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Friday, April 3, 2009
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15 comments:
Housing law changes key capital gains rule
Sunday, April 5, 2009
A little-publicized section of a 2008 federal law intended to help homeowners could reduce the amount of capital gains, or profit, that home sellers may exclude from taxation.
Under the previous law, a homeowner could exclude up to $250,000 in capital gains ($500,000 for a couple) from the sale of his principal residence if he had lived there for at least two of the past five years. The period of occupancy didn't have to be successive. It just had to meet the test of two of the past five years.
For example, if the homeowner paid $500,000 for the house, owned it for five years but lived in it for only two years and sold it for $750,000, he would walk away with a tax-free $250,000 gain - cash in his pocket. (For the sake of simplicity, this example doesn't include adjustments that reduce the amount of capital gains.)
Some real estate investors took advantage of this law by buying homes, renting them out for three years, and then living in them for two years before selling them and pocketing a tax-free capital gain of up to $250,000. Of course, this was when home values were increasing every month, contrary to the situation today.
The new law, which is called the Housing and Economic Recovery Act of 2008 and took effect Jan. 1, changes the rules. The maximum exclusions haven't changed, and the house still must have been the primary residence for at least two of the past five years, according to Jesse Weller, Bay Area spokesman for the Internal Revenue Service.
In general, the difference in the new law is that the capital gain allocated to the time the property was not used as one's primary residence may not be excluded from tax, Weller said in an e-mail. The taxable amount is determined by a formula based on the number of days the home was not occupied as the principal residence (nonqualified use) divided by the total number of days it was owned.
For example, if the home was owned for five years and not used as a principal residence for the first three years, 60 percent of the gain wouldn't qualify for the exclusion. Therefore, if the gain was $250,000, only $100,000, or 40 percent, could be excluded. If the gain was $400,000, only $160,000 could be excluded.
http://tinyurl.com/dehd9f
Wow, that is a big change for the people in that situation. I hadn't heard about it. Thanks, zerodown.
Wow, this means our landlord will need to pay capital gains after all, even if he finds a buyer next year! BWAHAHA!
Sorry, I'm not normally vindictive.
Speaking of tax issues, I have a question for all the $ geniuses here:
As you know, my in-laws are doing the downpayment for our new house, God bless them. (And lest you get inordinately jealous, they are already planning to move in with us, so I'm not exactly getting the sweetest deal ever.)
They each want to gift each of our children an equal amount, so the total amount gifted equals the downpayment.
I ran this by my CPA brother, and he said that was fine. They could each give each of my seven kids up to $13,000 tax free. He said we could deposit the checks in our account, and write a check for the downpayment.
Well, the underwriter at the bank doing our mortgage said he wants us to bring a cashier's check from my in-laws to my husband and I to endorse at closing. He said we can treat it as a short-term interest-free loan, and THEN my in-laws could gift the children, and THEN we could pay off the "loan" with the gifts.
That seems unnecessarily complicated to me.
Any thoughts?
If they are giving the money to your children, it becomes your children's money. If you use your children’s money as a down payment on your house, your children will either have an interest in your house, or the IRS will determine that the gift was, in substance, made to you and your husband.
There are other options.
Why not let your in-laws loan you and your husband the money and they can gift the loan balance back to you and your husband at the rate of $52,000 per year, ($13,000 from each in-law to both you and your husband).
Also, every taxpayer has a unified transfer tax credit. Your in-laws can gift you and your husband the whole amount to you now, tax free, if they don’t need or don’t care about using that portion of their credit to pay estate taxes upon their death. Depending on the size of their estate, they may never use all of the credit anyway.
Thanks for the tax story, Zerodown. This will probably mean that more houses will be sold instead of rented out, which might inadvertently put a floor under rental prices. (I'm seeing a huge softness in rental asking prices in the exurbs).
I'd go with Zerodown's idea rather than this scheme you are considering with the children. Make sure your in-laws complete the gift tax form (IRS Tax Form). The unified credit is listed on the form and is calculated for life. So your in-laws total lifetime used unified gift tax credit must be taken into consideration next time they give over the limit. They will want to file the form with IRS and keep a copy for themselves in case they have to give over whatever the limit is next time.
Thank you, zero and Jeff, so kindly for your help.
My in-laws are the ones who structured the gift to the kids, because that is how they see their downpayment help to us: a gift to their grandchildren. (As well as a downpayment on their retirement home, of course.)
Since they have a family business, I assumed they asked their accountant if that was the proper way to do it, but perhaps not. Maybe they were just being romantic.
In any case, this is something we need to clear up well in advance of closing, so this is most helpful.
Again, thank you.
Ithink what he really needs or what he is asking for is the down payment to be held in a MM account so that the sellers will have access to their money at closing. Another pitfall of not using a realtor with an earnest bearing account for deposits and such. There are many, many loans or "buyers" with family money that get to closing and come up short on cash.
Sounds to me like you cant really afford this house Tabitha. Not trying to be a jerk, but if you cant save up for a down payment, how are you going to handle an economic adversity?
And if I am thinking this, the underwriters will/should be thinking it also.
From what I understand, gifted down payments are a big no-no.
Tabby,
1) deposit the 7 $13 gifts in your account.
2) get cashier's check in your name made out to your name and bring to the close.
doug,
When my husband was in law school and took trusts and estates, his professor explained that the transfer of wealth from one generation to the next has changed, in that more and more, parents are giving their children their "inheritance" while they are still alive, in the form of paying for college or grad school, and helping them with a downpayment on their first house. I do not think this is an exceptional thing; the Post had an article about it a couple days ago, in fact.
No, we cannot afford this house on our own. But we had saved up a downpayment for a house we could have afforded on our own, and we are adding our savings to the gift from my in-laws for the downpayment. My in-laws made the same kind of gift to my husband's brother when he bought his first house, even though he is a doctor. This is a cultural norm for my husband's family, and they intend to live with us in the not-too-distant future.
We are very blessed to experience this kind of generosity and happy circumstance. Life has not always been easy, but if this works out in the end, it will be a good thing.
All,
Thanks everyone who gave advice about signing my contract.
We have done the inspection and did not find anything serious, although the kitchen equipment and the washer/dryer are too old and will need to be replaced soon.
I have a question on mortgage applications. My online broker is charging $35 for credit reports, $350 for appraisal (Their appraisal guy is waiting for me to give the go ahead) and if I lock, there will be a charge of $500 for not closing with them. I don't like that kind of pressure to go with them even before I have a chance to compare them with at least one other lender.So I haven't locked, but will have to do so within a day or two.
I am also dealing with a bank agent, who so far hasn't given me any pressure and hasn't charged a fee for the credit reports, etc. So far, they appear good, but I am told that generally banks charge a higher rate than brokers.
I would like to hear from others on their experiences with mortgage brokers.
Also, my settlement company is saying that Fairfax county has the following taxes--
Deed Recordation Tax of $3.33/$1,000 of sale price
as well as Deed of Trust (Mortgage) Recordation Tax of $3.33/$1,000 of loan amount.
Is that a normal thing?
Thanks.
Tabitha,
I think in your situation, the gift is good and should not be a cause of concern as long as you can handle the in-laws.
Tabitha..that is exactly why I will not sell below a certain price. I would prefer to gift it to my son. Why would I give a stranger the benfit of my lost equity when I plan on helping my son buy his first home. He really, really wants to be a canine police officer. I paid for a year at Shepherd where he majored in drinking and sex...at NOVA he has a 3.3 and will transfer back to a 4year. I am paying for everything within reason but not debachery...giggle..
Harriet:
Thank you for making this blog available to all of us.
Tabitha:
Your in-laws should probably consult with an attorney specializing in estate and gift taxation.
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