Q:

Subject: defining a primary residence

Greetings, Thanks for your very useful information on residences. I have a situation for which I haven’t been able to get credible information and am hoping you might have an idea. I’m a US tax payer living in a house in Belgium which I have owed for the past 3 years. My company is now sending me on a work-related assignment outside of Belgium The length of that assignment is not yet certain, but it may be for 3 -5 years. I want to keep the house here as it is my only property and I consider it my primary residence to which I would return eventually. Would the IRS see it that way, or do I lose the right to claim this house as my primary (read permanent) residence because I’m away on assignment. I understand that claiming a house as one’s primary residence is the sole criterion according to which the IRS either does or does not levy capital gains taxes when property is sold.

Thanks for your help in clarifying this question.

 A:

I’m sensing a couple of different issues here.

First, if you are wondering whether your time away on assignment can count as part of the time you owned and occupied the home as your primary residence in order to qualify for the two years out of five years rule, the answer is no.  Temporary absences away are fine; but yours is more of a permanent or long-term relocation. 

Before the residence sales rules were overhauled in 1997, there was an allowance for older people who were forced to move into a special care facility.  They were allowed to count that time as if they were living in their own homes in order to qualify for the occupancy rule that was in effect at that time for the once in a lifetime senior citizen tax free exclusion.  There is no such provision in the current law.

If your plan is to hold onto the Belgium house so that you can live there after finishing this current assignment, you would only have to live there for two more years in order to be eligible for the tax free sale of up to $250,000 of profit.  Of course, if you rent it out in the meantime, you will have to pay tax on the depreciation. 

You also have the option of waiting up to three years after moving out to sell the home and utilize the tax free sale; with the same provision for depreciation recapture.

The other issue you should be concerned with is how to treat the expenses on the home while you are away on assignment, mainly interest and property taxes.  That will depend on how the home is actually being used.  If it’s rented out, everything will go on Schedule E.  If you leave it empty or have family or friends stay there, it would be considered a personal (but not primary) residence, with interest and taxes deducted on Schedule A.

 As always, my comments are general in nature.  You really need to work with a tax pro who can better analyze everything in relation to your unique circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

 Dear Kerry,

 Thank you very much for taking the time to clarify these things. We will consult with someone here now to explore the specifics of our situation – but at least I have a starting frame of reference.

 

Thanks again.

 

Oregon mulls a new tax that environmentalists and privacy advocates will hate. – Not surprising for the infamous Left Coast.  A 1.25 cent per mile tax, to be monitored by Big Brother GPS units in everyone’s vehicles.

Detroit Ponders Fast-Food Tax – Just another sin tax to feed the rulers’ insatiable thirst for tax dollars.

Lowering Expectations for Stock Returns – Good explanation by Gail Buckner of how stock market investments are supposed to work.

What would an ad look like if we were recruited to endorse the same product as athletes and a certain former United States Senator have pitched?

N.Y. telecommuter tax under fire. Lawmakers’ bill would block double taxation of workers – Thanks to Ben Cunningham for this story of the screw-job the Empire State is doing on people who live in other states, but work for companies that are located in New York.  This is the kind of crap the rulers in the PRC like to pull, levying unfair taxes on people who can’t vote in that state or do anything else to punish the elected aristocracy.  Unfortunately, the only recourse does seem to be a Federal law banning this because the state government has a vested interest in maintaining this source of unfair revenue.

Some people may feel it’s no big deal to have New York levy income tax on nonresidents because of the credit that is available on most state tax returns for taxes paid to other states.  As someone who prepares a high percentage of multi-state income tax returns, I can attest to the fact that such credits do not balance things out properly.  For people who do live in taxable states, the net effect is that they pay the higher state tax on their income, which would normally be New York’s for the people discussed in this article.  For people who live and work in states without income taxes, they are completely screwed because there is no way to recover the tax paid to New York.  

One of the many misconceptions surrounding the debate over changing the way Social Security taxes are invested is the intentionally misleading one that the only alternative to the current structure is privately owned and controlled accounts that must invest in the stock market. Opponents of private accounts are literally giddy with glee each time the stock market drops because they believe that supports their case that such investment would be too risky for people to stomach. Their ridiculous contention that the only 100 percent safe and secure retirement account is the Social Security Ponzi scheme has already been covered by me, as well as many other learned individuals.

I thought this would be a good time to take another look at something I wrote about a little over a year ago, using your retirement account money to invest in your own business. I referred to a company in San Diego, BeneTrends, Inc, that has the prototype for setting up such an investment. I have no financial connection of any kind with BeneTrends; but I still think their concept is excellent. I have yet to hear of another company providing a similar service, and would be interested in learning of any.

The managers of BeneTrends liked my explanation of their program so well that they requested my permission to include it on their own website. This has lead to various emails from people who have been checking it out, such as the following.

From an attorney:

Subject: BeneTrends

Do you have any clients who have used BeneTrends? I see that BeneTrends is using your name and was wondering your experience with them? http://benetrends.com/News/TaxGuru.html. Someone has asked me about them.

My Reply:

I don’t have any clients of my own who are using BeneTrends. I learned about their service about a year ago from a reader and checked them out and wrote that article for my blog, which I gave them permission to post on their site.

Since then, I have received a couple of emails from people who said they were using BeneTrends and were happy with their service. There were only about two or three such emails.

What is good to note is that I have yet to receive any negative feedback of any kind regarding BeneTrends, which I assume would be forthcoming if anyone were to have a bad experience with them.

I hope this helps.

Kerry

From a person considering using BeneTrends:

Subject: Benetrends Rainmaker plan

Mr. Kerstetter,

I am very close to retaining the services of the folks at Benetrends to assist me in transferring a portion of my 401K savings to a new C corp. I plan to open.

I read your review of the Rainmaker plan at the Benetrends web site. To your knowledge are there any negative tax consequences using the Rainmaker plan? I would hate to have a surprise at a latter date. It appears the plan is within the IRS guidelines?

Of course I’m asking you because you are the expert. The 401k money will be worth more in ten years in my new business than invested in the stock market for the same duration. The franchise I am buying has a great track record and I feel I can successfully grow a profitable business. I hope in 5-10 years I can sell the business and roll the proceeds (at some higher multiple) into another retirement plan.

I appreciate any words of wisdom to help me through this “scary” process.

Sincerely,

My Reply:

As long as you follow the procedures, and properly understand the nature of the transaction that BeneTrends is setting up, everything should be fine.

You have to be very prudent, as manager of your corporation, that the money coming in from the 401k plan is to be considered as an investment in capital stock. You must therefore exercise due fiduciary diligence in conserving, maximizing and protecting that investment, just as you would if the money were being invested by unrelated parties.

I have seen cases where the corp managers got into serious trouble with IRS because they abused this fiduciary responsibility and used the invested funds as their own personal piggy-bank and blew the money on non-business kinds of things. I have never heard of these problems with BeneTrends clients, but I have seen them in similar types of transactions.

You are not supposed to have any personal access to the retirement funds without that being considered a taxable withdrawal. As long as the money is being utilized for legitimate business purposes, there will be no problems.

There will actually be some big tax consequences down the road if your business does well and the value of your retirement account grows considerably in value. There will be more income tax to pay when you draw out of your retirement plan in your later years.

Similarly, assuming our rulers in DC are not successful in killing the estate tax before you pass away, there will be a much larger asset to be included in your estate and possibly confiscated by IRS. Also, if you don’t have the plan in a living trust, the increased value could trigger higher probate costs, which are usually based on overall gross estate values. A good estate plan is essential to ensuring that the net worth you build up during your lifetime can be preserved and passed on to your choice of heirs.

Good luck. I hope this helps. As always, you should be working with a tax pro who can help you fine tune everything to fit your particular circumstances.

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you very much for the feedback. I really appreciate it and I will take my fiduciary responsibilities very seriously.