From the WSJ’s free RealEstateJournal:

Large Price Increases Result In Tax Hits for Home Sellers – While many aspects of the tax code have periodic inflation adjustments, our exalted rulers in all of their wisdom, when they established the $250,000 per person tax free exclusion for residence sales, didn’t consider it necessary to allow for any such adjustments.

 

Google and Craigslist May Weaken Realtors’ Hold on Home Listings – Allowing the power of the internet to be utilized in this way is an excellent step in the right direction for property owners; while obviously not so good for Realtors, who are losing their monopolies on property info. 

 

As Market Cools, Fewer Investors May Purchase Investment Homes – Is the air leaking out of the speculation bubble?

 

Real-Estate Brokers Step Up Rebates to Home Buyers – Classic supply and demand reaction.

 

The New Rules of Real Estate For a Cooling Housing Market

Q:

Subject: Home Sales

Dear Tax Guru,

I have read your Web page, on tax issues pertaining to the sale of my primary residence, however, I have a home sale question, that I am receiving conflicting answers from friends. Could you possibly respond to my query ?

I have filed my tax return for the past 35 years as ” Married Filing Individually-Head of Household “

My husband lives out-of-State, and also files “Married  Filing Individually”

My husband and I have been seperated for 35 years, and the ownership of the Home is in my name only.

When we seperated, my husband agreed to the changing of the DEED to my name solely.

We did not divorce, as he provides me with health coverage from his retirement plan.

I would like to sell my home this year and am wondering whether I am entitled to the entire $500,000 exclusion on the Sale of my Home. I am concerned about the technicalities of the IRS Regulations on the sale of my home–that is to say, that by still being married, and filing Married but Individually, my husband has the right to $250,000 Capital Gain Exemption on his tax return or am I entitled to the entire $500,000 exemption.

My husband has not resided in mmy home for 35 years. Before I sell my home in Long Island, I would like to be sure that I would be entitled to the entire $ 500,000 exemption ?

Could you advise me on this matter, as I am so confused and fearful of making a mistake. Thank you,

A:

Your first very big mistake is soliciting tax advice from friends.  That’s crazy.  You should be working with a professional tax advisor on matters such as this.   I hope you don’t get all of your medical advice from your friends as well.  Tax issues are just like medical ones, unique to the individual person and very technical.

From the way you described your situation, you would only be entitled to an exclusion of $250,000 of profit on the sale of your home because you are the only person who meets the tests.  If your husband had lived in the home for at least 24 months out of the 60 months prior to its sale, you would be able to claim a full $500,000 exclusion if you file a joint 1040. 

This really isn’t even a gray area.   The IRS rules are very clear on this point. 

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

• You are married and file a joint return for the year.
  
• Either you or your spouse meets the ownership test.
  
• Both you and your spouse meet the use test.
  
• During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

If the house is fully in your name, the sale will be reported fully under your SSN and you will have to show the full sales price on your 1040.  Your husband won’t have to show anything on his separate 1040. 

Again, you should consult with a professional tax advisor to see if there are more details in your life that would warrant a different answer.  There may also be some tax saving strategies that could help, such as adding your husband’s name back onto the deed.  An experienced tax pro should be able to suggest ideas such as that.

Good luck.

Kerry Kerstetter

Follow-Up:

Dear Kerry,

Thank you for the response to my query on Home Sales, i.e., the $500m or $250M capital gains exclusion based on joint or filing
singly returns deduction. I think it was very kind and generous of you, to return an answer by E-Mail, and I want to express my gratitude
to you, for taking time to assist me. You are indeed a humanist at heart, and I grateful you have that quality.

Thank you,

 

Q:

Subject: Schedule E Improvements vs Repair Expenses

 

Mr. Kerstetter,

 

How are you today?  I need your “guru” thoughts on improvements versus expenses on a residential real estate rental.  I saw your website and though I would see if you could give me your thoughts on this.

 

If you buy a new oven/dishwasher for a condo rental because the ones currently in the rental are not functional is this a repair or do these items have to be depreciated as seperate assets?  It is really black and white when you buy a furnishing like beds and couches for the rental- because those aren’t repairs they are adding value.  But on the replacement of a fridge/oven/microwave/dishwasher/washer/dryer that already existed in the apartment it seems as though this could be considered a repair expense.  Your expert thoughts would be greatly appreciated?

  

Best Regards,

A:

You really need to be working on matters such as this with a tax pro so that you don’t screw things up on your own.

New appliances do need to be set up on the depreciation schedule and deducted over their useful lives.  Trying to deduct them as repair expenses is one of the fastest ways to have your tax return flagged for an audit.

This actually balances out if you set the rental property up properly on the depreciation schedule when you first placed it into service.  While not all people do this, you are allowed to separate out the values of the appliances and other assets that are separately identifiable from the overall purchase price and put them on their own lines of the deprecation schedule, with their own lives, which are usually much shorter than the 27.5 years that you have to use for the structure.

This technique isn’t very complicated and has been around for decades.  Any tax pro who is experienced with properly handling rental properties can assist you with this, including how to adjust for a failure to do a proper allocation several years after the original purchase, such as is probably the case for you.

Good luck.

Kerry Kerstetter

 

(Click on image for full size)

Q:

Subject: Starting a new business

 

Dear Kerry,

I am a wedding/event planner and I would like to open my own business in Florida.

I read your article about C vs. S corporation… how much of that would apply to my case?

I am not planning to have any employees (at least for the first 6-12 months) and, seen the nature of the business, I would not begin to take in high amounts for that same length of time… should I just begin as a sole proprietor?

I understand I will eventually need a CPA working with me but, at the moment, I do not know one I can fully trust to make the right decision for me. So I thought that, if I had your opinion, I could then have some ground to stand on when talking to or choosing  a CPA.

I hope you have a couple of minutes to spare on this matter. I understand you must receive a lot of emails and I greatly appreciate your time.

Sincerely,

A:

It’s not true that you will eventually need to work with a CPA.  You need to do that right now.  If you don’t get started on the right path from the very beginning, it may be too late for any tax pro to properly help you later on.

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances.

Unfortunately, we don’t have anyone to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

Good luck.

Kerry Kerstetter

 

Q:

Subject: long term capital gains

 

Gentlemen,

I have a question.  Lets say a person has adjusted gross income of $14,000.  Lets also say that he sold common stock and had a gain of $60,000. Long term gains.  Would he be taxed on this gain at the lower tax rate or would the gain jump him up to the higher rate and and the gain taxed at the higher rate?  Also would his adjusted gross income be increased causing him to pay the higher tax on this income also?

thank you for your answer.

A:

While the nominal rates for long term capital gains (5% and 15%) are lower than normal income tax rates, the actual effective rate on a gain can be much higher because of the dozens of penalties levied on people with higher AGI. 

This is especially bad for senior citizens who are forced to pay Federal income taxes on 85% of their Social Security benefits if their AGI, including capital gains, puts them in the “evil rich” category of $25,000 for a single person and $32,000 for a married couple. 

You personal professional tax advisor can assist you in more detail with how this would affect your particular situation.

Good luck.

Kerry Kerstetter