Long Term Capital Gains Relief
Last month I discussed the capital gains exclusion for your primary home. Now, comes the other side, paying taxes (ugh!). The new (via the Tax Act of 2003) tax rates on long term capital gains, such as the sale of an investment property or a second home, offer some relief for all taxpayers. For those in the lowest tax brackets the relief may be substantial. A few details...
- For those in the 10% or 15% 'ordinary' tax brackets the tax on long term (greater than 1 year) capital gains was cut in half, from 10% to 5%. Note, for gains realized in 2008, the tax rate is 0% (ZERO).
- For those in higher tax brackets, the same cut is from 20% to 15%. The 2008 rate here stays at 15%.
And, unless Congress moves to make these new rates permanent, they revert back to the 'old' levels starting 1/1/2009. As always, consult your accountant to ensure that you choose the right tax strategy for you.
Taxes: Capital Gains Rules for Principal Residence
The Tax Act of 1997 changed the way the "profit" from selling your home is taxed. You may be able to "exclude" a huge portion of your profit from being taxed altogether. The Tax Act of 1997 allows you to take up to $500K ($250K for single taxpayers) in capital gains exclusion if you sell your principal residence. To qualify as a principal residence you must have lived there for 2 of the last 5 years. While the "old" rules allowed an exclusion only once in your lifetime, the new rules allow multiple exclusions. The IRS has a publication to help you through the 'details'. You can download Publication 523 from Here.
Reverse 1031 Exchanges - "You've Got It Backwards!"
A "Reverse" Exchange transaction, structured under Revenue Procedure 2000-37, allows exchangers to control the timing and value issues with respect to the purchase of their new (replacement) property if they need to purchase the new property prior to the sale of their old (relinquished) property, and still have the transaction qualify as a non-taxed event.
There are several reasons why an investor may decide to structure a Reverse Exchange...
- A buyer cannot be found for their current (relinquished) property, and there is a contractual obligation or desire to purchase the new property prior to the sale of their current property.
- The investor wants to make improvements to the new property they are acquiring, to increase its value to an amount greater than the eventual sales price of the current property. This strategy allows the investor to structure a fully tax deferred Exchange transaction. Without making the improvements before the Exchange, a portion of the sales proceeds from the old or current property would be taxable.
Information provided by TVPX, Inc. More information, and a downloadable flyer, go to the download webpage.
Tax Information for Rental Landlords - IRS Publication 527
IRS Publication 527 discusses rental income and expenses, including depreciation, and explains how to report them on your return. It also covers the rules for personal use, casualty losses on rental property, and how to fill out that all important 1040 Schedule E. Not light reading, but not awful either. Get Publication 527 Here.
I rented my home in Eastham for three summers before I moved here. This publication became my guide for how to manage the 'business' of being a vacation home landlord.
What's a 1031 Exchange?
1031 Exchanges provide taxpayers with a valuable opportunity to defer taxes that would otherwise be payable upon the sale of real estate or personal property held for productive use in their business or for investment. 1031 Exchange transactions are structured under the 1991 "Safe Harbor" guidelines provided by Internal Revenue Code Section 1031 and Revenue Procedure 2000-37. A successful 1031 Exchange allows investors to recycle 100% of their capital from the sale of qualifying real estate and personal property into the purchase of "Like-Kind" Replacement Property, instead of paying tax on their capital gain or depreciation recapture at the time they sell their Relinquished Property. (This information was provided by the Plymouth Savings Bank and Time Value Property Exchange, Inc (TVPX). A copy of a very informative TVPX flyer is available on my Download page ... HERE.)
Oil Tanks in Eastham
One of the prerequisites of a house changing hands in Eastham (at a closing), is that any existing fuel oil tank must either be double-walled or it must be demonstrably less than 10 years old. Eastham has instituted this new 'rule' to prevent the release of fuel oil into the fragile aqua-system of the Outer Cape.
- If a homeseller has a 'new' single-walled tank, he needs to get a variance from the fire department. The fire department requires the tank to be stamped with the date of manufacture or that the homeseller provide the invoice showing when the tank was installed prior to issuing the variance.
- Lacking a variance, the homeseller must replace the existing oil tank with a new double walled tank and have the old tank removed. This is roughly a $2,000 expense.
Of course, homes without an oil tank don't face this issue. An alternative to installing a new oil tank is conversion to natural gas heating. Many streets in Eastham have buried gas lines, making this conversion a viable option. Additionally, buried oil tanks are forbidden and must be removed prior to closing.
Is Your House Empty During The Winter?
More than 15 million homes sat unoccupied in 2003. Almost another four million were used only seasonally, according to the U.S. Census. That means sixteen percent of all homes in this country were left unattended at some point for an extended period of time. This is certainly true here in Eastham.
What would happen if a pipe sprang a leak? An eighth-inch crack can spew up to 250 gallons of water a day, wrecking floors, furniture and keepsakes.
That's why the Institute for Business & Home Safety created a brochure -- because when your house needs you the most, you may not be there.
Whether you travel extensively for business or pleasure, have rental property that is unoccupied, or share time between two homes: before closing up your house for any real length of time, take the necessary steps to keep it safe and protected. Go .... HERE ... for the web brochure.
Check 21 - Are You Ready?
On October 28th a new federal law will take effect: the Check Clearing for the 21st Century Act, dubbed "Check 21," will reduce the time it takes checks to clear a bank. Checks may clear the same day they are written, rather than the traditional three days. Financial institutions will no longer have to transfer the original paper check through the check clearing process, but will rely on an electronic image of the check. This system is more efficient for the banking institutions, but it will impact the folks who have relied on the three-day 'float' period as a cushion between paychecks. Don't get caught with overdraft fees and potential credit damage! Go here ... or here... for more details.
Private Mortgage Insurance (PMI)
Are you paying PMI premiums on your Eastham house? If you've been paying it for a year or more, it's unlikely that you still need to. PMI payments are intended to protect your bank or mortgage company should you default on your mortgage payments and generally range from $50 to $150 per month. PMI is usually required if you put down less than 20% of the property's appraised value. With the property appreciations we've had in Eastham (roughly 26% for 2002), your property's appraised value will most likely have increased enough to increase your equity beyond the 20% level. Contact your lender to determine whether you still require PMI coverage.
Example: You purchase a home in late 2001 for $200K (assume also that the house appraised at $200K), putting only 5% down (i.e. $10K). You were certainly required to pay PMI. The house would now be worth in excess of $250K. Your equity in this home is $60K (minimum) or 24%. Now PMI would NOT be required.
Capital Gains Rules for Principal Residence
Did you know that the rules for capital gains exclusion for the sale of your home have changed? The Tax Act of 1997 allows you to take up to $500K ($250K for single taxpayers) capital gains exclusion if you sell your principal residence. To qualify as a principal residence you must have lived there for 2 of the last 5 years. While the "old" rules allowed an exclusion only once in your lifetime, the new rules allow multiple exclusions. The IRS has a publication to help you through the 'details'. You can download Publication 523 from http://www.irs.gov/pub/irs-pdf/p523.pdf.