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Capital Gains Taxes Can Keep Owners from Selling

Dear Monica:  My husband and I are ready to move on from the home where we have lived for 30 years.  The house is too large for us and we would like to find a smaller, newer property close to things we like to do.  But the idea of paying capital gains taxes has us unable to make the move.  What would you advise?  Annemarie G.

Dear Annemarie:  You are like many who have lived in the Bay Area a long time and have enjoyed substantial appreciation in the value of their home.  We who live here are more fortunate than those in other parts of the country where there has been  only modest appreciation.  The rise in your home value has made you feel rich, but now that you want to sell, you feel less rich when you contemplate paying capital gains tax.

This is a decision you will have to make on your own.  You have always known that when you sold,  there would be tax to pay.  Of course if one of you dies, the surviving spouse will have a step-up in the base value of the home as of the date of the death, and there won’t be any capital gain.  But you may not want to wait for such a sad event just to avoid a tax.  You should make the decision based on how and where you want your life to be.  Paying capital gains tax is an unfortunate by-product of selling but it is worth doing if you can afford it and you want to enjoy your future life in a new place.  Think about how you want to live, not about the tax you will pay.

 

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Wood Burning Fireplaces

Dear Monica:  Whenever I am outside and I smell woodsmoke from someone’s fireplace, I immediately think of the terrible fires we have had in California and wonder why someone is polluting the air when we just got rid of all the smoke. What are the rules about burning wood in your fireplace?  Virginia C.

 

Dear Virginia:  The horrendous fires of the past few years in California have changed people’s minds about smoke.  The romantic allure of wood fire in the fireplace used to seem cozy and attractive but this attitude has changed considerably.   This year, when the Paradise fire brought days of unhealthy air to the region, many people began to rethink the recreational value of a wood fire.

 

Many cities in California have disallowed wood burning fireplaces in new construction for several years.  Older buildings that have them have been allowed to use them, but often if a major repair is needed to the flue or firebox, the city won’t issue a permit to fix it.  In addition we have more Spare the Air days when no burning of particulate matter is allowed unless the fire is the only source of heat for a building.  Gas fires, however, are allowed and these have little or no effect on air quality.

 

Real Estate As An Investment 

Dear Monica:    The stock market has fluctuated so much lately that I no longer feel as committed to it as I once was.  Do you think real estate would be a better investment going forward?  Ellen G.

Dear Ellen:  I can’t comment on what the financial market will do now or in the future.  No one knows for sure although judging by history, the markets are due for some kind of “correction” in the foreseeable future.

But considering the way Bay Area companies have been growing and expanding, it’s reasonable to predict that that good residential real estate will be in demand for a long time, making it a good investment.   Real estate prices are down from the highs of last spring and buyers have more leverage now than a year ago.  It’s true that interest rates are rising making housing more expensive, but it is a good time to buy and hold for the long term.

Consult your financial advisor to know if real estate makes sense for you but you can be confident that the future for real estate in our area is bright.

What To Do If Seller Didn’t Obtain Permits For Work Done

Dear Monica: I am searching for a home and am seeing properties that have been nicely updated.  However in some cases sellers did not get permits for the work.  What is the risk to me if I buy a house with un-permitted work?  Kevin K.

Dear Kevin:  If a homeowner does significant work without obtaining permits, the risks to a buyer are several.  First, you may not be able to get insurance enough to cover the cost of replacing the improvements done without permits.  For example, if a garage is converted without permits, and the property has a fire, the insurer may only pay to rebuild the space as it was, and not as the family room it was converted to.

Also if a new owner wants to do work to the home, the building department may require that the un-permitted work be removed.  This is not too common but it can happen.  Not obtaining permits can affect the value of your property because buyers may discount the price to cover the risk they are taking.  The best practice is to always get a permit for any work that requires one.

Year-End Indicators

Dear Monica:  There is volatility in the economic markets these days.  What effect do you think this will have on the real estate market?  Sarah G.

Dear Sarah:  Several things have combined lately that are affecting real estate prices and activity.  The stock market has lost significant value in the U.S. and globally, thus reducing investors’ wealth.     Homeowners are not able to deduct state and local taxes in excess of $10,000 on their federal tax returns and this affects California and other states with high property values and salaries.  In addition, interest rates are rising which makes owning a home more expensive.

How this has translated to the local real estate market is that prices are down by some percentage from where they were last spring and sellers are willing to negotiate, which they didn’t have to do before.   Buyers, motivated by wanting to buy before further rate increases,  are also actively picking up properties that are on the market if the price is reasonable.  I see this trend continuing into 2019.  Buyers have more leverage than they have had for awhile and they are taking advantage of it.

Happy New Year.

Fire Safety

Dear Monica: This year’s Camp and Woolsey fires have convinced me that no community is fire safe.  What can a homeowner do to protect property? Edward W.

Dear Edward:  There are large and small things that can be done to lessen the fire risk.  The main utility company has been shown to have been the cause of several of the worst fires and the California Legislature will be looking at many proposals for regulating them more strictly.

Building codes will also change to lessen fire risk.  Fire safe roofs and building materials will likely be required on all new installations.  Strict rules on defensible space will be enforced.  Utility lines will be put underground where possible.  Propane tanks may also be undergrounded.  Homeowners should be sure that electrical wiring is safe.

Forest management is another key part of any fire prevention plan.  The drought has produced many dead and dying trees that spread the fire quickly when ignited.  Much can be done to reduce this risk.

 

Rent-Backs Explained  

Dear Monica:  We want to make an offer on a property and the agent has told us that the seller wants a “rent back”.  How would this work?  Meredith G.

Dear Meredith:  Rent-back agreements are very common in today’s transactions.  A rent-back agreement gives the seller the right to stay in the property for some period of time after close of escrow.  Sellers like this because they can be sure the sale is going to close before they have to clear all of their things and commit to their next property, whether it be a purchase or a rental.  Buyers have become used to allowing rent-backs because the market has more or less required that they be flexible on this.

Buyers can offer the sellers a “free rent-back”, i.e., not requiring any money, but keeping only a security deposit.  Or, buyers can charge market rate rent for the period the seller remains in possession.  If a rent-back fits with your needs and timing, sellers love them and offering this may give you a competitive edge when making your offer.

 

October and Real Estate       

Dear Monica: I am looking for a home and am not sure if external influences are having a significant effect on prices.  How much do you think interest rate rises, stock market declines, tax law changes and other factors are going to affect the real estate market?  Kirk D.

Dear Kirk:  The market now is “softer” than it was earlier this year and all of the factors you mentioned probably have an influence on market changes.  It is still an active market though, albeit a bit slower with some price reductions happening.   Many buyers are finding good properties to buy and lots of sales are taking place this month.  The weather is still warm and though the days are getting shorter, they are still long enough to see properties at the end of the day.  Soon this will change.

This is a good time for buyers and you should continue to look the next two months until you find what you want.  The balance has shifted in your favor so take advantage of it while you can. Market fundamentals continue to be good and this should help the market remain stable.

 

The Real Estate Market and the Economy   

Dear Monica: It’s October and the stock market is having one of its periodic swings.  How do you think this will affect the real estate market?  Elaine M.

Dear Elaine:  As is often said, the stock market is not the economy and should not be regarded as such.   Market fluctuations can be normal and healthy especially if the stock market has become somewhat overvalued.   But if it continues to lose value it can be a sign of investors deciding that the future economy is not as strong as it has been, and this would include real estate.

The real estate market was already showing signs of slowing from the pace and prices of last spring.  Interest rates are rising and are likely to rise again later this year.  This affects the real estate market because buyers cannot afford as much as they previously could.  And if stock prices are down considerably, buyers will have smaller portfolios and less to spend.

It will take a longer time to know whether market fluctuations are a sign of a slowing economy or not.  We have been in a rising market for several years and it is normal for cycles to end.  And October is often the time of year when this happens.

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