The Housing and Economic Recovery Act was recently signed into law by President Bush.
The main focus of the bill was to help those in foreclosure and to bail out mortgage giants Freddie Mac and Fannie Mae.
They also added something to help collect more tax dollars from homeowners. Although it has nothing to do with solving the housing crisis this new change will affect owners that own second homes.
Currently, when a homeowner sells their primary residence they can escape taxation on the first $500,000 of their profit (married joint-filers) or $250,000 (single filers) if they lived in their primary residence for 2 out 5 years.
Under the old law, a homeowner could also claim the exclusion even on an investment property or vacation home if they turned it into their primary residence and lived there 2 out of 5 years.
Property owners in markets with high appreciation rates could sell their principal residences for a hefty profit pocketing the first $250,000 or $500,000 tax-free and then move into their investment property or vacation home for a couple of years and repeat the process.
As of January 1st, 2009 that is no longer possible. The new law will distinguish between “nonqualified” periods of rental or investment use and “qualified” periods of principal residence use.
Here’s an example: If you bought the house in 2009 and owned it for 10 years but lived in it as your primary residence for just two years, only two-tenths of the gain would be tax-free. They would take the total gain in property value and in this case divide it by 10 (ten years). You would then be taxed on the 8 year portion it was a rental, and not be taxed for the two year portion that you lived in it. Under this new law, that is now 8 years of tax you would not have had to pay under the old law.
If you are planning to sell your primary residence and collect the tax-free gains, and move into another property you own, then you may want to think about doing it before January 1st 2009 when the new law takes affect.
Michael Gier – Managing Partner
Nationwide Property Investments, LLC
Here is an article I thought was of vital importance to our investments in the Metroplex. It is one of many professional articles providing documentation on the large growth of population, the strong economy, and the rapid job growth experienced in Fort Worth. These are the main reasons why we at Nationwide focused on this area for our investments and believe you should to!
Editorial of the New York Sun, July 25, 2008
As the Congress considers whether to follow President Bush's lead in repealing the decades-old moratorium on drilling for oil on the Outer Continental Shelf and in the Arctic National Wildlife Refuge, it might want to take a look at what's happening in the Barnett Shale region in TEXAS. The recent history of the Shale, where innovative energy companies have turned a once impenetrable rock formation into the most important natural gas source in America, provides a testament to the professional competence of the engineers and geologists who find and obtain the energy resources that make America's economy possible. It also illustrates just how irrational the Congress's persistent opposition to drilling has become.
In addition to being the largest onshore natural gas field in America, the Barnett Shale sits directly on top of the Dallas-Fort Worth metropolitan area, which is home to 6 million people. Companies are drilling for natural gas underneath schools, underneath the Dallas-Fort Worth International Airport, and underneath residential communities, and the process so far has been a resounding success. The Shale is producing at rates that have exceeded all expectations, and it's being done in a major American city without disturbing the residents who live there. Surely the reindeer in the Arctic National Wildlife Refuge, on whose behalf much of the resistance to drilling in that area is based, are as amenable to the process of drilling for resources as the citizens of Fort Worth.
Meanwhile, the Shale's economic impact on central Texas is a reminder that oil and natural gas are not just fueling energy addiction and pollution; these resources also create wealth. While the national economy is suffering, central Texas is experiencing a veritable boom. The annual economic impact of the Shale is $22 billion, according to a study by the Perryman Group. The Shale has also generated nearly three-quarters of a billion dollars in local and state tax revenues, and has created nearly 100,000 jobs with more on the way. It's made a few billionaires, more than a few millionaires, and lifted thousands of fortunate men and women into sudden affluence. Would not a rational Congress rather these rewards accrue to Americans rather than our enemies in the Middle East?
Only a few years ago, drilling for the gas in the Barnett Shale was considered virtually impossible. "It is far more complicated to extract natural gas from shale than from other sources of natural gas, like sandstone," a spokesmen for Devon Energy, Chip Minty, said. Devon Energy has been active in the Shale since 2002, but until recently other companies have shied away from the area. Exxon Mobil, for instance, was late in buying an interest in the Barnett Shale even though its global headquarters is only a few miles away. Geologists and energy companies have known about the vast natural gas deposits in the Shale for decades, but the tight, almost impermeable nature of shale, a black rock formed from organic deposits 300 million years ago, made drilling there economically infeasible. A few decades of trial and error and a couple of visionary technological innovations later, and the Shale has become the most important natural gas field in America. The history of the Shale, Mr. Minty said, "shows the potential for energy resources across America."
There is new lending criteria that dramatically affects how we as investors acquire properties. The new requirements make it even more difficult to get loans and force us to be even more creative in structuring deals. Here are the new rules in no specific order:
1. Insurance companies will no longer write PMI (private mortgage insurance) policies on investment real estate, therefore, LTV's (loan to value's) may not be acquired for greater than 80%. This means that every real estate investment you look at (assuming you will use a traditional loan), will require a minimum of 20% down.
2. The new minimum down payment on fourplex units is now 25%. You may no longer place only 20% down.
3. Fannie Mae, Freddie Mac, and the other large lenders will limit the amount of properties you may have to 4, which includes your primary residence. It use to be that you could get 10-20 loans (with outstanding credit) but that has now been reduced to four. As a full time professional RE investor, this new lending criteria slams the door on those of us who actively purchase multiple properties. We will now be forced to acquire commercial loans or even commercial blanket loans on residential properties. A commercial blanket loan would be a loan in which the lender would wrap multiple residential properties under one commercial loan, thus freeing up your ability to purchase more residential properties with conventional financing.
This new criteria makes it more difficult for us as investors, however, not impossible. We still have the option of private lender loans, using IRA funds, 401k funds, home equity, and of course, OPM (other people's money). You can also find a credit partner to work with you. Contact me for assistance if you fall into one or more of the criteria mentioned above and need ideas of how you may continue or start investing in real estate.
William Barnard - Managing Partner
Thursday, August 07, 2008
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