Tag Archives: home improvement

Tax Reform and Home Equity Loans

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photo by Kalmia

MortgageLoan.com quoted me in Tax Reform Just Made Home Equity Loans A Lot Less Attractive. It reads, in part,

Home equity loans have long been attractive ways for homeowners to borrow money to pay for everything from major home improvements to a child’s college education. But these loans just lost a major benefit: When filing their income taxes, homeowners can no longer deduct the interest they pay on home equity loans each year.

This might make these loans less popular. The loss of the interest deduction might persuade homeowners to look for other ways to tap the money in their homes.

“From what I see, there are very limited times that home equity loans would still come in as a benefit,” said Tristan Ahumada, a real estate agent with Keller Williams Realty in Westlake Village, California.

A rush to pay off home equity loans?

And she’s not alone. Donald Daly, managing partner of REIS Group LLC in New York City and a licensed real estate appraiser, said that since January 1 he has seen a higher level of requests for appraisals from homeowners seeking to refinance their existing mortgage loans. Many of these owners are doing this as a way of paying off their Home Equity Lines of Credit, a form of home equity loan.

The reason? These lines of credit, better known as HELOCs, are not nearly as attractive to homeowners when they don’t come with the bonus of a tax deduction.

“We fully expect this trend to grow over the next weeks and months as more and more homeowners learn of the effect these changes will have on their personal finances,” Daly said.

Goodbye, deduction

In the past, homeowners who took out home equity loans or HELOCs could deduct the interest they paid on up to $100,000 of these loans. If you took out a home equity loan for $50,000, then, you could deduct all the interest you paid during the year on that loan. If you took out a home equity loan for $150,000, you could deduct the interest you paid on the first $100,000 of that loan.

When Congress in December of last year signed the Tax Cuts and Jobs Act into law, this all changed. The big tax reform legislation eliminates the home equity loan deduction starting in 2018. You can still claim your tax deduction when you file your income taxes in April of this year. That’s because you’re paying taxes from 2017.

But you won’t be able to claim the home equity loan deduction when you file on your 2018 taxes and beyond. Most of the tax cuts impacting taxpayers, including the home equity deduction rules, are scheduled to expire after 2025. No one knows, though, whether Congress will vote to continue them past that date once that year rolls around.

Existing loans aren’t grandfathered in, either. If you took out a home equity loan in 2016 and you’re still paying it off this year, you won’t be able to deduct any interest you pay on it in 2018, even if you’ve already deducted interest payments in the past.

*     *      *

Home equity loans can still work, though

Just because the tax benefits of home equity loans are disappearing, though, doesn’t mean that these loans are no longer a viable option for all homeowners.

The deduction was a benefit, but the biggest advantage of home equity loans is that they are a relatively cheap way to borrow money. The mortgage rates attached to home equity loans tend to be low. That isn’t changing.

So if you do have equity in your home and you want money to help pay, say, for your children’s college tuition, a home equity loan or HELOC might still be a smart move.

“While tax deductions are important, they are not the only reason we take out home equity loans,” said David Reiss, professor law at Brooklyn Law School in Brooklyn, New York.

Reiss said that when considering whether a home equity loan or HELOC is right for them, homeowners need to ask several important questions.

First, why do they want to take out the loan? If it’s for home improvements or to reduce high-interest-rate debt, the loan might still be worthwhile, even with the tax changes.

Next, homeowners need to look at their monthly budgets to determine if they can afford the payments that come with these loans. Finally, homeowners should consider whether they can borrow money cheaper somewhere else, taking the loss of the deduction into consideration.

“If you are comfortable with your answers, there is no reason not to consider a home equity loan as a financing option,” Reiss said.

Manafort Indicted for Real Estate Fraud

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Special Counsel Mueller

Paul Manafort and his protege, Richard Gates III, were indicted on a variety of charges, including conspiracy, failure to file requirement financial reports and the making of false statements. The indictment was signed by Special Counsel Mueller. A number of the allegations involve real estate transactions. Here are the highlights (lowlights?) of the allegations that document how money can be laundered through real estate:

Manafort used his hidden overseas wealth to enjoy a lavish lifestyle in the United States, without paying taxes on that income.  Manafort, without reporting the income to his tax preparer or the United States, spent millions of dollars on luxury goods and services for himself and his extended family through payments wired from offshore nominee accounts to  United States vendors.  Manafort also used these offshore accounts to purchase multi-million dollar properties in the United Sates.  Manafort then borrower millions of dollars in loans using these properties as collateral, thereby obtaining cash in the United States without reporting and paying taxes on the income.  In order to increase the amount of money he could access in the United States, Manafort defrauded the institutions that loaned money on these properties so that they would lend him more money at more favorable rates than he would otherwise be able to obtain. (para 4)

More than $75,000,000 flowed through Manafort and Gate’s 15 offshore accounts. They also had 17 US corporations through which some of these funds flowed as well. In order to avoid paying taxes on this money, Manafort and Gates made millions of dollars in wire transfers to pay “for goods, services and real estate.” (para. 15) Manafort spent more than $12,000,000 on personal items including home improvement services, clothing, cars and housekeeping. He also bought four properties for over $6,000,000.

After Manafort bought these properties, “he took out mortgages on the properties thereby allowing Manafort to have the benefits of liquid income without paying taxes on it. Further, Manafort defrauded the banks that loaned him the money so that he could withdraw more money at a cheaper rate than he otherwise would have been permitted.” (para. 33) He did this by wrongfully claiming on a loan application that an investment property was owner-occupied (banks generally give you a more favorable interest rate if the property is owner-occupied). He was also able to borrow more money by claiming that part of the proceeds of a loan would be used to fund a renovation when in fact he did not intend to use the funds for that purpose.

The allegations in the indictment provide a nice case study of how real estate is used in money laundering.

Renovating Among The Stars

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Justin Theroux, photo by David Shankbone

Realtor.com quoted me in Justin Theroux’s Renovation Drama: What Went Wrong? It opens,

Actor Justin Theroux might have many admirers (including his wife, Jennifer Aniston), but apparently the “Leftovers” hunk inspires more than his share of haters, too—including his Manhattan neighbor Norman Resnicow. Apparently their feud started two years ago, when Theroux decided to renovate his apartment; Resnicow lives one floor down.

As anyone who’s lived under, next to, or anywhere near a demolition site knows, home renovations can get noisy—which is why Resnicow, a lawyer, felt it within his rights to ask Theroux to do the neighborly thing and install soundproofing to muffle the ruckus. There was just one problem: According to the New York Post, the requested soundproofing would cost a whopping $30,000 and make it difficult for Theroux to preserve the original flooring in his place, which he was keen to do. So he refused.

That’s when things got ugly. According to a lawsuit filed by Theroux, Resnicow embarked on a “targeted and malicious years-long harassment campaign” to derail those renovations and just make life unpleasant for the actor.

Here’s how the suit lays it out:

  • Resnicow accused Theroux’s contractors of damaging the marble in the building’s entranceway, and demanded they make repairs.
  • He halted Theroux’s roof deck renovations by arguing that the fence separating their portions of the deck encroached on his property.
  • Then, for good measure, he cut down the ivy lining the fence purely because he knew that the site of the foliage made Theroux happy.

Theroux now seeks $350,000 from Resnicow, alleging nuisance, trespass, and all in all “depriving Mr. Theroux of his right to use and enjoy his property.”

But Resnicow remains resolute, telling the Post, “I have acted for one purpose only, which remains to assure my and my wife’s health and safety.”

How to balance renovations with neighbor relations

As Theroux’s predicament makes painfully clear, few issues can ruin a neighborly relationship like noise—particularly if you live in an apartment building or other tight quarters. Problem is, homeowners also have a right to make home improvements. So at what point does reasonable renovation ruckus become so loud it’s a legitimate nuisance? That depends, for starters, on where you live, as noise ordinances and other regulations vary by area.

New York City’s Noise Code prohibits construction noise that “exceeds the ambient sounds level by more than 10 decibels as measured from 15 feet from the source.” (And in case you have no clue how to figure that out, the city uses devices called sound meters; you can also download sound meter apps to take your own measurements.) Volume levels aside, most areas have limits on when you can hammer away; in New York, work is typically limited to 7 a.m. to 6 p.m., Monday through Friday.

The third variable to consider is the co-op, condo, or HOA board that governs your building or community, which may place further restrictions on hours or even the type of renovations you do. Yet if a homeowner like Theroux is following these rules, odds are he’s in the clear.

“In New York City, they say ‘hell hath no fury like an attorney dealing with noisy neighbors,’ but as long as you have the proper permits, then construction noise created during normal business hours is generally allowed, with the understanding that it will only be temporary,” says Emile L’Eplattenier, a New York City real estate agent and analyst for Fit Small Business. “As long as he isn’t running afoul of his building’s rules—which is doubtful—then his neighbor has little recourse.”

Still, if you’re a homeowner about to embark on a renovation who doesn’t want to drive your neighbors nuts, what can you do? For starters, keep in mind that even if the sounds don’t ruffle you, people’s noise sensitivities can vary.

In the words of David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School, “One person’s quiet hum is another’s racket.”

Using Home Equity Responsibly

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photo by Scott Lewis

Chase.com quoted me in How a Home Equity Line of Credit Can Help Your Family. It reads,

If you’re a homeowner, you could qualify for a unique financial product: the Home Equity Line of Credit (HELOC). HELOCs allow you to borrow money against the equity you have in your home and similar to a credit card, they offer a revolving credit line that you can tap into as needed.

“Equity is the market value of your home less what you owe on your mortgage balance,” explains David Lopez, a Philadelphia-based member of the American Institute of Certified Public Accountant’s Financial Literacy Commission.

With home values on the rise and interest rates historically low, HELOCs are an attractive option right now. Plus, according to Lopez, for most borrowers, there’s the added benefit of a potential tax deduction on the interest you pay back.

However, since your home is on the hook if you can’t meet your debt obligations, you’ll have to be cautious, explains David Reiss, a professor at Brooklyn Law School and editor of REFinblog, which covers the real estate industry.

So, what are the most common reasons you might consider leveraging this tool? According to the Novantas 2015 Home Equity Survey, 50 percent of people said they opened a HELOC to finance home renovations, upgrades and repairs.

That was the case for Laura Beck, who along with her husband, used their equity to fund a substantial home renovation that doubled their square footage and home’s value.”The HELOC let us do a full renovation right down to re-landscaping the yard without being nervous about every penny spent,” she says.

Interested? Here are a few of the most common reasons people leverage a HELOC:

Home improvement expenses

Upgrades to your home can increase the market value and not to mention, allow you to enjoy a house that is customized to fit your family’s needs.

Pro Tip: Some improvements and energy efficient upgrades, such as solar panels or new windows may also score you a bonus tax credit, says Lopez.

Debt Consolidation

Exchanging high interest debt (like credit cards) for a lower interest rate makes sense, especially since interest payments on your HELOC are usually tax deductible, says Lopez.

Pro Tip: Reiss stresses how important it is to “be cautious about converting unsecured personal debt into secured home equity debt unless you are fully committed to not running up new balances.”

Surprise expenses

When faced with a situation in which money is the only thing preventing you from getting the best medical care, a HELOC can be a literal life saver, Reiss explains.

Pro Tip: If you need to pay an existing medical bill, however, try negotiating with the health care provider rather than use your equity, says Reiss. Often, they are willing to work something out with you, and you won’t have to risk your house.

College expenses

Reiss explains how a good education can improve one’s career outlook, increase earnings, and has the potential of offering a strong return on your investment.

Pro Tip: Before turning to your equity for education costs, try to maximize other forms of financial aid like scholarships, grants, and subsidized loans.

No matter your reason for considering a HELOC, if used responsibly it can be a great tool, says Reiss. For information on how to qualify, speak to a banking professional to see if this is a good option for you.

Beware of Contractor

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photo by Rogier Krens

Realtor.com quoted me in Beware of These 8 Red Flags When Hiring a Contractor. It opens,

Finding the right contractor for a major renovation is like finding a spouse. You have to have chemistry, you have to be on the same page, you have to trust each other, you have to love pugs, and you must share a passion for Korean barbecue (oh, scratch the latter two—it’s not totally like finding a spouse). And while there might be more than one Mr. Right, there are plenty of Mr. Wrongs who can transform your beloved renovation project into a nightmare (and give new meaning to the term “punch list”).

In 2011, the average U.S. homeowner spent $2,889 on home improvements—it’s a pretty penny, but a fraction of the cost of a big project like a major kitchen overhaul ($60,000) or bathroom renovation ($18,000). So a lot of cash is at stake here, along with your mental health! Here are some matador-worthy red flags to look for when researching a contractor, and strategies for finding one you’ll love.

1. They have lousy reviews

We live in a world saturated with social media, where it’s harder for bad contractors to hide. When you see a Yelp review that slams a contractor, your antennae should go up. Not that any one review is gospel; review sites often are battlegrounds for competitors who unfairly slam one another.

“Anyone can have one or two bad reviews from cranks or revenge seekers, but a pattern of problems or red flags should make you think twice,” says Sandy Edry, a real estate agent with Keller Williams in New York City.

2. They’re not responsive

As in any long-term relationship, communication is key. If you have trouble getting a contractor on the phone before you give him your business, imagine how hard it will be for him to return calls after he already has your security deposit. Give a prospective contractor 24 hours to return your introductory call—48 hours, tops—before you move on.

3. They insist on unlimited time and materials

The best way to wreck a budget is to sign a time and materials contract that puts no fence around expenditures. Make sure a contractor offers you a flat fee for a project and specifies how much change orders will cost. If he won’t, walk. Or run.

4. They lack a sense of humor

When it comes to home renovations, Murphy’s Law (anything that can go wrong, will) might be a bit exaggerated (although we know quite a few homeowners who’d beg to differ). No matter what, you should be prepared for at least one unexpected problem to arise. Look for a contractor who can keep his footing when things get rocky, and has the expertise to remain calm—and to help calm you down—while sorting out a solution.

5. They overpromise

Before you sign a contract with anyone, do your homework to get a rough idea of how long a project should take and cost. Remodeling’s Cost vs. Value annual report provides national averages for popular projects and is a great resource. Beware of contractors who offer you a much lower price and faster delivery. If it sounds too good to be true, it probably is.

6. They have outdated references

Good contractors have a constantly revolving list of new and satisfied customers. If they can’t provide a current reference, perhaps the quality of their work has dropped.

“You don’t want any old references,” says David Reiss, research director for the Center for Urban Business Entrepreneurship in Brooklyn, NY. “You want references for recent and current jobs, and for jobs that are similar to yours.”

Clintons’ October Permitting Surprise

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hand-stop-sign

Realtor.com quoted me in Final October Surprise: Clintons Make Untimely Mistake Renovating Their New Home. It opens,

This is proving to be the year that redefines the notion of the presidential campaigns’ “October Surprise.” First Donald Trump‘s hot mic/hot mess “Access Hollywood” tape surfaced, followed by the ugly after affects. Then with just over a week to go before Election Day, Hillary Clinton‘s email woes returned, this time on Anthony Weiner‘s computer. Talk about lousy timing! Now, on the final day of October, one last surprise is rearing its head. Remember when the Clintons bought the home next door to their own in Chappaqua, NY, a few months back? Well, it turns out they renovated it without permits.

Breaking news alert!

According to public records, government officials received a complaint in early October about excavation happening at the Clintons’ new home. When an inspector arrived, he saw that a number of unpermitted upgrades were taking place, including a kitchen remodel and the installation of a new HVAC system.

Conspiracy theorists take note: Once the Clintons learned of this oversight, they took steps to fix it. And to be fair, the inspector on the case, William Maskiell, concedes that architects or contractors typically file for permits rather than the homeowners themselves. Still, he points out, “If you own the house, you’re responsible on everything that goes on with that house.”

In other words, the buck stops with the Clintons.

Granted, this blooper might seem small compared with the much larger problems on Hillary Clinton’s plate right now. Still, it can serve as an important lesson to all homeowners—many of whom might be tempted to sneakily sidestep those annoying permits before they start renovating. Honestly, are those little pieces of paperwork all that important?

It turns out they really are.

“I can’t believe a contractor working on a multimillion-dollar home wouldn’t pull permits,” says Mark Clements, a contractor at MyFixItUpLife.com. “It’s very much the contractor’s responsibility to gain those permits, and nearly unthinkably stupid not to.”

Here’s why: “On the surface, permits are inconvenient, but their value vastly outweighs what it takes to obtain them,” Clements explains. “They ensure everything from zoning variances to proper building practices are followed. And they make sure there is another set of expert eyes on the work being done, checking for everything from proper structure to code-approved electric to fire stops are safely installed.”

Once that’s done, a final inspection and certificate of occupancy, or “C of O,” is issued. The home may be reappraised—which could raise property taxes—”but it will also mean that when you list it for sale with three bathrooms, you can do so legally,” Clements adds.

A Stronger America, One Permit At A Time

So what’s the worst that could happen if you don’t bother with permits before you embark on a home improvement project? For one, if you’re caught, you could face fines.

“In some jurisdictions the penalties can be heavy, but it’s the stop-work order than can really hurt,” says David Reiss, a professor of Law at Brooklyn Law School and editor of REFinBlog.com. “Not only does it delay the completion of the work, but it may lead to additional costs from the contractor and subcontractors working on the project. And to top it off, it may interfere with the homeowners’ plans to leave their current home and move into their new one. The cascade effect among the affected parties can be painful.”

And even if you’ve already completed your renovation off the radar, you aren’t in the clear. If you decide to sell your home one day, unpermitted renovations can discourage buyers from biting—if they’re discovered.

“When buying a home, you always want to pay attention to any signs that there was unpermitted work done on the house,” says Reiss. “Is the certificate of occupancy for a one-family home, but there is a mother-in-law unit in the back? Are all of the houses on the block one story but your house is two stories? In such cases, you definitely want to dig a little deeper so you are not left holding the bag.”

REFinBlog has been nominated for the second year in a row for The Expert Institute’s Best Legal Blog Competition in the Education Category.  Please vote here if you like what you read.

Thursday’s Advocacy & Think Tank Round-Up

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  • Harvard’s Joint Center for Houses Studies released its Leading Indicator of Remodeling Activity (LIRA) which predicts a deceleration in remodeling activity due to sluggish home sales, the LIRA also projects annual spending for home improvements will increase a more modest 2.9% in 2015.
  • National Association of Realtors’ testimony before the United States Senate Committee on Banking, Housing and Urban Affairs, Hearing titled Regulatory Burdens to Obtaining Mortgage Credit, argues that unnecessary burdens prevent qualified buyers from obtaining mortgages in today’s market.