Chapter 16: Sale of Residence. 16: Sale of Residence

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Reginald Harper
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2 Learning Objectives Page Upon completion of this seminar, participants should be able to Determine if the exclusion or the reduced exclusion applies. Apply rules for nonqualified use of a principal residence. Analyze the proper tax treatment for short sales. Evaluate tax & non-tax consequences of reverse mortgages 2

3 Key Developments Page Chart indicating tax status of costs associated with the settlement of a residence. Page The many disadvantages associated with reverse mortgages, especially fees. Page 271 3

4 Page 256 II. Definition of Residence The vacant land can be sold separately from the residence and consist of various sizes Requirements: Sale or exchange of land occurs within two years of residence sale In all other ways land qualifies under IRC 121 7

5 Page 256 III. Definition of Principal With an ever increasing mobile society and 1 st, 2 nd and even 3 rd homes it important to remember: The residence and tax home of the taxpayer may not be the same thing. Taxpayers who use multiple properties would be well advised to keep records of days at each property. Spouses may in fact have different residences and/or tax homes. 8

6 II. Definition of Principal Page While Reg (b)(2) list factors that are relevant it is not necessarily all inclusive. 1. Place of employment 2. Where does the family reside 3. Tax return filing address 4. Primary mailing address 5. Location of banking 6. Location of social and spiritual life 9

7 Page 257 III. Definition of Principal The focus of the family s day to day life was in New York City and the Chappaqua NY home was nothing more than a second home 10

8 Page 257 III. Definition of Principal The taxpayer failed to demonstrate the majority of their time was spent at the property to qualify. 11

9 Page 257-New III. Definition of Principal When is an absence too long to qualify as a residence? Barrett, TC Memo IRS argued that the taxpayer s focus was in DC versus his residence in Las Vegas Court Said His travel to DC was less than six months per year Performed business services also in Las Vegas Taxpayer and spouse did not have separate tax homes because the spouse focused solely in Las Vegas. 12

10 Page 257 IV. Computation of Gain or Loss Formula for basis Purchase cost of home Plus: Settlement/Closing Fees Home Improvements Less: Seller credits at purchase Tax Credits received 13

11 Page 259 IV. Computation of Gain or Loss However a permanent easement for mixed use property was a sale. 14

12 The sale or purchase of a personal residence is subject to numerous fees Various settlement costs are delineated for the sale or purchase of a personal residence. These costs can be summarized as: By a show of hands: A. Mostly currently deductible. B. Mostly non-deductible. C. Mainly affect basis. D. Have little impact on the taxpayer s return. E. Are dependent on many factors as to their tax treatment. 15

13 Page 259 V. Settlement Costs 16

14 Page 260 V. Settlement Costs 17

loss to a deductible loss - Basis for computing loss or depreciation is

15 VII. Conversion of a Residence to A Rental or Business Use Page 260 Renting a former personal residence will NOT convert a non-deductible loss to a deductible loss - Basis for computing loss or depreciation is the lesser of: 1. FMV on date of change 2. Adjusted basis on date of change HOWEVER 18

16 VII. Conversion of a Residence to A Rental or Business Use Page $30,000 $20,000 Tax Basis = $280,000 Land at Conversion = $ 30,000 Bldg at Conversion = $230,000 Suspended Basis = $ 20,000 $230,000 19

17 VII. Conversion of a Residence to A Rental or Business Use Page 261 Perhaps it can end up with neither a gain or loss but $16,000 of rent was received tax free or even help a taxpayer recover their over improvements. 20

18 Original Cost $280,000 Conversion Value $260,000 Depreciation Taken Adjusted Basis for Gain Adjusted Basis for Loss Sale Price VII. Conversion of a Residence to A Rental or Business Use Realized Gain / (Loss) Recognized Gain/(Loss) $16,000 $264,000 $244,000 $260,000 -$4,000 $0 Page 261 If the property is sold for a loss the basis for sale is the conversion value plus post capital expenditures 21

19 VII. Conversion of a Residence to A Rental or Business Use C. Documentation is the key to converting a residence from personal to business. Page Appraisal is the best Look to a realtor for a thumbnail market analysis. 2. Without documentation the taxpayer may find themselves having to defend a guesstimate. 22

20 VIII. Exclusion of Gain from the Sale of a Principal Residence 1. The individual who fails to live in the home for two years due to medical issues. Page

21 VIII. Exclusion of Gain from the Sale of a Principal Residence Page Divorced/Separated Taxpayers As long as one spouse is granted use of home by a separation or divorce agreement the non-resident spouse continues to qualify Caution Ex-spouse must maintain joint ownership with spouse who retains ownership interest 24

22 VIII. Exclusion of Gain from the Sale of a Principal Residence Page 264 US Armed Forces or Foreign Service Members can suspend the five-year testing period during periods of qualified official extended duty for one property for up to ten years + 25

23 Page 264 IX. Reduced Maximum Exclusion A. Sales that are eligible for reduced exclusions The Safe Harbors 1. Change in place of employment (50 mile safe harbor) 2. Health Issues 3. Unforeseen Circumstances Suitability of Property Changes Financial Ability Sale must occur proximate to the Change 26

24 Page Bonus IX. Reduced Maximum Exclusion Taxpayer who sold home after second child was eligible for reduced gain exclusion, PLR

25 X. Reduced Exclusion for Non-Qualified Use After 2008 Page A. Exclusion rule under IRC 121 is generally $250,000/$500,000 except for: 1. Nonqualified use (something other than as a principal residence) after 12/31/08, this would include: Rental Vacation Home Any use of the property not qualifying as a principal residence 28

26 Page 269 XIII. Short Sale Transactions What happens in a short sale? A. Home is sold for less than existing mortgages and debt is forgiven as part of transaction. B. The taxpayer should but may not receive the 1099-C. C. If there is debt forgiveness income in the transaction is dependent upon whether the mortgage(s) are recourse or non-recourse. 29

27 XV. How the HECM Differs from Traditional Mortgages Page The borrower retains title to the property but: FHA receives first deed of trust Proceeds of home sale are first used to satisfy mortgage 2. Home can be sold at owners discretion but like any mortgage the HECM must be satisfied first. 3. The owner can still bequeath the home to who they chose 30

28 XVIII. Disadvantages Page 271 Danger The fees are astronomical May be as much as $6,000 up front. Each year an additional 1.25% of the outstanding balance. 31

2015 Gear Up 1040 Individual Tax

2015 Gear Up 1040 Individual Tax Melanie Mogg CPA MelanieMogg Copyright 2009 Thomson Reuters/Gear Up. All rights reserved. Today s Topics Net investment income tax (NIIT) Investment income Passive & rental