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Good news. And bad news. There is a new REET in town. by Jen Hudson

I’ll take “What is REET” for $400 please.

The REET is the Real Estate Excise Tax.  Think of it like sales tax when you sell your property.

Washington State has (2019 and prior) a flat excise tax of 1.28% across the state.  In addition to this 1.28%, individual jurisdictions such as cities or counties can levy an extra 0.50%, for a total of $1.78%.

For example, almost everywhere in Snohomish, King, Skagit, or Whatcom county is a tax of 1.78% total.  The exceptions here are Darrington and Skykomish, at a total of 1.53% instead.  There are others throughout the state, those are just the ones we work most frequently with.

That means, if you want to sell your home, in most areas you will pay a total excise tax of 1.78% at closing to the Department of Revenue.

Right now, it does not matter if your property is worth $300,000 or $3,000,000, your excise tax is the same rate at 1.78%.

Is the REET going to change?

Yes.  Starting January 1, 2020, the real estate excise tax rate across Washington State is going to change.

The good news? 

Home and property owners with sales prices at $1,500,000 or below will see either no change or a reduction in this rate.  Properties valued below $500,000 will see a reduction of 14% from 1.28% down to 1.10%.  The properties between $500,000 and $1,500,000 will remain the same.

The bad news?

Property owners with sales prices above $1.5mil will see their taxes more than double, with rates at 2.75% for $1,500,000 – $3,000,000 and 3.0% for $3,000,000 and above.

How does the new REET work?

This new REET system is going to be a graduated or tiered structure.  While the lower end of the market will benefit from these new rates, the middle stays the same, and upper end will owe more in taxes at closing.

New REET Rates for Washington State (State only, local jurisdiction is extra)

REET Price Example – $350,000:

For example, if you sold a property for $350,000 in Everett, you would pay $6,230 today (1.28% plus 0.50% = 1.78%).

If you sold that same property in 2020, your tax is now $5,600 (1.10% plus 0.50% = 1.60%), which is a $630 savings.

REET Price Example – $2,500,000:

The other end of the spectrum looks a little different.  Let’s say your property is worth $2.5mil.  Today, your tax is $44,500 (1.28% plus 0.50% = 1.78%).

In 2020, those same taxes will increase to $58,300 ($8,000 + $17,800 + $32,500), which is an additional $13,800 cost.

1st tier $500,000 of sales price x (1.10% + 0.5% = 1.6%)  = $8,000

2nd tier $1,000,000 of sales price  from $500k-$1.5mil x (1.28% + 0.5% = 1.78%) = $17,800

3rd tier $1,000,000 of sales price from $1.5mil-$2.5mil x (2.75% + 0.5% = 3.25%) = $32,500

Is there anything else I should know?

Keep in mind these rate changes are to the state portion of the real estate excise tax, not the local city or county jurisdiction.

If you live in a location such as Everett or Arlington where you currently pay 1.28% to the state plus 0.50% to the local jurisdiction, then you will still pay your state fee between 1.10-3.0% (in the chart above) plus the extra local percentage on top of that.

One more thing. 

While a 1031 tax deferred exchange is usually a great weapon to combat your tax bill, unfortunately it won’t work here.  In Washington State, the excise tax is due on the sale of your property to the state and local jurisdiction, and is not one of the taxes that can be deferred later, such as capital gains or the recapture tax on depreciation.

As Sun Tzu says “Strategy without Tactics is the slowest route to victory.  Tactics without Strategy is the noise before defeat.”  We excel at helping you plan and prepare, to make sure you get to the finish line in the best way possible.

For more information about local tax rates or to talk strategy, give us a call at (206) 466-4020 or send an email to info@hudsoncreg.com.

Cheers!

Jen Hudson & Duane Petzoldt
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It’s Time to Raise the Bar. by Jen Hudson

Let me translate the title for our younger crowd… #RaiseTheBar… of your financial fitness, that is.

We recently posted an article about Humans versus Robots.  If you missed it, you can read it here.

Following this, we received a very kind note from our good friend and longtime lender, Tom Lasswell.

Tom was gracious enough to expand on our story and pointed out some things that bare repeating.

“I appreciated reading your most recent report…. Technology and how that is impacting Real Estate and Lending…

Too many financial disciplines are needed to work together for an individual or family to even have a basic strategy, let alone a great one.  With so many variables for any individual or family, many of the attorneys, financial advisors, CPAs, and Bankers don’t even understand how their service area impacts another, and vice versa.”

Based on a recent report published by CNBC (and released by Bankrate), only 39% of Americans could cover an unexpected $1000 emergency from their own funds.  In case you are doing the math, that translates to 61% of Americans do not have enough cash or money in the bank to pay a $1000 emergency.

RaiseTheBarThat. Is. Scary.  Especially when most emergencies cost a lot more than $1000… at least from what I have seen.

He continues with “the industries have dumbed down their disciplines to compete.  Yet what I see today is Sales people Selling and Telling, when they should be Caring and Consulting.  Many do not have the education and expertise to truly guide their clients in the best manner possible.”

Is it in anyone’s best interest for us to sit back and ignore the problems that these automated and “streamlined” systems are creating?  I don’t think so.  Where has common sense gone?

Tom states “there are approximately 216 combinations of residential mortgage and insurance strategies.” 

That is a lot of combinations for a single mortgage or insurance or financial advisor to understand.  But, isn’t that their job?  Shouldn’t you be able to have a qualified professional discuss the pros and cons with you personally based on your unique situation?  Yes, it takes work to understand all those details and be able to educate someone on them.  But…. That is what I thought a professional was!

With this ongoing shift in our world to a more automated and “intuitive” system, we need to be careful.  If most loan advisors do not really understand how rates work, then how can you expect them to guide the technology company to create a program that works in their client’s best interest?

Next time you run into a “professional”… or professional hack, that is… ask them what is the difference between a stock and a bond?  Or, the difference between an annuity or life insurance policy?  How about the difference between a will and a trust?  Careful though, all of these questions will also require you to then ask your CPAs how all the tax implications work.  I hope you have a good CPA too!

Tom warns us that we need to be aware of entire industries that are trying so hard to compete on price, that they have overlooked value completely.  If you are working with a professional who lacks the understanding behind their industry and service, then maybe you should keep searching for a real professional instead.  If you have questions, the answer should NEVER be “let’s not discuss too many options, as that elicits too many questions and crates too many headaches for our company.”  Of course, they don’t state that directly… but you get the feeling a lot of times that is what they want to say, right?

When you need a real professional for your lending needs, you should give our friend Tom Lasswell with New American Funding a call at (206) 817-5532.  He’s been in the business for 35 years and knows more than just a thing or two.

And, when you want a team of professionals who truly understand the real estate market and all the related and moving components, you can reach us directly any day except Sunday.

Duane Petzoldt (425) 239-1780 or duane@hudsoncreg.com

Jen Hudson (206) 293-1005 or jen@hudsoncreg.com 

Your life decisions shouldn’t be made by a robot, and certainly not a robot that is still in the beta phase.  Let’s all come together and force these companies to raise the bar when it comes to their automated technology and how they train the people who are supposed to be helping you.

Cheers!

Jen Hudson & Duane Petzoldt
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Commercial RE Appraisal Changes

Did you know? On April 9, 2018, the FDIC changed their rules.  Per the federal agencies, commercial real estate transactions below $500,000 will no longer be required to have an appraisal.

Remember, just because the FDIC doesn’t require something… that doesn’t mean your local lender or bank won’t.

Want to read the full rules?  Check them out here.

If you need help getting prepared for your next investment or business purchase, give us a call.

Jen Hudson

(206) 293-1005 or jen@hudsoncreg.com

Duane Petzoldt

(425) 239-1780 or duane@hudsoncreg.com
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Tax Update: Victory!!!… Maybe? by Jennifer Hudson

Depreciation - Taxes PhotoI have never claimed to have a crystal ball, but this is the first time in the last 13 years where I feel the need to send out an update right away.

If you missed the most recent newsletter, it was about the exciting world of taxes.  At the time of writing the last newsletter, the tax plans that were presented by both the House and the Senate proposed increasing the exemption for capital gains on a primary residence from a required 2 of the last 5 years up to 5 of the last 8 years.  No one was excited about that in the real estate world, and we started making some calls.

After a little shuffle, we pulled off a WIN!  In the final version, the capital gains exemption was left alone and still requires you to live in your property as a primary residence for 2 of the last 5 years in order to be exempt from capital gains.  Score!

Bring on the conversion of a primary residence (for only 2 years!) to future rental (for no more than 3 years) game once again!  With the market on the upswing, we can build some real equity!

Unfortunately, we lost a different tax benefit instead.  You know how we have talked about Home Equity Lines of Credit (HELOC) in the past?  Well, the interest on a HELOC used to be tax deductible.  Today, it is no longer able to be written off on your taxes.

That makes me a little sad too, but it might be a blessing in disguise.

Maybe the loss of the HELOC tax deduction will actually cause people to pause for a moment before just taking out more debt on their homes.  It’s possible, right?  Time will tell.

In the meantime, I hope you all had a wonderful New Years and got to spend time with those you care about.  I know I did.  But now, it’s time to get back to work and invest wisely… and always with an eye on the future.

Looking for projects?  Me too.  Let’s look together.  Call me at (206) 293-1005 or email Jen@HudsonCREG.com for a quick refresher on where the market it at.

Remember… even though prices are higher than they have been, you make money on the purchase, NOT on the sale.  Run your numbers carefully before writing checks.  Let’s make this a great year!

Market Intelligence Matters.
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Knock Knock. Who’s There? The IRS. by Jennifer Hudson

I think many of you are familiar with the whole “2 year tax game.”  You know what I’m talking about, right?  The one where if you use a property as your primary residence on your tax returns for at least 2 of the previous 5 years, you can avoid capital gains.

How does… I mean DID… this work in real life?  Let me show you.

CaptureIn December 2012 in Everett, the average sales price for a home was $306,761.  In December 2014, it was $351,499.  In December 2017, it was $472,871… geez!  That’s a lot of money in Everett.

 

Let’s say that you purchased your house in 2012 for $306,761 and then sold in in 2014 for $351,499.

(Psst… check out the chart MY HOME: 2012->2014)

Picture1

 

If you sold it in 2014 for $351,499, the capital gain tax was magically waived.  Well, it’s not magically with elves or anything.  It is the tax code, after all.

If you had an extra $15,738 for just living in the home, that seems like a pretty sweet deal.

But, what if you stayed longer and just sold this year in 2017 instead?

(Psst… check out the chart MY HOME: 2012->2017)  

Picture2

 

Now we’re talking.  This looks pretty good right?  An extra $127,098 because you were in the upswing of a market.  Not bad.

But, that is where most people stop playing the game.

 

THE EXPANSION SET.

You know how cool card games, like “Cards Against Humanity” or something will get such a great response that they then create expansion sets to keep people coming back?

There is… I mean was…. an expansion set for this tax game too.  It’s called the rental property expansion set.

And, this game is one I was playing.  Well, still will… but way slower than before, which makes me sad.

Let’s say you bought the home in 2012 and moved out in 2014.  You didn’t sell in 2014.  Instead you decided to rent the home for 3 years before selling.  So, what does that look like?  Let’s see.

Ok, but let’s look closer at the investment side.

Rental Income.  Let’s say that you rented the house out and after all expenses, maintenance, insurance, property taxes, interest on your mortgage, etc… you were making $1,525 per month income.

$1,525/month x 36 months (or 3 years) = $54,900 in additional income

Depreciation.  Now, with an investment property, you also get to depreciate it on your taxes, which reduces your taxable income overall.  Let’s say that I was able to depreciate $8,521 per year, or a total of $25,563.

Not to get too complicated, but you’ll have to pay 25% of this back at closing as a depreciation recapture tax to the IRS.  Don’t worry about it too much.  You were still ahead all the other years.  It’s not perfect, just an example.

With this new investment property scenario, what does my income look like now?  Let’s see.

(Psst… check out the Expansion Set Chart)

Picture3

Now we’re talking.  You got a house to live in for 2 years which paid you.  Plus, you had an investment property for 3 years, which overall paid you too.  An extra $201,171 sounds pretty sweet!

NEW TAX PLANS.  THINK “5 OF THE LAST 8”.

So what is the change that both the senate and house are talking about?

Well, they want to take the primary residence exemption and expand that to 5 years from the current 2 year period.  This means you need to live in your house for a full 5 years on your tax returns before moving.

While there is still not a reconciliation for the new tax plan at the time I am writing this, BOTH the house and senate bills take the primary exemption and extend that requirement to 5 of the last 8 years.

So, in this real-life example above, I would have a surprise $25,420 tax bill (20% tax on the gain of $127,098).  If I’m not ready for that, it’s a big surprise.

So, what if I never used the property as a rental and just sold it “early”?  What does this new sale look like to someone who bought a house in 2014 instead of 2012?  Let’s take a peek.

(Psst… check out the Whoops! Chart)

Picture4

 

It’s still great that you get $65,888 after tax on your return.  But, that’s still a “surprise” $16,472 tax bill that no one has been accounting for.

The biggest challenge with this scenario is that all the people who have their homes under contract right now but won’t close until 2018 could be left for a bit of a shock come next tax season.  In one version of the bill you are protected if you are under contract, the other other… you are just out of luck.

PERSONAL OPINION TIME.

Let’s be real for a moment, shall we?

Issue One – Saving.  As a nation, we appear to have a real challenge saving money.  I’m not perfect by any means, but I’m trying to learn.

For a lot of people, a “surprise” you owe the IRS an extra $16,472 could really throw off their year and plans.  The part I don’t understand is how no one is talking about this.

So yeah, this scares me a little for many of my friends and clients.

You know what else scares me a little bit more?

Issue Two – Understanding Cash at Closing.  I feel like a lot of people forget… the dollars you see at closing are NOT the dollars that are taxed by the IRS.  The IRS doesn’t care one bit about whether you have a mortgage on a property.  That’s your choice.

If you have a home equity line of credit or HELOC against your property that “eats up” all the extra cash at the end, that doesn’t change anything about what you owe the IRS come tax season.

I see a lot of people… and predict that a WHOLE LOT MORE will start taking out home equity lines of credit or HELOCs on their homes in 2018.  Why?  Because they can.

If you think about it, your lender just sold you a 3.5% mortgage for 30 years.  You’re probably not going to give that up.  However, I bet that you will go get a line of credit for a slightly higher rate to pull a bunch of money out of your home so you can make improvements or put the kids through college or just go to Disneyland.  Whatever it is, a 5.5% HELOC is still cheap and you figure it will be paid back in no time.

Except, what happens when there is an emergency and you really do need to sell your home before the end of 5 years or before the HELOC is paid back?  In the scenario above, anyone with a line of credit for more than $65,888 may have to pay money to sell their house instead.

What was previously a break-even scenario could quickly turn into a tax problem if you don’t think ahead.

This potential unseen tax bill combined with future over-leveraged homes scares me too.  We did this already.  It was called 2006-2009.

Issue Three – Inventory and Housing.

Do you know what concerns me the most right now?  It’s the simple fact that this tax plan has many unintended consequences.  For example, it may lead to less homes for sale… which will continue to drive our prices up at rates that are not sustainable.

Remember how real estate is about supply & demand?  Well, we have a supply issue for the most part.  If you haven’t noticed, there are not many homes for sale or rent right now and that is driving up prices both for purchase and prices on rental properties.

As a home owner, I was previously planning on selling 2 homes in 2019.  One is my residence and the other is a rental.  Now?  I don’t plan on selling either of those for the simple issue of taxes that will accompany it.  I do pay the IRS every year, but I don’t enjoy it.  So, I have now personally added to the inventory shortage problem, which will continue to impact appreciation rates and rental prices.  Of course, this makes it less affordable for others no matter which side they are on.

Could I get into the 1031 exchange and start the deferring my taxes?  Sure, but it is like heroin (I assume… I’ve never done it).  Once you start, it’s hard to stop. The taxes owed just keep rolling over and piling up.

Why do I tell you these things?  For starters, I want to try and make people’s lives better.  I think you should be aware of what is going on and I think there should be more people talking about true issues and less hype in the world.  It drives me crazy that it has become so difficult to find real news.

Second, I think people should do more planning for the future and working just a little bit every day to make that happen.  Think of planning for the future like tooth maintenance.  Does brushing your teeth once make a difference?  No.  Does brushing your teeth twice everyday make sure you keep your teeth?  Sure does.

I would absolutely love to help you sell your house this next year.  Do I think you should?  That depends on your life plan and goals moving forward.  It’s not about the moment.  It’s time to think about the future.

Remember, markets don’t go up forever, but considering the natural disasters, local economy, new jobs, housing, cost of money, and a whole lot more…. I think we have a little while left still before a major shift.  So far, this feels like a slow squeeze instead of a bubble, but depending on how you plan, that could be ok.

When you are ready or when you just want to talk, I am here to help.

(206) 293-1005 or jen@hudsoncreg.com any day except Sunday

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