A new month means five new housing vocabulary!

Capital Gains

What are capital gains?

Capital gains are profits made from the sale of real estate, investments and personal property. The Internal Revenue Service (IRS) classifies capital gains according to the length of time the taxpayer owned the property. Short-term capital gains refer to profits made from selling assets owned for one year or less, while profits earned on assets owned for more than one year are considered long-term capital gains.

Deeper definition

Although many people associate the term with stocks and bonds, capital assets are anything an individual owns and uses for personal and investment purposes. This includes houses, furniture, coin collections, precious metals and jewelry.

According to the IRS, taxpayers must report and pay taxes on all capital gains. There is a capital gains tax exemption for the sale of a primary residence. As long as an owner lived in her primary residence for at least two of the last five years and hasn’t used the exemption within the past two years, she doesn’t have to pay capital gains taxes on the profit earned from the sale.

The IRS treats short-term capital gains as regular income and calculates the taxes due, using the taxpayer’s filing status and adjusted gross income. Long-term capital gains generally have a lower tax rate than short-term gains, capped at 20 percent in the highest tax bracket. Most taxpayers qualify for the 15 percent tax rate, and those with low incomes sometimes pay no taxes on capital gains.


Carry back

What is carry back?

Carry back is a special provision that allows transfer of a net loss of a particular year to the preceding years, mainly to ease the tax burden.

Deeper definition

“Carry back” is an accounting technique where a company applies parts of the current year’s net operating losses to the income of the preceding year. In other words, a year’s tax loss may be used to offset profits in previous years. This technique is a legal method of reducing the tax liability of the current year.

A net operating loss arises when tax deductions and operating expenses exceed the income realized in a particular financial period. These losses can be carried back to ease the year’s tax burden. This loss can be apportioned anywhere during the three preceding years.

A loss carry back has similar dynamics to those of a carry forward. The difference is that the carry forward apportions the operating losses to future periods. In this method, losses can be carried forward and applied within seven years after the operating loss has been incurred.

The IRS recommends that records for any year involving a net operating loss should be kept for three years after the expiration of the carry forward.

The process of claiming a carry back begins by completing the tax return that is relevant to the type of business. If the net loss realized is greater than the income earned, one can proceed with the carry back process to the previous year.


Cash-out Refinance

What is a cash-out refinance?

A cash-out refinance, or “cash-out refi,” is when a mortgage is refinanced for more than what is owed and the borrower takes out the difference in cash.

Deeper definition

As you make your mortgage payments, the equity in your home increases and the balance of the mortgage decreases. You also can accrue equity if the home values in your area appreciate. If you want to access the equity in your home, a cash-out refinance is one way to do so.

There are fees associated with a cash-out refinance, such as closing costs and mortgage points. The lender may charge a higher interest rate for a cash-out refinance than for a conventional mortgage. Terms for cash-out mortgages usually vary from 10 to 30 years.

A cash-out refinance mortgage is a common alternative to the home equity loan. While home equity loans usually have lower fees, the mortgage for a cash-out refinance often has a lower interest rate. However, the home equity loan is an additional loan (and payment) on top of your regular mortgage payment. The cash-out mortgage replaces your original mortgage and mortgage payment.


Catastrophic policy

What is a catastrophic policy?

A catastrophic policy is an insurance policy that covers only serious medical emergencies and illness. In most cases, the patient is responsible for all other medical-related costs.

Deeper definition

Limited preventative care is often covered under catastrophic policies. This includes a select number of visits to your family physician or relevant specialist. Blood pressure screenings, HIV tests and other tests may be covered.

Deductibles under a catastrophic plan are harder to meet than they are with traditional health insurance plans. A majority of catastrophic plans feature deductibles that kick in only after thousands of dollars have been spent. After paying the deductible, services related to the plan go into effect. Until the deductible is met, the insured party must pay for any expenses, except those listed among approved preventative care.

Catastrophic insurance usually is available only to people under age 30. Anyone who can prove a hardship exemption may also be eligible on a monthly basis. The exemption is usually reviewed each month and cannot exceed a full year of coverage.


Certificate of occupancy

What is a certificate of occupancy?

A certificate of occupancy is a document issued by the local government that gives permission for tenants to live in a building that has recently undergone construction or renovation.

Deeper definition

A certificate of occupancy indicates that a building adheres to all of the local building and zoning laws. It serves as proof that the space is up to code and in livable condition.

There are certain situations that require a certificate of occupancy:

  • When a builder completes construction of a new building.
  • When the main purpose of a building changes.
  • When ownership of a commercial or multi-residential building changes ownership.

Builders must prove that their structures are habitable by securing certificates of occupancy. Without a certificate of occupancy, the title for the property cannot change hands. If an owner plans to rent a building formerly used for commercial purposes to residential tenants, a certificate of occupancy is necessary. The housing or building department of the local government maintains responsibility for issuing the certificate of occupancy.