ANSWER

Sorry, but losses on the sale of a personal home are never deductible.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but things are really in flux around this legislation. The House and Senate and the White House are far apart and it is impossible to know what the final bill will look like, let along when it will be effective, if enacted. Things may become clearer in the next week or two.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Some of your efforts may have earned a residential energy tax credit, which you claim on form 5696: http://www.irs.gov/pub/irs-pdf/f5695.pdf

You'll find info on the program here: http://www.energystar.gov/index.cfm?c=products.pr_tax_credits

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Let me take a stab at what's going on, based on the information you provide. The law classifies rental real estate losses such as yours as passive losses, and such losses generally are not deductible until yo sell the property that is producing them (this is an anti tax shelter rule). But, the law also includes an exception to allow people who actively manage their properties to deduct up to $25,000 a year of otherwise nondeductible passive losses. And, that $25,000 allowance is gradually phased out as AGI rises from $100,000 to $150,000 (on a single or joint return). So, if your income is somewhere in the phaseout zone, your deduction would be reduced, but not necessarily to zero.

If this is what's going on, the other $20,000 of passive losses is "suspended" until you have passive income to offset, or until you sell the rental property.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Such improvements can qualify as medical expenses, but only to the extent that the improvement does not increase the value of the home. Thus, if installing the sink added $500 to the value of the home, just $3,500 would qualify as a medical expense. If you can argue that the improvements did not add to the value of the home -- that a future buyer might want to remove them and thus reduce what he/she is willing to pay -- then you could argue that the full $4,000 qualifies.

This is a "facts and circumstances" issue. I hope this helps.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

If you get your name added to the mortgage (so you are liable for the debt) and to the deed of the condo (so you are a co-owner), then you could deduct the mortgage interest (assuming this would be your second, and not third or more home) and property taxes (regardless of how many homes you own).

The law allows you to deduct such expenses only if you are legally obligated to pay them.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but you can only deduct interest if you file a tax return and itemize deductions. If you have no taxable income and do not file a return, you can't deduct your mortgage interest.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry to hear about your financial problems. There are two exceptions to the general rule that forgiven debt is considered taxable income. One is if the debt is wiped out in a bankruptcy proceeding. I'm not sure if that applies to you since the actions are going on separately and in different states. The other waives the income issue if you are insolvent -- defined as your debts exceeding you assets.

You may want to read the document you'll find at: http://www.irs.gov/newsroom/article/0,,id=174034,00.html

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

The carried-over passive loses can be used against nonpassive income only when you sell the property. Converting it to personal use will not trigger the deduction.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

The law allows you to deduct mortgage interest on up to $1 million worth of "acquisition debt," which is basically defined as money borrowed to buy or improve a home that serves as security for the mortgage. If you were to pay off your mortgage and then take out a new mortgage secured by the same home, the debt would not qualify as acquisition indebtedness because the money would not be used to buy the home (any part of the new loan used to pay for capital improvements would, however, qualify and interest on that amount would be deductible as acquisition indebtedness). Now, up to $100,000 of debt on that "new mortgage" on the paid off house could qualify as "home equity" debt, the interest on which is deductible.

You'll find these rules in IRS Publication 936: http://www.irs.gov/pub/irs-pdf/p936.pdf

But wait, there's more: If you borrow money to buy an investment property, interest on that loan may be deducted. If the house you buy is rented out, for example, interest on the mortgage is a rental expense deductible on Schedule E.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Oh, my, you've really raised a complicated issue...and one for which I'm afraid I can't find a definitive answer.

Back in 1973, a Tax Court case (TC Memo 1973-265) allowed a taxpayer to claim a charitable contribution deduction, over IRS objections, for allowing a fire department to turn down a house as a training exercise. And, the deduction was based on the fair market value of the house before its destruction. However, the IRS is fighting a similar deduction in court now, so it's clear the government position is still to oppose such a write-off. Some observers believe the homeowner actually gets a benefit from allowing the fire department to burn down the house, reducing costs of removing the property so he/she can rebuild, for example, or reducing the volume of materials that must be disposed of.

I believe some tax advisors would be willing to recommend such a deduction and be willing to fight the IRS if the return were audited; others would steer clear of the deduction. I'm afraid I can't weigh in one way or another on that point.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Are you talking about withdrawing funds from a traditional IRA? If so, then yes, there is an exception to the 10% early withdrawal penalty for up to $10,000 withdrawn to buy a first home. The money would still be taxed -- in your top tax bracket -- but no 10% penalty would apply.

If you have a Roth IRA, you can withdraw all of your contributions tax and penalty free at any time, and then up to $10,000 of earnings can also be withdrawn penalty free to purchase a first home.

If you're talking about a 401(k), there is NO exception to the 10% penalty for first time home purchasers.

If you qualify for the exception to the penalty, report it on form 8606: http://www.irs.gov/pub/irs-pdf/f8606.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

That depends on how long it takes you to sell. The provision that allows homeowners to claim up to $250,000 of home sale profit as tax-free ($500,000 if you file a joint return) requires that you own and live in the house for two of the five years leading up to the sale. So, if you're already owned and lived in it for five years, you'll be okay as long as you sell within three years of the time you move out.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Sorry, but the exception to the 10% penalty that applies to up to $10,000 withdrawn from an IRA prior to age 59 1/2 for the purchase of a first home does NOT apply to premature withdrawals from a 401(k). Such 401(k) withdrawals are taxed and penalized. You figure the penalty on Form 5329. http://www.irs.gov/pub/irs-pdf/f5329.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Inheritances are income-tax free and do not have to be reported to the IRS. In your case, though, it sounds like you inherited property and then sold it. If so, you should report the sale on a Schedule D, to accompany your Form 1040. Your basis in the property would be it value at the time of death of the previous owners. If the value rose between that time and the time you sold, you have a long-term capital gain; if it fell, you have a long-term capital loss to report.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

If you were simply a nominal owner of the home--put on the deed for convenience sake, and never claimed deductions for mortgage interest, for example, and received none of the proceeds from the sale--then no, you're not liable for the taxes on the sale.

And, make sure your dad doesn't report any gain that is tax-free. Remember, if he owned and lived in the home for two of the five years leading up to the sale, up to $250,000 profit is tax-free. And, there's a special rule for the use test since he's in a nursing home. In that case, he only has to have lived in the home for one of five years leading up to the sale (and time he lives in the nursing home counts as time he lives in the house he owned).

See IRS Publication 523 for details. http://www.irs.gov/publications/p523/ar02.html#d0e2072

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

A good place to start is IRS Publication 334, Tax Guide for Small Business http://www.irs.gov/pub/irs-pdf/p334.pdf

I'd also suggest you check the website of professional organizations for Realtors; you might find more specific help there. And, by all means ask your fellow real estate professional about the resources they use.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

Generally, any resident of the U.S. is taxed on his or her worldwide income. The sale of raw land would produce a capital gain or loss. So would the sale of a home, but up to $250,000 of profit on the sale of a home is tax free ($500,000 if you file a joint return) if you have owned and lived in the house for at least two of the five years leading up to the sale.

Sorry, but I'm not conversant with any tax treaties between the U.S. and Nepal that may avoid double taxation, that is, being taxed in Nepal as well as the U.S. on your income. Wish I could be of more help.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

I'm assuming you're talking about a traditional IRA, not a Roth IRA. I'll also assume that you have not made any nondeductible contributions to the account. In that case, the amount withdrawn from your IRA is taxable income, to be reported on lines 15a and 15b on the front of your Form 1040.

If you were under age 59 1/2 at the time of the withdrawal you may owe a 10% penalty, too. The penalty is waived on up to $10,000 withdrawn from an IRA for a first time home purchase..and first time is defined as a home purchased when you have not owned a home in the previous two years....even if you owned a place earlier than that. If you qualify for this exception, it will save you up to $1,000.

You figure the penalty, and report the exception to it, on Form 5329 -- http://www.irs.gov/pub/irs-pdf/f5329.pdf

All the details are in IRS Publication 590 -- http://www.irs.gov/pub/irs-pdf/p590.pdf

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors

ANSWER

If any of the "engineering" work you had done counts as a capital improvement (it would if you had electricity or water installed, for example), add that cost to the cost of the land when figuring your basis. The higher your basis, the lower your capital gain. If you arranged to have the proceeds paid to you over more than one tax year (e.g., an installment sale), you could stretch the reporting of the gain out over more than one year, too.

Since you owned the land for more than 12 months, you can treat the profit as a long-term gain, taxable at a maximum rate of 15%. If you're otherwise in the 10% or 15% bracket, the rate on long-term gains realized this year is 0%.

--Kevin McCormally
Editorial Director
Kiplinger Washington Editors