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Is buying a home to live in a good investment?

Anecdotal evidence suggests that in some markets investors are buying foreclosure properties at bargain prices. These properties are located in areas that appear to have good growth potential, and they generate enough rental income to at least offset the holding and maintenance costs. The deal needs to make sense financially regardless of whether there is a big run up in appreciation. The plan is to hold the property for the long term.

There was a time not long ago when investors bought condos and houses even if they didn't produce enough cash flow to cover the carrying costs. Prices were rising so quickly, they could afford a little negative cash flow. The holding period was short and the appreciation payoff was big. According to Standard & Poor's/Case-Shiller 20-city home-price index, prices increased almost 75 percent between February 2000 and February 2008.

In most housing markets, it's not possible to count on appreciation now. The market could be bottoming out in some places, according to some economists. Or prices could move lower before leveling off. It could be years before significant appreciation is again part of the housing picture. With this in mind, is buying a home to live in still a good investment?

Just as the lenders are moving back to basics in terms of qualifying borrowers for mortgages, home buyers should examine the fundamentals of home ownership to determine if they are good candidates.

HOUSE HUNTING TIP: The equity in your personal residence shouldn't be used to pay for vacations, education, new cars and credit-card debt. Many homeowners who participated in serial refinancing when rates were low and money was easy found they had no equity left when the credit crunch hit in August 2007. A good portion of these repeat refinancers now owe more than the current value of their home.

Along the same lines, it's risky to look at your home as a retirement account. It's not a good idea to rob your pension plans in order to purchase a home. This money should be kept for retirement. Some financial advisors suggest that you don't consider the equity in your home as part of your financial portfolio. After all, you will always need to live somewhere. Most people will always need to budget part of their net worth for housing.
Buying a residence hoping for appreciation to increase your net worth is dicey. You may earn appreciation. Nationally, home prices have tended to rise over the long term. But, this doesn't mean that your home will appreciate during the time period you own it.

However, there are plenty of good reasons to buy your own home, if you can afford it. The government subsidizes the cost of home ownership by permitting taxpayers who itemize deductions to write off some or all of the mortgage interest and property taxes they pay. Restrictions do apply. So, check with your tax advisor before making a purchase.

Owning your own home gives you a sense of security. You can choose the community in which you live. You're not at the mercy of a landlord who might issue an eviction notice. If you buy with a fixed-rate mortgage, you know how much you'll be paying over time. Rents, in most places, are subject to increases. It doesn't make sense to spend money fixing up someone else's house so that it feels like yours. And, most landlords will have a say in what you can and can't do -- even down to paint colors.

THE CLOSING: But, if you own it, you can redecorate to your taste

Swapping vacation homes easier under IRS rule

Many investors are taking advantage of the like-kind exchange, which is authorized under Section 1031 of the Internal Revenue Code. These exchanges are commonly referred to as "Starker" exchanges.

But if you own a vacation home, there has been a lot of confusion as to whether that property qualifies for the exchange.

Indeed, back in September 2007, the Treasury Inspector General for Tax Administration (TIGTA) issued a scathing report about the lack of IRS oversight of the capital gains (or losses) deferred through this kind of exchange.

The TIGTA report recommended that the IRS "must provide clear guidance to taxpayers regarding the rules and regulations governing like-kind exchanges with respect to second and vacation homes that were not used exclusively by owners."

The inspector general expressed concerns that "the absence of clarification on this issue leaves unrebutted the sales pitch of like-kind exchange promoters who may encourage taxpayers to improperly claim deferral of capital gains tax by selling non-qualified second and vacation homes through 'tax-free' exchanges."

The IRS agreed and promised to issue guidelines by March 15, 2008.

True to its word, effective March 10, 2008, we now have what is known as a "safe harbor" for these vacation-home exchanges.

In order to have a valid Starker exchange, only investment properties can be swapped with other investment properties. There are other tax benefits for homes used as the principal residence, such as the ability to shelter up to $500,000 of the profit you have made (if you are single or file a separate tax return, this exclusion is limited to $250,000 of gain.)

According to Revenue Procedure 2008-16, the property must be a house, apartment, condominium or similar improvement that "provides basic living accommodations including sleeping space, bathroom and cooking facilities." This can include mobile homes and boats.

When discussing the 1031 exchange, one must use the proper terminology. The property that you currently own and want to dispose of is called the "relinquished property." The new property that you want to obtain by way of the exchange is the "replacement property."

A safe harbor simply means that if you follow the guidelines promulgated by the IRS, your tax return will not be challenged.

To qualify the relinquished vacation or second home for the exchange, it must have been owned by the taxpayer for at least 24 months immediately before the exchange. (The IRS refers to this as the "qualifying use period.")

And in addition, for each of the two years within the qualifying use period, the taxpayer must have rented the property at a fair rental for at least 14 days. Furthermore, the taxpayer cannot have used it personally for the greater of 14 days or 10 percent of the number of days during each 12-month period that the property is rented at a fair rental.

Sounds confusing, but it is the law. The IRS does not want taxpayers to claim that their property is "investment" when in fact they take their families to the beach for the entire summer.

You can, of course, periodically go to your second home to inspect it, and make any necessary repairs. However, if that use exceeds the use restrictions described above, you will not be able to do a Starker exchange. Confirm this with your own accountant.

What is fair rental? The IRS falls back on its standard formula: It will look to the facts and circumstances of each case. To be on the safe side, have at least two real estate agents provide you with a written market analysis of the rents being charged for similar properties in the area where both the relinquished and the replacement properties are located.

What about the replacement property? Here, the same rules apply. If you swap one property for another, you must rent it out for at least two years or the exchange will fail. According to the IRS:

"If a taxpayer files a federal income tax return and reports a transaction as an exchange under §1031, based on the expectation that a dwelling unit will meet the qualifying use standards ... and subsequently determines that the dwelling unit does not meet (those) standards, the taxpayer, if necessary, should file an amended return and not report the transaction as an exchange..."

That could be calamitous. You did a 1031 exchange, and by law, you have to use all of the proceeds from the sale of the relinquished property in order to obtain the replacement property. Now, you have failed to comply with the requirements and have to file an amended return -- and pay the tax on the capital gain. Where will you get the money to do this?

If you follow the rules, a 1031 exchange is a very valuable tool. For example, if you purchased your investment property for $200,000 and sold it for $400,000, you would in most cases have to pay the IRS $30,000, in addition to any state or local tax. However, if this property were sold in connection with a Starker exchange, and you obtained another investment property worth at least $400,000, you would not have to pay any capital gains tax. Instead, the basis of the old property would be transferred to the new one; you would have to pay the tax only when you ultimately sold the replacement property and did not engage in yet another 1031 exchange.

But you must understand that a 1031 is not a "tax free" process; it simply defers the time when you have to pay the capital gains tax.

And even if you follow the vacation rules outlined in the recent Revenue Procedure, you still have to comply with the general requirements of a like-kind exchange. While you must consult your tax and legal advisors about your specific situation, here is a brief synopsis of the rules.

You must identify the replacement property within 45 days after you have gone to settlement on the relinquished property. The identification must be as specific as possible. You can identify up to three such replacement properties. However, if you want to identify more, the aggregate fair market value of the identified properties cannot exceed 200 percent of the aggregate value of the relinquished property (or properties).

The price of the replacement property must be at least equal to the sales price of the relinquished property. All of the sales proceeds from the relinquished property must be held in escrow by a qualified intermediary; under no circumstances can you have any access to that money. It must all go into the purchase of the replacement property.

And finally, you must acquire the new property within 180 days from the day you disposed of the relinquished property.

The rules are complex, and must be followed religiously. A successful 1031 exchange is a valuable tool for investors, but any misstep will cause you to have to pay the capital gains tax you are trying to defer.


Home sellers who understand market prosper

Buyers aren't the only ones holding back in today's housing market. Many sellers are postponing putting their homes on the market because they are convinced that now is not a good time to sell. They would prefer to wait for a better market.

Waiting could be risky if you need to make a move within the next year or so. Most areas of the country are mired in a slow market where sellers are finding it difficult to sell, at least at a price they'd be willing to accept. There's no guarantee that if you wait to sell that the market will be any better than it is now, at least in the short term.

However, the market isn't slow everywhere. Some areas, like San Francisco, Palo Alto (Calif.) and parts of the East San Francisco Bay Area are still suffering from a lack of inventory. Or, lack of the right kind of inventory.

Recently, there were six offers on a hot new listing in Piedmont, Calif., a city adjacent to Oakland. Multiple offers are commonplace in Palo Alto and San Francisco. What these areas have in common are a coveted location and very low inventory of homes of sale.

Negative press about the real estate market is keeping sellers who could do quite well selling now from doing so. If you'd like to sell, but have been scared off by bad news, don't make a decision until you find out more about what kind of homes are selling in your local market.

HOUSE HUNTING TIP: Supply and demand set the pace of any real estate market. When there are more homes for sale than there are buyers willing to buy, it takes longer to sell and prices are often soft. When there is a shortage of homes for sale and plenty of buyers wanting to buy, good homes sell quickly and there is often an upward pressure on prices.

Even though the overall market might be soft, there can be pockets that are hot. The hot spots needn't necessarily be a specific location. They can be a certain type of house within a location.

For example, the Piedmont listing mentioned above took 13 days to sell. It would have sold more quickly except that the sellers decided to expose the property to the market before entertaining offers. The home was a good size and had broad-based appeal. It had eight rooms, a two-car attached garage, a level-out backyard, and it had been completely remodeled with high-end finishes. It was priced competitively.

Contrast this with another Piedmont listing that did not sell in the three months it was on the market. It was a smaller six-room house with no garage and without a level-out backyard. It had limited appeal in comparison to the listing that sold quickly. And, it was significantly overpriced for the market.

The current market is extremely price-sensitive. An Oakland, Calif., listing was on the market earlier in the year priced approximately $100,000 above what the market would bear. The listing was removed from the market and listed several months later at a realistic price. It sold then with three offers for over the asking price.

Selling in this market is not easy. But, sellers who understand the market can do well selling today. They must be realistic about what they need to do to prepare their home for sale. Property condition is more important to buyers today than it was several years ago.

Sellers also must be committed to the process. There is no margin for error when it comes to pricing.

THE CLOSING: If you can't bring yourself to price to sell, you're not a committed home seller.
 
Recycling codes: What they mean

According to the Environmental Protection Agency (EPA) (http://www.epa.gov), in 2006, the U.S. produced more than 251 million tons of garbage -- approximately 4.6 pounds of waste per person per day. Of that, recycling diverted 82 million tons of material away from disposal. In short, Americans are putting plastics into their recycling bins.

Many of us recycle without knowing if something is actually recyclable. Have you ever wondered what those numbers mean on plastic bottles? Below we explain what the seven different codes found on plastics mean and what they are recycled into. Check to see which plastics are accepted in your city; every city has different curbside recycling programs.

1. Polyethylene Terephtalate (PET, PETE): PET is a clear plastic found in soft drinks, water, juice, sports drinks, and condiments bottles; food jars for such products as peanut butter and jelly; and in frozen food packaging.

PET is recycled into fiber for carpets, clothing, and tote bags. It can also be re-used for food and beverage bottles. PET is the most common-used plastic due to its inexpensive and easy-to-recycle features, and is widely accepted by most curbside recycling programs.

2. High Density Polyethylene (HDPE): HDPE is resistant to most solvents and is used for food products with a shorter shelf life such as bottled milk. Because it's more chemical-resistant than PET, it's also used for household cleaners including laundry detergent, shampoo, and plastic grocery bags.

HDPE is recycled into bottling for non-food items, such as motor oil and antifreeze, plastic lumber, flowerpots, and recycling bins. It's accepted by most curbside recycling programs.

3. Polyvinyl Chloride (PVC, Vinyl): You won't find this recycling symbol on household items. PVC is chemical-resistant so it's used to make packaging products, shrink-wrap, window frames, fencing, and decking.
PVC is recycled into pipes, fencing, decking, floor tiles, traffic cones, garden hoses, and packaging products. It's not commonly accepted by curbside recycling programs.

4. Low Density Polyethylene (LDPE): A tougher and more flexible plastic, LDPE is used for dry cleaning bags, newspapers, breads, frozen food, shrink-wrap, container lids for hot and cold beverages, and toys. It's most common use is for plastic shopping bags.

LDPE is recycled into envelopes, garbage can liners, trashcans, paneling, and floor tile. LPDE is not commonly accepted by curbside recycling programs, but plastic bags are now readily accepted at supermarkets.

5. Polypropylene (PP): PP is also strong and chemical-resistant, which is good for hot-fill liquids. It's used for takeout food, yogurts, margarine, and bottle caps.

PP is recycled into automobile parts, such as turn signal lights; brooms; bicycle racks; and trays. Some recycling curbside recycling programs accept PP.

6. Polystyrene (PS): PS is more versatile than the other plastics and is used in many food items such as cutlery, plates, cups, and containers. It's also used for those pesky packing peanuts, as well as foam packaging for electronics and furniture.

PS is recycled into mouldings, thermometers, and license plate frames. Some recycling curbside recycling programs accept PS.

7. Other: An item with this marking means that it is made with a different resin other than the six listed above. These items can include oven-baking bags, some juice and ketchup bottles, and packaging materials. It's recycled into bottles and plastic lumber and is not commonly accepted by curbside recycling programs.

For more info: http://www.americanchemistrycouncil.com

THINGS YOU NEVER KNEW YOUR CELL PHONE COULD DO.
There are a few things that can be done in times of
grave emergencies. Your mobile phone can actually be
a life saver or an emergency tool for survival. Check
out the things that you can do with it:
FIRST
Subject: Emergency
The Emergency Number worldwide for Mobile is 112.
If you find yourself out of the coverage area of your
mobile; network and there is an emergency, dial 112
and the mobile will search any existing network to
establish the emergency number for you, and interestingly
this number 112 can be dialed even if the keypad is locked.
Try it out. (I have entered in my cell phone number
directory.)


SECOND
Subject: Have you locked your keys in the car?
Does your car have remote keyless entry? This may come
in handy someday. Good reason to own a cell phone: If
you lock your keys in the car and the spare keys are at
home, call someone at home on their cell phone from your
cell phone. Hold your cell phone about a foot from your
car door and have the person at your home press the unlock button, holding it near the mobile phone on their end.
Your car will unlock. Saves someone from having to drive
your keys to you.
Distance is no object. You could be hundreds of miles away, and if you can reach someone who has the other "remote"
for
your car, you can unlock the doors (or the trunk).
Editor's Note: It works fine! We tried it out and it
unlocked our car over a cell phone!"


THIRD
Subject: Hidden Battery Power
Imagine your cell battery is very low. To activate, press
the keys *3370# Your cell will restart with this reserve
and the instrument will show a 50% increase in battery.
This reserve will get charged when you charge your cell
next time. (I have entered the access # in cell phone
directory.)


FOURTH
How to disable a STOLEN mobile phone?
To check your Mobile phone's serial number, key in the
following digits on your phone: * # 0 6 #
A 15 digit code will appear on the screen. This number
is unique to your handset. Write it down and keep it
somewhere safe. When your phone get stolen, you can
phone your service provider and give them this code.
They will then be able to block your handset so even
if the thief changes the SIM card, your phone will be
totally useless.
You probably won't get your phone back, but at least
you know that whoever stole it can't use/sell it either.
If everybody does this,
there would be no point in people
stealing mobile phones.
; And Finally....(I have made note of my phone's serial
number._


FIFTH
Cell phone companies are charging us $1.00 to $1.75 or
more for 411 information calls when they don't have to.
Most of us do not carry a telephone directory in our
vehicle, which makes this situation even more of a
problem. When you need to use the 411 information option, simply dial: (800) FREE 411, or (800) 373-3411 without incurring any charge at all. Program this into your cell phone now. (I have entered this # in my cell phone directory.)


This is the kind of information people don't mind receiving, so pass it on to your family and friends.