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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 Landlord’s 1099 reporting repealed Repeal retroactive to 1/1/11 TIGTA tells IRS to audit more rentals 53% of landlords misreport income $12b of unreported income

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2011 Federal Tax Update

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  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 Real Estate Tax News 3-2 • Landlord’s 1099 reporting repealed • Repeal retroactive to 1/1/11 • TIGTA tells IRS to audit more rentals • 53% of landlords misreport income • $12b of unreported income • IRS agrees to audit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

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