Q:

Subject:  Primary residence tax question

This morning I was speaking to a friend who is a local REALTOR.  She is suggesting that some people seem to be under the impression that if the Democrats win this election, this tax law could be changed or eliminated.  What is your impression or awares on this subject.

 

Thank you for your time,

A:

If you’re referring to the Section 121 $250,000 tax free gain rule, I haven’t noticed any discussion of anyone suggesting repealing this.

The Dems are seriously discussing several other huge tax hikes, such as allowing the Bush tax cuts to expire in a few years, removing the special lower tax rates for long term capital gains, and no repeal of the Estate Tax.

As I posted in my blog recently, in California, the Dems are attempting to remove the deduction for home mortgage interest, which could be an indication of how DC Dems might move.  There’s always a chance that they could scale back the limit on how large deductible home mortgages could be from the current million dollar level.

It’s all speculation and conjecture at this point, but as much as I fear the Dems’ tax hiking urges, I’m not very worried about them removing the tax free home sale rule.  Luckily, it’s not part of the Bush temporary tax cuts, so it will live on until enough of our rulers in DC decide to attack it.

Worst case scenario that I could imagine would be for them to scale its savings opportunities back a bit, such as by making it a once in a lifetime deal, as the previous law was, instead of the current ability to use it every two years.

There’s also the possibility that they could reduce the amount of tax free gain from the $250,000 per person level.  However, since that amount was established in 1997 and has no provisions for any inflation adjustments, I don’t see that happening either.

That’s how I see it.  Thanks for writing.

Kerry Kerstetter

As a means of saving huge amounts on taxes, 1031 exchanges of real estate have always been in the cross-hairs of our rulers looking to generate more tax revenue.  Rather than completely repeal Section 1031, the more likely approach is to whittle away at its usage.  I recently came across two such attempts that are in the works.

Federal regarding farm land:   1031 Proposal In The Farm Bill Update

In California, a frequently proposed idea has resurfaced, to disallow referral of gain on the disposal of Calif. property when the replacement property is not also in Calif.  Some other states have already implemented this kind of restriction, and if Calif does this, we can only expect many more states to follow.

We recently received the following news item in an email from Wachovia Exchange Services: 

Hello friends,

I recently received some information about California that might interest some of you.  Hopefully, we will never see this proposal get
enacted.  And I would hate to think that it might give any other states the same idea.

California, like a number of states, is faced with a severe budget shortfall. The legislature is therefore looking at a number of proposals
to raise revenues and reduce expenditures. As part of this effort, the California Legislative Administrative Office has proposed a revenue
raiser wherein an exchange of California property for out-of-state commercial property would not be eligible for deferral as a like-kind
exchange.

California currently has a claw-back regime where California property is exchanged for non-California property. In such case, while the gain is deferred, if the replacement property is subsequently sold, the deferred gain is subject to California tax. The reason for the proposal is the administrative difficulty in taxing the gains once the property has left the state.

This is just a proposal at this time; however, it should be noted that California has a history of non-conformity with the federal tax rules,
so it would not be out of character for it to have different rules for like-kind exchanges.