DC City Council Passes New Co-op Taxation Regulations (well, almost)**

**see DC Coops update below…

If you live in DC and believe in stimulating an especially satiated sector of the Washington DC real estate market, you now have the right to be slightly embittered. The DC City Council has passed a new co-op transfer tax that is set to go into effect on October 1 of this year. For a little background – ownership rights of condos and coops, although seemingly identical, do differ. When “buying” a unit in a coop, you are actually “buying stock” in the building. Sounds a little scary and that’s what keeps/kept many buyers away from coops. But the “stock” is “ownership interest” in your unit. Again, very similar to condo living and rights…but there were definitely some financial advantages when it came to purchasing.

Because you were purchasing “ownership interest” (hence treated like “stock”), your purchase was classified as personal property ownership. Benefits? Because the transaction was not defined as a transfer of real estate, the parties were exempt from having to pay transfer or recordation taxes that are standard with the purchase or sale of condos, townhomes, rowhouses, single family homes, etc.

Under this new tax, however, a coop has an “economic interest” tax (you got me!?), requires the standard transfer tax imposed on “ownership interests in real estate” – that is a 1.1% tax on residential properties sales that are less than $400,000, while sales of more than $400,000 will be taxed at a 1.45% rate. The recordation fee is the same amount and will also apply to all coop transactions.

Is This Stimulous?
One has to wonder about the timeliness of such a tax . Could this be penny wise and pound foolish ? After all, the economy is still struggling to get moving and the real estate market is still sluggish. With its “forgiving” taxation regulations on co-ops, DC was able to draw in buyers who were interested in taking advantage of keeping their costs down. With the changes that are set to take place in October, however, buyers might not consider a co-op transaction in DC to be such a good deal anymore.

I have a wild idea, instead of cutting incentives that could greatly help lower both DC condos and co-op absortion rate, couldn’t we increase taxes cigarettes. Maybe give a few more tickets out to DC cab drivers who I think sometimes try to drive you off the road on purpose.

Of course, one could argue that the buyer of a DC co-op may not be deterred by this additional tax. On a $400,000 purchase, for example, the taxes would be $5,800 at the 1.45% rate. A savvy seller, however, would be wise to drop the price to $399,999, as this price would qualify for the 1.1% tax and would cost about $4,400. Dropping the price by one dollar is certainly worth a $1,400 tax savings! Therefore, once the new tax system is put in place, sellers and real estate agents should be sure to consider the value of the property and the resulting taxes when trying to determine the asking price as well as the price they are willing to negotiate down to.

**(Note: As of the time of this blog submission, the new tax was not totally a sure thing. Although it is in a budget bill passed by the DC Council, the total budget has not yet been approved…So, we’re in a “wait and see” mode on this one. The fact that this proposal has gotten this far, however, would certainly suggest that we can look forward to coops being taxed like other residential properties …. sooner or later..

New Housing Credit Falls Short…In My Opinion

You can’t please all the people all the time…and who am I to second guess some of the brightest minds in the country….but I do think the House and Senate fell short in the housing credit in the recently enacted stimulus plan.

According to reports, the final bill reported out of conference contains an $8,000 tax credit for “first time” buyers. “First time” is defined as anyone who has not bought a house in the past three years. The credit will apply to all home purchases from January 1, 2009 to December 1, 2009 (so it is retroactive to the beginning of January) but it does have an income cap. The $8,000 begins to phase out for single persons after $75,000 of annual income and for couples with annual incomes of $150,000. The credit totally disappears at $95,000 for singles and $170,000 for joint returns.

Sound good? Not for real estate in Bethesda or the rest of the DC Metro Area. I don’t want to sound like the New York Times writer who suggested that it was impossible for bank executives to live on the $500,000 proposed by President Obama, but the $8,000 credit and the income limits just won’t go far in our metropolitan area. And why limit the credit to first time buyers?

I know that our legislators had to consider a lot of ways to structure a plan which would have an immediate and positive impact on the economy. But I think everyone agrees that a strong and stable housing market is key to this recovery. All of a sudden, the same people who dolled out billions to banks with no strings attached are worried about spending money to encourage people to buy houses.

At one point, the Senate bill contained a $15,000 tax credit. I don’t know if this credit was limited to first time buyers and whether it was means tested, but I’d argue that this is a “better” number. Maybe there should be a range, based on local housing markets, that goes between $8,000 and $15,000 – much like the FHA and conforming loan limits (which, in this legislation, will go back to the higher levels we saw in 2008). A similar range could apply to income limits. It actually seems quite simple to draft legislation that authorizes an $8,000 credit for buyers in areas where the FHA loan limit is $271,050 and raises incrementally to a maximum of $15,000 in areas where the FHA limit goes to $729,750. If the FHA recognizes this tremendous differential throughout the country in housing costs, why didn’t Congress?

No one asked me….but since we’re throwing so much Monopoly money around, I would have liked to have seen more go to housing incentives.

Washington, D.C. #1 for Real Estate Investors

Washington DC Capitol Building at Dusk

According to a Forbes Magazine article written by Matt Woolsey, Washington, D.C. is rated the #1 world’s best places for real estate investing in 2009.

This first place ranking has, in the past, been reserved for powerhouses like New York, London and Tokyo – but Washington DC property has now been identified as the place to put your real estate dollars this year. The reason lies in the massive amount of government spending that is going to be needed to get us out of our economic mess. And this influx of dollars means an influx of staff — and those people need both offices and places to live. The ensuing benefit to the Washington area real estate market will be in both commercial and residential sectors, according to this January 21st article.

The Forbes list was prepared using data from the Association of Foreign Investors in Real Estate. This organization tracks the places where their member investors are finding the best deals in real estate throughout the world. The article suggests that there is a greater fear this year of investing in markets in places like China and India and that the United States, as a whole, and Washington, D.C., specifically, will benefit greatly from this global concern.

According to the Association of Foreign Investors in Real Estate, there is a lot of money that is available for investment. Whether or not those controlling this capital will feel comfortable putting it to work in 2009 – or whether they will “wait out” the market – will certainly dramatically impact the end result of Washington, D.C.’s #1 ranking.

The world’s ten best places for real estate investment:

  • Washington, D.C.
  • London
  • New York City
  • Tokyo
  • Shanghai
  • San Francisco
  • Los Angeles
  • Paris
  • Houston
  • Singapore