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Archives November 2021

Foreclosure
Personal Finance

Should I Buy A Short A Sale Or Foreclosre?

by Patrick

In this buyer’s market, some homebuyers ask themselves: Will purchasing a short sale or foreclosure end in disaster — or yield a jackpot? And which type is best to go all-in with: a short sale or foreclosure? “There’s really no cut-and-dry answer,” says Gwen Daubenmeyer, a certified distressed property expert with Re/Max in the Hills in the Detroit area. “It really depends on the buyer and what the buyer’s priorities are.” Before starting their search, homebuyers who want to play their cards right should know the benefits and drawbacks of buying either type of “distressed” property: foreclosures and short sales.

What is a short sale?

Short sales — which are typically recorded with the county recorder’s office — refer to the sale of a home for less than the value owed on the mortgage. The best-known example was during the Great Recession when thousands of homes sold for less than their mortgages after being “shorted” by homeowners who were underwater (that is, owing more than what the home is worth). The short sale has become a more popular option as home values have rebounded in recent years. “The mortgage crisis was so bad that there was really no other alternative [but to sell for less],” Daubenmeyer says.

Benefits of buying a short sale

Short sales are not foreclosures. For that reason, they don’t carry a big stigma. These transactions often take place quickly — typically between 30 days and 90 days, Daubenmeyer says — and they can save sellers a huge chunk of cash. “There’s nothing new about a short sale,” Daubenmeyer says. “It has been going on for years and years and years.” Generally, they require less time and paperwork than a traditional foreclosure — and they won’t increase a homebuyer’s likelihood of eventually being kicked out of the property. “A short sale can resolve all of the issues that typically would go on in a foreclosure,” Daubenmeyer says. What’s more, they may also be less expensive to buy.

Drawbacks of buying short sales

It can take longer: “If you’re trying to buy a short sale, it’s typically a much longer time period to work through,” says Daubenmeyer. Because the lender has the right to decide when the sale can close, buyers are forced to sit on the seller’s property as the sale proceeds. If they want to continue looking, they may have to sit out until the sale closes, potentially wasting precious time. (The timeline varies on the type of short sale or foreclosure, too: If the home is a foreclosure, buyers can expect the sale to close in 30 to 60 days; for a short sale, sellers expect it to close in 90 to 120 days.) Pay a higher price: While a short sale may offer the most bang for your buck, it may also involve paying a higher price than a foreclosure.

This post contains affiliate links. Please please read my Disclaimer for more information

What is foreclosure?

A foreclosure is a way for a lender to “own back” a property, usually foreclosed on from a foreclosure proceeding in the county where the property is located. “Lenders take over the rights to the property, and they can take control over it any time they feel like it,” Daubenmeyer says. A foreclosure often ends in the foreclosure sale — whereby the lender simply sells the home at auction to another buyer — or it may conclude in a repossession case, where the lender, which in many instances was then the original mortgagee, takes ownership of the property by executing a judgment. A lender may file a foreclosure lawsuit to foreclose on a home and seek control over it, but the process doesn’t always result in a sale.

Benefits of buying foreclosure

If you’re looking for a quick turnaround, mortgage lenders will look favorably on your purchase. Since these homes were in foreclosure, it’s likely that there are no negative encumbrances — like liens or standing water, which are usually a deal-killer. Many mortgage lenders will actually waive fees related to delinquent property taxes, to boot. (Under current law, borrowers in default are liable for their delinquent taxes until they pay them off.)

Drawbacks of buying foreclosures

Drawbacks of buying foreclosures include the tax hit on the closing, but there’s also a lot to consider. While a short sale can take months to get approved by the bank or lender and a foreclosure a few weeks, foreclosure purchases require a key component to be done before you close: buy a new title to the property. Once the new deed is secured, you can close on the short sale/foreclosure. While a short sale can take months to get approved by the bank or lender and a foreclosure a few weeks, foreclosure purchases require a key component to be done before you close: buy a new title to the property. Once the new deed is secured, you can close on the short sale/foreclosure. The tax hit: Remember, if you have capital gains on your investment, that money is taxable.

Purchasing delays

It takes time for a short sale to be processed by the bank that holds the mortgage, making it an “orphan” transaction. However, it will always be quicker to buy than to rent, which typically takes six to nine months on average. And, for the buyer, the wait will be well worth it: The seller can get their cash fast and the buyer won’t have to close escrow and bring in their downpayment. Buyers often prefer the speed of buying because they’re usually holding out for a better deal, says Daubenmeyer. “But I’ve been in a short sale when I was the one who had to sell [the home],” she adds. “They might not have gotten exactly what they wanted, but it wasn’t a huge hit to their credit, and there was less of a market disadvantage.

Additional Risks

Concerns about any real estate deal should be weighed, and, of course, every buyer’s situation is unique, notes Daubenmeyer. But it’s also important for buyers to consider that foreclosure buyers are usually required to jump through a lot more hoops to close the deal. Re/Max explains that for foreclosure properties, buyers must submit forms proving their creditworthiness, and once the seller “closes,” the seller is supposed to move out, and the buyer has to sign paperwork verifying that the keys have been turned over to the bank. While short sales often give sellers cash on the barrelhead, there is one major difference between a foreclosure and a short sale.

Potential Additional Fees

By law, when a property becomes a short sale or foreclosure, additional fees and costs are levied against the buyer. (The buyer must pay the mortgage lender, Realtor, attorney, etc., on top of what the home is actually worth.) These costs can include Mortgage Fraud, Agreement Fee (MFA), Mortgage recording fees, Bank charge-offs, Title Insurance, Mortgage Insurance, and Restrictions on the Sale of Property. Several of the above fees and charges can cause a short sale or foreclosure to be much pricier than it should be. And while not all short sales are as pricey as others, some Realtors have reported that in most cases, a short sale (no title insurance) will run between $30,000 and $100,000 more than a foreclosure (full title insurance) or short sale.

Conclusion

Which type of home you decide to buy may be dependent on which type of buyer you are. For many, buying a foreclosure, short sale or another type of “distressed” property might be the best decision available. But for others, looking at the wrong home is the key to disaster. The right type of property can be the difference between escaping foreclosure and losing your home.

“If you have any feedback about should I buy a short sale or foreclosure that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”

NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.

1035 Exchange
Personal Finance

What Is A 1035 Exchange? How Does It Work?

by Patrick

If you want to exchange your current life insurance, endowment, or annuity policy for a new policy, a 1035 Exchange just might be a great tax-deferred option for you to consider.

What is a Section 1035 Exchange?

1035 Exchange is the sale of a “qualified life annuity contract” (QLAC) in exchange for a qualified longevity annuity contract (QLAAC) or a qualified endowment contract (QEAC) in a Qualified Retirement Annuity Contract (QRAC) (both of which allow one or more death benefits to be passed on after the client dies). The current owner can usually access the money in the policy any time after the purchase is completed. If the owner needs to access the funds early, they can (subject to annual tax withholding). The account owner can’t use their gains to pay for living expenses while they are still alive. You can find more information in IRS Publication 590 (Circular 190) QLAC and QEACs allow you to defer up to $3,000 of gains each year on the sale of the policy.

How does a 1035 Exchange work?

Using a 1035 Exchange, you can complete the paperwork in conjunction with your insurance company, with a 1035 exchange form that can be completed in many different ways. In order to qualify for a 1035 Exchange, your current policy must have been purchased before 1993. Other conditions, such as being 25 years old or older, or having certain health conditions, may also prevent you from participating. In addition, any pre-existing conditions must be included in the 1035 Exchange.

When is a 1035 Exchange appropriate?

There are two situations when you might consider a 1035 Exchange: If you recently acquired a new life insurance policy, you can’t currently use it and don’t want to make a lapse of policy penalty when you change insurance coverage. If you are in the process of changing to another policy for the same reasons. There is no loss in cost to the government if you choose a 1035 Exchange, even if you’re in a higher tax bracket than the policy you are trading in. “Even in the current high-tax environment, a 1035 Exchange can provide tax benefits,” said Tim Dougherty, Senior Financial Planning Specialist at Raymond James & Associates in Denver. “The longer you hold on to the old policy, the more tax benefits you receive.”

This post contains affiliate links. Please please read my Disclaimer for more information

When is surrendering a policy better than doing a 1035 Exchange?

If you wait to surrender your existing life insurance policy to do a 1035 exchange, you’ll have to pay the gift tax (if you’re older than 59½) or you’ll have to file a 1041 Withholding Return. A 1031 exchange can also get you better tax-deferred treatment than a 1035 exchange. But waiting will also cost you more. The good news about surrendering to do a 1035 exchange is that you’ll usually avoid a penalty tax on the cash surrender value of the policy.

What are “like-kind” exchanges that qualify for 1035 Exchanges?

A like-kind exchange, or 1031 exchange, is one of the many ways to exchange real estate for something else, including stocks, bonds, commodities, foreign real estate, certain business interests, or cash. Keep in mind: The U.S. Treasury and Internal Revenue Service will not issue 1031 exchange applications on your behalf. If you are considering a 1031 exchange, you should work with a tax professional, independent broker-dealer, or other investment professional to make sure you do your homework.

Can multiple contracts be used for a 1035 Exchange?

You can generally only have one policy in a 1035 Exchange at any given time. It must be a life insurance policy, annuity or annuity contract, or endowment policy. It cannot be a long-term health plan or a deferred annuity. It cannot be a universal life or universal variable universal life policy. When can I use a 1035 Exchange? Once you sell your current life insurance policy, you may use your 1035 exchange to exchange your policy for a new policy. Generally, you must use your 1035 exchange before the life insurance policy expires.

Can the owner be changed during a tax-free 1035 Exchange?

Yes, the owner can be changed during a tax-free 1035 Exchange. This is called a non-forfeiture transfer.  Yes, you can change your beneficiaries. (However, you may need to keep them current.) Yes, the owner can be changed during a tax-free 1035 exchange. When you obtain a life insurance policy with a named beneficiary, it’s irrevocable. That means your original named beneficiary cannot be changed for 1035 exchanges. Allowing you to exchange or change the owner in a tax-free 1035 exchange means that you can avoid making one of the following: Identifying a named beneficiary, Paying any premium on a newly issued policy, and Applying for the new policy.

Can the insured be changed during a tax-free 1035 Exchange?

Yes. The insured is always eligible to choose a new policy that would be immediately cash available for that beneficiary to take over. Yes. A 1035 Exchange does not change a person’s life insurance contract for any reason other than as permitted by law. The most common reasons that a life insurance policy would be swapped for a new one is when the insured dies or if the insured’s beneficiary changes. Any exchange is complete upon surrender.

Will the new life insurance policy become a modified endowment contract?

The fact that a policy exchange becomes a Modified Endowment Contract, however, can cause some confusion. Basically, the new policy is no longer a contract to ensure you have a certain amount of cash in your account on your death or disability and instead becomes a life insurance policy. This is just another type of life insurance policy that you buy and take out on yourself or on your beneficiary(s).

Conclusion

There are more than enough tax benefits from saving for retirement to negate the tax-free gain that a 1035 exchange can create. And that is an important distinction to make! It’s important that you always consider the tax consequences of any financial transaction and act accordingly. Not only are the current tax rules in your favor, but you can maximize your retirement savings by contributing to your 401(k) or IRA. It’s also important to note that you can also make a traditional IRA contribution in conjunction with your 401(k). That way, you can immediately deduct the pre-tax contribution that you make to your 401(k) from your current taxable income and only the post-tax contribution that you make to your 401(k) will be deductible from your taxable income.

“If you have any feedback about what is a 1035 exchange that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”

NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.

Charity
Personal Finance

What Are Qualified Charitable Distributions

by Patrick

A qualified charitable distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions. As a result, donors may avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions, though there are some other limitations.

How do qualified charitable distributions work?

The recipient of the QCD generally must be a 501(c)(3) or another recognized charity recognized by the IRS. The contribution must be in the form of U.S. cash or property, which means cash (or the equivalent in check or coin) or a current bank account, with a physical location of the charity. Non-cash contributions may include stock or other securities, or units in a qualified business enterprise (QBE). For 2016, the maximum cash deduction is $100,000, or 50% of the donation amount if the contribution is $100,000 or more. For tax years 2017 and 2018, the maximum is $100,000, or 50% of the donation amount if the contribution is $100,000 or more. For 2019, the maximum is $100,000, or 50% of the donation amount if the contribution is $100,000 or more.

Benefits of qualified charitable distributions

QCDs may be more valuable than ever because the income limits for the most current and future deductible contributions to traditional IRAs have increased. The IRS made these changes for all taxpayers except those with adjusted gross income (AGI) below certain limits. Donors will avoid having their basic exemption for the following tax year reduced from $0 to $10,000 for the first two qualified charitable distributions and $20,000 for additional distributions. The donor can contribute up to $13,000 to the same qualified charitable organization and avoid having the donor’s base income count towards their state and local income tax burden. The donor can avoid the greater than $1,050 state income tax for every $1,000 donated, and the $1,050 federal income tax.

Who can make a qualified charitable distribution?

QCDs may be made by a donor who is 70½ years old or older as well as anyone that is blind, disabled, or age 65 or older, although a retiree may be exempt from the requirement to take the distributions by taking the distribution on a spouse’s record. A qualified charitable distribution must be made from all of an individual’s lifetime RMDs, with the exception of RMDs taken before age 70½. In addition, a qualified charitable distribution is not considered a distribution from the estate, so there is no probate process or other tax consequences for making a qualified charitable distribution. Qualified charitable distributions must be made on an individual’s tax return, even if the individual is deceased, and are treated as ordinary income.

This post contains affiliate links. Please please read my Disclaimer for more information

Type of charity that can receive a QCD

The following are the types of charities that can receive a QCD. Generally speaking, a QCD will be made directly from a qualified charitable distribution to a charity of your choice. However, certain situations may lead to a partial or complete charitable distribution to a specific charity, rather than to any or all of the charities of your choice. Make charitable gifts within 60 days of the end of the calendar year. You do not need to wait until your retirement to make charitable gifts. If you want to make your QCDs after your retirement, you need to follow this three-step process. If you make a QCD, you can receive a tax deduction for the value of the transfer from the assets that are included in the QCD.

When might a qualified distribution not be effective?

When donations are paid out of pre-tax accounts, they count against the donor’s taxable income. That means that if the taxable income is too high, the donations may be more than the individual is required to pay in taxes. And there are some more unusual rules. For instance, you may not be able to make a QCD if your total IRA balance is less than $611,000, or if you are 55 years old or older, you may be required to pay capital gains taxes on a QCD.

Tax reporting

QCDs are reported on Schedule A of your 1040 and are subject to standard income tax withholding. QCDs are a bonus to charities and a bonus to taxpayers, but they can make or break the charities. Ask the charities to plan for this tax benefit by organizing tax-deductible contributions into their accounts, even though you cannot itemize donations. You will need to stay on top of your donations, though, as you might miss out on larger donations that can boost their fund-raising efforts.

What are the limitations of using QCDs?

They may be used to donate to any 501(c)(3) charity (or a local community organization), but they must go through a qualified charitable distribution representative to make sure all applicable tax rules and regulations are followed. Contributions must be made directly to a qualified charitable distribution representative, and QCDs cannot be used for church, nonprofit religious organizations, political parties, or other organizations that are not recognized charities. A charitable contributor is required to include a copy of the tax identification number for the charity in the QCD form.

How can I find out if I am eligible for a QCD?

The IRS allows individuals to apply for a QCD in one of four ways: filling out Form 8604, a form required to start or continue a QCD; writing a check to an authorized charity; scheduling a qualified donor meeting with an IRS representative, or initiating a transfer with a qualified charitable organization. These sources provide a helpful way to research your eligibility for a QCD.

What should I consider before making a QCD?

If you are 70½ years old or older and make a QCD, you must use the money to help individuals or families who are low income or otherwise in need. Generally, the first $100,000 you donate each year is tax-free, but there are some special restrictions that could apply to you. Here’s what to consider before making a QCD: If you donate QCD funds to a charity that doesn’t exist yet, the IRS can audit you, which might not be worth the potential tax benefits. In addition, charities that aren’t incorporated as charities may not be eligible for the QCD. If your QCD fund goes to a new charity every year, the value will eventually be below the $100,000 amount, and you will have to start the process all over again.

Conclusion

Tax reform is a significant benefit for taxpayers in many ways. Through new limits on itemized deductions and the elimination of most of the itemized deductions available to higher-income taxpayers, tax reform benefits taxpayers in several ways. The first step to taking advantage of these changes is to ensure you understand and have documented your tax situation.

“If you have any feedback about what are qualified charitable distributions that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”

NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.

Cars
Personal Finance

Should I Buy Or Lease A Car?

by Patrick

Choosing whether to lease a new vehicle instead of buying it largely comes down to priorities. For some drivers, leasing or buying is purely a matter of dollars and cents. For others, it’s more about forming an emotional connection to the car. Before choosing which road to go down, it’s important to understand the key distinctions.

What is a lease?

A car lease is a contract between the driver and a car dealer that agrees to cover the cost of a new car for a specified time (known as “lease term”). The contract guarantees that the buyer will return the car at the end of the lease, and makes sure that payments won’t go up during the duration of the lease. By contrast, a loan is more like a traditional, permanent loan from a bank. It provides the car buyer with a lump sum payment – known as the down payment – which is the amount the owner of the car will pay toward the purchase price of the car. If the car buyer decides that they do want to own the car at the end of the lease, they must pay the full price of the car upfront (called “forever payments”).

Advantages of Leasing a car

Leasing offers a lot of benefits for drivers who lease new cars: It’s a simple way to own a car. It’s easy to check-in and out of a lease. Because you don’t have the added cost of owning a car, there are fewer variables to manage. There are some tax benefits. There are many different ways to get car tax paid. Leasing is another option for those who don’t want to do the math to figure out how much tax they’ll owe. Leasing a car has many advantages as well. You can easily drop the payments on your lease, and you don’t have to worry about returning the car if you change your mind. Leasing is cheaper than buying a new car. Another advantage is the fact that you can own the car as long as you’re willing to pay for a maintenance contract.

Disadvantages of Leasing a car

It’s worth remembering that leasing can come with some major drawbacks. If you don’t pay down the balance of your loan, you’ll owe a monthly fee, even if the car is paid off at the end of the contract. For some drivers, leasing is a quick way to rack up high monthly payments, which eats into the budget. Leasing also means the car might not be the right size for your needs.

This post contains affiliate links. Please please read my Disclaimer for more information

Advantages of Buying a car

Buying a car has many advantages. There are no monthly payments to think about. You can buy as much or as little of the car as you want. You can always sell it if you decide it’s not working for you. Not everyone wants to deal with the hassle and headaches that come with ownership, though.

Disadvantages of Buying a car

Buying a car is not an inexpensive proposition. In fact, according to Edmunds, the average sticker price for new cars sold in the U.S. in 2017 was $35,558. However, there are some crucial costs to consider before making your decision. “Even with the best interest rate, financing isn’t always the best way to get the lowest price,” said Michael Hitchings, president of Car-Buying.com. “When looking for a car, you have to consider what you’re getting and what you’re giving up. Buying a car can cost $1,000 more or more than if you lease.” Also, dealers and private sellers offer a wide range of financing options. In fact, one survey by the financing comparison website CompareCards found that 63 percent of car shoppers who purchased a vehicle in 2016 did so with a loan or lease.

Maximizing Tax Deductions

A lease makes sense if you expect to keep the car for a long time. In addition, a car lease can take the pain out of paying car tax and registration fees. With that in mind, a car lease usually has a lower monthly payment than a traditional purchase and is often cheaper to finance as well.

Longer-Term Considerations

Leasing isn’t for everyone, but if you’re unsure about how much you’ll be using a car every year or two, and you don’t want to be locked into a long-term car payment, leasing might be your best option. It’s no secret that these days, leases on used cars are incredibly expensive, so you’ll want to have ample time to negotiate a lease deal that fits your budget. The biggest downside to leasing a car is the payment. For short-term, casual leasing, the up-front cost is more or less unavoidable. For example, you might not be able to trade in your car once you’ve been leasing it for six months or more. When the lease ends, you’ll have a huge payment to contend with – and there’s no option to extend the lease.

How to Find the Best Car Purchase Deals

Buying a new car is typically the most economical way to go. Compared with the lifetime cost of leasing a car, buying a new car is typically more affordable. The price of buying a new car is determined by how long you will own the vehicle, as well as how much you’ll pay in lease and maintenance fees.

Invest in the brands you love

When it comes to selecting a new car, consumers could have a narrow set of options when deciding on which brand to go for. When considering a sedan over a crossover, for example, consumers can typically go for a sedan because of its handling capabilities, comfort, safety features, reliability, and available options. This makes it a more straightforward choice than choosing between, say, the Audi A4 and A5. But this is only true when choosing an upgrade over an equivalent luxury car. It’s not easy to pick between two brands when it comes to choosing their next car, but for some drivers, their values and passions are tied to particular brands. Those with a passion for certain car brands, in particular, may be more likely to go with them over competitors.

Conclusion

Cars are extremely expensive and people are extremely fickle when it comes to their needs and requirements. It’s rare that you find a car that can satisfy all of your needs. Instead of making a hasty decision, think through your wants and needs. It’s best to spend a few hours researching each car on the market to ensure that it meets all of your demands and needs.

“If you have any feedback about should I buy or lease a car that you have tried out or any questions about the ones that I have recommended, please leave your comments below!”

NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.