For the person who has good credit and income but not enough money for the down payment on a home, their qualified retirement program could offer them some help. The rules are different depending on whether it is a 401(k), a Roth IRA or a traditional IRA.
Up to half of the balance of a 401(k) or $50,000, whichever is less, can be borrowed by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from 401ks that would determine the repayment; interest is usually charged but goes back into the owner’s account. You can consult with your HR department to find out the specifics.
A risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid with as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also.
Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.
Traditional IRAs have a provision for first-time buyers which include anyone who hasn’t owned a home in the previous two years. A person and their spouse, if married, can each withdraw up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. However, they will have to recognize the withdrawal as income in that tax year. For more information, go to IRS.gov.
Another interesting fact about this provision is that the taxpayer making the withdrawal can help a relative includes children, grandchildren, parents and grandparents.
If you want more information to clearly understand the issues involved relative to your specific situation, talk to your tax professional or consult www.IRS.gov.
During campaign season, it is not unusual to hear a candidate criticized because they make a lot of money but pay little in income tax. While it might not seem fair, taxpayers are allowed to arrange their affairs so that they minimize the amount of tax paid.
Salary, wages and commissions, along with interest and dividends are taxed at ordinary income rates which can range from 10% to 39.6%. However, capital gains rates, for property held more than 12 months, are much lower ranging from 0% to 20%. Taxpayers in the 25-35% brackets pay LTCG rates of 15%.
The profit on rental property enjoys the lower long-term capital gains rates as compared to the profit on “flipped” property which is taxed at ordinary income rates.
Investments in rental homes generate income, provide depreciation for tax shelter, have equity build-up due to the amortizing loan, leveraged growth due to the borrowed funds and appreciation. The profits could be considerably higher than alternative investments and the profits taxed at lower rates.
The advantage is available to people who understand the tax laws and choose to arrange their activities so they pay a minimal amount of tax. The advantage is available to all taxpayers, not just the rich. In fact, implementing these types of strategies could lead to an increase in wealth.
Consider having this discussion with your tax professional.
The seller has three tools available to affect the marketability of their home: price, condition and terms. Price is the easiest to adjust for the competing properties, amount of inventory or market conditions. However, lowering the price may or may not be the best decision when trying to maximize the proceeds of sale.
If a home is in poor or outdated condition, updating can be done to make it show favorably with other homes that are currently on the market. Sometimes, sellers rationalize not doing the work by saying they believe the buyers would rather make their own choices. But, most buyers are using all their resources to get into the home and will have to live with it in its present condition until they can save enough to make the changes they want.
Another reason to go ahead and invest the money and effort into improving the condition is that it is difficult for buyers to imagine the home any other way than its current condition. When comparing one home to another, buyers will sometimes label a property as the “stinky house” or the “old kitchen” which may put it at a disadvantage versus others tagged with positive adjectives.
While price and condition are the main things that control the marketability, terms can be equally effective. Terms relate to financial considerations made by the seller to entice a buyer to make a decision to purchase their home.
Seller-paid points or closing costs, interest rate buy downs, and owner-financing where the seller has a large equity position, are examples of terms that may increase the marketability of a home because of the additional benefits they offer to buyers.
Increasing the marketability of your home is a great conversation to have with your real estate professional, especially to help you get the highest price in the shortest time with the fewest problems.
If competition is a buyer’s biggest concern, for goodness’ sake, get in the game. In a new survey of close to a thousand home buyers conducted by Redfin, affordability is still the number one concern but due to low inventories, competition from other buyers is moving its way up the poll.
26% identified affordability while 19% mentioned competition and 15% mentioned low inventory as their respective top concerns.
To win, athletes study the competition to come up with a plan and buying a home is not different.
- Probe, if you can, what terms are important to the seller before you write the offer.
- Once you decide to make an offer, do it swiftly so that your offer might be the only one the seller has to consider.
- Make a good (or possibly, your best) offer in the beginning; you may never get a chance at improving it. In highly competitive situations, consider offering above the list price if you believe the property may be under-valued.
- Attach your pre-approval letter from a respected lender. This means you’ll need to get pre-approved before you even think about writing an offer. Before you begin visiting properties you’re interested in is wiser.
- Ask your agent to share your lender’s contact information with the listing agent to reassure them of your ability to qualify. Let your lender know you’re doing so.
- Include a higher amount of earnest money for the price range and market area to focus the seller’s attention on yours being an offer that can be counted on to close.
- Eliminate unnecessary contingencies.
- Consider whether or not writing a personal, hand-written letter telling the seller what you like about their home and why you want it is a good idea. Ask your agent’s opinion and trust your gut instincts. This an approach that may be either very positively or negatively received by the seller.
- Minimize seller expenses paid for the benefit of the buyer.
- Shorten inspection times.
- Don’t ask for personal property. Accept personal property the seller prefers to leave with the house.
- Be flexible on closing dates to accommodate the seller’s move.
Once you find your dream home, don’t take a chance on losing it. Write an offer that is a win for both yourself and the seller.