Show All » 2009 » October
Monday, November 09, 2009FIRST TIME HOME BUYER CREDIT-EXTENDED AND EXPANDED
The “Worker, Homeownership, and Business Assistance Act of 2009”
Effective November 7, 2009, there are new law changes that go into effect for qualifying for the Homebuyer Credit. Note that this extends the first time homebuyer credit (FTHTC) and also allows a credit for homeowners who are (1) higher-income taxpayers and (2) to existing homeowners who are qualifying “long-time residents” and who buy another principal residence. However, for the first time there will be a dollar cap on residences qualifying for the FTHTC.
FTHTC extended: The FTHTC is extended to apply to a principal residence purchased by the taxpayer before May 1, 2010. The FTHTC also applies to the purchase of a principal residence before July 1, 2010 by any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010.
FTHTC available to higher income taxpayers:. For purchases after November 6th, 2009 the FTHTC phases out for individual taxpayers with modified adjusted gross income (AGI) between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase (it was $75,000 for Single filers and $150,000 for Joint filers).
FTHTC available for existing long term homeowners: For purchases after November 6th, 2009, any individual (and, if married, the individual's spouse) who has maintained the same principal residence for any 5-consecutive year period during the 8-year period ending on the date of the purchase of their new principal residence qualifies for the FTHTC. The maximum allowable credit for such taxpayers is $6,500 ($3,250 for a married individual filing separately
FTHTC home price limitation: For purchases after November 6th, 2009, the FTHTC cannot be claimed for buying a residence if its purchase price exceeds $800,000. Note that this is a “cliff credit” which means a purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.
OTHER NOTABLE CHANGES/ ANTI -ABUSE RULES:
- The taxpayer may elect to treat a home purchase after 2008 as made on Dec. 31 of the calendar year preceding the purchase for purposes of claiming the credit on the prior year's tax return.
- For purchases after November 6th, 2009, the FTHTC can't be claimed unless the taxpayer has attained 18 years of age as of the date of purchase. A taxpayer who is married is treated as meeting the age requirement if the taxpayer or his spouse meets the age requirement.
- For purchases after November 6th, 2009, the FTHTC can't be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase.
- For 2009 tax returns the FTHTC is not allowed unless the taxpayer attaches to their tax return a copy of the settlement statement used to complete the purchase.
- The Act extends the FTHTC for an additional year, and waives recapture provisions, for individuals who are on qualified official extended military duty., as amended by Act Sec. 11(e))
Greg I. Nelson, CPA, MBT
Olsen Thielen CPAs
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Show All » 2009 » October
Tuesday, October 06, 2009Mortgage Interest Limitation
The $1 Million Dollar Mortgage Interest Limitation has potential new meaning with recent Chief Counsel Advice
Chief Counsel Advice 200940030 (10/08/2009)
IRS Chief Counsel recently advised that indebtedness incurred by taxpayer to acquire, construct, or substantially improve qualified residence can constitute home equity indebtedness to extent it exceeds $1 million.
TAX LAW BACKGROUND
Currently taxpayers can deduct home mortgage interest if they fall into one of two categories consisting of 1) interest paid on acquisition indebtedness or 2) interest paid on home equity indebtedness. Acquisition indebtedness is indebtedness to acquire, construct, or substantially improve a residence, but the amount treated as acquisition indebtedness cannot exceed $1 million. Home equity indebtedness is indebtedness other than acquisition indebtedness, but the amount treated as home equity indebtedness cannot exceed $100,000.
SITUATION
Facts: Taxpayer buys a principal residence for $1,500,000, paying $200,000 in cash and borrowing the remaining $1,300,000 through a loan that is secured by the residence.
Question: Can $100,000 of Taxpayer's indebtedness in excess of $1 million qualify as home equity indebtedness or is the taxpayer limited to the $1 million cap? If yes; then interest on up to $1.1 million of the debt would be deductible ($1 million of acquisition indebtedness and $100,000 of home equity indebtedness).
The Chief Counsel Advice Memorandum determined that the taxpayer would qualify for a mortgage interest deduction based on the combined $1.1 million dollar cap. This position is contrary to previous Tax Court Memos (Pau v. Commissioner, T.C. Memo. 1997-43 and Catalano v. Commissioner, T.C. Memo. 2000-82). To the extent it becomes the “official” position of IRS there would be little reason for a court to again address the issue.
Note: This Chief Counsel Advice responds to an issue under a specific consideration. This advice may not be used or cited as precedent.
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.
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Show All » 2009 » May
Wednesday, July 15, 2009Attention Florida Rental Property Owners:
Casualty Loss resulting from Chinese Drywall damage
Casualty loss deductions would ease the financial pain of faulty Chinese drywall
Responding to legislators' requests that IRS clarify whether damage caused by defective Chinese drywall can result in a casualty loss deduction, IRS Associate Chief Counsel George Blaine has responded with a conditional “yes.” The damage would be deductible as a casualty loss under Internal Revenue Code 163(h) but only if the Environmental Protection Agency (EPA) and Consumer Product Safety Commission (CPSC) determine that the defective drywall is the source of unusual damage.
Background. To qualify as a casualty loss, a loss must result from a destructive force, such as a fire, shipwreck, automobile collision, hurricane or other storm, flood or similar event.Personal casualty losses are subject to a $100-per-casualty floor and the 10%-of-AGI limitation. Business casualty losses are not subject to any limitations (Rental Properties)
Court decisions and revenue rulings have developed the overall concept that the term casualty refers to an identifiable event of a sudden, unexpected, or unusual nature. Suddenness is an essential element of a casualty. To be sudden, the event must be one that is swift and precipitous and not gradual or progressive. Progressive deterioration of property through a steadily operating cause isn't a casualty loss.
Chinese drywall problem. At the height of the U.S. building boom (largely in Southwest Florida), a scarcity of domestically made drywall resulted in the importation of large quantities of Chinese-made drywall, which was installed in an estimated 100,000 living units. Many news reports have surfaced to the effect that the Chinese drywall is defective, and due to the chemicals it emits, is causing health, as well as construction problems.
Please consult your tax advisor if you feel this may apply to your situation and to the treatment of these losses.
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 | Principal | Olsen Thielen & Co. Ltd. | Flagship Corporate Center | 775 Prairie Center Dr. Ste. 480 | Minneapolis, MN 55344 | Phone: 952-829-3402 | Fax: 952-941-0577 | www.otcpas.com
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Show All » 2009 » May
Tuesday, June 02, 2009No deduction for costs before real estate business actually began; training classes nondeductible
Thomas J. Woody, TC Memo 2009-93
Thinking about starting a business in real estate? Dot your 'i's and cross your "t's ! A recent Tax Court decision deals with a taxpayer who spent big money to get into the real estate business but wasn't entitled to deduct his expenses for a couple of reasons 1) because they were incurred before his business began and 2) because they were incurred for a new career as such deemed nondeductible educational expenses.
Background. To be deductible under Internal Revenue Code (IRC) 162, ordinary and necessary business expenses must be directly connected with or pertain to the taxpayer's trade or business. The entity must be functioning as a business when the expenses are incurred. Until the business is functioning as a going concern, expenses related to it are not ordinary and necessary expenses but, rather, startup expenses that may be deductible over a period of time under IRC 195 .
Facts. In 2004, Thomas J. Woody started investigating the real estate market so that he could buy properties for investment or rental purposes. He created a name for his venture (Value Property Investments) and began marketing his services via business cards, flyers, and word of mouth. In May 2004, Mr. Woody completed a business outline for his venture with “buying, remodeling, and renting property” being its stated purpose. On Oct. 17, 2004, Woody paid $21,490 to the Wealth Intelligence Academy for certain training classes, which he subsequently attended to acquire real estate investment skills. After taking the courses, his business plan shifted from merely buying, remodeling, and renting to also include what Woody referred to as “flipping” or “wholesaling.” However, he never completed this type of transaction during 2004. In November of 2004, he got a loan from the U.S. Small Business Administration and got an employer identification number from IRS. In December of 2004, he got a credit card in the name of “Thomas J. Woody Value Property Invest” and opened a checking account in the name of “Mr. Thomas J. Woody D/B/A Value Property Investments.”
Despite his efforts, Woody didn't actually engage in any real estate activity until Dec. 30, 2004, when he bought an investment property. He didn't succeed in renting it out until 2005.
On his 2004 tax return Woody reported $23,373 of expenses on Schedule C, consisting of the cost of his training classes (the majority of $21,515) and expenses for car expenses, supplies, meals and entertainment, and computer and software costs.
IRS disallowed Woody's claimed Schedule C deductions on the ground that he wasn't engaged in the active conduct of a trade or business and determined an income tax deficiency of $4,955. Woody appealed to the Tax Court.
No business deductions until business actually commences. The Tax Court pointed out that in determining whether a trade or business exists, the courts have examined: (1) whether the taxpayer undertook the activity intending to earn a profit; (2) whether the taxpayer was regularly and actively involved in the activity; and (3) whether the taxpayer's activity actually commenced. The Tax Court found the third factor to be determinative in Woody's case. Until he actually began to buy, remodel, or rent— i.e., to perform the activities for which he organized Value Property Investments—he was not carrying on a trade or business for IRC 162 purposes. And until that time, none of his expenses could be claimed as IRC 162 expenses. The Tax Court found that Woody's activities did not rise to the level of a trade or business until, at the earliest, the time he purchased investment property on Dec. 30, 2004, and more likely, did not rise to that level until he held the property out for rent sometime after the close of 2004. If the earliest possible date he was actively carrying on a trade or business was Dec. 30, 2004, then any expenses incurred in that year but incurred before the active trade or business began would be, by definition start-up expenses rather than ordinary and necessary business expenses.
The Tax Court pointed out that Woody's largest expenditure in 2004—$21,515 for workshops and training—was an educational expense incurred to prepare for a new career, i.e., real estate investor and renter, rather than to maintain or improve skills in an ongoing business or career. It was therefore not deductible under IRC 162 nor would of been if classified as a start up expense.
Note: The treatment of start-up costs were different in 2004 where there had to be an election filed with the taxpayers return. The regulations changed in October of 2004 eliminating this election however, only a very small portion of Woody's expenses were incurred after that date and wouldn't have helped him much. Even if Woody had paid for his educational expenses after Oct. 22, 2004, he couldn't have amortized the cost as start-up under IRC 195. A start-up expense must be one that, if paid or incurred in connection with the operation of an existing active trade or business (in the same field as the taxpayer's new business), would be deductible for the year in which paid or incurred. Because the educational expenses would not have been deductible under ordinary and necessary, they could not have been amortized as start-expenses.
Greg Nelson CPA, MBT
Olsen Thielen, CPAs
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Show All » 2009 » May
Monday, May 04, 2009$1,500 Tax Credit for Home Energy Improvements:
Individuals are allowed a nonrefundable personal credit, up to $1,500 of aggregate credits, for improvements to their principal residence in 2009 and 2010 that meet certain energy efficiency standards. The credit is equal to 30% of the sum of amounts paid or incurred during the tax year for (1) energy efficiency improvements to the building envelope and (2) residential energy property expenditures, i.e., expenditures for qualified energy property (Windows and Furnaces are just a few types of expenditures).
For a good resource of what qualifies go to : energystar.gov/taxcredits
Greg Nelson, CPA, MBT
Olsen Thielen CPAs
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Show All » 2009 » March
Thursday, April 16, 2009First-Time Homebuyer Credit: Scenarios - IRS issues FAQ Bulletin
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Show All » 2009 » March
Saturday, March 21, 2009
Moving Up
Afraid to move up in this market? Learn the math behind buying a home at a great price and with a great interest rate!
Take advantage of the opportunities to enhance your current financial stability in today’s low mortgage interest rate environment by joining us for our upcoming seminar and Q&A forum.
Topics include: • Eye-opening financial benefits of buying a home
• Pricing and preparing your home to sell in this market
• How a loss on your sale may be recouped with a good buy
• Cost effective services to rent and manage your home if it doesn’t sell
Tuesday, March 31 at 6:30 p.m, Cornerstone Mortgage Company -
436 Gateway Blvd., Burnsville, MNFeatured Speakers include:
Ronny Loew - MN Home Loan Partners
John Stenroos - MN Real Estate Team
Greg Nelson - Olsen Thielen CPA
Lisa Atkinson - Set to Show Homes
Nina Haugen - NTH Enterprises
Free admission. Just bring this flyer,
RSVP to Sandra Loew| 952.808.0042 or sloew@houseloan.com
This seminar is for informational purposes only. The information discussed may not be wholly or at all applicable to every situatuion. It is recommened that you consult your professional advisor before acting upon this information.
Posted By: Ryan O'Neill @ 5:18:53 PMTop
Show All » 2009 » February
Thursday, March 19, 2009First-Time Homebuyers Have Several Options to Maximize New Tax Credit
News Release 2009-27, 03/18/2009, IRC Sec(s).
As part of the Treasury Department's consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they've already filed their tax return.
The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.
“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they've already filed their tax return.”
First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.
Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000 or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.
The filing options to consider are:
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File an extension. Taxpayers who haven't yet filed their 2008 returns but are buying a home soon can request a six-month extension to October 15. This step would be faster than waiting until next year to claim it on the 2009 tax return. Even with an extension, taxpayers could still file electronically, receiving their refund in as few as 10 days with direct deposit.•
File now, amend later. Taxpayers due a sizable refund for their 2008 tax return but who also are considering buying a house in the next few months can file their return now and claim the credit later. Taxpayers would file their 2008 tax forms as usual, then follow up with an amended return later this year to claim the homebuyer credit.•
Amend the 2008 tax return. Taxpayers buying a home in the near future who have already filed their 2008 tax return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on the 2009 return.•
Claim the credit in 2009 rather than 2008. For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return. This could include people who have less income in 2009 than 2008 because of factors such as a job loss or drop in investment income.
The IRS reminds taxpayers the amount of the credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000, or $150,000 for joint filers. Taxpayers can claim 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately.
Compliments of Greg Nelson, CPA - Olson Thielen - ginelson@otcpas.com
Posted By: Ryan O'Neill @ 3:54:33 PMTop
Show All » 2009 » February
Tuesday, March 17, 2009Converting a Home into a Rental Property
You have decided to move to another residence, but find it difficult to sell your present home. One way to weather the soft residential selling market is to rent out your present home until the market improves. If you are thinking of taking this step, you no doubt are fully aware of the economic risks and rewards. However, you also should be aware that renting out your personal residence carries potential tax benefits and pitfalls.
It is recommended that you sit down with your CPA and review together how a rental decision will affect your income and deductions, and your tax breaks as a homeseller. Depending on your situration, you will also have to review how your tax situation will be affected if you eventually sell your home at a loss.
You generally are teated like a regular real estate landlord once you begin renting your home to others. That means you must report rental income on your return, but also are entitled to offsetting landlord-type deductions for the money you spend on utilities, operating expenses and incidental repairs and maintenance (e.g., fixing leak in the roof). Additionally, you can claim depreciation deductions for your home. You can fully offset your rental income with otherwise allowable landlord-type deductions. However, under the tax law passive activity loss (PAL) rules, you may not be able to currently deduct the rent-related deductions that exceed your rental income unless and exception applies. Under the most widely applicable exception, the PA rules won't affect your converted property for a tax year in which your adjusted gross income doesn't exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don't exceed $25,000.
You should also be aware that potential tax pitfalls may arise from the rental of your residence. Unless your rentals are strictly temporary and are make necessary by adverse market conditions, you could forfeit an important tax break for homesellers if you finally sell the home at a profit. In general, you can escape taxation on up to $250,000 ($500,000 for certain married couples filing joint returnes) of gain on the sale of your home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So renting your home out for an extended time could jeopardize a big tax break. Even if you don't rent out your home so long as to jeopardize your principal residence exlusion, the tax break you would have gotten on the sale (i.e., exclusion of gain up to the $250,000/$500,000 limits) will not apply to the extent of any depreciation allowable with respect to the rental or buisness use of the home or periods after May 6, 1997. A maximum tax rate of 25% applies to this grain (attributable to depreciation deductions).
Some homeowners who bought at the height of a market may ultimately sell at a loss. In such situations, the loss is available for tax purposes only if the owner can establish that the home was in fact converted permanently into income-producing property, and isn't merely renting it temporarily until he can sell. Here, a longer lease period helps an owner. However, if you are in this sutuation, you should be aware that you propbably won't wind up with much of a loss for tax purposes. That's because basis (cost for tax purposes) is equal to the lesser of actual cost or the property's fair market balue when it's converted to rental property. So if a home was bought for $300,000, converted to rental property when it's worth $250,000, and ultimately sold for $225,000, the loss would only be $25,000.
The question of whether to turn a principal residence into rental property isn't easy to resolve. You should review your situation with your CPA so he/she can guide you to an answer that makes the most sense for you.
Greg Nelson, CPA, MBT - ginelson@otcpas.com
Posted By: Ryan O'Neill @ 5:36:11 PMTop
Show All » 2009 » February
Saturday, February 28, 2009Becoming The Wild West. Don't Go it Alone...
Becoming the Wild West. Don't Go it Alone...
A quick wrap of what is taking place out there in the real estate and mortgage world right now. It's a roller coaster, to say the least. A statement of the obvious for some. But for those who are focusing on the positive news of low rates, low home prices and tax credits as this blog points out, it is also important to understand the realities we are also facing.
All the way from the individual to small and large corporations, even the federal government, everyone is scrambling for solutions. But the more solutions, bailouts and stimuli are rolled out, the more confusion they cause. Those ready to finally take action are questioning their decisions with each new headline.
Yesterday, clients of mine were headed to a closing on a home they had waited for a long time. They originally wrote the offer on a short-sale property in mid-October, 2008. The offer was finally accepted the first week of February but the sellers insisted on closing at the end of the following week, a very fast closing. On closing day, they informed all parties that it was now too fast for them and they needed until the end of the month. Yesterday was the new closing date. We were informed first thing in the morning that the sellers side had filed papers in court to halt the sale and they were seeking to cancel the sheriff's sale and reinstate their mortgage.
After a full day of banter and saber rattling between agents, closers, bank reps and attorneys, the closing went through shortly before 5:00 PM.
It turns out, the sellers and the bank holding their mortgage were concerned that they might be taking an unnecessary loss by proceeding with the short sale when new details are coming out in a week on the new stimulus bill. So they were trying to sabotage the closing.
If I have said it before, I will say it again, NO ONE can afford to go into a real estate transaction in this market without proper representation. The buyer's agent on this purchase saved it from falling apart by knowing the law, knowing what to say and to whom to say it.
Certainly people are trying to save money on the sale of a home by selling For Sale by Owner when they are underwater. Buyers perceive they may save a few bucks if they make an offer directly to the seller and cut real estate commissions. Investors now seeing higher financing costs are paying cash and cutting corners on necessities like title insurance. It is only a matter of time until these savings turn into nightmares.
It is no different in getting mortgage advice. Though it used to be rare to see guideline changes more than a few times a year, this market is bringing change at an alarming rate. Numerous announcements are sent daily announcing sweeping changes taking effect immediately or within days. Those dragging their feet waiting for lower rates are missing the point that appraisal values and changing guidelines may make a drop in rate worthless if they are no longer qualified for the loan.
Bloomberg published a great article about the realities in the mortgage world this week. Even for well qualified borrowers, it can be difficult to get financing right now as banks try to write only the best loans and restore investor confidence in their institutions:
Low Mortgage Rates a Mirage as Fees Climb, Eligibility Tightens (http://www.bloomberg.com/apps/news?pid=email_en&refer=home&sid=a8ta_MEhUZ9E)
It is going to take a while, to say the least, for this crisis to calm down. We believe things will get worse before they get better. So be sure to have the right advisors around you to help protect you and resist the urge to be penny wise, pound foolish.
By Ronny Loew - Ronny is the Next Home Specialist with MN Home Loan Partners. Whether you are moving up, downsizing, relocating, keeping your home as an investment to buy a new primary residence or refinancing, Ronny has specific strategies to make it easy and a financial win. He can be reached at 952-808-2815 or rloew@houseloan.com
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