Year End Tax Tips 2008 Q&A - Real Estate
Tax Tips Q&A
Read Kevin McCormally's answers to tax questions submitted by NBR's viewers.
Click on a tax topic to explore related questions and answers.
This feature is intended to provide general information and education and should not be considered as investment or tax advice. Each individual should consult his or her own tax, financial, or investment advisor.
Real Estate
QUESTION: Taxes Due On Inherited Real Estate
After a brothers death, we received a small parcel of land in Southern Illinois in the year 2000. It sold in 2008 for approximately $20,000. The entire estate was less than 100,000. Are federal income taxes owed on the $20,000? Thanks Anne
-- Anne, Spokane, WA
ANSWER:
Not on all of it. When you inherit property (whether it's stocks or land or some other kind of asset) your "tax basis" becomes the property's value on the day the previous owner died. What you need is an estimate of the parcel's value at the time your brother died. A local real estate agent should be able to help. Subtract that 2000 value from what you got when you sold it to determine if you have a gain or a loss. If the value of the land has declined, you could actually wind up with a money-saving tax loss....along with the cash you got from the sale. You'll report the sale of the land on a Schedule D.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Forfeited Deposit On Investment Property
I entered into a sales agreement with a land developer
on December 2005 in which I received $60,000 up front. The sale was contingent
upon zoning approval, which was granted, and slated to close 1/15/08.
The developer backed out due to the economy. Is the 60K taxed as regular
income or capital gains?
-- N.M., Vancouver, WA
ANSWER:
I asked my friend and colleague, Peter Blank, editor of the Kiplinger Tax Letter, to weigh in on this one. His response:
While the matter is not entirely free from doubt, it
appears that under Internal Revenue Code section 1234A, you are entitled
to capital gain treatment for a forfeited deposit on investment property.
In your case, the gain would be long term since the sales contract was
held for more than one year. But if you are a developer of real estate
and would have to report ordinary income on the sale of the property,
the forfeited deposit would be taxed as ordinary income.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Claiming Home Purchase Deduction
Can I claim the $7,500 deduction for a home purchase if I previously owned a home (previously married, over 4 years ago). My realtor said I could.???
-- Maureen Moen, Yukon, OK
ANSWER:
You can qualify for the credit if you have not owned a principal residence in the three years prior to the purchase of a home. For married couples, neither spouse can have owned a home within the previous three years.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Tax Breaks For Daughter's Residence
My wife and I purchased a second home(townhome) which our daughter lives in. She pays no rent just living costs.Can we get any tax breaks?
-- Dennis Z, Algonquin, Il
ANSWER:
You can deduct your mortgage interest and property taxes, just as you do on your own home. But, since you're not charging rent, it's not a rental property and, thus, you can't claim rental property deductions or depreciation.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Tax On Permanent Residence vs Vacation Home
I have lived as a permanent resident for the last 2+years out of the last 5 yrs.in what was once my vacation home. Earlier this year I bought a place in WA state where there is no state income tax . I've read that the 2 out of 5 year tax exclusion is changing beginning in 2009. If I declare my WA home as my permanent residence this month will I qualify for the full $250k tax exclusion if I sell my once vacation home in the next 3 yrs or do I have to keep this as my permanent residence for the next 3 yrs.?
-- Ed, Oceanside, OR
ANSWER:
The new rules you mention affect vacation homes that are converted to principal residences after 2008...not the other way around, converting principal residences into vacation homes. So, in your case, if you convert your home to a vacation home and then sell the property within three years -- so you still meet the two-out-of-five-years test, then you'll qualify for the full $250,000 exclusion.
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
QUESTION: Do Capital Gains On Real Estate Push Me Into AMT?
I just sold my rental property (2Family House)and I have a capital gain of $120000.00 I made $25000 for year 2008. What tak bracket will I have to pay? Can I take any more Deciation to slide in a lower tax bracket or am I in the AMT club?
-- Denis, Yardville, NJ
ANSWER:
First, based on the information in your question, I don't see why you'd need to worry about the alternative minimum tax.
As for what tax bracket you're in, $25,000 of taxable income -- that's after all your exemptions and deductions -- lands you in the 15% bracket, regardless of what your filing status is...single or married.
The capital gain on the house you sold will be taxed at capital gain rates (assuming you owned the place for more than a year). Those rates are, GET THIS: 0% -- for the amount of income that falls in the 15% bracket....and 15% for any additional gain (not subject to depreciation recapture...more about that in a second).
If you're single, the 15% bracket -- which earns you 0% tax on the gain -- runs to $32,550; if you're married, the magic number is $65,100. Once your other income, plus the gain, passes that level, your gain will be hit with the 15% rate.
Now, to the extent that your gain is attributable to depreciation claimed while you rented the property (depreciation reduces your tax basis and therefore increases your gain dollar for dollar), that gain is taxed at 25%.
Whew....
-- Kevin McCormally, Editorial Director, Kiplinger Washington Editors
