Archive for the 'Taxes, Taxes and Taxes' Category
Mortgage Tax Relief……Up To $ 2,000,000 May Not Be Taxable
August 31st, 2008 Categories: Taxes, Taxes and Taxes
The Mortgage Forgiveness Debt Relief Act of 2007 may allow up to $2,000,000 debt forgiveness on a principal residencefor married couples (it is $ 1,000,000 for a married person filing seperate) for a limited time period.
If your mortgage debt is partly or entirely forgiven for the years ending 2007, 2008 or 2009, you may be able to claim this special tax relief.
Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.
The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence.
Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for this special tax-relief provision. In some cases, however, tax relief based on insolvency or other special provisions of the tax law may be available.
A form 1099-C will be issued if your debt is reduced or eliminated. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.
If you have debt or mortgage relieved for the years 2007, 2008 and 2009, do talk to your attorney, CPA or tax preparer to determine the impact on your individual tax liability and explore any mitigating options that you may have.
Source of information: Tax and Business Strategies, September 2008.
Your comments are welcomed.
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Homeowner Rescue Plan Is No Free Ride.
July 28th, 2008 Categories: Taxes, Taxes and Taxes
The homeowner rescue plan that many people have been waiting for is almost law.
There is an old expression: Be careful for what you wish for!
A quick review of who gets help and the caveats that many people will not like are noted as follows:
First Time Homeowners:
The law will extend a tax credit up to $ 7,500 for these people. However purchase has to have occurred between April 8, 2008 and before July 1, 2009 (meaning by no later than June 30, 2009).
The CATCH: The tax credit has to be repaid at a rate of $ 500 per year up to 15 years. If the property is sold before that, yep you guess it, the homeowner has to pay the government the remaining balance.
Forgiveness To Allow Re-financing:
If a homeowner falls behind because (for instance) the loan has turned into an adjustable-rate-mortgage, the law encourages lenders to forgive some of the debt in order to re-finance.
The CATCH: There will be an equity sharing arrangement. If it is an FHA loan both the lender and the homeowner will share equally in any profit (appreciation) providing the homeowner maintains the property for five years or more. If less than 5 years, then the lender’s share will increase 10% for each year less than five years.
So if the homeowner sells the home in the second year, any appreciation will be shared with 80%+ going to the lender and 20% (or lower) to the homeowner.
No Resolutions:
Home lines of credit. There is no certainty how this is going to be handled but it may occur that the line of credit will be become a second. The rules however are vague to none. It is something that everyone will have to work through.- Down payment assistance. Good bye to down payment assistance programs such as Nehemiah and AmeriDream.
Property Tax Deduction. This segment of the law helps those that do not itemize deductions on Schedule A. For those that do not itemize the standard deduction will be increased by $ 500 for singles and $ 1,000 for couples filing jointly.
So if you are a couple that pays $ 800 in property taxes you will be able to deduct $ 1,000 under the new law.
Loan limits: Conforming mortgages (Fannie Mae and Freddie Mac) will remain at $ 417,000 until next year and after that it is can be higher. Higher is 115% of the median home prices in the area not to exceed $ 625,500.
FHA-insured mortgages will be $ 417,000; and as in conforming can be increase by 115% of the median home prices in the area, not to exceed $ 625,500.
Reverse mortgages. Insurance salesmen can not originate a reverse mortgage and the law prohibits originators from requiring homeowners to buy annuities or insurance products.
Fees for reverse mortgages cannot exceed 2% of up to $ 200,000. Above $ 200,000 the limit is $ 4,000 plus 1% of the loan amount above $ 200,000.
Manufactured homes. FHA type loans for manufactured homes limits have been increased to $ 70,000 up from $ 48,000.
Service members: If a service member had a mortgage before entering active duty, a lender cannot start foreclosure proceedings until nine months after the service member returns home from active duty.
In addition the interest rate on all previously existing debt are capped at 6%, including home loans. This 6% extends until one year after the service member returns from active duty.
Other items included in the law:
- The Office of Housing Counseling will be established.
- All mortgage brokers will have to be licensed and registered. This will be on a national level.
Your comments are welcomed.
Referenced used for this article is from Bankrate.com through MSN Money.
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Are You A Real Estate Professional? Maybe Not, Says IRS.
July 17th, 2008 Categories: Taxes, Taxes and Taxes
This article was written by Diane Kennedy and sent to me by Sandyleee Sanderson of Star Investment Analyzer, LLC
If you’re a real estate investor who has ever taken a real estate loss on your tax return, there is a target on your back. For months, members on my Forum have been complaining about being selected for audit, and losing, based on the IRS’s new set of real estate professional guidelines.
Under tax law, a “real estate professional” isn’t always a licensed real estate agent or a broker. It’s a tax classification, and it’s an important one. As a regular real estate investor, you are limited to deducting $25,000 in passive losses each year, against your passive income. That amount begins phasing out once your taxable income tops $100,000 and disappears entirely when your income reaches $150,000. Real estate professionals have neither the dollar nor the income limitation, making this classification an important part of tax-planning.
When the market got hot, the number of real estate professionals shot up. But as the “tax gap” (the difference between taxes that should be paid and taxes that are paid) increases, government is looking for ways to turn things around, and this classification is squarely in the cross-hairs.
To meet the IRS requirements, you need two things: spend the majority of your working time spent performing qualified real estate activities (regardless of what you do), and rack up at least 750 hours. Qualified activities include “develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease or sell” real estate.
Practically speaking you won’t make the cut if you work elsewhere and report full-time W-2 income. And there’s a third hurdle: material participation. In a twist that can only make sense in the IRS world, real estate activities are one of two things: passive, or materially participating passive. If you have a passive loss, it can only be used against passive income. Period.
Materially participating passive losses, on the other hand, can be used against materially participating passive income and, in some cases, other income. This is where the power of the real estate professional classification comes in: the ability to take the loss from real estate investments against other income. Unfortunately, what has been acceptable in the past, no longer is. Here are three areas the IRS is focusing on right now:
Limited Partnership Interests: By definition, if you hold property in a limited partnership as a limited partner, you do not materially participate. This area is being hit hard, and the number of audits of limited partnerships has increased.
Failure to Aggregate Hours Worked: The material participation rule requires that you work 500 hours on each property you own, or make an election to aggregate all the properties together into a single 500-hour block. Fail to make this election, though, and you will run into trouble.
Failure to Meet 500 Hour Threshold: To get even the $25,000 deduction you’ve got to meet the 500-hour minimum, even if you aren’t going for full real estate professional status. Fail to meet this requirement and your passive loss will be limited to the amount of your passive income.
But the biggest change that we’re seeing is to the material participation rules, and what does and doesn’t constitute a real estate activity. For example, managing real estate is a qualified activity, but managing real estate through a third-party property management company is being challenged. So if you live hundreds of miles away from your rental properties, be on the lookout for this type of question. Another is research. The hours spent on researching properties and markets is being challenged by the IRS who consider this a passive activity.
Proper records are also becoming vital. Anyone looking to claim this classification must be keeping a detailed time log of dates, locations and activities, preferably backed up with photographs or other evidence showing you hard at work.
Finally, frustrating everyone is the fact that in many cases the “new” IRS rules (which came out in December of 2007) are being applied after the fact, and made retroactive to 2007 and earlier when the old rules were still in force. Both sides are appealing up to the Tax Court, hoping to either set a new precedent or rein in the IRS. Until the Tax Court rules one way or another on whether or not the IRS can apply new rules to old earnings, we’re in limbo. Reviewing your activities and taking steps to make sure you’re in compliance with the new rules may be your best plan.
Published: July 17, 2008
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Who, When, What, Why A Supplemental Real Estate Tax
December 7th, 2007 Categories: Taxes, Taxes and Taxes
When……
The California State Law was changed July 1, 1983 requiring the reassessment of property as of the first day of the month following an ownership change or the completion of a new construction.
How Much…….
The assessor determines the new value of the property based on current market conditions. An evaluation is made of the variance between the new value and the previous value, the result is the supplemental assessment.
Multiple assessments are possible….
Multiple assessments are possible depending on when ownership changed or when construction was completed. Because property is assesses each January 1 for the upcoming fiscal year (July 1 thru June 30), a supplemental tax bill will be made if the change in property value was recorded on the tax roll between June 1 and December 31.
A second supplement will be issued if the change of property is recorded on the tax roll between January 1 and May 31.
Appeals…..
Any assessment can be appealed. The first step is to take it to the assessor to see if that office will change the valuation. Additionally, the Board of Supervisors (in most communities) has established an Assessment Appeals Board for the purpose of resolving valuation problems in connection with supplemental tax bills.
Critical is that applications for appeal must be filed within 60 days of the mailing date shown on the tax bill.
Even if you appeal one is still obligated to pay the tax installments in full by the appropriate deadline. If your appeal is granted, a refund will be issued.
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Don’t Read This If You Want To Pay More Taxes Than You Should On Real Estate Transactions
November 26th, 2007 Categories: Taxes, Taxes and Taxes
There are two things one has to do to overcome being tax dumb: show documentation and the flow of the money.
One needs to do both to sustain an audit and decrease exposure to capital gains taxes.
Be it an investment property, one’s home or simply an itemized deduction, keeping solid documentation and knowing the sources of money are strong support actions you can take to handle a tax audit and perhaps lessen the tax burden.
For this discussion the focus is on real estate documentation.
When entering or closing real estate transactions one ends up with 20 million pieces of paper, of a print size necessitating a magnifying glass to read the documents.
Consider all of these papers as important and put them in a folder.
Listed below is how I manage my documentation but to be sure you can add or subtract as you see fit.
My folder includes the following sections:
The Tax Documentation Section Should Cover All:
-Offers and counter offers
-Preliminary HUD (mortgage cost)
-Home inspection (even on a new home)
-Structural inspection (if necessary)
-Pest control reports
-Soil reports (if you buy on a hillside or know that the land is unstable)
-Warranties and associated manuals including the builders home warranties
-Home Owners Associations bylaws (if applicable).
-All email and written notes about the transaction
-Pictures of the property (inside and out)
-Any repair reports if purchasing a used home.
If buying a ranch……..
Have a well and water check. This should be a normal action taken by the buyer’s agent but if it is a private sale one would want a well test and water test for purity and pressure. A smart lender will insist that this be done.
Septic tanks. Get all documentation and tests previously done and ask if there had been any repairs to the tank. A septic tank test will last for about 24 hours with water running into it continuously to determine its draining capabilities. Find out how old the tank is and when it was cleaned last.
Water rights. More important than gold.
The Flow of Money Section Should Include:
-Appraisals
-Capital improvements (such as an addition).
-Contracts and information about the method of payment (checks/automatic transfers).
-Most definitely show the source of the funds (line of credit, savings or loan) for purchase and improvements.
The IRS loves to ask “Where did the funds come from to …….?”
Proof of Basis Section: You will need—-
-Final settlement statements (Purchase and sale).
-Mortgage notes, loan addendums and lines of credit
-Deed
-Plat map
-Title insurance
-Escrow instructions
-Reconveyance documentation
If it is an Investment Property, Include This Section
-Property management agreements and addendums
-Tenant agreement and addendums
-Credit reports
-Pictures of the property inside and out before the tenant moves in.
Have a Section For Insurance:
-Hazard
-Liability
-Umbrella
-Rental insurance
-Loss of income and home warranty insurance policies.
No matter what, strive to keep track of where the cash came from.
Keep copies of your checks and receipts. Make a copy of your bank statement(s) and show notes of funds deposited and payments. If an investment property have a separate bank account. You will be glad you did.
Make copies.
Keep one set of the copy material close at hand. Keep another set (the originals) at a different location (bank deposit box). In the event of a fire, flood, etc., it is nice to know that all of your key documentation are available.
The main thing is to show the flow of money…..how you got it and how it was dispersed.
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