The last couple of years have been difficult for businesses, homeowners and financial markets, to say the very least. Limited credit, economic uncertainty among businesses and consumers, and poor financial performance across industry sectors make people wonder what their long-term strategy should entail.
As homeowners know, the real estate market took a hit in 2008 and 2009. While signs show the Scarsdale real estate market is improving, including Edgemont, many owners are still hesitant to list their homes for sale and would prefer to wait for some unknown future moment when the market will have improved more greatly.
The remainder of 2010, however, is an extremely important time for any homeowner who is contemplating the sale of their home to strategize. They should give serious consideration to the valuation risks now versus future years due to the scheduled increase in the Capital Gains Tax in 2011.
Unless Congress acts and President Obama signs legislation, the tax on capital gains will increase on January 1, 2011 for most taxpayers. In addition, the recently passed Health Care Law increases the top capital gains tax to 23.8 percent in the year 2013.
Originally signed into law in 2001, the capital gains tax rate was reduced as part of President Bush's Economic Growth and Tax Relief Reconciliation Act. Under the reduced rate, long-term capital gains and qualified dividends were taxed at 15 percent. The lowered rate was set to expire in 2008, but was extended in 2006 under the Tax Reconciliation Act. This rate is currently scheduled to expire at the end of 2010 and will revert to the 2003 figure, which was 20 percent.
Given the capital gains tax rate increase represents a 33.3 percent higher effective tax rate, this should be a significant motivation for homeowners already considering a potential sale in the near-term to consider taking action before the end of 2010.
Currently, if the property sold is a main residence, individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived there for a minimum of two out of the last five years. Those two years do not need to be consecutive.
There are other tax exceptions as well. If a seller lived in the home less than 24 months, they may be able to exclude a portion of the gain. Exceptions are also allowed if the property was sold because of a relocation for employment, health concerns, or for an "unforeseen circumstance."
Many Scarsdale and Edgemont residents who are thinking of selling have owned their home for decades, and stand to profit much more than their original purchase price.
Beyond avoiding a higher tax rate on long-term capital gains, sellers also need to carefully plan the timing of their sale in order to secure the most attractive buyer and preserve leverage in the negotiations of the purchase, meaning any seller considering a move should do so sooner rather than later.
Timing is critical. The capital gains tax rate increase puts many buyers at a disadvantage, since they will have less to spend next year. Selling a home in 2010 is likely to find buyers with more cash to put down, and they will have more purchasing power. Think about the fact that, as 2010 progresses, the buyer will be able to use the impending tax increase as leverage in deal negotiations, aware the seller has significant motivation to close before 2011. In fact, if negotiations are still ongoing in the later months of this year, buyers are likely to try and discount the purchase price, or seek tougher terms in the purchase agreement, believing the seller will try to avoid paying the higher tax rate.
Understandably, owners might be hesitant to pursue such an action without greater economic certainty, but there are numerous reasons suggesting why 2010 may indeed be the right time to consider a potential sale. Sellers's should consider the overall economic picture. There are signs that the economy has stalled in growth and job creation. For those homeowners who paid more for their homes than they are worth now, selling is not the best idea, if it is at all avoidable. However,the number of homes sold in the first half of the year have increased dramatically versus the same period in 2009, and in conjunction with historically low mortgage rates, buyers continue to purchase homes in our area.
Seller's should also cultivate their strategy using a long-term view. While the economy is likely to hit some turbulence in the upcoming months, prices in the area are expected to remain stable. Knowing that no one has a crystal ball, it is important to attempt to determine somewhat of an accurate "future pricing." Let's say the real estate market continues to move along with current trends, an increase in spring home prices can likely be seen around 2-3%. Now, let's consider that capital gains taxes will increase from 15% to 20%, with additional taxes added onto that from the Health Care Law, and it can be clearly understood that selling in 2010 versus 2011 could be more financially beneficial for many homeowners. In addition, we should not forget about New York States tax increases as well, such as the mortgage recording tax and the possible elimination of the STAR. Even the town of Scarsdale is considering adding a special Open Land Tax on every property sold in its district. With all these extra fees and taxes, all signs show that selling before the end of 2010 will most likely be more profitable for sellers.