Last Week in the News – Economic Update!

The Consumer Price Index (CPI) surged 0.7% in January, after decreasing 0.1% in December, the Labor Department reported February 22. However, the core CPI, which excludes often-volatile food and energy prices, rose only 0.2%, proving to most economists that inflation was still largely restricted to the food and energy sectors.

On February 21, the Conference Board reported that the U.S. index of leading economic indicators, which includes key economic measurements ranging from unemployment benefit claims to building permits, rose a sharp 1.1% in January, the largest jump in seven months. A positive rise in the index typically signals favorable economic trends up to six months ahead.

U.S. orders for durable goods — everything from computers to cars — fell by 10.2%, the biggest slump in more than five years, the Commerce Department said February 24. The larger-than-expected decline was led by a 68.2% drop in orders for commercial aircraft.

First-time unemployment claims dropped to 278,000 in the week ended February 18, the Labor Department said February 23. It was the sixth straight week — the longest stretch in more than five years — that jobless claims remained under 300,000.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity increased 0.8% for the week ended February 17, the first rise in four weeks based on strong demand for new purchases.

This week look for updates on new home sales on February 27.

Taxes weren’t paid, so parcels are on the block

By Michael Stetz
UNION-TRIBUNE STAFF WRITER
February 24, 2006

Who in the world knows why.

In some cases, it’s something of a mystery: People giving up on their real estate by failing to pay property taxes.

People giving up on San Diego real estate.

Today, more than 80 parcels – mostly empty lots and time shares – will be up for auction because the property owners haven’t paid taxes on them for the past five years.

If you go
Public Auction/Tax Sale begins at 9 a.m. in Room 28 of the San Diego Convention Center, 111 W. Harbor Drive.

Look out for a crowd. Last year, more than 500 attended.

Successful bidders must pay the full price if it’s $5,000 or less. For property over $5,000, a minimum 10 percent or $5,000 (whichever is greater) must be paid.

Cash, money order, traveler’s checks and cashiers/certified checks are acceptable for payment.

Maybe some consider the property garbage, stuck way out in the middle of nowhere and unsuitable for development. Maybe the people owe more than they think the properties are worth.

Or maybe they get their financial advice from their cats.

Regardless, the county will put the properties on the block to get back the taxes owed.

“Some people just think it’s easier to walk away from the property than pay up,” said San Diego County Treasurer-Tax Collector Dan McAllister.

He’s getting bigger space for today’s auction.

Last year, 500 people crammed the room in the Community Concourse, next to City Hall, for the 70 properties offered. This year, the event will be held in the Convention Center, beginning at 9 a.m. Every year the crowd swells, he said.

“People think, wow, this is my chance,” he said. “Real estate is what everybody talks about.”

The parcels are spread throughout the county. But go figure: None are in Rancho Santa Fe.

Twenty-five of the parcels are so-called “unimproved” properties, meaning empty lots or rural acreage. Fifty-six are time shares, while the remaining three are structures, which include houses.

Property owners had until 5 p.m. yesterday to make good with the county and, inevitably, some do.

Indeed, on Wednesday morning, McAllister’s office issued a news release, saying that 132 properties were to be auctioned. That number fell to 84 by yesterday afternoon.

Yearly, McAllister goes to the county Board of Supervisors in December to get approval to go after such properties. This year, 242 owners were found to be five years in arrears on their taxes, but many have settled up since then.

Jenny Egan and her husband are a case in point.

Their Clairemont house was one of those listed in the brochure produced by the county called “Public Auction Tax Sale.” They owed $112,800.

According to Zillow.com, an Internet site that estimates real estate values, the house is worth about $600,000.

But the couple had no idea about the back taxes, Egan said. She said her husband inherited the house from her mother. When they got the letter – something about a tax auction and their house being on the block – her husband went rushing to pay it off.

“We should be off the list,” she said.

They are.

McAllister maintains that the county makes every effort to contact property owners who are in arrears throughout the five-year time frame. They are billed annually, and late notices are routinely sent. Before a home is put up for auction, county workers go to the site and try to make personal contact.

“In my view, giving five years is more than generous,” McAllister said.

In most cases, the houses are empty. But that doesn’t mean they’re abandoned, he said. In some cases, they may be in escrow. As part of the deal, the seller will make good on the liability at the time of the sale, McAllister said.

Those coming to the auction need to do their homework, he noted, because it’s buyer beware.

McAllister remembers one case when someone purchased two acres of rural land, only to discover that it had no access, a deep ravine ran through it and it was full of rocks.

Time shares are again plentiful, and that’s becoming something of a trend.

People pay a certain amount of money to land a week in paradise and maybe, for some, paradise gets tiring. Or maybe a number of the owners are going through divorces and don’t feel like dealing with a piece of property they owe $1,200 on. So they let it go.

The majority of the back taxes owed on time shares run between $1,200 and $1,800. But a check of San Diego-area time shares on the market shows them selling from $5,000 and up.

McAllister said that some time-share developers try to snatch up the available ones and then resell them.

He expects a hearty showing today. It’s the latest craze, after all. Folks trying to land San Diego property … on the cheap.

Real estate and taxes, or cost basis of a home

Source San Francisco Chronicle & Pro Real Estate Network

Readers of this column seem to love items on real estate and taxes. So this one on real estate taxes should be a real crowd pleaser.

After my recent columns on tracking the cost basis of stocks and funds, reader Stuart B. writes:

“With an Excel spreadsheet and a little diligence, keeping track of the cost basis of stocks and mutual funds is not that hard. More difficult is tracking the cost basis of one’s house. It is difficult sometimes to decide what is a capital improvement and what is maintenance. For example, we just replaced some double-hung windows in the living room. The old ones were 50 years old, not very tight, and without double-pane glass. The new ones are Marvin Tilt Pacs with all the latest technology. Thus the new windows are an improvement over the old, but might be regarded, at least in part, as age-related maintenance. Similar arguments can be made for landscaping. Perhaps you could do a column on this.”

Ask and you shall receive.

When you sell a stock, house or other asset, your adjusted cost basis is subtracted from your sales proceeds to determine your capital gain or loss.

Basis starts with what you pay for an asset, but many things can increase or decrease it. For example, capital improvements can be added to basis, but repairs or maintenance cannot.

If you sold a house before May 7, 1997, and deferred the capital gain, that gain reduces the cost basis in your existing house.

Single homeowners can exclude $250,000 in capital gains on the sale of a primary residence, and married couples filing jointly can exclude up to $500,000, if they have owned and lived in the house for at least two of the previous five years ending on the date of sale.

Any profit over those limits is taxed at the capital gains rate, which tops out at 15 percent.

In the Bay Area, it doesn’t take long to surpass the exclusion limits, especially if you sold your previous house before 1997.

The more things you can add to basis, the smaller your tax.

According to Internal Revenue Service Publication 523, you can add to basis the cost of “additions and other improvements that have a useful life of more than one year.” Improvements are things that “add to the value of your home, prolong its useful life, or adapt it to new uses.”

Examples including “putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway.” Adding a deck, sunroom or new garage are also improvements.

Improvements that are no longer part of the home cannot be added to basis. For example, if you installed carpeting, then replaced it with wood floors, the carpeting is no longer part of your basis. Or if you plant a tree and it dies, the tree exits your cost basis.

On the other hand, repairs that “maintain your home in good condition but do not add to its value or prolong its life,” cannot be added to basis, the IRS says.

Examples including repainting, fixing gutters or floors, repairing leaks or plastering and replacing broken window panes. However, repairs that are done as part of an extensive remodeling can be added to basis.

So how about those fancy Marvin windows?

Michael Gray, a San Jose certified public accountant, says he would add them to cost basis.

IRS spokesman Jesse Weller says, “I can’t give a specific yes or no answer because the law is not that specific.” It depends on “all the facts and circumstances.”

For example, “If all the windows in a home (as opposed to one or two) were upgraded and replaced from 50-year-old single paned windows to new double-paned windows costing $30,000, the IRS would probably consider that expense a capital improvement rather than a repair.”

He adds, “If the new windows were done in 2006, and qualified for the new energy tax credit (up to $200 total for windows), the credit amount claimed on the return would be subtracted from the costs that get added to basis.”

Weller says it’s important to keep records that document any expense that is added to cost basis.

When you sell a home, you can deduct from your sales proceeds commissions, advertising and legal fees and loan charges paid by the seller, such as loan placement fees or points. These deductions also reduce your capital gain.

Expenses to fix up a home for sale, such as a fresh coast of paint, cannot be deducted from the sales proceeds, nor can they be added to basis, says Gray.

For rental properties, the cost basis rules are similar to those for residences.

However, “the rental owner does not have to wait until selling to benefit from the expense. The basis of rental improvements is capitalized and deducted through depreciation, usually over 27 1/2 years. Rental repairs are usually fully deductible in the year of the expense, while personal residence repairs are not deductible,” Weller says.

Property taxes

If you already have a $250,000 profit in your house ($500,000 if married), you may be tempted to sell it and buy another house so you can take advantage of the exclusion again. You can use the capital gains exclusion as often as every two years if you meet the other requirements.

In California, however, your property taxes could soar if you buy a house of equal or greater value.

Under Proposition 13, your property is assessed on the date of purchase at fair market value, usually the purchase price.

The statewide tax rate is 1 percent of the assessed value. (Local property taxes add to your bill.)

After that, your assessed value can’t go up by more than 2 percent a year. If you build an addition, its market value is added to your assessment, but the original property is not reassessed.

If you sell your house and buy a new one, your property tax will be based on the value of the new, unless you meet exceptions approved under Propositions 60, 90 or 110.

If you or your spouse is 55 or older or if you are severely and permanently disabled, you can transfer your existing home’s assessed value — called base-year-value — to a replacement house, under certain conditions.

The replacement house must be of equal or lesser value than the first house, and it must be in the same county or in one of seven counties that accept transfers of base-year values. Those counties are Alameda, San Mateo, Santa Clara, Orange, Los Angeles, San Diego and Ventura.

You and your spouse can transfer your base-year value only once, with one exception. If you transfer your value once for age, you can do it a second time if you or your spouse subsequently becomes severely and permanently disabled and must move because of the disability.

The California Board of Equalization has written a new letter to county assessors answering many questions about base-year transfers. It’s posted at www.boe.ca.gov/proptaxes/pdf/lta06010.pdf.

Gifts and bequeaths

If someone gives or bequeaths you a house, what is your cost basis and base-year value?

If you inherit a house, your basis is usually the home’s fair market value on the date of death.

If you get a house as a gift, there are two possibilities:

If the market value at the time of the gift is greater than donor’s adjusted basis, your basis is the donor’s adjusted basis. (If the donor paid gift tax, the gift’s basis is increased by part of the gift tax.)

If the market value at the time of the gift is less than donor’s adjusted basis, the calculation gets quite complicated. (See IRS Publication 551, Pages 8-9.)

As for property taxes, in California, a house is reassessed upon transfer, including by gift or inheritance, with a few exceptions.

If a primary residence is transferred — by gift or inheritance — between spouses, or between parents and children, it will not be reassessed. Also, if you inherit a house from your registered domestic partner, it won’t be reassessed.

For more on intra-family transfers go to www.boe.ca.gov/proptaxes/faqs/propositions58.htm.

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Additions to cost basis
Some improvements that can be added to the cost basis of a home:

Additions: bedroom, bathroom, deck, garage, porch, patio, sunroom.

Lawn & grounds: landscaping, driveway, walkway, fence, retaining wall, sprinkler system, swimming pool.

Heating and cooling: heating system, central air conditioning, furnace, duct work, central humidifier, filtration system.

Plumbing: septic system, water heater, filtration or soft water system.

Interior: built-in appliances, kitchen modernization, flooring, carpeting.

Insulation: attic, walls, floor, pipes, ductwork.

Miscellaneous: storm windows or doors, new roof, central vacuum, wiring upgrades, satellite dish, security system.

Source: Internal Revenue Service Publication 523
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Last Week in the News – Economic Update!

Aided by unseasonably warm winter weather, new-home construction soared 14.5% in January, pushing construction to a seasonally adjusted annual rate of 2.276 million units, the fastest rate since March 1973, the Commerce Department said February 16. Permits rose as well in January, climbing 6.8% from the December level.

Wholesale inflation rose by 0.3% in January, just half the 0.6% surge in December, reflecting a calming of energy prices, the Labor Department reported February 17. However, core inflation, which excludes volatile energy and food prices, jumped 0.4% in January, the biggest one-month rise in a year. The acceleration of underlying inflation pressures is likely to attract the attention of the Federal Reserve and new Fed Chairman Ben Bernanke, who delivered his first report to Congress on February 17. In his testimony, Bernanke said he was upbeat about the prospects for the U.S. economy, but also sent a warning that robust consumer demand could ultimately lead to inflation.

Retail sales posted a strong 2.3% gain in January, the best showing in 20 months, the Commerce Department said February 14. The overall increase, attributed to unusually warm weather and consumers eager to spend their Christmas gift cards, was more than double what economists had been forecasting.

Industrial production fell by 0.2% in January, the first drop since last September, the Federal Reserve reported February 15. A record 10.1% plunge in utility output led the decline, reflecting Januarys warm temperatures. Manufacturing output, however, rose a solid 0.7%.

Rates on 30-year mortgages edged up for a fourth straight week, rising to the highest levels in two months, Freddie Mac reported February 16.

This week look for updates on the consumer price index on February 22.