It's all about helping the taxpayer?

[redux]

SEE:

http://finance.yahoo.com/loans/article/105...en-Tax-Traps-in

FOR THE FOLLOWING:

The Hidden Tax Traps in the Housing-Rescue Bill

by Eva Rosenberg

Wednesday, July 30, 2008

The housing-rescue bill, also known as the Housing Assistance Act of 2008, is intended to calm the mortgage market, the real estate market, homeowners on the verge of bankruptcy and foreclosure, victims of bank failures and others whose lives are topsy-turvy this year.

But from a tax perspective, the bill is likely to cause more upset than calm. Here is a look at five areas where tax law was changed along with housing law, and the good news and bad news that goes along with each:

1. Tax Credit for New Homeowners

First, we have a $7,500 credit for new homeowners that's not really a credit. It's a loan. Those who qualify to receive this credit will receive 10% of the purchase price of their home -- up to $7,500, in the first year. Then they will repay the loan over a 15-year period, starting in the second year after the taxable year in which the house is purchased.

In other words, if you bought a home in August 2008, you start paying back 6.667% of the original credit on your 2010 tax return. This credit applies to purchases of new homes on or before April 9, 2008 and before July 1, 2009.

The good news:

This is a refundable credit. That means, even if your total tax liability is zero, you can file to get this money directly from IRS.

Although this is a loan, it's a zero-percent loan.

Bonus: If you buy the home in 2009, before July 1, 2009, you can make an election to report the purchase on your 2008 tax return and get the refund a year early.

The bad news:

Mark Luscombe, principal tax analyst for CCH, a Wolters Kluwer business, points out that people who normally don't have to file tax returns will need to start filing tax returns just to pay the credit back. That will affect seniors living on modest fixed incomes and Social Security.

If you forget to pay it back? Well, the bill doesn't include any specific penalties. But all of IRS's usual non-filing and non-payment penalties will apply. Expect IRS computers to track this and to issue notices for unfilled returns.

If you sell the house in less than 15 years, you will have to repay the rest of the credit immediately. This requirement is waived if the owner dies. There are special provisions when the house is sold due to divorces or other emergencies.

This is a temporary credit and may not be renewed once it expires on June 30, 2009.

The credit phases out for married folks, filing jointly, with modified adjusted gross income (MAGI) between $150,000- $170,000. For singles, the phase-out is at MAGI between $75,000-$95,000.

Who qualifies? Folks who haven't owned a principal residence for three years before buying the new home. If you've owned a vacation home or timeshare, you will still qualify.

In long-distance marriages each spouse may buy his/her own home (principal residence). They will have to split the credit between them.

2. New Standard Deduction Rules

We have a new standard deduction -- in addition to the old standard deduction -- for real property taxes paid. This is designed for folks whose overall itemized deductions fall below the standard deduction. Married couples, filing jointly, may now deduct qualified real property taxes paid up to $1,000 ($500 for singles and married filing separately).

"Qualified" refers to real property taxes you could have deducted on Schedule A if you had been able to itemize. Naturally, property taxes used on other parts of your tax return, like Schedule E, Schedule C, Schedule F, or office in home can't be used again here.

Luscombe points out that generally when Congress gives us these extra deductions, they are "above the line" deductions, like education expenses, student-loan interest and teacher expenses.

This is effective in 2008. And there are no AGI limits to this benefit.

3. Vacation-Home Hit

We've been taking for granted that lovely $250,000 ($500,000 for couples filing jointly) personal residence capital-gains-tax exclusion for about a decade. Savvy taxpayers have played hopscotch, moving from home to vacation home to the next home, etc. and avoiding income taxes on the sale of each one. That free ride is at an end.

The personal resident exclusion is still good on your personal home. However, you'll be paying taxes on the sale of your vacation home, or rental property converted to a home. The tax will be based on the amount of days the house was not a qualified personal residence divided by the total number of days you owned it. This ratio is multiplied by the amount of gain realized on the sale of the property.

Gain resulting from depreciation taken on the property after May 6, 1997 won't be included in this computation. That gain will still be taxed separately as ordinary income.

The good news:

This won't affect any sales you make this year since the law becomes effective on Jan. 1, 2009.

The ownership period to take into account as the numerator for nonqualified use also starts on Jan. 1, 2009.

Snowbirds, folks who typically summer in their principal residences up north and spend winter in their vacation homes in the south will have to wait until IRS writes up regulations interpreting the new law. It's not clear if their temporary absences will be considered a period of nonqualified use.

The new law defines unqualified use as:

any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and

any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account.

4. Tighter Tracking of Payments

In a blow to eBay merchants and others accepting credit cards, debit cards, or third-party payments, your merchant bank will now be required to send a report to IRS and to you with your total annual gross payment card receipts. In other words, IRS will get your total merchant credit card gross receipts for the year.

The good news:

For merchants who had always meant to catch up on bookkeeping, you will now get a report summarizing all the money you received.

This won't be effective until Jan. 1, 2011.

There will be an exemption for business with 200 or fewer transactions generating sales of $20,000 or less.

The bad news:

Like most bank reports that add up total deposits, it will be wrong. After all, there were credits you issued, and refunds that won't be reflected in the total gross receipts. Be sure to reduce the total income on that report by all the costs and fees you had too.

In the past, when IRS wanted to get information from banks and merchant accounts, it required going to a judge and getting a subpoena. With this new law in place, IRS can now step in and audit at any time -- with a little or no notice, depending on the urgency of the circumstances, explains Luscombe.

5. Miscellaneous Provisions

Some other juicy tidbits tossed our way include:

Tax exempt interest on certain mortgage bonds will no longer be an alternative minimum tax preference.

Low-income-housing credits and rehabilitation credits may now reduce AMT.

Bonds backed by FHA are eligible for treatment as tax-exempt bonds.

Many of the provisions of this law won't become effective until next year. Some won't be effective for several years.

But the provisions for converting your vacation home to a personal residence are becoming effective soon. So, if you've got a second house you want to sell tax-free in the next year or two -- move into it before the end of this year.

Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new e-book, "The 100% Home-Based Business Tax Solution." Reach her at [email protected]

AND:

http://www.section1031.com/PDFs/QIForum/Ge...p;%20Giveth.pdf

CONGRESS TAKETH AWAY!

The Housing and Economic Recovery ACT of 2008 Effects Changes To Section 121

Taxpayers who own a second home and want to defer the capital gain on sale have used one of two

strategies to achieve tax relief. The property can be converted to rental property for a minimum of

two years prior to sale and structured as a Section 1031 Exchange using a Qualified intermediary with

the acquisition of new Replacement property that is also rented for the first two years after

acquisition. The second method is to simply move into the second home and declare it as your primary

residence for a minimum of two years and when sold use the Provisions of Section 121, Sale of Primary

Residence, to exclude $250,000 of the gain per taxpayer or $500,000 for a married couple filing jointly.

The first strategy allows taxpayers with the ability to walk away from the deferred tax indefinitely by

exchanging again and again. The second provided an outright exclusion from the capital gain tax if it

did not exceed the limitations. Since the primary residence exclusion can be used every two years, a

planning opportunity for full tax escape has benefited thousands of taxpayers.

The Housing & Economic Recovery Act of 2008, signed into law on July 30, 2008, contains a restriction

on the practice of converting your second home to your primary residence. It requires that the

exclusion be prorated based on the time the property was used as a second home. The portion of the

profit that will be taxed is based on the ratio of the time after 2008 that the home was used as a

second residence or rented out to the total time that the taxpayer owned the property. The balance of

the gain will remain eligible for the Section 121 Exclusion.

To illustrate the point; a second home is owned for five years and converted to a primary residence

after 2008 for two years prior to sale. At sale, the taxpayer will pay capital gain tax on 2/7 or 28.57%

of the gain, the balance will be excluded up to the Section 121 limitations. The longer a property is

owned, the lower the ultimate tax will be.

CONGRESS GIVETH

First-time Homeowner Tax Credit

The Housing & Economic Recovery Act of 2008, signed into law on July 30, 2008, provides an attractive

tax credit for first time homebuyers. A first time homebuyer is someone who has not owned a home in

the preceding three years. All homes, whether single-family, town homes or condominiums or new

construction will qualify, however it must be used as the taxpayer’s primary residence.

The tax credit is for 10% of the purchase price, up to $7,500, but phases out for higher-income

homeowners. Homebuyers who file as single or head-of-household can claim the full $7,500 if their

adjusted gross income is less than $75,000. For married couples filing a joint return, the income limit

doubles to $150,000. Homeowners are eligible for the tax credit if they have purchased a home since

April 8, 2008 or make a purchase before July 1, 2009.

This is a tax credit, not a deduction. It reduces the homeowners' tax bill by up to $7,500 for the tax

year in which the purchase was made. If you pay less than $7,500 in federal income taxes, then the

government will write a check for the difference in the same manner as an overpayment of your

taxes.. If a house is purchased this year, a tax credit for the 2008 tax year can be taken with a filing

deadline of April 15, 2009. If a house is purchased next year by the end of June, a tax credit for the

2009 tax year can be taken in the April 15, 2010 filing. It's a one-time credit; you don't get to keep

taking it year after year.

There is a catch, and that is that the money has to be repaid over 15 years, starting two years after

you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax

credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then,

you'll have to pay Uncle Sam the remaining balance.

SECTION 121 EXAMPLE

"Congress did restrict a break for turning a second home into a main home: Some of the gain will be

ineligible for the home-sale exclusion if the house is converted to personal use after 2008 and is later

sold. The portion of the profit that's taxed is based on the ratio of the time after 2008 when the house was

used as a second residence or rented out (emphasis added) to the total time that the seller owned the

house. The rest of the gain remains eligible for the home-sale exclusion of $500,000."

Source – Kiplinger Tax Letter Volume 83 #15 July 25, 2008

Taxpayer's original cost in his Relinquished Property is $100K, with $50K of depreciation already taken.

Sale price is $400K, no debt, QI receives $400K (neglect expenses).

Replacement Property is a Single Family House (SFH) costing $400K on 1/1/09; adjusted basis is $50K.

Owner enters the house as his home on 1/1/11, and sells it on 1/1/14 for $600K. During the rental

period he claimed $10K more depreciation. Adjusted basis on 1/1/11 is $40K.

Indicated gain at time of sale is $560K. Under the OLD RULE, this married taxpayer would pay tax on

$60K, and exclude $500K of the gain. Under the NEW RULE, this married taxpayer must make the

following calculation:

Owned 5 years (denominator), rented for 2 years (numerator); 2/5 x $560K gain is $224K recognized,

balance excluded.

The incentive is to reduce this fraction by either owning the property longer (increases denominator) or

renting it out for less time (reduces numerator, but flies in the face of Rev. Proc. 2008-16).

It seems that the days of simply buying an SFH (or a series of SFH's) with your exchange dollars, and

later converting it (them) to your principle residence(s), selling and eliminating $500K at a time are

over.