Where Do Those Numbers Come From?

Credit is important for people who own real estate. How do credit agencies like Equifax,   Experian, and TransUnion determine your credit rating score?

A recent New York Times article breaks the numbers down:

►        Payment history.  This is the biggest component, looking at whether you pay your bills on time to any organization that reports information to a credit bureau.  This can include medical bills, parking tickets,             even library fines.

►        Outstanding loans.  How much money do you owe the bank, or any other creditors? 
      Is it a large percentage of the total loan or credit you have available?  For example,
      maxing out on your credit cards will bring your score down.

►        Credit history.  This component looks at how old your accounts are and how much
            activity they’ve seen.  Long standing accounts that you’ve paid off consistently
            have a more positive impact on your rating.

►        New accounts.  Applying for lots of new credit cards can look as if you’re having trouble
      paying your current bills and can trigger a drop in your numbers.

►        Type of credit.  This accounts for about 10 percent of your score.  Agencies look at how well you manage installment debt, like a mortgage, and also revolving debt, like your credit card payments. Paying off the balance regularly is better for your score than just making the minimum payment.

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To Lend or Not to Lend

In these economic times, a request to advance money to family and friends is not uncommon.  You should be clear as to whether this is a loan and the money is to be repaid to you or whether the advance of money is a gift and does not need to be repaid.

If it is intended to be a loan, you should consider the amount of the loan.  Is this something that you could afford to lose?  What is the impact if you do not get paid back?

If the money advanced is to be a loan, the terms should be discussed.  When is the loan to be repaid?  What interest, if any, should be charged? If this loan is to start a business, are there any implications other than the advancement of money.  Are there any rights to the business?  Both parties should be clear as to understanding.

It is important to document all loans and agreements in writing.  You should not rely on memory or oral witnesses.  We suggest that you consider securing all loans by a recorded mortgage against the property.  While this is very formal, it provides you additional documentation that it is a loan and not a presumed gift.  It also provides a means of enforcing payment.

Even though this is a loan between family or friends, the proper procedures should be followed.  You should also be aware that a transfer between relatives is presumed to be a gift.  For example, if you, the lender, receive interest, you should declare the interest that you receive.  To write off bad debts, you should have the loan formalized at the outset.

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Checking on a Release of Mortgage

If you are fortunate to have paid off your mortgage, you may want to be diligent in following up that a release of that mortgage has been recorded so that you have clear title.  A document called Release of Mortgage or Satisfaction of Mortgage should be filed.  Mortgages are often sold especially to mainland lenders, and mainland lenders are sometimes not as concerned about filing a Release of Mortgage.  You want to make sure your title reflects the mortgage is no longer an obligation against your property.  It is best to check as soon as the mortgage has been paid.  If you wait several years, you may have difficulty in finding the appropriate party to sign the Release forms.           

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Top 10 Tax Real Estate Benefits

Here's a list of Top 10 Tax Breaks related to ownership of real property.  You may wish to visit the Internal Revenue Service’s website for more details on each item.  This is merely to be information to you and not tax advice.  As always, you should consult your own tax advisor.

Mortgage Loan Interest: Interest payments comprises a large portion of  your  mortgage
payment in the early years of the loan's term.  Mortgage interest on a maximum of $1 million in mortgage debt secured by a first and second home is deductible. Deductions reduce your taxable income against which your taxes due are calculated. The $1 million level applies to married tax filers who file jointly and single taxpayers. Married taxpayers who file separately split the maximum equally.

Home equity loan interest is also deductible, but is limited to the smaller of $100,000 (half as much for each member of a married couple if they file separately), or the total of your home's fair market value as determined by a complicated formula.  You should seek your tax professional's help to determine the applicability to your situation.

Home Improvement Loan Interest: The interest on a home improvement loan is also
deductible, but it is calculated differently. You can deduct all the interest on a home improvement loan provided the work is a "capital improvement" rather than repairs, maintenance or cosmetic upgrades. Capital improvements typically increase your home's value, prolong it's life or adapt it to new uses.  You get tax benefits from repair work only when you sell your home, but you can use a home equity loan to make repairs and deduct the interest -- up to the allowable limits.

Points: A point is equal to 1 percent of the loan principal and is charged by lenders as part of the cost of the loan. You can fully deduct points associated with a home purchase mortgage, but not a mortgage broker's commission. Refinanced mortgage points are deductible too, but only when they are amortized over the life of the loan. Once you refinance a second time, the balance of the old points from a refinanced loan offer an immediate write off, as you begin to amortize the new points.

Property Taxes: Property taxes or real estate taxes are fully deductible.  Any local city or state property tax refunds reduces your federal property tax deduction by the same amount.

Capital Gains Exclusion: The Taxpayer Relief Act of 1997 allows married taxpayers who file jointly to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. The amount is halved for those filing single or separately. You can use the benefit as often as you qualify.

Home-Based Business Deduction: Home offices that use a portion of your home exclusively for business could qualify you to deduct a percentage of costs related to that portion. Included are a percentage of your insurance and repair costs, utility bills and depreciation. Under clarified provisions of the Taxpayer Relief Act of 1997, if your home office qualifies, you don't have to allocate a home sale's capital gains between the home and the business.

Selling Costs and Capital Improvements: When you sell your home, you can reduce  your taxable capital gain by the amount of your selling costs, which include real estate commissions, title insurance, legal fees, advertising and inspection fees. Therefore, you should keep records of these costs.  Cost typically stemming from decorating or repairs -- painting, wallpapering, planting flowers, maintenance, and the like -- are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.

Selling costs are deducted from your gain. Gain is your home's    selling     price,     minus
deductible closing costs, minus selling costs, minus your tax basis in the property. Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.

Moving Costs: A move triggered by a new job comes with some deductible moving costs. To qualify, you must meet certain requirements as spelled out in the tax code.

Mortgage Tax Credit: Mortgage Credit Certificates (MCCs) allow qualifying low-income, first-time home buyers to take a mortgage interest tax credit of up to 20 percent (the amount varies by jurisdiction) of the mortgage interest payments made on a home.

This credit is available every year you keep the loan and live in the house purchased with the certificate. Unlike a deduction that reduces your income, the credit is subtracted, dollar for dollar, from the income tax owed.

Energy Tax Credits: The newest home-based tax credits were made possible by the Energy Policy Act of 2005. Tax credits of up to $1,500 through December 31, 2010 were available for upgrading heating and air conditioning systems, insulations, windows, doors and thermostats, caulking leaks, installing pigmented metal roofs and for otherwise putting the bite on energy waste in your home. Qualified solar energy and fuel cell systems can net up to 30% tax credit through December 31, 2016. Some states also offer tax credits or rebate deals that could reduce the federal credit. Related tax credits are available for consumers who buy alternative and clean-fuel burning cars and for entrepreneurial consumers who install clean-fuel vehicle refueling property at the principal residence of the taxpayer.

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Co-Signing a Note

We have discussed the topic of co-signing on several occasions, but it is a topic worth repeating.  If you are asked to co-sign a loan, you need to understand that co-signing a loan is not merely providing your credit to support a loan.  You are agreeing to be actually liable for the loan if the other borrower does not pay the loan.  Your co-signing is a debt obligation for you. The failure to pay the debt will affect your credit score.  The fact that you have co-signed on a loan may limit your ability to borrow for yourself.

The lender will view you as the borrower. It is not obligated to first collect from the other co-signer.

Since you have potential legal liability, you should ask to be advised in the event of a default.  If you co-sign a loan, you want to know if the co-borrower misses a payment. This will give you time to deal with the problem. 

Co-signing is often done for family and friends.  They are normally done for non-monetary reasons.  This does not lessen the legal implication or your legal obligation.

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Abandoned Possessions

Q.  How may the landlord dispose of a tenant's abandoned possessions?

The Hawaii Residential Landlord Tenant Code provides the following:

The landlord may sell the abandoned possessions in a commercially responsible manner or store the possessions at the tenant’s expense, or donate the possessions to a charitable organization.  Before selling or donating the possessions, the landlord must mail a notice of his intent to sell or donate the possessions to the tenant at the tenant’s forwarding or last known address.  In addition, after the notification before selling the possessions, the landlord must advertise the sale in a daily paper of general circulation for at least three consecutive days.

The proceeds of the sale of possession shall, after deduction of accrued rent and costs of storage and sale, including the cost of advertising, be held in trust for the tenant for 30 days, after which time the proceeds shall be forfeited to the landlord.

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Amortization

Real property mortgages are often sold after you have secured them.  You then owe payment to a different party.  To minimize any dispute as to the amount you owe, we suggest that at the time you secure your loan, you ask your lender to provide you with an amortization table.  This is a schedule of payments that are to be made and shows how the mortgage balance is reduced over time.  You can then use this to track your payments.  Along with your proof of payment, this should minimize any errors in the amount of payments that you owe.

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