1 / 75

2011 Federal Tax Update

2011 Federal Tax Update. Real Estate & Investment. New Tax Legislation. Real Estate Tax News. Landlord’s 1099 reporting repealed Repeal retroactive to 1/1/11 TIGTA tells IRS to audit more rentals 53% of landlords misreport income $12b of unreported income

greta
Download Presentation

2011 Federal Tax Update

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. 2011 Federal Tax Update Real Estate & Investment

  2. 3-1 New Tax Legislation

  3. Real Estate Tax News 3-2 • Landlord’s 1099 reporting repealed • Repeal retroactive to 1/1/11 • TIGTA tells IRS to audit more rentals • 53% of landlords misreport income • $12b of unreported income • IRS agrees to audit more rental activities • Passive loss Form 8582 instructions to be revised New!

  4. 3-3 Residences

  5. First Time Homebuyer Credit Update 3-4 • 2008 Credit payback began in 2010 • IRS sending reminder letters • Reminder: Allowed for purchases through April, 2011 for • Extended duty military • Foreign service • Intelligence community workers

  6. 3-5 Gain on Sale of Residence The $250,000/$500,000 MFJ Exclusion Rule

  7. The Exclusion Rule! 3-5 • $250,000 (or $500,000 if married filing joint) of gain is excluded on sale (or exchange) of principal residence if: • Owned for two of last five years, • Occupied for two of last five years, and • No sale in last two years

  8. How to Exclude $500,000! 3-6 • Either spouse owns 2 out of 5 years • Both spouses use 2 out of 5 years • Neither spouse excluded gain in last 2 yrs • Must file “Married Filing Joint” Is this Jessie?

  9. Surviving Spouse May Qualify for $500,000 Exclusion 3-6 • $500,000 exclusions applies if • After 12/31/07 • Sale within 2 years of death of spouse • Immediately prior to death • Either spouse owned 2 out of 5 years • Both spouses used 2 out of 5 years • Neither spouse excluded gain in last 2 yrs Is this Jessie?

  10. Recent Court Cases 3-7 • 50% owner gets 100% of exclusion (Hsu) • Divided court says must live in house to qualify for exclusion (Gates) Is this Jessie?

  11. No Exclusion for Prior Non-Qualified Use 3-8 • Substantial limitation on vacation homes • Gain must be prorated, S/L for qualified & non-qualified time • Non-qualified: time not principal residence • Non-qualified time doesn’t include: • After use as principal residence before sale • Temporary absence (up to two years)

  12. Example: Rent 2 yrs; Use 3 yrs 3-8

  13. Example:Rent after Personal Use 3-8

  14. Example: Gain Before 2009 3-9

  15. Qualification for The “Reduced Exclusion” Rule 3-9 • Homeowner Violates: • 2 Year Ownership Rule, or • 2 Year Use Rule, or • Only Once in Last 2-year rule • Because of: • Change in Place of Employment • Health, or • IRS’s “Unforeseen Circumstances”

  16. Converting Residence to Rental 3-10 • Can you convert a personal residence to a rental property? Yes! • But watch out – • Basis is the lower of cost or FMV at date of conversion • Losses resulting prior to rental are not deductible

  17. 3-10

  18. Foreclosures on the Rise 3- • Nevada, Arizona, California &Florida still leading the way • (RealtyTrac.com) • More than 1,000,000 foreclosures in 2010

  19. COD Exceptions 3-11 • Excluded by law, e.g., gifts & bequests • Qualified student loan COD • Cancelled debt would have been deductible • Qualified purchase price reduction

  20. COD Exclusions 3-11 • Qualified principal residence debt • Bankruptcy COD • Insolvency COD • Qualified Farm COD • Qualified real property business COD

  21. Foreclosure Results in COD 3-12 • Reduction in debt taxable as ordinary income • Form 1099-A (foreclosure sale), but not needed if foreclosure and COD in same year • Form 1099-C (loan reduced)

  22. Mortgage Modification 3-12 • Foreclosures • Deed in lieu • Mortgage workout

  23. Foreclosure Results in COD 3-12 • Foreclosure • Even a forced sale is a taxable sale

  24. Nonrecourse vs. Recourse Debt 3-12 • Nonrecourse debt (not personally liable) • Recourse debt (personally liable)

  25. Foreclosure of Nonrecourse Debt 3-13 • Sales price = nonrecourse debt • Result: No COD • Home acquisition debt in 14 states often non-recourse (CA, MT) • But, be careful! A refinance changes status of debt

  26. Foreclosure of Nonrecourse Debt 3-13

  27. Foreclosure of Recourse Debt 3-13 • Recourse debt must be bifurcated • Amount of cancellation of debt & • Gain/loss on sale • COD income results • Refi’s are often recourse debts

  28. Foreclosure of Recourse Debt 3-14

  29. Worksheet 3-15 • Calculates COD income for • Foreclosures • Repossessions

  30. Property Type Matters 3-15 • Business, investment or personal • Business = ordinary loss on sale • Investment = capital loss on sale • Personal = non deductible loss on sale • What did you do with the money?

  31. Foreclosure of Business Property 3-15 • Calculate COD • Loan less COD • Calculate gain or loss on “sale” • FMV at foreclosure is sales price • Character of gain or loss same as if property sold

  32. Sharon Loses Las Vegas Rental 3-16

  33. Bill Loses Phoenix Rental 3-16

  34. Short Sale 3-17 • House sold, not enough to pay off bank • If “short pay” forgiven by bank, COD results (Stevens) • Bank files Form 1099C

  35. §108 Exceptions to COD Income 3-18 • Bankruptcy • Insolvency • Farm debt for solvent farmer • Seller financing • If payment of liability creates a deduction • Discharge of real property business debt • Bona fide dispute • Qualified home acquisition debt

  36. Bankruptcy 3-18 • Exclusion does not apply to a debtor in a bankruptcy case • The bankruptcy exclusion rules apply • Taxpayer may choose insolvency exclusion

  37. Insolvency 3-18 • Taxpayer insolvent to extent liabilities exceed assets • Includes house, pension, IRA, autos, furniture, tools, etc. • How to calculate insolvency worksheet • Pub. 4681

  38. Reduction of Tax Attributes 3-19 When COD non-taxable, reduce tax attributes in the following order • NOLs • General business credits • AMT Credits • Capital losses • Basis reduction • Passive activity losses • Foreign tax credits

  39. Qualified Residence Debt Exception Under §108 3-20 • Must meet two requirements • Qualified principal residence • Qualified home acquisition debt

  40. Principal Residence 3-20 Requirement #1: Qualified Principal Residence • Same definition as §121 • Not available for vacation homes, rentals or investment properties

  41. Qualified Acquisition Debt 3-20 Requirement#2: Original or refinanced debt used for • Acquisition, construction or improvement of principal residence • Secured by the principal residence • Limited to recourse debt under $2 million • Mortgage workout debt relief qualifies

  42. Only Portion is Acquisition Debt 3-20 • Ordering rules are required if acquisition debt less than total debt relief • Any forgiven home equity debt not used for improvements cannot be excluded

  43. Mortgage Debt Forgiveness Facts/Checklist 3-21 • Must be principal residence • Must be acquisition indebtedness • Homeowner not bankrupt • Homeowner not insolvent • Cancellation is not for personal services • See Interactive COD calculator on IRS website

  44. Reduce Basis of Residence 3-21 • Basis of home is reduced by the amount of excluded income • Turns ordinary income back into capital gains

  45. 3-22 Passive Activities

  46. §469 Passive Loss Overview 3-22 • Passive losses only deductible to the extent of passive income • Excess losses carried forward • Current year passive income may be offset by prior year passive losses • Losses are allowed if • Complete disposition • To unrelated party • In taxable transaction

  47. What Activities Are Passive? 3-23 • Rentals, regardless of level of participation • Trade or business, if no material participation

  48. IRS Issues 7 Rental Activity Tips 3-23 • Income reported when received • Advance rent reported when received • Security deposits not taxable unless kept • Property or services in lieu of rent taxable • Expenses paid by tenants are income • Expenses pertaining to rental deductible • All personal use must be pro rated

  49. Rental Activities That Aren’t! 3-24 • Avg. stay < 7 days • Avg. stay < 30 and significant services • Extraordinary personal services provided • Rental is incidental to non-rental activity • Rent to employee at employer convenience • Rents < 2% of lesser of basis or FMV • Non exclusive use by customers • Rental to entity owned by landlord

  50. Why Identify Activities? 3-25 • Determine if a rental activity • Determine if taxpayer materially participates (Sidney Shaw) • Determine whether or not complete disposition has occurred • Apply pre enactment transitional rules

More Related