Fil 260 Chapter 14

Front 1

What is Ownership?

Back 1

the right to residual values, how can someone take pride in a point in risk/return space?

** much more useful expression is greed of ownership, short-term residents of a community care about issues like schools and crime if they own homes cuz the residual they will receive on resale will be affected by buyers feelings about the community's desirability

Front 2

Financial costs of home ownership

Back 2

1. Illiquidity of Investment- down payment and principal payments are tied up
2. No periodic returns (interest, dividends) are earned on residence
3. Some Maintenance expenses- do not provide a measurable financial return
4. Property taxes and transaction costs can offset inflationary gains- (Assets that are non-standardized, such as real estate and art objects, tend to have high transaction costs)

Front 3

Financial Benefits of home ownership

Back 3

1. Interest paid on money borrowed to buy a home, and property taxes paid in connection with home ownership, are deductible from the income on which federal income tax is paid
2. capital gain on a home sale (from reselling at a price higher than the original purchase price) gets favorable income tax treatment; unless gain exceeds 250,000 (500,000 for a married couple filing joint return), there is never an income tax to pay (unless home owner sells at a gain less than two years after previous sale involving an untaxed gain)
*3*. Home owner is not taxed on the imputed rental value of a home; home owner gets some investment benefits such as interest and property tax deductibility, w/o the need to treat the related benefit as income

Front 4

NOT TAXED ON THE IMPUTED RENTAL VALUE OF A HOME:

Back 4

**if you owned a house but rented it out to me and I owned a house but rented it out to you, each of use would be an owner each would have a place to live and each would get interest and property tax deductions, but each of us would also be taxed on the rental income received. But simply change the names on the deeds and we both still get the deductions while not having to declare any rental income

Front 5

Interesting point to note up front on Home Ownership and the Federal Income tax:

Back 5

For federal income tax purposes, your "home" can be a traditional free-standing house, a condominium unit for your proportional share of a cooperative building, a mobile home, or even a houseboat.

**it must have power, along with cooking and bathing facilities to qualify

Front 6

A basic equation for federal income tax computation:

Back 6

GROSS INCOME (other than excludable items)
- Adjustments (expenses incurred generating income)
= Adjusted Gross Income
- Deduction (mortgage loan interest, property tax, mortgage insurance, state income tax, charitable contributions)
- Personal Exemptions
x Tax Rate
= Tax Owed
- Credits (1st home buyer, residential energy, college tuition, earned income, dependent care)
= Final Tax Liability

Front 7

Capital gain on the sale of a home is taxed (income tax) only if:

Back 7

the gain is extremely high: selling the house for a price that is more than 250,000 (or 500,000 for married filing jointly) above what you paid for it.

old tax law: a gain was untaxed only if the seller replaced the home sold with one at least that expensive w/in a 2 yr period.

**exception was that a taxpayer aged 55 or older could choose, once in the life of a single taxpayer or of either spouse, to exclude forever the tax on a gain of up to 125,000 from sale of personal residence- but once either member of a married couple had claimed this exclusion, the other spouse couldn't (called "tainted spouse" provision)

Front 8

More specifically we get tax breaks from:

Back 8

1. Interest ( paid on loan)
2. Property taxes
3. Mortgage insurance
4. 1st home buyer credit
5.Residential energy efficient property credit- US resident (single or filling jointly) can claim a credit of 30% of the amt spend during the relevant tax yr on certain solar, wind, geothermal, or fuel cell energy upgrades
6. Some one who moves to a new primary residence cuz of a job change generally can treat the moving expenses as an adjustment to income
7. Personal residences do not qualify for depre. deductions

Front 9

Fair Housing Laws

Back 9

It is illegal to coerce, intimidate, threaten or in any other way interfere with a person's attempts to buy or sell (or rent) real estate

Front 10

Fair Housing Act of 1968

Back 10

-makes it illegal to discriminate with respect to a buyer's or renter's race, color, national origin, religion (religious groups can give preference to their members if they dont discriminate in other ways), gender, or having children or being disabled. ( in activities involving selling, renting advertising, or financing real estate)

-requires brokers and lenders to prominently display "Equal Housing Opportunity" posters
- doesnt apply to individuals selling their own single-family homes without broker assistance (or to owners of 1-4 unit building who live on-premises)

- Illinois Human Rights Act closely parallels the Fair Housing Act, but also provides for state enforcement, Cook County also has an ordinance)

**over time, however, enforcement of the FHA has come to focus less on race and more on disability or family status

Front 11

"blockbusting"

Back 11

encouraging someone to buy, sell, or rent specifically to change the racial makeup of the neighborhood

Front 12

What is the interesting Illinois case in the west-suburban Bellwood in 1979?

Back 12

Plaintiffs felt that 2 real estate brokerage firms were trying to maintain a certain racial breakdown in the town, by "steering" white buyers to primarily white neighborhoods and minority buyers to an integrated neighborhood
**Supreme Court ruled that testers that lived in the local area did have standing to sue cuz community had been harmed by efforts to interfere with housing opportunities

Front 13

Another Illinois Case south-suburban area in 1991:

Back 13

Several suburbs enacted ordinances that required "affirmative marketing" which means trying to encourage whites to move into certain integrated neighborhoods (while discouraging racial minorities). Realtors sued the communities, on the grounds that complying with these laws would require them to engage in illegal steering. But a federal appellate court in Chicago upheld these "integration maintenance plans" and the US supreme Court declined to hear an appeal

Front 14

Civil rights Act of 1866

Back 14

prevents housing discrimination based on race. This law even applies to individuals selling their own houses

ex: individual selling his own home could discriminate based on a buyer's age, national origin, religion, or gender under FHA exceptions, but not based on race cuz CRA doesn't allow for exceptions

**how far should the Fair Housing Laws go?

Front 15

Using income tax laws to promote home ownership is controversial:

Back 15

because renters do not get tax breaks even thought hey provide money for landlords to pay interest and property taxes, poor renters are subsidizing more affluent home owners.

Front 16

2. These are deductible from adjusted gross income:

Back 16

-mortgage loan interest
-real estate taxes
-mortgage insurance premiums

federal government, in that way, subsidizes home ownership

**EX: taxpayer must itemize deductions in order to gain an income tax benefit from mortgage loan interest and mortgage insurance premiums (and typically to deduct property tax payments, though a temporary provision, discussed below, allows non-itemizers to claim an income tax benefit for property taxes paid