A recent Congressional Research Service (CRS) Report tries to reduce fears that the 3.8% Medicare contributions tax on unearned income (added by the Health Care and Education Reconciliation Act of 2010) effective for tax years beginning in 2013, is a “real estate” or “home sales” tax. As noted below, part or all of the gain on the sale of a residence will be subject to this new tax, along with many other items of passive income.

The Medicare contribution tax is a 3.8% additional tax that is imposed on individuals, estates and trusts on the lesser of (i) unearned income and (ii) Modified Adjusted Gross Income (MAGI) in excess of a threshold amount. The threshold amount for married individuals filing jointly is $250,000 ($125,000 if filing separately) and $200,000 for all others.

The CRS report stresses that the tax is not limited exclusively to real estate transactions and does not apply to the portion of gain which is excluded from tax under Internal Revenue Code section 121. Currently, under code sec 121, when a taxpayer sells his or her principal residence, there is an exclusion from taxable income of up to $250,000 of the capital gain if single or $500,000 if married filing jointly. Certain ownership and use tests must be satisfied to qualify for the exclusion. Gains in excess of the section 121 exclusion will be treated as capital gain for regular tax purposes and investment income for purposes of the 3.8% Medicare tax. However, given the exclusion amount only a limited number of taxpayers would be affected, especially since many home owners have experienced a decline in the value of their homes in recent years. It should be noted that gains on the sale of second homes (i.e., those which are not a principal residence) will not be eligible for the exclusion and may very well be subject to the 3.8% Medicare tax, in addition to the regular income tax.

If you are planning on selling a primary residence with a significant gain in excess of the $250,000/500,000 or a second residence, it may be a better idea to sell before the end of 2012 to avoid this additional 3.8% tax. For sales after 2012, installment sales reporting may be helpful to spread the recognition of gain into more than one year. An installment sale would also spread the regular capital gains tax over more than one year, but you are also delaying the receipt of the cash. An unknown is what would happen if you made an installment sale of a home in 2012 with some of the proceeds payable in 2012. Would the portion of the gain reportable in 2013 for regular tax purposes be subject to the 3.8% Medicare tax?

Finally, for regular tax purposes a loss on the sale of a personal residence is not deductible. Will the same rule apply to the 3.8 % Medicare tax or can that loss be used to reduce the tax on other investment income?

Excerpt from The 100/0 Principle, by Al Ritter

Posted by Ron Dinsmore on April 13, 2010 · Leave a Comment 

What is the most effective way to create and sustain great relationships with others? It’s The 100/0 Principle: You take full responsibility (the 100) for the relationship, expecting nothing (the 0) in return.
Implementing The 100/0 Principle is not natural for most of us. It takes real commitment to the relationship and a good dose of self-discipline to think, act and give 100 percent.
The 100/0 Principle applies to those people in your life where the relationships are too important to react automatically or judgmentally. Each of us must determine the relationships to which this principle should apply. For most of us, it applies to work associates, customers, suppliers, family and friends.
STEP 1 – Determine what you can do to make the relationship work…then do it. Demonstrate respect and kindness to the other person, whether he/she deserves it or not.
STEP 2 – Do not expect anything in return. Zero, zip, nada.
STEP 3 – Do not allow anything the other person says or does (no matter how annoying!) to affect you. In other words, don’t take the bait.
STEP 4 – Be persistent with your graciousness and kindness. Often we give up too soon, especially when others don’t respond in kind. Remember to expect nothing in return.
At times (usually few), the relationship can remain challenging, even toxic, despite your 100 percent commitment and self-discipline. When this occurs, you need to avoid being the “Knower” and shift to being the “Learner.” Avoid Knower statements/ thoughts like “that won’t work,” “I’m right, you are wrong,” “I know it and you don’t,” “I’ll teach you,” “that’s just the way it is,” “I need to tell you what I know,” etc.
Instead use Learner statements/thoughts like “Let me find out what is going on and try to understand the situation,” “I could be wrong,” “I wonder if there is anything of value here,” “I wonder if…” etc. In other words, as a Learner, be curious!
Principle Paradox
This may strike you as strange, but here’s the paradox: When you take authentic responsibility for a relationship, more often than not the other person quickly chooses to take responsibility as well. Consequently, the 100/0 relationship quickly transforms into something approaching 100/100. When that occurs, true breakthroughs happen for the individuals involved, their teams, their organizations and their families.

This is not easy, but if you want something badly enough, you can serve and wait for results.

The Latest Punch to the Gut: Foreclosures Fraud

By Inya Ivkovic, MA

Many Americans facing foreclosures on their homes are starting to believe they may not have to leave their homes, because questions have arisen as of late about lenders and whether they have followed all the foreclosure rules. If they have not, then seizures may be halted until the regulators get to the bottom of it all. But is it really a relief, is it simply postponing the inevitable, or are these foreclosure irregularities perhaps going deeper and threatening the overall recovery?

Attorneys general in as many as 40 states so far have started investigations into home foreclosure procedures and many lenders seem to have been caught in the net of providing foreclosure documents that have not been properly validated. Executives appear to have signed hundreds of thousands of documents without actually checking any loan records or having even the basic knowledge about who owns specific mortgages.

The defense of some of the lenders is that, while there may have been some procedural errors, the underlying transactions have not been fraudulent. This is hard to believe; if the lenders are not familiar with the details of specific loans, how can they be sure such loans are not fraudulent? In the meantime, the pressure is mounting. As foreclosure levels have reached record highs in the U.S., the U.S. government has had to say something, pressuring the lenders to reduce their eviction rates. But lenders, many of them having benefited from the billions of dollars in bailout money, are quite adamant on getting their loans back, one way or another.

Regardless, suspicions are mounting that lenders facing an exorbitant number of foreclosures have taken one shortcut too many trying to collect as much money as they could before the lending market truly imploded. According to RealtyTrac, just in August, lenders have taken possession of 95,364 California homes and served eviction notices on 338,836 more.

The problem is if these deficiencies are as widespread as 40 attorneys general think they are, hundreds of thousands of foreclosures could be tied up in courts for years, including the evictions already executed as well. If that happens — and it seems right now that the problem might be turning into an avalanche — economic recovery in the U.S. could be further delayed. There is simply no way getting the economy to start moving again without resolving foreclosure issues first.

The foreclosures fraud highlights another problem — the “shadow inventory.” If the homes now in default flood the market, which is a distinct possibility, real estate prices could be further depressed. If potential buyers, who are already scarce, believe that prices have not yet hit rock bottom, the will keep on waiting to get into the market and the U.S. real estate market will continue being nothing more than barren wasteland.

As for the resale homes turnover rate, the data point to an even more dismal picture. Data collected from 23 states where faulty foreclosures are now flooding the courts indicates that the average time between borrowers defaulting on their loan payments and sales of their homes has widened to 25 months in August of this year from 18 months reported in August 2007, at the onset of the financial crisis that has led to the crash of 2008.

The widening of the turnaround time is not only having an adverse impact on resale prices, but it may also serve as a signal to other stressed borrowers that it may be okay to stop paying, because their cases could also end up in courts for years. Considering the number of foreclosures, lenders are very likely to deal with the worst-case scenarios first and leave delinquent homeowners of less valuable properties in their homes longer.

Even when defaulting borrowers are trying to find a resolution and renegotiate their loans, they are hitting six-foot-tall brick walls. In far too many cases, no one can tell them who owns their mortgages, let alone how to go about refinancing them.

Wells Fargo Nixes Extensions For Short Sale Close Dates and Trustee Sale Postponements

This was forwarded to me by my good friend Patricia Platt of Old Republic Title

“Due to recent industry changes, we at Wells Fargo will no longer be granting any extensions for short sale close dates or postponing foreclosure/trustee sale dates. If you were issued an extension letter dated 9/14 or earlier, those extension letters will be honored, but no further extensions will be granted. Files must close by expiration date on the original approval letter or they will be removed. If your approval expires 9/15 or 9/16, you will have 48 hours to get me the final HUD for approval and close.”

What this means for short selling:

Time is of the essence. While it previously normal for banks to grant multiple  extensions to the short sale approval and the Trustee Sale postponement this will not occur with Wells any more.  All parties must process the short sale in an expeditious manner.
Other banks may follow suite. We will be tracking this an updating you on this blog.
The game is constantly changing. This change further illustrates that the standards for short sales are in a continuous flux.

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By Brett Arends , The Wall Street Journal

Enough with the doom and gloom about homeownership.

Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers that declare "Owning a home may no longer make economic sense," it's time to say: Enough is enough. This is what "capitulation" looks like. Everyone has given up.

After all, at the peak of the bubble five years ago, Time had a different take. "Home Sweet Home," declared its cover then, as it celebrated the boom and asked: "Will your house make your rich?"

But it's not enough just to be contrarian. So here are 10 reasons why it's good to buy a home.

1. You can get a good deal. Especially if you play hardball. This is a buyer's market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We're four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor's Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it's mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You'll never catch the bottom. It doesn't really matter so much in the long haul.

Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.

2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What's not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won't see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi.

3. You'll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you'll get a tax break on capital gains–if any–when you sell. Sure, you'll need to do your math. You'll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.

4. It'll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You'll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. "You can tell the ones that have been bought," said my local guide. "They've painted the front door. It's the first thing people do when they buy." It was a small sign that said something big.

More on the Developments Blog

• Buying a Home, Good Idea?

• With Little to Do, Home Builders Focus on Quality

• In Monaco, the 'Most Expensive' Home

• House of the Day: Private Maine Island

5. You'll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you're better off buying.

6. It offers some inflation protection. No, it's not perfect. But studies by Professor Karl "Chip" Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That's valuable inflation insurance, especially if you're young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast.

7. It's risk capital. No, your home isn't the stock market and you shouldn't view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.

8. It's forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won't. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn't a cost. You're just paying yourself by building equity. As a forced monthly saving, it's a good discipline.

9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That's below last year's peak, but well above typical levels, and enough for about a year's worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.

10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the "glut" simply won't matter: It's concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won't have any long-term impact on housing supply in your town.

Write to Brett Arends at brett.arends@wsj.com

Watch where you live. This is true is certain areas. NY, Calif, NV, AZ, FL, MA, CT, and others, some will fall more than 10-15%.

great perspective.

Not everywhere it is a good time.

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Surveys suggest that as of 2010, approximately 30% of employers are using Facebook to screen potential employees - even more than those who check LinkedIn, a strictly professional social networking site. To avoid missing out on a career opportunity, avoid these common Facebook faux-pas. Read: 6 Career-Killing Facebook Mistakes

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