Show All » 2011 » April
Friday, September 23, 2011Tax Court Rules on Real Estate Professional
Taxpayer qualified as a Real Estate professional on 2 of his 6 properties
Tom Miller vs. Comm., TC Memo 2011-219
This recent court case outlines a good description to qualify as a real estate professional and the related record keeping issues one should think about when getting into this business.
SUMMARY:
Although Mr. Miller worked as a ship pilot he was able to provide testimony and contemporaneous work logs that showed he met 750-hour requirement where he completed number of significant construction projects, both as contractor and landlord, and performed additional real estate tasks, including researching and bidding on properties, finding tenants, collecting rent and performing maintenance work at rental properties. Also, Mr. Miller participated in activities at those properties for over 100 hours and his participation wasn't less than participation of any other individual. However, Mr. Miller didn't meet 100-hour requirement or show that their participation in activities at remaining properties constituted substantially all of participation for those properties in years at issue, particularly in light of Mr. Miller’s brother's participation at property adjacent to his home. The end result was that 2 out of 6 properties were classified as non-passive rentals vs. passive rentals.
It should also be note that the real estate grouping election was not filed accordingly.
Circular 230 Notice: IRS regulations require us to advise you that, unless otherwise specifically noted, any federal tax advice in this communication (including any attachments, enclosures, or other accompanying materials) was not intended or written to be used, by any taxpayer for the purpose of avoiding tax-related penalties imposed under the U.S. Internal Revenue Code or any other applicable state or local tax law provision; furthermore, this communication was not intended or written to support the promoting, marketing or recommending of any of the transactions or matters it addresses.
Greg Nelson CPA, MBT
Olsen Thielen, CPAs
Posted September 23, 2011
Posted By: Ryan O'Neill @ 5:29:35 PMTop
Show All » 2011 » April
Wednesday, August 10, 2011Key Developments in Second Quarter 2011
Looking back at the Second Quarter 2011 there were a couple key items that affect the real estate industry …
Standard mileage rates increase for last half of 2011. The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is increased 4.5¢ from 51¢ to 55.5¢ per mile for business travel from July 1, 2011 to Dec. 31, 2011. This will also result in making sure you track your mileage accordingly between the first half of the year and second half of the year for tax reporting purposes.
Two bonus depreciation deductions for one expenditure. Under IRS regulations, businesses that trade in machinery/equipment or even business owned vehicles for which they claimed bonus depreciation may qualify for another bonus depreciation deduction on the remaining depreciable basis if they swap for like-kind property that also is eligible for bonus depreciation. In effect, the business gets two bonus depreciation deductions for its expenditure on the traded-in property.
Real estate professionals allowed late election to aggregate rental real estate interests. The IRS has provided guidance that allows certain real estate professionals to make a late election under the regulations to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss rules. This election can make it easier to currently deduct losses from real estate activities. As a general rule, the election is made by filing a statement with the taxpayer's original income tax return for the tax year. However, under new guidance, a taxpayer meeting certain conditions can make a late election on an amended return
Nonspouse real estate transfers under IRS scrutiny. A recent court case reveals that the IRS has discovered a pattern of taxpayers failing to file gift tax returns for real property transfers between nonspouse related parties. As a result, it launched a compliance initiative to capture data from states and counties regarding real property transfers taking place between nonspouse family members for little or no consideration during the period of Jan. 1, 2005, through Dec. 31, 2010. Thus, individuals who transferred real property to nonspouse family members should make sure that required gift tax returns were filed and file amended returns if they weren't.
Greg
Nelson, CPA, MBT
Olsen
Thielen CPAs
www.otcpas.com
Top
Show All » 2011 » January
Monday, July 25, 2011Rental Property Owners Take Note
EFFECTIVE JANUARY 1, 2011-
On September 27, 2010, President Obama signed into law the “Small Business Jobs Act of 2010.” The bill contains a number of tax provisions that are designed to give tax breaks to individuals and small businesses. The bill also includes multiple revenue raisers in an attempt to pay for the tax breaks. Among the revenue raisers is the expanded use of Form 1099 to rental property owners.
Beginning January 1, 2011 rental property owners will be required to file Form 1099-MISC with the IRS reporting payments of $600 or more during the year for rental property expenses. Separate 1099’s must be filed for each person providing services of $600 or more during the year. The taxpayers will be required to provide a duplicate copy of the form to the service providers (painter, plumber, accountant, etc.). The forms must be filed by January 31 of the year following the expense. The service providers are required by law to give the taxpayer his name, address, and Federal identification number to be used on the 1099. Rental property owners will need to include their own information and the total amount they paid to the recipient on the 1099.
Failure to comply with the law will result in increased fines. Individual violations result in fines from $30 to $100, with the maximum calendar year penalties ranging from $500,000 to $1,500,000.
As with any tax law, there are exceptions. Taxpayers who are temporarily renting their principal residence, or whose rental income does not exceed an IRS determined amount (which is TBD), will be exempt from the new filing requirements. For those whom the filing requirement would create a hardship, as defined by the IRS, would also be exempt from filing.
Feel free to visit our Olsen Thielen CPA Blog at www.otcpas.com/blog
Mark Angell, CPA mangell@otcpas.com
Olsen Thielen CPAs
Posted By: Ryan O'Neill @ 5:31:00 PMTop
Show All » 2010 » October
Monday, July 25, 2011Is there a 3.8% Additional Tax on Home Sales?
After the passing of the Health Care Bill on March 23, 2010, articles have been circulating through the real estate community claiming there will be a 3.8% tax on the sale of homes. The truth is, unless the home being sold is an investment property, most home sales will not be subject to the tax increase.
The Patient Protection and Affordable Care Act does impose an additional 3.8% Medicare tax on the lesser of net investment income starting in 2013 for individuals making over $200,000 and married couples making over $250,000 per year. The items included in investment income subject to the tax increase are: dividends, interest, royalties, annuities, rents, capital gains, income from passive activities, and net gains from the sale of non-business property. The specific tax formula is calculated based on the lesser of net investment income or the excess over the income thresholds stated above.
If a taxpayer qualifies for the Personal Residence Gain Exclusion under IRC 121 they are excluded from the 3.8% Medicare tax up to a specified amount. Single taxpayers are allowed to exclude up to $250,000, $500,000 for married couples, of the gain on the sale of their personal residence; so long as it has been used as their personal residence for the past 2 years. If the total gain realized on the sale of the principal residence is over the specified limits, only the gain over the limit would be subject to the additional 3.8% tax ( or if the two year test is not met and there are no unforeseen circumstances to rely on). It is important to note that the exclusion applies to the total gain realized on the sale, not on the sale price of the home. If a married couple sells a home for $800,000, they won’t be required to pay any tax on that sale unless they purchased the home for anything less than $300,000.
All gains from the sale of rental properties and second homes would be subject to the new 3.8% tax, assuming the seller’s adjusted gross income is high enough. Note that the tax is on the gain and not the gross proceeds as some articles have suggested.
Greg Nelson, CPA & Mark Angell, CPA
Olsen Thielen CPAs
Posted By: Ryan O'Neill @ 5:29:07 PMTop
Show All » 2009 » October
Monday, July 25, 2011Court Case Sets the Tone: Accounting for your Rental Expenses- Substantiation
In a recent
court case, Thomas
F. Hale v. Commissioner, TC Memo 2010-229, the IRS determined that the
taxpayer was not entitled to deductions for his rental properties because of the
lack of substantiation.The taxpayer introduced into
evidence approximately 317 pages of uncategorized photocopies of receipts,
canceled checks, invoices, and similar documents. He made no attempt to tie that
evidence to the IRS’s expenses in question. The taxpayer basically handed the
IRS a “shoebox”.
RESULT:
Although the court case addresses
other items in the taxpayer tax return, the net result was that the taxpayer
owed taxes AND accuracy related penalties of:
Year Deficiency
Penalty
2003
$17,994 $3,599
2004 19,240 3,848
2005 23,216
3,568
TAKEAWAY:
Part of a taxpayer’s
responsibility in running a business is having a set of books and records in a
form that is traceable back to the origin of the receipt. Whether it is using an
accounting software package such as Quickbooks or cross referencing your
receipts to cancelled checks- there needs to be an auditable path to the expense
in question.
Circular 230 Notice: IRS
regulations require us to advise you that, unless otherwise specifically noted,
any federal tax advice in this communication (including any attachments,
enclosures, or other accompanying materials) was not intended or written to be
used, by any taxpayer for the purpose of avoiding tax-related penalties imposed
under the U.S. Internal Revenue Code or any other applicable state or local tax
law provision; furthermore, this communication was not intended or written to
support the promoting, marketing or recommending of any of the transactions or
matters it addresses.
Greg Nelson, CPA,
MBT
Olsen Thielen
CPAs
Top
Show All » 2010 » October
Monday, July 25, 2011Anoka MN Homes for sale
The city of Anoka, Minnesota has had a significant increase in the quality and
profitability of it’s housing market, along with an increase in affordable
housing, in the month of January 2010 as compared to January 2009. This may
generally be seen as evidence towards a growing trend of “bottoming out” in the
housing market as the credit collapse comes to a close and the surplus quantity
of homes on the market begins to meet demand. It should be noted that, while
nowhere near the sky-high levels of a few years ago, Anoka houses are now
closing in less time, for less money, in higher levels of frequency.
The
first and most telling number is that new listings in Anoka decreased 34.6% as
compared to the same month last year, which indicates that there is less of a
glut of houses entering the market, giving the market more of an opportunity to
bleed of existing supply. This is also reflected in the fact that the average
number of days between when a house is first listed and when it sells has
decreased from an agonizingly high 131 days to a much more reasonable 69 days, a
drop of over 47%. This indicates that the housing market has largely stepped out
of it’s free fall, and while 69 days is still a historically long time for a
house to remain on the market, it is much closer to expected norms than
131.
The most hopeful number, however, is that the percentage of closed
sales has increased 80% when compared to January of 2009. This indicates that
more houses are ending with sale of the property as opposed to the property
being abandoned or falling into bank ownership. However, this may be due to the
fact that housing prices have dropped almost 25% within the past year. While
certainly good to first-time home buyers and new homeowners, this means that
property values are dropping and that many persons who sought to make their home
an investment are receiving much less from the sale than they had hoped.
However, since on average a seller receives 92.1% of the asking price, it
appears that most persons who are selling their home at least receive most of
what they expect to get for the sale. This seems to indicate that prices have
now met market demand and may in fact be helping to spur sales.
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Show All » 2010 » October
Monday, July 25, 2011PART II: Is there a 3.8% Additional Tax on Home Sales?
Recent Congressional Research Report confirms our explanation
Recently we posted a blog clearing the air on how the 3.8% Medicare Contribution Tax was going to be applied to real estate sales beginning in the year 2013.
Low and behold a recent Congressional Research Service (CRS) Report confirms our explanation on how this tax will apply to real estate transactions. The big misnomer was that the tax applied to the gross sales of Principal Residences and exclusive of the IRC 121 gain exclusion. The CRS report confirms that the tax does not apply to all real estate transactions.
As mentioned in our previous blog posting any gain from the sale of your Principal Residence that is excluded under IRC 121 is excluded from the 3.8% tax. Keep in mind any gain over the IRC 121 exclusion may also escape the 3.8% tax if their income falls under the gross income threshold (see previous blog).
When is my home sale subject to such tax? The CRS report explains when a home sale may be subject to the tax:
1) the taxpayer's modified adjusted gross income (MAGI) exceeds the $200,000/$250,000 threshold,
2) the taxpayer engages in the sale of a principal residence resulting in a capital gain greater than the IRS 121 exclusion (inclusive of the partial exclusions also described in the IRS Regulations)- Single $250,000 or Married $500,000, or
3) engages in the sale of a non-principal residence that results in a capital gain
The CRS Report details some examples on how this tax would apply:
Example 1: A married couple who earn a combined salary of $100,000 a year. They sell their principal residence for $400,000, and net a capital gain of $140,000. They qualify for the IRC 121 gain exclusion. Their MAGI in the year of the sale is $100,000 (their salary). Because their MAGI is less than the $250,000 threshold, they do not pay the unearned income Medicare tax. Even if the sold residence was a second home and the $140,000 gain was included in MAGI, the result would be the same- their MAGI would be $240,000 which would still be below the $250,000 threshold.
Example 2: Assume the married couple described in Example 1 above, earn a combined salary of $100,000. However, they sell their principal residence for $700,000, and net a gain of $640,000. Their MAGI in the year of the sale is $240,000 (salary plus $140,000 gain above $500,000 exclusion). Because their MAGI is less than the $250,000 threshold, they do not pay the unearned income Medicare tax.
NOTE: If the gain was not excluded under IRC 121 they would be subject to the 3.8% tax calculated as follows: Their net investment income is $640,000 (gain on home sale with NO IRC 121 exclusion) and the excess of their MAGI over the threshold is $490,000 ($740,000 minus $250,000). Their tax therefore is 3.8% of $490,000 or $18,620.
Example 3: A married couple earns a combined salary of $260,000. They sell their principal residence for $1.2 million, and net a gain of $700,000. Their MAGI in the year of the sale is $460,000 (salary plus $200,000 gain above $500,000 exclusion). Because their MAGI is more than the $250,000 threshold, they will have to pay the unearned income Medicare tax. The tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Their net investment income is $200,000 ($700,000 minus $500,000) and the excess of their MAGI over the threshold is $210,000 ($460,000 minus $250,000). Their tax therefore is 3.8% of $200,000 or $7,600.
Example 4: A married couple earns a combined salary of $260,000. They do not engage in any real estate transactions. Although their AGI exceeds the $250,000 threshold, they will not be subject to the unearned income Medicare Tax since the tax is applied to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Since their net investment income is zero there is no tax.
Example 5: A married couple earns a combined salary of $2 million. They sell their principal residence for $1.2 million, and net a gain of $700,000. Their MAGI in the year of the sale is $2.2 million (salary plus $200,000 gain above $500,000 exclusion). Because their MAGI is more than the $250,000 threshold, they will have to pay the unearned income Medicare tax. The tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Their net investment income is $200,000 ($700,000 minus $500,000) and the excess of their MAGI over the threshold is $1.95 million ($2.2 million minus $250,000). Their tax therefore is 3.8% of $200,000 or $7,600.
Example 6: A married couple earns a combined salary of $2 million. They sell their VACATION home for $1.2 million, and net a gain of $700,000. Their MAGI in the year of the sale is $2.7 million (salary plus $700,000 gain). Because their MAGI is more than the $250,000 threshold, they will have to pay the unearned income Medicare tax. The tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Their net investment income is $700,000 and the excess of their MAGI over the threshold is $2.45 million ($2.7 million minus $250,000). Their tax therefore is 3.8% of $700,000 or $26,600.
Example 7: A married couple earns a combined salary of $260,000. They do not engage in any real estate transactions. They also have dividend and interest income of $50,000. Their AGI exceeds the $250,000 threshold they will have to pay the unearned income Medicare Tax. The tax is applied to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount. Their net investment income is $50,000 and the excess of their MAGI over the threshold is $60,000 ($310,000 minus $250,000). Their tax therefore is 3.8% of $50,000 or $1,900.
TAX PLANNING: Although we have until 2013 for this tax to take effect, taxpayers should start to plan on any real estate transactions in the short term and also plan on how to mitigate their gross income in a transactional year in regards to the MAGI exclusion (like-kind exchanges, installment sales, etc.)
Greg Nelson, CPA, MBT & Mark Angell, CPA
Olsen Thielen CPAs
Posted By: Ryan O'Neill @ 5:27:31 PMTop
Show All » 2010 » October
Monday, July 25, 2011Are You a Real Estate Professional?
Tax Court Case favors the IRS-Taxpayer did not meet real estate professional 750-hour requirement
If you are claiming to be a Real Estate Professional here is another case that points out that taxpayers needs to be documenting their time when performing real estate activities. A recent tax court case held against the taxpayer claiming that he did not qualify as a real estate professional. The Tax Court held that being “on-call” does not count towards the 750 hour requirement (Moss, 135 TC No 18).
SITUATION: The taxpayer was employed full time. The taxpayer and his wife owned a number of rental properties, including four apartments and three single-family homes. The taxpayer was directly involved in the rental properties performing rent collection, repairs/maintenance, and screening/evicting the tenants. For record keeping purposes the taxpayer kept a log detailing the dates he spent performing these activities. The taxpayer neglected to include the time spent but later was allowed to go back and prepare a time summary. The taxpayer’s total hours were 646 and did not meet the 750 hour test (as required to be a real estate professional). NOTE: Not to mention the fact that over 50% of his service must be in the real estate profession.
The taxpayer also argued that he was on-call during his employee time to handle rental issues. The Tax Court took the position that service time must be actual performance of such service. The tax court also rejected the taxpayer’s claim that his calendar reflected only 75% to 85% of his time- failure to provide proof.
CONCLUSION: The Tax Court ruled in favor the IRS and the taxpayer was subject to additional income taxes and accuracy-related penalties.
TAKE AWAY: Taxpayers claiming to be real estate professional need to keep detailed records of their time and services when working on their properties.
Greg Nelson, CPA, MBT
Olsen Thielen CPAs
Posted By: Ryan O'Neill @ 5:26:43 PMTop
Show All » 2009 » February
Monday, July 25, 2011FAQ about the First-Time Home Buyer Tax Credit
Frequently Asked Questions
About the First-Time
Home Buyer Tax Credit
The Housing and Economic Recovery Act of 2008 authorizes a $7,500 tax credit for qualified first-time home buyers purchasing homes on or after April 9, 2008 and before July 1, 2009. The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
- Who is eligible to claim the $7,500 tax credit?
First time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008 and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs. - What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer. - How do I claim the tax credit? Do I need to complete a form or
application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective home buyers will want to be sure they qualify for the credit under the income limits and first-time home buyer tests. - What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time home buyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. - Instead of buying a new home from a home builder, I have hired a contractor
to construct a home on a lot that I already own. Do I still qualify for the tax
credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. - That is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
- If my modified adjusted gross income (MAGI) is above the limit, do I qualify
for any tax credit?
Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
- Can you give me an example of how the partial tax credit is
determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.
Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625. Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances. - Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the home buyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns. - Are there any circumstances for which buyers whose incomes are at or below
the $75,000 limit for singles or the $150,000 limit for married taxpayers might
not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time home buyers, this means the credit will equal $7,500. For home buyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price. - heard that the tax credit is refundable. What does that
mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that taxpayer qualified for the $7,500 home buyer tax credit. As a result, the taxpayer would receive a check for $6,500 ($7,500 minus the $1,000 owed). - What is the difference between a tax credit and a tax
deduction?
A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $7,500 in income taxes and who receives a $7,500 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $7,500 in income taxes. If the taxpayer receives a $7,500 deduction, the taxpayer’s tax liability would be reduced by $1,125 (15 percent of $7,500), or lowered from $7,500 to $6,375. - Can I claim the tax credit if I finance the purchase of my home under a
mortgage revenue bond (MRB) program?
No. The tax credit cannot be combined with the MRB home buyer program. - I live in the District of Columbia. Can I claim both the DC first-time home
buyer credit and this new credit?
No. You can claim only one. - I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519. - Does the credit have to be paid back to the government? If so, what are the
payback provisions?
Yes, the tax credit must be repaid. Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven. - Why must the money be repaid?
Congress’s intent was to provide as large a financial resource as possible for home buyers in the year that they purchase a home. In addition to helping first-time home buyers, this will maximize the stimulus for the housing market and the economy, will help stabilize home prices, and will increase home sales. The repayment requirement reduces the effect on the Federal Treasury and assumes that home buyers will benefit from stabilized and, eventually, increasing future housing prices. - Because the money must be repaid, isn’t the first-time home buyer program
really a zero-interest loan rather than a traditional tax
credit?
Yes. Because the tax credit must be repaid, it operates like a zero-interest loan. Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments. The program is called a tax credit because it operates through the tax code and is administered by the IRS. Also like a tax credit, it provides a reduction in tax liability in the year it is claimed. - If I’m qualified for the tax credit and buy a home in 2009, can I apply the
tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount. - For a home purchase in 2009, can I choose whether to treat the purchase as
occurring in 2008 or 2009, depending on in which year my credit amount is the
largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount. - Is there any way for a home buyer to access the money allocable to the
credit sooner than waiting to file their 2008 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the future home buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment. Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
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Show All » 2008 » October
Monday, July 25, 2011Our Blog
Welcome to The Minnesota Real Estate Show's Blog! This will be an outstanding forum for you to get information on our local real estate and mortgage marketplace.
We will posting thoughts and comments from all of our preferred partners (see Blogroll on the right), as well as comments directly from Scott Wollmering, Alec Grebis, Rob Bonahoom, and Ronny Loew!
Feel free to email us questions and or comments! Any discussion topics for our show? Or anything at all really!
Thanks again for stopping to check out our new Blog!
Posted By: Ryan O'Neill @ 5:23:45 PMTop
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