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You are here: Home » Taxes » Archive by category "Income taxes"

TAXABLE GAIN?

There is a big benefit to homeowners in our current tax code where you can sell a principal residence and avoid paying taxes on up to $250,000 of gain if you are single, and up to $500,000 in gain if you are married, as long as you’ve lived there at least two out of the last five years. But what happens if you have to move prior to the two-year period? The good news is your home is probably worth a lot more than what you paid. The bad news is you may be subject to capital gains taxes!

 

Whether you owe the taxes or not will depend on your reason for selling. If you are moving just to get a bigger/smaller/newer/better home, you’ll probably owe taxes. However, if you are selling because of a change in employment, divorce, or another IRS “safe-haven,” you might qualify to avoid some or all of any capital gains taxes owed.

 

If you don’t meet one of these safe-havens, don’t despair. Talk with your tax expert and find out how much it will be. The tax hit may be less than you think. If you bought a home for $400K and it’s now worth $500K, it looks like $100K in gain. However, you can deduct some closing costs on the purchase and the sale transactions, along with hard improvements. Some of my clients opt to make the move and just pay the tax because the benefits of moving outweigh the taxes owed. But many other times they find that if they just delay selling their home a few months (in order to meet the two-year period) it saves them thousands of dollars.

 

My point is to only make your decision to sell or not sell once you have all the facts. I’m not a tax expert, so check with your tax professional.

DEDUCT INTEREST WHEN NOT ON TITLE?

I’m seeing more situations where a parent will step in to buy a home for their adult child since the parent has better credit, even though the child will be living in the home and making all the payments. There is typically a question about whether the child can write off the interest on the loan, and the answer is “probably.”

Regulation 1.163-1(b) of the IRS reads: “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”

The IRS has challenged this type of situation before – sometimes they allow the deduction, but other times they don’t. They want to see that the party claiming the deduction has all “the benefits and burdens of ownership…”

Here are the factors in the cases allowed in the past that seemed to sway the IRS towards approval: 1. The child must live in the property. Their driver’s license, voter registration and utility bills should be in their name and should list the property address. 2.
Parent and child should sign a written agreement saying that the child is fully obligated to make mortgage payments, that parent can evict in the event of default, and that parent recognizes that the child has an “equitable interest” in the property. 3. Child should be responsible for all maintenance and upkeep of the property. 4. Parent and child should sign a Quit Claim Deed, conveying the property to the child. This will not be recorded, but shows your intent that the child really “owns” the property.

Please see a tax expert and/or attorney for specifics to your situation.

End Of The Year Tax Tips

The end of the year is fast approaching. Now is the time to do some planning ahead to try to reduce your income tax bill if you can. Here are two ideas for you to consider.

1. Pay your property tax bill in December (if you can). If your property taxes are not impounded, that means you write the checks yourself. If this is you, and you can afford it, consider paying the 2nd installment (the one due next February) before the end of this year. That could increase your deductions for the 2013 tax year.

2. Pay your January mortgage payment(s) in December. Same reason as above. This can generate an extra month’s worth of interest deduction on your taxes.
You’ll want to check with your tax professional first to see if it is more beneficial to increase your deductions this year versus next. If, for example, you believe you will be in a lower tax bracket next year because of a reduction in income, you may want more tax breaks this year, and vice versa. If this seems backwards, consider that the higher your marginal tax rate, the more beneficial each dollar of deduction is.

This is an important consideration, because by pulling some of your 2014 deductions into 2013, you will be effectively reducing your 2014 deductions by that amount. If you do this again in 2014, you will be roughly breaking even (assuming you will be in the same tax bracket). However, due to the time value of money, I think you’d rather have the tax break THIS year versus next year.
Please check with your tax professional for specifics to your situation. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

Free loan mod/short sale seminar

Updated for 2012. New loan mod/short sale laws and incentives will be discussed along
with the following topics:

  • Who is a good
    candidate for a loan modification vs. a short sale?
  • Can lenders
    pursue you after a short sale, foreclosure or loan modification?
  • Impact on your
    credit score and waiting period to buy another home.
  • Which lenders may
    pay you up to $30,000 to do a short sale.
  • Discussion of the
    “1099 issue” and the two big exceptions to it.
  • How the
    expiration of the Mortgage Forgiveness Act at the end of 2012 affects you.

June 12th at 6 pm or 7:30 pm or June 16th at 10 am or Noon. All will be the same
one-hour presentation including time for Q&A.

Presented by: Brian Sharp, Certified Distressed Property Expert.

««« MUST R.S.V.P. TO RESERVE A SEAT «««

Phone:
925.998.9712  Email:
Brian@SharpHomesOnline.com

 

TAX CREDIT REPAYMENT

If you bought a home between 2008 and 2010 and claimed the First-Time Homebuyer Tax Credit, or you know someone that did, you need to read this. You may be required to start repaying that credit, and the IRS is no longer mailing out reminder notices.

The credit of 2008 was really more like a no-interest loan than a true tax credit. There were other tax credits that came the following years that WERE true tax credits, but the 2008 vintage needs to be paid back in 15 equal installments, starting with your 2010 return. This will be on line 59b of your 1040 form.

If you sold the home you claimed a tax credit for, or even if you stopped using it as a principal residence, you have may to repay the credit, and this may apply whether you bought the home in 2008, 2009 or 2010. If that describes you, you should be attaching form 5405 to your return to repay the credit.

This is a very complicated issue as there were many different types of homebuyer tax credits, and the rules changed every year, and even during some years. For more info, got to www.irs.gov and search for “First-Time Homebuyer Credit.” They even have a webpage where you can look up your account to see if you are supposed to be paying your credit back, and what your balance is: https://sa2.www4.irs.gov/irfof-fthb/

I AM NOT A TAX EXPERT. PLEASE CONSULT YOUR OWN TAX EXPERT FOR SPECIFICS TO YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty

MORTGAGE FORGIVENESS ACT

The Mortgage Forgiveness Debt Relief Act of 2007 is about to expire at the end of this year. Mortgage forgiveness can occur in a short sale, foreclosure, or even a loan mod if they reduce your principal. Most people think that they have to “hurry up” and make sure their short sale, loan mod or foreclosure occurs by December 31 of this year to qualify to make sure they don’t have to pay tax on the 1099 they’ll receive for any forgiven debt.

The good news is that there is talk in Washington D.C. right now about extending the Mortgage Forgiveness Act through the end of 2014. It’s included in President Obama’s recent budget proposal, so this is pretty seriously being considered. The bad news is that the Act doesn’t do what everyone seems to think it does. It is not a blanket exclusion where any forgiven debt is tax-free. As I read the IRS tax regulations, even when the Act is in place, it still doesn’t cover money you took out of the home and spent somewhere else. What it does cover is money used to buy, build or substantially improve a principal residence (which means this is NOT for investors). As I understand it, the Act was closing a loophole where some people had refinanced their loans, taken NO cash out, but were going to be taxed on the forgiven debt just because they had refinanced their loan, which didn’t seem fair.

Even if the Act expires, there are still other exemptions in the tax rules that will cover many people, specifically insolvency (when your debts exceed your assets) and if your loan was used to buy, build or improve your residence. For most of my clients who are facing a short sale or foreclosure, they appear to qualify for one of these exclusions.

END OF THE YEAR TAX TIPS

The end of the year is fast approaching. Now is the time to do some planning ahead to try to reduce your income tax bill if you can. Here are two ideas for you to consider.

1. Pay your property tax bill in December (if you can). If your property taxes are not impounded, that means you write the checks yourself. If this is you, and you can afford it, consider paying the 2nd installment (the one due next February) before the end of this year. That could increase your deductions for the 2011 tax year.

2. Pay your January mortgage payment(s) in December. Same reason as above. This can generate an extra month’s worth of interest deduction on your taxes.

You’ll want to check with your tax professional first to see if it is more beneficial to increase your deductions this year versus next. If, for example, you believe you will be in a lower tax bracket next year because of a reduction in income, you may want more tax breaks this year, and vice versa. If this seems backwards, consider that the higher your marginal tax rate, the more beneficial each dollar of deduction is.

This is an important consideration, because by pulling some of your 2012 deductions into 2011, you will be effectively reducing your 2012 deductions by that amount. If you do this again in 2012, you will be roughly breaking even (assuming you will be in the same tax bracket). However, due to the time value of money, I think you’d rather have the tax break THIS year versus next year.

TAX SURPRISES NEXT MONTH

Income tax returns are due next month. I wanted to cover two items that are highly misunderstood. Both of these may surprise you, and depending on your situation, either in a really good way, or a really bad way!

The first is one is in regards to the 1099 issue on forgiven debt, what’s known as “phantom income.” If you have had forgiven debt due to a foreclosure, short sale, loan mod, etc. you should receive a 1099 from the lender. There are several important exemptions. One of the biggest is that purchase-money debt is exempt, which means money used to buy, build or substantially improve a principal residence (so a loan for investment property, or taking cash out may be taxable). The second exemption is if you are insolvent, which means your debts exceed your assets. [See IRS pub. 4681.]

The second one has to do with the homebuyer tax credits. Not all homebuyer tax credits are the same. First, there was the federal tax credit that came out in 2008. Then in 2009-2010 there was another federal tax credit, but it was significantly different from the prior year’s credit. Then California had a homebuyer tax credit in 2010. I don’t have space to get into all the details of how all these tax credits are different. I can only focus on the federal 2008 credit, because that is the one that you have to start paying back. That’s right, starting with your 2010 return (the one that’s due next month), you need to start paying back the credit over a 15-year period. The good news is that it is an interest-free loan, so you simply take the amount of your credit and divide by 15. The bad news is that if you sell your home prior to 15 years, the remainder of your loan will be due that tax year. Now, if you got one of the other credits in 2009 or 2010, you don’t have to pay it back UNLESS you sell your home within 3 years for Federal credit and 2 years for California credit.

MORTGAGE INTEREST DEDUCTION GOING AWAY?

The interest you pay on your home loan is one of the last big tax deductions left to the average homeowner. There is a rumor floating around that the mortgage interest tax deduction is about to go away. Here are the facts: As of right now, the mortgage interest tax deduction has NOT been changed. All that has happened is that it’s being discussed as one of many possible ways to solve the nation’s deficit problem. President Obama mentioned it in a speech and then his Debt Commission included it as a possible area where the government can pick up more tax revenue if it were abolished, or reduced.

The proponents of doing away with this tax deduction argue that it unfairly benefits “the wealthy,” since they normally own more expensive homes, and therefore get a bigger deduction. The opponents of change say that our real estate market is already on shaky ground, and taking away the tax deduction would tank real estate values further.

If we can set aside the “fairness” argument, I think that if the deduction is done away with across the board, it WOULD set real estate values back tremendously. Many people buy a little more home than they can afford, just because the tax deduction brings their “net” payment back into the affordable range. If that went away, prices would drop. Of course, this just proves the point that the tax deduction is artificially inflating home values. But I know that our real estate market absolutely cannot handle any more shocks right now.

I think the banking and real estate lobbies will be successful in squashing any real reform in this area. Even if something meaningful IS passed, I think they would still allow deductions up to some number, say $500,000 of mortgage balance, and even then it would be on new purchases. This way anyone that bought a home prior to this change would get to keep their deduction. And even then, this might not happen for many, many years to come.

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