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    Homeownership and Trading Down: Don’t Trade Your Taxes Up

    Trading down to a smaller home? The Pennsylvania Institute of Certified Public Accountants cautions you to take the time to review the tax implications before you go ahead with your plans.

    In particular, make sure you take full advantage of tax-free gains. When you sell your primary residence, you can make up to $250,000 ($500,000 if you file a joint return) and not owe any capital gains tax. There is no age requirement and no need to buy a more expensive home to qualify for this exclusion, as long as you meet IRS requirements.

    To qualify for the exclusion, the home you sell must be your principal residence, and you must have owned and lived in it for at least two of the five years prior to the date of sale. However, that doesn’t mean you need to be living in the home when you sell it. If you own a primary residence and a vacation home, you may need to plan ahead—depending on which property has appreciated more in value since the time you bought it, you might want to take steps to qualify that property as your principal residence. Since there is no limit on the number of times you may qualify for tax-free gain, you may have another chance to reap the tax benefit if you sell the remaining home. The only requirement is that the sales be at least two years apart.

    If you’ve owned your home for a while, it’s possible that its value has increased beyond the $250,000/$500,000 tax-free thresholds. Any gain that exceeds the exclusion threshold is a long-term capital gain, which would be 15% for most homeowners, but could be as low as 5% depending on taxable income.

    If you have a gain that exceeds the threshold, don’t assume that you owe tax on the entire amount above the threshold. Chances are that over the years you’ve improved your home, such as by adding a deck, another bathroom, or new landscaping.

    According to tax law, the cost of additions and other improvements that add to the value of your home or prolong its useful life increase the basis—purchase price plus closing costs, such as legal fees and transfer taxes, and the cost of major improvements—which reduces your gain and your tax bill.

    Source: The Pennsylvania Institute of Certified Public Accountants(PICPA), in Money Management; www.picpa.org.

    Get Smart About Insurance at Insure U

    The National Association of Insurance Commissioners (NAIC) has launched a public education program to assist consumers with information about insurance issues. The campaign, under the banner of Insure U, is designed to help consumers get smart about insurance as their needs change at different life stages, and to educate them about how to avoid being scammed by fake insurance companies.

    More information can be found at the Web site www.insureUonline.org.

    Source: The National Association of Insurance Commissioners (NAIC), a voluntary organization of the chief insurance regulatory officials.

    The New Mortgages: More Ways to Take on Debt

    Skyrocketing real estate values, other forms of high-rate consumer debt and a trend toward get-rich-quick real estate investment is driving supply and demand for loans that allow lower monthly payments in exchange for slower or, in some cases, negative buildup of equity. Are these new mortgage loans ticking time bombs?

    It depends on your financial situation and how you use them, but requires careful analysis. Whether they come from your current lender or a late-night infomercial, here’s an overview from the Financial Planning Association of several non-traditional loan options on the market and their potential risks and rewards:

    Interest-Only Loans: This immensely popular loan option allows a borrower to pay only the interest on the mortgage in monthly payments for a fixed term. After the end of that term, usually five to seven years, the borrower can refinance, pay the balance in a lump sum, or start paying off the principal, in which case the payments can rise. Although some types of interest-only mortgages have been around for decades, today’s loan products are in many cases marketed to “sub-prime” borrowers who in the past could not have qualified for standard loans. That’s where the risk comes in.

    Zero-Down Mortgages: An increasingly common option for borrowers with less-than-perfect credit, these loans allow borrowers to buy with no money down. It gets a borrower into a home, but any chances of acquiring equity in a home will have to come from rising market values, and that’s not something every borrower can count on.

    Piggyback Loans: Some borrowers who can’t make a 20% down payment may consider an end run around private mortgage insurance by taking out a first and second mortgage concurrently. Typically, a piggyback loan works as follows: the most common type is an 80/10/10 where a first mortgage is taken out for 80% of the home’s value, a down payment of 10% is made and another 10% is financed in a second trust at possibly a higher interest rate. Some lenders may allow a piggyback loan for less than a 10% down payment.

    100-Plus Loans: Also known as loan-to-value (LTV) mortgages, lenders promote these mortgage loans of 100% or more of appraised market value as a way to draw in customers who can’t make a down payment. An overly high appraisal value in a sliding market, a loss of home value, or even worse, a loss of a job can lead very quickly to rising debt and the possible loss of the home.

    Negative Amortization Loans: Negative amortization means that a loan balance is increasing instead of decreasing. With a negative amortization loan, if a payment isn’t enough to cover the interest and principal payment, the shortage is added to the loan balance, which means you never really start paying off the loan. Again, this may work for people in short-term housing situations in markets with rising rates, but those conditions are never guaranteed.

    Source: The Financial Planning Association, the membership organization for the financial planning community.