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Author: Steven W. Hays, Sr., CPA
As printed in Builder News, January 2007
A publication of the Home Builders Association of St. Louis & Eastern Missouri

THE MARKET

As I write this in mid-December, 2006 will end much the way it started – a few spurts here and there – but overall lacking any kind of real consistency. We estimate overall closings may be down as much as 40% from a record-breaking year in 2005. It is important to keep in perspective that last year ended what have been quadruple back-to-back-to-back-to-back record-breaking years. This year will put up closing numbers close to 2002 activity, which is NOT BAD, but certainly not what was expected going into the year.

A good thing – It appears inventory levels have been reduced in the last few months. Spec activity as a percentage of the total market has been very high for the entire year. Creative marketing, incentives, and discounting have become the norms, which are fueling the sale of spec housing.

What to expect for 2007? NAHB is now cautiously predicting there will be some upturn beginning mid-year. Given a current strong economy, high employment, continued job growth and household formation, and steady if not potentially falling interest rates, it seems reasonable to think their prediction will be on-target.

In St. Louis and the Midwest, it is hopeful that sales will be better during the upcoming spring selling season. However, given the very low amount of backlog at the end of 2006, spec sales will need to remain high for 2007 to be a successful year. It is likely to be a market loaded with much activity in the last half of the year. Stay tuned!

TAX ADVANTAGES OF HOME OWNERSHIP

Given the slowdown in the market, it is important to remind buyers, and especially those buying for the first time, that home ownership continues to be one of the best tax favored advantages available for individuals. As a reminder, the following items should be considered and “promoted” when selling a home:

Purchasing Your Home

Individuals may deduct the interest on up to $1 million of acquisition debt incurred to acquire either their primary or secondary residence.

Mortgage interest and real estate taxes on both your primary home and on a secondary or vacation home are deductible. Real estate tax payments are deductible, while condominium association fees and subdivision assessments are not.

Residing in Your Home

Taking out a home equity loan can provide you with additional tax deductions. Interest on $100,000 of home equity debt is deductible, regardless of how you use the funds, as long as the fair market value of the home is at least $100,000 greater than the acquisition indebtedness with respect to that residence. As personal interest (car loans, credit card debt, etc.) is not deductible, consider using a home equity loan to convert your personal debt to qualified residence debt.

Selling Your Home

Most homeowners now escape taxation on the sale of their homes, as up to $250,000 ($500,000 if married, filing jointly) of gain on the sale of a principal residence is now excluded from income provided certain tests are met. To qualify, the home must have been your principal residence for at least two of the last five years. For individuals who do not meet the two-year requirement due to job relocation or health reasons, a prorated amount is excludable.

If you still incur a taxable gain on your home sale, any capital improvements can be used to increase your cost basis. Improvements, such as adding a room, landscaping, or “updating” your kitchen, all add to the basis in you home and thus reduce your taxable gain.

A gain on the sale of your residence over and above the exclusion amount is taxed to you as a capital gain, and is subject to the more favorable federal capital gain rates of 15%. A loss on the sale of a personal residence is not deductible.

Final Tax Tip

With careful planning, individuals who retire and move from their principal residence to their vacation home may be able to take advantage of the exclusion on both homes. In order to do this, the principal residence is sold and the exclusion is taken. Then the vacation home must be established as your principal residence by such things as residing in the home for at least two years, registering to vote in the new area, and making the new address your tax home when filing returns.

HAYS’ BITS

• It may be worth noting, but after the bad winter storm we recently experienced, it appears the “new” home building projects rarely suffer much damage.
• Despite a drop in sales, “traffic” numbers continue to remain decent, if not good at times. However, the days of “order-taking” have passed as sales have become a much more competitive process.
• NAHB is working hard to provide information to builders in adjusting to the changing times. Its recent publication “It’s A Great Time To Buy” is excellent in emphasizing the opportunities for buying a home in today’s buyer’s market.
• Nobody asked me, but it seems more and more of the home buying traffic is being driven from signs and the internet . . .

Hope you all have a great start to 2007!

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