Chapter 3 Concepts of Home Ownership

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9th. Ed.

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Chapter Three Concepts of Home Ownership:

Chapter Three Concepts of Home Ownership ON LINE Program 75 Hr. Real Estate Broker Principles Course ON LINE Program 75 Hr. Real Estate Broker Principles Course Copyright Sarrett 2017

Slide2:

Apartment Buildings Condominiums Cooperatives PUDs Retirement Communities Converted Use Manufactured Housing - Mobile Homes (Personal Property) Modular Homes Time Shares Types of Housing Page 23- 24 Chapter 3 Concepts of Homeownership

Slide3:

Rent vs. Buy Considerations Length of Time in an Area ( Live or Work) Financial Situation Housing Affordability Factors Price of Medium Home Mortgage Interests Rates Down Payment ( i.e. 5% 10% 20%) Tax Consequences What may happen to rents or home prices in the future Housing Affordability Page 25 Chapter 3 Concepts of Homeownership

Slide4:

P = Principal I = Interest T = Taxes (real estate) I = Insurance Ownership and Ability to Pay (PITI ) Note: There may be additional monthly expenses to add to the PITI ( i.e. Homeowners association fees, FHA , VA or Private Mortgage Insurance Premiums etc. Page 25 Chapter 3 Concepts of Homeownership

INVESTMENT CONSIDERATIONS:

INVESTMENT CONSIDERATIONS Property Value Increases Mortgage Debt Reduction Equity (Property Value less any debt owed on the property) Plus Tax Advantages ( Income and Property Tax Deductions) Single Family Owner Occupied Page 25 Chapter 3 Concepts of Homeownership

INVESTMENT CONSIDERATIONS:

Cash Flows from Rent Annual “depreciation “ deductions from Net Income Capital Gains Treatment ( 1031 Exchange) Other Deductions Interest, Repairs, Travel , Insurance, Professional Fees and Losses Investment Rental Income EXTRA Chapter 3 Concepts of Homeownership INVESTMENT CONSIDERATIONS

TAX BENEFITS OF HOME OWNERSHIP :

TAX BENEFITS OF HOME OWNERSHIP  Owner occupied residential – Taxed as ordinary income rate Investment Property Rates – Federal rate - 15 % (or 20 %) Illinois State rate – 3 % Page 26 Annual Mortgage Interest Deductions Annual Property Tax Deductions Loan Origination and Loan Discount Points Paid Capital Gains Exclusions CAPITAL GAINS - “ Profit” earned on the sale of real estate Chapter 3 Concepts of Homeownership

CAPITAL GAINS ( Homeowners Exclusions) :

CAPITAL GAINS ( Homeowners Exclusions) Single - $250,000 tax free Married - $500,000 tax free Rule: Must have occupied the dwelling 2 of the last 5 years . Page 26 Chapter 3 Concepts of Homeownership

Slide9:

Original Purchase Price: $ 500,000 Current Selling Price: $ 1,000,000 w/5% Broker Commission Profit Earned: $ 500,000 CAPITAL GAINS ( Investors ) Exchange -1031 Page 26 Chapter 3 Concepts of Homeownership

Slide10:

Capital Expenses: $161,000 New Roof - $ 65,000 Resurface Lot - $ 18,000 New heating unit - $ 28,000 Commission - $ 50,000 Original Purchase Price: $ 500,000 Current Selling Price: $ 1,000,000 w/5% Broker Commission Profit Earned: $ 500,000 Profit: $ 500,000 Deductions: $ 161,000 Taxable Profit: $ 339,000 Options: 1. Pay tax: $ 61,020 ( fed 15% and state 3%) 2. Defer: Buy new building and declare 1031 Chapter 3 Concepts of Homeownership

Slide11:

Exchange for Lower Price - $900,000 Tax Due $18,000 (fed 15% and state 3%) on “ boot” of $100,000 Exchange for Higher Price Property- $1,200,000 Tax Due $0.00 Page 26 Chapter 3 Concepts of Homeownership 1031 Exchanges

Slide12:

Declare Intent and Close (180 days) Select a qualified intermediary and 3 possible replacements ( 45 days) Within an additional 135 days close on the new building Page 26 Chapter 3 Concepts of Homeownership 1031 EXCHANGE RULES

Slide13:

Basic Form Policy ( Broad Form Includes Additional Coverages) Subrogation ( Company Settles and Stands in Shoes of Insured)) Coinsurance Clause ( Need to carry a policy at least 80% of building’s replacement cost) Homeowners Insurance Page 27 Chapter 3 Concepts of Homeownership

FEDERAL FLOOD INSURANCE PROGRAM:

FEDERAL FLOOD INSURANCE PROGRAM Initiated in 1968 Assists owners in flood prone areas Administered by FEMA Needed to get a Mortgage Owner/Borrower pays a monthly insurance premium. Page 28 Chapter 3 Concepts of Homeownership

quizzes for Chapter THree:

quizzes for Chapter THree ON LINE Program 75 Hr. Real Estate Broker Principles Course Copyright Sarrett 2017

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