Foreclosure and REO Properties Expert Advice

Here we go again. 

What goes up, must come down.  The roller coaster ride is not over. 

With the downward turning real estate market ahead of us, the million dollar question is how do I sell my property with falling real estate values? 

Falling from what? 

Are we talking about falling from a reasonable return on your real estate over the last twenty years or are we talking about the inflated values over the last three to five?   I think it is time that we get things into perspective.  Financial planners don’t suggest that you get a 22% return on your investment.  They speak of averages.  Their projections are all based on years of increment earnings.  Why then, do we not do the same for real estate? 

Instead we focus on what the values were last summer and demand the same elevated return.  If you look at real estate markets around the United States that have record high real estate values, you will find that over a twenty year period, their appreciation was below double digits. 

We have to take into account the highs and lows over a longer period of time rather than focusing on the last 36 months. 

When selling your real estate in this down turning market, look at what return you are making from your original purchase price prior to 2004.  If you are one of the lucky ones that purchased real estate in the early 2000’s then you will most likely see a decent return, unless it was within the last year.  Prior to 2004 and certainly in the late 80’s or 90’s, you have to take averages to consider how far you have come and how much you have benefited.  

For example, let’s suppose you bought a house in the late 80’s for $300,000 and it appreciated only 6% for 15 years but appreciated 16% for the last five years, your overall appreciation is around 8.5%.  Not a bad return considering for the first 15 years your home increased in value by almost two and a half times its original purchase price and during these last five years, your home increased in value just over two times in one third the time to a market value of nearly $1,500,000. 

Now suppose you have to sell your house for $1,250,000 in this sluggish market. 

You will have earned nearly a million dollars and your property has quadrupled in value.     Before you sit back and relax and feel lucky to have made all this money, you need to consider what your net earnings will be when you pay the taxes on the sale of your home. 

You are entitled to a $500,000 exclusion as a married couple which leaves a taxable gain of about $450,000.  Take an average combined federal and state capital gains rate of 25%, you have reduced your net earnings by $112,500 ($450,000 x 25%), leaving you with net earnings now of  $837,500 ($500,000 + $337,500).

So before you waste all of your time squabbling about falling real estate values, you need to redirect your energy toward proper estate planning.  Giving up more than 10% of your in pocket profit deserves more attention than reducing your inflated sales price by 20% during this down turn. 

Focus on keeping what you earn versus what you could have earned.  There are many ways to do this but it requires planning in advance.  It may require donating your home in whole or part to a charity of your choice:

The “fill in your last name” Foundation. 

That’s right. 

Given the right conditions, you may want to form a family foundation and donate the real estate to your own foundation before selling your property in your name and avoid or defer the payment of that hard earned $112,500.  By doing so, you remove the asset from being taxed for capital gains and it provides you and your surviving spouse a safe, secure stream of income from the investments your foundation manages. 

In addition, you get to do good things with the money and leave a legacy behind.  I like to think of it as “Improving our Community One Property at a Time”. Whether you choose to form a 501(c)3 non profit foundation or donate it to a charity of your choice, the Charitable Remainder Trust (or one of the many variations of charitable trusts) is a viable solution to make the down turn in the real estate market seem not so painful. 

There are multiple alternatives to paying the capital gains tax but your thoughtful consideration and preplanning before putting your property on the market are critical in determining whether you transfer the asset to a foundation, a family trust, or an LLC.  Consult with a professional to explore your options or contact us and we will be happy to explore your options. 

Two brothers needed to sell a cow to pay some bills. The first brother cleaned the cow and brushed her to look good and raced down to the market.  The market was slow and the brother worried. 

Along came the first and only buyer so he sold the cow for far less than what she was worth because it was all he thought he could get.  The tax collector came and took half of what he earned. 

The second brother milked the cow for weeks, then butchered the cow, kept half of the meat and packaged and sold the rest at the market for about what the brother sold his cow for.  The tax collector came and took half of the earnings the second brother made from the sale of the meat.

When the two brothers compared their earnings, the first brother asked the second how he favored so well.  The second brother replied, “it’s not in the sale, it’s in the preparation.”

Don’t get caught up with the loss of income from the sale of your depreciated real estate, focus on the benefits derived from it and do your proper planning to maximize your return.

Author Bio:
Mark C. Hughes is President and CEO of Virtuosity Unlimited, LLC which operates with a team of advisors to help those in distressed properties with “strategic solutions” to restructuring their loans or exiting without eminent foreclosure. Mark can be reached at mark@virtuositypro.com or visit www.virtuositypro.com.  Mr. Hughes and Virtuosity Unlimited, LLC publishes the VirtuosityPro eNewsletter as a service to its clients and their advisors. While we make every effort to ensure the accuracy and reliability of the information published, we do not warrant or guarantee the accuracy of the information or its fitness of purpose, nor do we claim to give legal advice. With all estate and tax planning, there are conditions and exceptions that require your consultation with a competent tax attorney or CPA.