax refunds and other tax related information, just click over to the Taxes Category under Scottsdale Real Estate Categories to the right.

Scottsdale mortgage debt remains untaxed for another year.With all the talk about the “Fiscal Cliff” approved by Congress at the 13th hour, little attention was given to a key part of the extension that prevents distressed Scottsdale homeowners from being taxed on forgiven mortgage debt.

The exception for “qualified principal residence indebtedness” was created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners whose mortgages have been restructured to prevent foreclosures, or those who have gone through “short sales,” selling their homes for less than what is owed in mortgages.

The exception allows homeowners to exclude from their income certain cancelled debt on their principal residence.

The relief act’s extension was seen as vital to the recovering housing market. Short sales nationwide had been surging in anticipation of the exception’s end on Dec. 31. The exception will now expire on Dec. 31, 2013.

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable.

The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven.

The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

RealtyTrac reports that a total of 193,059 U.S. properties in some stage of foreclosure or bank-owned (REO) were sold during the third quarter of 2012, an increase of 21 percent from the previous quarter, but down 3 percent from the third quarter of 2011.

For continuous updates on how new or extended legislation surrounding the “Fiscal Cliff” deal finally approved by Congress could affect your Scottsdale mortgage debt or taxes, stay tuned to our site. We’ll bring you updates from time to time as they become relevant to Scottsdale real estate or Scottsdale mortgage debts or rates.

Limiting real estate tax deductions could definitely affect Scottsdale home values, and it’s an issue you’re likely to hear more about as Congress and the Obama administration continue negotiations on the comprehensive tax reform that could send the economy over the “fiscal cliff.”

What Could Happen to Scottsdale Home Values?

Scottsdale home values could be affected by limiting tax deductionsAny significant reductions in these long-established tax benefits would inevitably trigger declines in Scottsdale home values. Under some circumstances, they could be well into the double digits — 15%, according to Lawrence Yun, chief economist of the National Association of Realtors. “That’s how much we can expect values to fall as buyers discount the value of the deduction in their purchase offers,” according to Yun.

Cutting back on real estate write-offs could make homes less attractive financially, but other potential features of a final tax compromise could counteract the loss of deductions, softening the net impact on values. Plus no one on Capitol Hill is talking at the moment about eliminating the mortgage interest or property tax write-offs, just capping them in some way for higher-income individuals.

But would limiting real estate deductions necessarily lead to lower Scottsdale home values? A 1995 study by the consulting firm Data Resources Inc. estimated that a consumption-based “flat tax” that repealed all deductions would lead to a 15% aggregate decline in home values, costing owners $1.7 trillion in equity holdings.

More recently, a 2010 study for the Tax Policy Center of the Brookings Institution and the Urban Institute sought to model the effects of Obama’s tax reform proposals for fiscal 2011 — limiting mortgage interest and property tax deductions to the 28% bracket level, and the simultaneous increase in the highest-income tax brackets back to the levels existing before 2001.

In one scenario, when taxpayers in the 33% bracket had their mortgage interest deductions limited to 28%, with no other tax changes, housing values dropped 6.9% to 15%, according to the study. The restrictions would have the heaviest effects on houses in areas of the country with relatively high local tax rates and where the costs of renting a home or apartment are favorable when compared with the costs of purchasing.

The reference to “certain assumptions” is key here. Nobody knows what shape tax reform — if it occurs in 2013 — will take: How drastically Scottsdale home values could be pared back, how long a transition period would be provided and what other elements in the final deal might serve to cushion the effect on homes, such as by spurring more vigorous economic growth, lower federal deficits and debt.

But for a segment of the economy such as Scottsdale home values, where asset values are tied in part to long-standing tax subsidies, almost any change that reduces those benefits appears likely to have at least a mildly negative effect on pricing. That is what is now in play on Capitol Hill.

Stay tuned to our site. We’ll keep you up to date on Scottsdale home values, and how they may be affected by any tax reform that Congress may enact.

One might think that when you buy a Scottsdale home, your property taxes will be what the previous owner paid, right? WRONG!

When buying a Scottsdale home, your taxes will most likely be higher than what the seller of that house was paying.

Why Taxes May Be Higher on Your New Scottsdale Home:

Property taxes when buying a homeWhen you buy a Scottsdale home, your new taxes will be based on the sales price. It’s common sense if you think about it. The sellers of the property probably paid a lot less for the house than you just did whenever they bought it (unless they bought it a year or two ago). Their taxes were based on that price, plus whatever the legally allowable annual raises in taxes were.

Once the city/county assessors office gets the paperwork on the new sales price of your home, the taxable value is adjusted and your taxes will likely go up.

Don’t rely on the current taxes advertised on a house to set your budget. Know what your taxes will be after you buy and you’ll be all set. How do you do that?

Try going to Google or Bing and finding your city or state’s property tax estimator. Try searching for “Scottsdale estimated property taxes.” If that doesn’t get you any results, try to search for a more specific query such as “Scottsdale estimated property tax” or “Scottsdale property tax estimator.” Keep trying, you’ll find it eventually.

Finding the correct property taxes you’ll be paying when you move into your new Scottsdale home is important. If all else fails, call the local Scottsdale assessor’s office and ask what your taxes will be based on the value you’re buying your home for.

If you’re our client and we’re helping you find the perfect Scottsdale home, we’ll assist you in determining what your new property tax rate will be. Just ask us. The last thing we want for you is to have budget shock when you get a property tax bill that is much higher than what you may see listed for taxes for a particular property.