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Understanding Assessment and Appraisal and the Massachusetts Stamp Tax.
Assessment
This the value placed on a property by local governments for the purpose of calculating and collecting property taxes. Assessments are generally updated every three years. The assessment rate is the percent of the appraised value that will be taxed.
Appraisal
This the value of a property calculated by an independent licensed professional, most often for the purpose of ensuring your lender that the home is worth sufficient value to justify the mortgage loan. A certified appraiser will visit the home to check such things as the number of rooms, condition, improvements made, lot size and square footage of livable space, construction quality and the condition of the neighborhood. Then the appraiser reviews recent comparable sales in the area to determine the estimated value of the property.
Market Value
This the price a home will bring at a given point in time, once the buyer and seller establish a “meeting of the minds”. It should not be confused with either Assessment or Appraisal values. Simply put, a home is worth only what someone is willing to pay for it above others.
Excise Tax Stamps
When property is conveyed from one party to another by means of a deed, the Commonwealth of Massachusetts requires that Excise Stamps be purchased and affixed to the deed before it is recorded at the Registry of Deeds. These tax stamps are paid for by the seller and the money required to pay for them is most often deducted from the seller’s proceeds by the bank attorney at the closing or “passing of papers”. The closing attorney purchases the stamps and affixes them to the deed prior to recording.
The amount of the tax stamps is figured at a rate of $2.28 per $500 of the sell price. This amounts to $4.56 per $1,000 of the sell price when the sell price is in even $1,000 increments. When the sell price is not in even $1,000 increments, the sell price is rounded up to the nearest $500 to determine the base for stamp tax calculations.
Understanding Capital Gains in Real Estate
When you sell a stock, you owe taxes on your gain-the difference between what you paid for the stock and what you sold it for. The same is true with selling a home (or a second home), but there are some special considerations.
How to Calculate Gain
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:
- Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed at closing.
- Add adjustments:
Cost of the purchase-including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
Cost of sale-including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
Cost of improvements-including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace. - The total of this is the adjusted cost basis of your home.
- Subtract this adjusted cost basis from the amount you sell your home for. The result is your capital gain.
A Special Real Estate Exemption for Capital Gains
Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:
- You have lived in the home as your principal residence for two out of the last five years. You have not sold or exchanged another home during the two years preceding the sale.
- Also note that as of 2003, you also may qualify for this exemption if you meet what the IRS calls "unforeseen circumstances," such as job loss, divorce, or family medical emergency.
Reprinted from REALTOR® Magazine Online by permission of the NATIONAL ASSOCIATION OF REALTORS® Copyright 2005. All rights reserved. www.REALTOR.orglrealtormag
Disclaimer: For illustration purposes only. C21 Carole White Associates nor its agents or affiliates make any representations or warranties regarding the accuracy of this information. Clients/customers are expected and encouraged to conduct their own research and consult with their accountant, financial planner, and/or lawyer.