Santa Cruz Real Estate  Digest,  Ed. 19
March, 2017 - In This Issue:
In This Month's Issue
In this month's Digest you will find national and local news as well as informational pieces on topics that we have found to be increasingly important in the real estate industry. 

This month's Digest contains fewer articles, but each is filled with information that we think every home buyer, owners, and seller needs to know. 

First we dive into a study on homebuyers. Read about mistakes that first-time and repeat homebuyers made and how to avoid them.

With tax season rolling in, we've dedicated a major part of this Digest to talking to  
real-estate related taxes.
Do you know what  Prop 13, Prop 60/90, Capital Gains Tax, and 1031 Tax Exchanges  are ? If so, great! If not, don't miss this article. 

This month, Christine wanted to provide information for novice and experienced investors alike. She reviews various tools  that you can use to calculate ROI  (return on investment), and important    
acquisition considerations  
associated with buying an SFR for investment purposes.  
Real Estate Market Statistics 
For Santa Cruz, Santa Clara, and  Monterey

The reports contain median home prices, real estate price statistics, valuable information about mortgage rates and much more.

Buying a Home?
Learn From the Mistakes of Others , a website that compares financial tools, commissioned a study on homebuyers to better understand where issues emerge. Their  findings 
are based on a survey of more than 2,200 people, about 1,300 of whom have applied for a mortgage and more than 1,400 of whom are current homeowners.

Listed below are a few of the major issues that these homebuyers came across, along with solutions to help you avoid making the same mistakes.

While Obtaining a Mortgage:

"6% of mortgage applicants reported that they had been denied a mortgage. Of those who have been denied, more than half (52%) said they had a high debt-to-income ratio, 39% said they had issues with credit history or score, and 25% said they had insufficient income."

Let's break this down into three categories:

High debt-to-income ratio

It's wise to pay off as many debts as you can before applying for a mortgage. Small sacrifices like reducing your "entertainment" budget, waiting to take that extravagant vacation, or making DIY (do-it-yourself) gifts for Christmas can go a long way in helping you to save some extra cash, which you can use to pay off your debts.

We know that our younger, first-time homebuyer clients are finding that large student loans result in high debt-to-income ratios. Some tips for you include:
  • Trim your budget. You only have to do this short term, and by canceling a few of your subscriptions, reducing the amount of money you spend on eating out and alcohol, and buying a couple less lattes, you'll find that each month you have a little more to put towards your loan(s).
  • Which brings us to our next point, pay more than your monthly minimum payment. This will help you pay off your loan faster. Even if you can only pay $20 extra each month, start there, and then work your way towards paying more.
  • Consolidate and Refinance. If you can refinance for a lower rate, you may save thousands of dollars in interest over time. Those savings can then go toward extra payments, helping you to get out of debt even faster.
  • Find more tips here .
Issues with credit history or score

If you don't have credit history, you can easily start building your credit by applying for a low-cost credit card and using it regularly for small purchases. If your credit score is low, you can:
  • Pay down your credit card balances and keep them low.
  • Gather up all those credit cards on which you have small balances and pay them off. Then select one or two go-to cards that you can use for everything.
  • Be sure to pay your credit card bills on time.
    See more tips here.
Insufficient Income

While this problem may seem harder to address in the short-term, this article points out that there ares ways to increase one's income on a loan application such as:
  • using income that you may not have considered like capital gains income, Social Security income, VA benefits income, and others.
  • bringing in a co-borrower.
A qualified, professional mortgage broker can help you better understand your loan options, the strengths and weaknesses in your loan application, and what you can do today to improve your mortgage prospects. While it can be tempting to shop for mortgages online, be sure that you educate yourself and speak to a professional and experienced lender before applying for a mortgage.

The Homebuying Process:

"Asked what surprised them most about the home-buying process, 19% of millennial homeowners said they were surprised by how long the entire process took, 16% were surprised by how complex it was, and 15% were surprised by hidden fees. These types of surprises can also lead to buyer's remorse."

Reviewing the  length of time it takes to buy a property, we'll start from the day you start looking at homes, to the day you are able to walk into the house and call it your own. Understand that each situation is different, and there is no exact formula that will tell you how long this process will take. However, there are some factors that will increase or decrease the amount of time you should expect to spend buying your house.

Most people spend 30-60 days looking for a home. Once you find "the one" and submit an offer, you will usually hear back from the seller within a week as to whether or not your offer has been accepted. However, there is a big IF to this last point. If you make an offer on an REO property (a property owned by a lender), you may have to wait several weeks.

The offer you have written will include a date for close of escrow, which is the day that the title to a property is recorded and officially becomes yours. Therefore, once you get an accepted offer, you will have a reasonable estimate of how much time you will have to wait before you can start moving in. We say estimate because deals can, and often do, get delayed. Whether it's due to inspections or hiccups when obtaining the loan, numerous unknowns can emerge that will delay the close of escrow. That being said, barring any MAJOR issues such as issues of title, major property defects, or some other disaster, you can expect to close within 30-45 days of the offer being accepted.

Note, if you are paying all cash, this process can take substantially less time. When you take a mortgage out on a property, the home you are buying is the bank's collateral. This means the lending institution will require an appraisal to determine the property's worth and a thorough background check of your finances, which takes additional time.

In conclusion, assuming you have a loan, look for your house for 60 days, have a contract that stipulates close escrow in 30 days, and NO major issues arise during the deal, you're looking at a three month process, give or take a month.

As for the complexity of the home buying process, we won't go into details on this. I'll leave you with this thought. Over eighteen people with different roles and jobs touch a real estate transaction, and your real estate broker is responsible for coordinating these people. She is also responsible for ensuring that everything is completed within the appropriate time frame. This is why most people hire real estate brokers: houses, and the process involved in buying them is complicated and takes time.

A little bit of education can easily eliminate the "hidden" in  hidden fees . Here are some fees associated with the home buying process that you may not know about:
  • Home inspection and Pest Inspection fees: $500-$700
  • Closing Costs:   According to Zillow , closing costs will run you an extra 2% to 5% of the home purchase price. So if you're buying a $600,000 home, expect to spend between $12,000 and $30,000. These costs will cover lender fees, the appraisal, title or attorney fees, escrow fees, and interest that has been prorated. Note that some of these can be paid by the seller if stipulated in the contract. 
  • Ongoing Tax and Insurance: when you use mortgage calculators, you will be given your monthly mortgage payment, but that does not always include taxes and insurance. To accurately assess how much you'll be paying each month, you need to calculate your monthly principal mortgage, interest, tax, and insurance (PITI) payments. Here is an example of a PITI mortgage calculator that. If you need help with this calculator, give us a call. 
  • Once you purchase the home, know that additional costs for repair and maintenance will emerge over time. The actual amount you'll need will vary widely and depends on a number of factors. Most estimates range anywhere from 1% to 5% of the purchase price of the home. If you're uncomfortable using such a large range to determine your needed savings, you'll find a more accurate method of determining your home's repair and maintenance costs here .
A few more interesting finds from the study:

"If they had to do it all over again, 57% of millennial homeowners would change their approach to the home-buying process. At the top of the list: 28% said they'd save more money before buying, 15% would do more research on the home-buying process, 14% would better organize their paperwork from the start, and 12% would do more research on the mortgage-lending process."

"Among current homeowners, 20% of Gen-X homeowners, like millennials (19%), wished they purchased a bigger home. For starters, more than one-quarter (27%) said they would save more money before buying a home, 19% said they would do more research on the mortgage process, 18% said they would have shopped around more for a home loan, and 16% would do more research on the home-buying process."

Whether it's improving your loan prospects, saving more money before buying, or researching the home-buying process before you start, taking time to prepare for this major purchase will go a long way. If you are thinking of buying, we highly recommend that you call Christine, the Broker at Schneider Estates. Christine can answer your questions and help you understand what you can do today to create a successful and prosperous real estate deal. 

Let's Talk Taxes: Prop 13, Prop 60/90, Capital Gains Tax and 1031 Tax Exchanges

Disclaimer: This article is not a substitute for legal or tax advice from a professional accountant or lawyer. Please consult your accountant and/or lawyer with all tax-related questions.

Proposition 13:

Each property owner's annual property tax is calculated by multiplying the taxable value of their property (assessed value) by their property tax rate. 

Property Taxe = (Tax Base*)(Tax Rate)

*Tax Base = Assessed Value of your Property + Value of Additions. 

Passed in 1978, Prop 13 rolled back the assessed value of all properties in California (with a few exceptions) to their 1975 level and restricted property  taxes to 1% or less of this value. Additionally, under Prop 13, a property's taxable value may not increase by more then 2% each year. 

Once a property is sold, the property will be reassessed at 1% of the sales price. Each year thereafter, the property's taxable value increases by 2% or the rate of inflation, whichever is lower. This process continues until the property is sold and again and taxed at 1% of the purchase price. 

Prop 13 passed on the premise that real estate values were increasing so rapidly that owners would not be able to afford to pay property taxes if their property was reassessed each year. Legislators hoped to make property taxes predictable and manageable.

Since 1975, on average, California real estate has appreciated at a rate of 6.8% annually ( source). This means that anyone who has owned her property since 1978 is enjoying a significantly lower tax base than she would be if Prop 13 were not in place. If this person moves, she will likely face a much higher tax base, even if she moves into a smaller house due to these high levels of appreciation. The good news is that there are exceptions to the "reassessment" rule. 

Exceptions that require a claim to be filed:
  • If the property is your principal residence, it will not be reassessed when transferred from a parent to a child, or from a child to a parent. In addition, transfer between said parties of additional real property up to $1 million in assessed value are also exempt from reassessment.
  • Transfers of a principal place of residence from grandparents to their grandchildren, but not vice versa (and the transfer of up to $1 million of other real property from grandparents to their grandchildren) provided that:
    • the transfer occurred on or after March 26, 1996;
    • the grandchild(ren)'s parent (grandparent's child) died on or before the date of transfer.
  • If you are 55 years or older, and you purchase a property which you intend to use as your primary residence, and if that property's current market value is equal to or less than than your original home's current market value, than you may transfer your tax base. See more in the "Proposition 60/90" section below.
  • A home purchased by a severely disabled person is exempt from reassessment.
  • If one domestic partner transferred property to another between January 1, 2000 and January 1, 2006, and filed a timely claim, than County assessors are required to reverse any reassessment that resulted from that transfer.
The Following are  Automatically Exempt from Reassessment:
  • Transfers of the property into or out of a Revocable Living Trust,
  • The transfer of real property between spouses,

  • Transfers of real property between registered domestic partners that occur on or after January 1, 2006,
  • Transfers that only correct the name(s) of the person(s) holding title to real property, and in some situations, transfers that simply change the method of holding title but does not alter the proportional ownership interest of each party involved.
To learn more and see a complete list of exceptions to the reassessment rule, click here.

When additions are made to your property, they will likely affect your tax base. the County Assessor's office will use  AH 531 from the CA Board of Equalization to determine the cost-to-build per square foot for that structure and use this number to determine its value. This value will then be added to the pre-existing assessed value of your house. The addition will not affect the tax base of the rest of your house, however, it could result in a substantial increase in your taxes depending on the scale and cost of the project.

A renovation project such as upgrading your kitchen or a bathroom will not affect your property's assessed value. However, major remodeling projects that involve knocking down walls and substantially changing a majority of the home's interior may result in a reassessment. If you want to avoid this, we suggest bringing your remodeling plans to the County Assessor's office to gain a better understanding of your project's potential impact on property taxes.

Proposition 60/90:

As mentioned above, those who are 55 years or older at the time of purchase may transfer their property's tax base when purchasing a new primary residence. Proposition 60 allows the transfer of your property's tax base within the same county, and Prop 90 allows transfers from one county to another, at the discretion of each county. Unfortunately for us Santa Cruzians, our county does not allow inter-county tax transfers. The following counties do however: Alameda, El Dorado, Los Angeles, Orange, Riverside, San Bernardino, San Diego, San Mateo, Santa Clara, Tuolumne, and Ventura.

Additionally, for tax-base transfer eligibility, the following are required:
  • You or a spouse living with you, must have been at least 55 years old when the original property was sold.

  • The replacement property must be your principal residence and be eligible for homeowners' or disabled veterans' exemption. Your original property must have been eligible for these same exemptions at the time it was sold or within two years of the purchase or development of your replacement property.  

  • The replacement property must be of equal or lesser "current market value" than the original property.

The replacement property must be purchased or built within two years of the sale of the original property.

  One other important thing to consider:

  • Each senior citizen may only transfer his/her base year value once, with the exception of that person becoming severely disabled after transferring their tax base once. In this case, the person would have an additional exemption from reassessment.  
You can find more details about Prop 60/90 here.

Capital Gains Tax

Part I of this article reviews Long-Term Capital Gains Tax (CGT). If you already have a strong understanding of this concept, and would like to review the current laws on CGT, please skip to Part II. 

Part I: Understanding Capital Gains Tax

CGT is a tax imposed on the profit (capital gains) resulting from the sale of an investment. Your Captial Gains can be calculated as follows:

Capital Gains = Sales Price - Purchase Price

"Sales Price" includes the sum of:
  • all money received from the sale, the value of any notes,

  • mortgages, or other debts that the buyers has assumed (taken over) during the sale,

  • any real estate taxes that the buyer has paid on your behalf,

  • the fair market value of any other property or services you received,

  • and any amount that you received for granting an option to buy your home if the option was exercised.
The following are not included in the Sales Price: Money received for personal property (furniture, draperies, rugs, washer and dryer, and lawn equipment), and payment or reimbursement from an employer because of a job transfer.

The second part of the equation, the "Purchase Price" is your basis. 

The "Purchase Price" includes:
  • the amount you paid for your home (or if you built your home, the cost of the land and the cost to build the home), including your down payment and the amount of any mortgage(s) that you obtained,
  • any settlement fees or closing costs that you paid when you bought your home, excluding financing-related fees,
  • any real estate taxes or other costs you paid on behalf of the seller you bought the home from,

  • any amount you spent on construction, renovation, or other improvements* that are still apart of the home when you sell it, but are not costs of repairs and maintenance,

  • amounts spent to repair damage to your home or the land it sits on,

  • and special assessments for local improvements.

Examples of (*) in the bulleted list above can include a new roof or a kitchen remodel, however, not all money put into your home can be added to your basis. In general, any repairs or maintenance that keep your home in good condition, but do not add to its value or prolong its life cannot be added to the basis.

Here is a table of projects that could be added to one's basis on 2016:

( Source)

Part 2: Capital Gains Tax Rates and Exemptions

Long-term CGT applies to the sale of an asset that you've held for a year plus a day, or longer. Your CGT rate is determined by your tax bracket:

( source)

Note that during the election, President Trump proposed to reduce the number of tax brackets to three. If this proposal goes through without modification, this may be the distribution of CGT rates:

Now let's talk about CGT Exemptions.

If you are selling your primary residence, which you have owned for at least two years and lived in for at least two of the past five, then you most likely qualify for a CGT exemption. If you are single, you are exempt from paying taxes on any capital gains up to $250,000. If you are married, this exemption jumps to $500,000.

Anyone's spouse that plan to take advantage of this double exemption should take note of the following:
  • Either spouse can pass the "ownership test" meaning one spouse can own the house for one-and-a-half years, and then add their significant other to title for half a year.

  • Both spouses must have lived in the residence for two years, however, you do not have to have been married for those two years. If you lived in the house together for one-and-a-half years, and then wed six months before selling the house, you can still claim the double exemption.

  • If either spouse sold a home and claimed an exemption within the two years leading up to your current home's sale, you cannot claim the double exemption.
Read more about partial exclusions, and exclusions under special circumstances here.

If you are selling a property that is NOT your primary residence then read about 1031 Tax Exchanges below to learn how you can defer CGT resulting from the sale of your property.

1031 Tax Exchanges

1031 tax exchanges allow investors to defer capital gains tax on investment property by reinvesting the realized gain of the sale into a property of "like-kind". You can roll over your gain time and time again without paying taxes until you sell one of these properties for cash.

Here, "like-kind" simply refers to the nature of the investment, rather than its actual form. This means that you can exchange one investment property for any other kind of investment property: a single family residential home for a condo, raw land for a shopping center, or an office for apartments. An investment property and a personal residence are not "like-kind". 

If you want to invest in real estate, be aware of the concept of "stock in trade".  If the house is deemed to be stock for trade, it does not qualify for a 1031 Tax Exchange. Houses may be considered stock in trade in the following scenarios:
  • A "fixer upper" is purchased, renovated, and sold as soon as improvements are finished.

  • Houses that are built by developers and offered for sale.

  • Houses that are purchased and then sold very quickly.
Once you determine that your property qualifies for a 1031 Tax Exchange, the requirements are as follows:

After the sale of your investment property,
  • you have 45 days from the close of escrow (COE) of your original  property to identify the replacement property;
  • you have 180 days from  COE to acquire a replacement property.

Hopefully, this has given you a basic idea of 1031 tax exchanges. We suggest that you speak to your accountant or a lawyer to ensure that you understand how to execute this exchange successfully. If you find that you are in a position to take advantage of a 1031 Tax Exchange, and need a quick sale/purchase, we can help! Give us a call if you'd like to discuss this option.

Christine's Corner

We are committed to providing excellent service to our seller clients. This means accurate valuation of your property and high quality marketing that puts your property in front of as many potential buyers  as possible. This leads us to the question, where are the buyers? 

Zillow conducts regular studies on  buyer behavior, and I wanted to share one of their findings with you from the Summer 2016, Housing Market Trends Report.

89% of buyer are shopping for properties online. This is why we have redirected a majority of our marketing efforts to high quality online marketing. If you want to learn about our marketing plan, visit our website marketing page found here

73% of buyers are searching for properties through their agents. We also utilize social media and my 11+ years of working in this market to connect with other agents and ensure, if they have an interested buyer, we know about. Through facebook alone, we  can reach 2,000+ Agents in Santa Cruz, 4,200+ Agents in the San Jose Area, 5,200+ Agents in San Francisco.

Call me if you would like a home valuation and to learn how I can market your property effectively and intelligently. 

Christine Schneider, Broker
(831) 600-6550