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Tax Break When Selling Land Adjacent To Your Residence

Wed, 04 Nov 2009 17:40:00 -0400

Plan for Qualified Lot Sales

IRS regulations specifically allow you to use the federal income tax home sale gain exclusion privilege to shelter profit from selling vacant land adjacent to your house - even if the land sale occurs in one or more transactions that are completely separate from the sale of your house. Although this sounds too good to be true, it is true!

Gain Exclusion Qualification Rules

    If you're unmarried, you can potentially sell your principal residence for a gain of up to $250,000 without owing anything to the U.S. Treasury. If you're married and file jointly, you can potentially exclude up to $500,000 of home sale gain. To qualify, you generally must pass both of the following tests:
    1. You must have owned the property for at least two years during the five-year period ending on the sale date (the ownership test).
    2. You must have used the property as a principal residence for at least two years during the same five-year period (the use test).
    To be eligible for the $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test.
    If you excluded a gain from an earlier principal residence sale under these rules, you generally must wait at least two years before taking advantage of the break again. For joint filers, the $500,000 exclusion is only available when both you and your spouse have not claimed an exclusion for an earlier sale within two years of the sale date in question.
    Capital gains in excess of your exclusion are generally taxed at a maximum federal rate of no more than 15 percent. State tax may also apply.

To take advantage of this break, however, there are some restrictions:

The land must be adjacent to the parcel that contains your house, and it must be used as part of your principal residence (as opposed to being used for business or rental purposes).
The house must also be used as your principal residence.
The adjacent land must be sold within two years before or after the sale of the parcel that contains your house, and you must meet certain timing requirements for both the sale of the house and the sale, or sales, of the land. (See right-hand box for timing qualifications.)

Assuming you pass all the tests, you can use whichever gain exclusion amount applies ($250,000 for single filers or $500,000 for joint filers) to shelter from federal (and sometimes state) capital gains tax the combined profit from selling the parcel containing your house and the adjacent land.

How Much Land Can You Sell?

Based on an example in the IRS regulations, you could sell at least 29 acres without being challenged by the government (maybe more because there are no specific guidelines for the amount of land that can be considered part and parcel of your principal residence).

What happens when the adjacent land is sold in a year before or after the year you sell the parcel containing your house? If you sell the parcel with your house after the due date of the return for the earlier year when the land was sold, you must report the land sale gain on your Schedule D (your gain equals the difference between the sale price for the land and your tax basis in that part of the property). Then after you've completed the sale of the parcel that contains your house, you file an amended return on Form 1040X to use part of your gain exclusion (up to $250,000 or $500,000 if you file jointly) to shelter all or part of the profit from the land sale. You will then be due a tax refund for the year of the land sale.

If you sell the parcel with your house before the due date of the return for the preceding year when the land was sold, simply use part of your gain exclusion to shelter all or part of the land sale gain on the earlier year's return. In the later year, you can use your remaining gain exclusion to shelter all or part of the profit from selling the parcel that contains your house.

Your tax adviser can help you take advantage of the home sale gain exclusion for sales of land next to your house. Advance planning may be necessary to maximize your tax savings.

We Were Warned!

Mon, 05 Jan 2009 14:30:00 -0400

Some more retrospective on the "melt down" in real estate. Back in 2006 this article appeared in Fortune.

NEW YORK (FORTUNE) - The lesson that equity can evaporate quickly is something Brooks and Judy Butler of Coral Springs, Fla., learned the hard way.

In 1989, Brooks, a sales executive for software company DataCore and a former IBMer, bought a condo in Hartford, right around the corner from the Mark Twain and Harriet Beecher Stowe homesteads. Housing prices had soared by more than 90 percent in the previous four years, and a few weeks after he plunked down $98,000, a similar condo sold for $125,000, which made him feel pretty good.

But then the insurance industry went into a slump, and Hartford's population declined. As the years went on, units in his building started to change hands for less and less.

Brooks thought about selling when he was $4,000 down, but he couldn't afford to lose that kind of money. The next time he thought about it, he was $25,000 in the hole.

When he finally cashed out in 1998, he had to bring a $40,000 check to the table. "It was awful," he says. (The condo, he heard, sold two years ago for $82,000 -- still short of its 1989 level.)

Which is why, as a matter of family philosophy, Brooks and Judy refuse to believe their current house in Florida is worth a single penny more than $210,000 -- the price they paid five years ago -- even though comparable dwellings on the street are going for close to $500,000.

Their rule: Never allow outstanding loans against the house to surpass the purchase price. In fact, their mortgage and the $9,000 they took out on a home-equity line of credit are considerably less, they say.

And where did they put that $9,000? Back into the house. They refurbished the deck and the driveway and purchased hurricane shutters. "That's a conservative approach," says Brooks. "If we stick to it, we'll be safe."

Americans have increased their home equity in the past five years by 60 percent, or more than $3.6 trillion. They have also tapped it -- to the tune of $600 billion in 2004 alone.

Some of this cash has been spent wisely: to put the kids through college, for instance. But plenty has gone toward vacations and new wheels. Great for the economy; bad for many personal balance sheets.

"A new kitchen is fine because it adds real value to your home," says Leamer. "But to buy an SUV and go out to fancy meals with expensive wines, that's spending money you may never have."

Clearly, the message of the forecast is that appreciation may not always support such spending. Some 60 percent of homeowners, according to one recent survey, expect at least 5 percent annual price growth during the next several years.

That may not sound extreme, but in dollar terms, on today's already hefty home prices, it certainly adds up.

And -- surprise -- it's way out of touch with historical norms: Home prices have risen slightly more than 1 percent annually after inflation. Chances are, appreciation in the future will look more like that, at best, than like the heady figures we've seen in recent years.

The takeaway: "Your home isn't worth as much as you think it is," says Economy.com's Zandi. "So borrow as if it were worth measurably less, because it is."

Real Estate Retrospective

Mon, 05 Jan 2009 14:11:00 -0400

Sometimes it is useful, or at least interesting, to look back at what was foretold versus what actually happened as we now know it. This is an article from FORTUNE back in 2005.

Real Estate: Is the party over?
Exclusive forecasts for the 100 largest markets.
December 16, 2005
By Ellen Florian Kratz, FORTUNE

NEW YORK (FORTUNE) -- Everybody from Los Angeles to Boston -- your mom, your doctor, your dry cleaner -- is puzzling over which way the nation's real estate market is headed. Up or down? Bubble or not?

It's a debate that's been raging for years, and recently that there have been clear signs of a slowdown. It's unlikely, however, that the housing market will come to a screeching halt.

To get a clearer picture of how things may play out, FORTUNE turned to Moody's Economy.com and home property-valuation service Fiserv CSW.

The researchers crunched numbers on the 100 largest metropolitan regions in the country, and the results of their analysis appear in the table below.

Nationally, the overall outlook seems reasonable: 7 percent appreciation for 2006 and flat for 2007. But markets that have seen the greatest appreciation over the past five years appear to be vulnerable.

Indeed, at some point in the next two years, according to the forecast, a third of the nation's 100 largest metro areas (accounting for 60 percent of the U.S. population) are expected to see modestly falling house prices.

Real estate bear markets often come in the form of steady declines over many years, rather than sudden sharp drops.

As inflation gradually gnaws away at the value of nominal home prices, regular folks might not take much notice. But in the long run the loss of wealth becomes all too real. From 1989 to 1997, for instance, Los Angeles residential real estate dropped more than 40 percent in inflation-adjusted terms.

The nation's most perilous regional market, according to the forecast data: Las Vegas, a speculator-infested hot spot. Prices there are projected to deflate by 7.9 percent next year, the year after by another 5 percent. For newcomers to the market and those with low-money-down deals who may have overleveraged themselves with adjustable-rate mortgages, even a modest downturn could mean financial jeopardy.

Click on column headings to re-sort. Click on city name for in-depth statistics.

Rank	Metro Area	State	Median home price	Projected growth 2006	Projected growth 2007
1	San Antonio	TX	$129,900	8.30%	7.00%
2	Jacksonville	FL	$164,700	8.10%	2.50%
3	El Paso	TX	$107,100	8.10%	7.10%
4	Little Rock-North Little Rock	AR	$115,700	7.80%	7.20%
5	Baton Rouge	LA	$133,800	7.60%	3.80%
6	Richmond	VA	$191,800	7.40%	3.30%
7	Virginia Beach-Norfolk-Newport News	VA	$193,100	7.30%	1.00%
8	Nashville-Davidson-Newport News	TN	$157,300	7.10%	6.70%
9	Houston-Sugar Land-Baytown	TX	$139,800	7.00%	6.60%
10	Memphis	TN	$147,600	7.00%	6.50%
11	Allentown-Bethlehem-Easton	PA	$247,400	6.90%	1.20%
12	Oklahoma City	OK	$116,900	6.90%	6.00%
13	Birmingham-Hoover	AL	$152,500	6.90%	5.40%
14	Albuquerque	NM	$166,700	6.50%	6.10%
15	Columbia	SC	$133,200	6.40%	5.40%
16	Fort Worth-Arlington	TX	$125,700	6.30%	5.00%
17	Syracuse	NY	$109,400	6.20%	5.40%
18	Dayton	OH	$116,500	6.10%	5.60%
19	McAllen-Edinburg-Mission	TX	$71,000	6.10%	6.20%
20	Salt Lake City	UT	$165,700	6.10%	3.40%
21	Austin-Round Rock	TX	$161,800	6.10%	5.00%
22	Tulsa	OK	$116,600	6.10%	6.20%
23	Pittsburgh	PA	$113,000	6.00%	5.00%
24	Cincinnati-Middletown	OH	$146,200	6.00%	6.60%
25	Albany-Schenectady-Troy	NY	$176,700	6.00%	4.50%
26	Dallas-Plano-Irving	TX	$155,500	5.90%	6.30%
27	St. Louis	MO	$134,900	5.80%	4.10%
28	Toledo	OH	$116,400	5.70%	5.00%
29	Greenville	SC	$141,300	5.70%	5.00%
30	Sarasota-Bradenton-Venice	FL	$314,300	5.60%	-3.60%
31	Indianapolis	IN	$121,700	5.60%	5.40%
32	Wichita	KS	$107,200	5.50%	4.80%
33	Columbus	OH	$150,700	5.50%	6.00%
34	Akron	OH	$117,600	5.40%	5.30%
35	Buffalo-Niagara Falls	NY	$96,400	5.40%	5.30%
36	Knoxville	TN	$140,100	5.40%	5.20%
37	New Orleans-Metairie-Kenner	LA	$149,100	5.40%	6.60%
38	Rochester	NY	$111,200	5.30%	6.80%
39	Raleigh-Cary	NC	$183,100	5.20%	5.10%
40	Philadelphia	PA	$199,400	5.10%	0.50%
41	Charlotte-Gastonia-Concord	NC	$172,800	5.10%	5.50%
42	Louisville	KY	$134,800	5.00%	4.60%
43	Milwaukee-Waukesha-West Allis	WI	$210,900	4.80%	2.50%
44	Tampa-St. Petersburg-Clearwater	FL	$193,700	4.80%	-0.50%
45	Greensboro-High Point	NC	$145,100	4.80%	5.50%
46	Kansas City	MO/KS	$154,600	4.70%	4.10%
47	Poughkeepsie-Newburgh-Middletown	NY	$265,000	4.60%	0.80%
48	Youngstown-Warren-Boardman	OH	$83,400	4.50%	5.30%
49	Gary	IN	$127,300	4.40%	3.40%
50	Cleveland-Elyria-Mentor	OH	$142,800	4.30%	5.10%
51	Omaha-Council Bluffs	NE	$136,100	4.30%	4.10%
52	Lake County, Kenosha County	IL/WI	$259,100	4.20%	1.90%
53	Atlanta-Sandy Springs-Marietta	GA	$165,300	4.20%	4.00%
54	Honolulu	HI	$570,400	4.00%	-1.00%
55	Orlando-Kissimmee	FL	$226,400	3.80%	-0.50%
56	Grand Rapids	MI	$137,300	3.60%	2.90%
57	Fort Lauderdale-Pompano Beach-Deerfield Beach	FL	$356,600	3.10%	-4.50%
58	Springfield	MA	$197,900	3.00%	1.20%
59	Portland-Beaverton-Vancouver	OR/WA	$234,600	3.00%	-0.70%
60	Baltimore-Towson	MD	$249,100	2.90%	-0.80%
61	Tucson	AZ	$220,900	2.90%	-4.00%
62	Camden	NJ	$210,800	2.70%	0.80%
63	Denver-Aurora	CO	$244,800	2.60%	2.50%
64	Wilmington	DE	$231,000	2.50%	1.70%
65	Seattle-Bellevue-Everett	WA	$335,500	2.50%	1.00%
66	Tacoma	WA	$222,700	2.30%	0.60%
67	W. Palm Beach-Boca Raton-Boynton Beach	FL	$386,200	2.10%	-3.90%
68	Phoenix-Mesa-Scottsdale	AZ	$238,100	2.00%	-3.70%
69	Warren-Farmington Hills-Troy	MI	$196,000	1.90%	0.80%
70	Washington-Arlington-Alexandria	DC/VA	$404,900	1.80%	-3.40%
71	Hartford-West Hartford-East Hartford	CT	$257,600	1.80%	0.60%
72	Miami-Miami Beach-Kendall	FL	$343,700	1.80%	-5.50%
73	Detroit-Livonia-Dearborn	MI	$120,100	1.60%	2.00%
74	Newark-Union	NJ	$407,000	1.50%	-1.80%
75	New Haven-Milford	CT	$280,300	1.40%	0.60%
76	Worcester	MA	$287,800	1.30%	-0.30%
77	Edison	NJ	$387,900	1.20%	-2.90%
78	Chicago-Naperville-Joliet	IL	$264,900	1.10%	0.20%
79	Cambridge-Newton-Framingham	MA	$448,800	0.80%	0.00%
80	Minneapolis-St. Paul-Bloomington	MN	$234,600	0.70%	0.70%
81	Bridgeport-Stamford-Norwalk	CT	$472,500	0.40%	-1.30%
82	New York City-White Plains-Wayne	NY/NJ	$504,800	0.10%	-3.50%
83	San Francisco-San Mateo-Redwood City	CA	$766,000	0.10%	-2.90%
84	Bethesda-Gaithersburg-Frederick	MD	$444,500	0.00%	-0.50%
85	Boston-Quincy	MA	$422,900	-0.10%	-1.40%
86	Essex County	MA	$380,600	-0.20%	-0.70%
87	Stockton	CA	$423,100	-0.30%	-5.90%
88	San Jose-Sunnyvale-Santa Clara	CA	$720,900	-0.40%	-3.90%
89	Oxnard-Thousand Oaks-Ventura	CA	$480,300	-0.70%	-5.00%
90	Oakland-Fremont-Hayward	CA	$651,300	-0.70%	-4.40%
91	Fresno	CA	$340,800	-0.80%	-2.80%
92	Bakersfield	CA	$286,300	-0.80%	-3.00%
93	Providence-Fall River-New Bedford	RI/MA	$292,800	-1.10%	-2.20%
94	Sacramento-Arden-Arcade-Roseville	CA	$372,900	-1.20%	-5.10%
95	Los Angeles-Long Beach-Glendale	CA	$412,900	-1.60%	-6.30%
96	Nassau-Suffolk counties	NY	$461,300	-2.00%	-4.20%
97	Riverside-San Bernardino-Ontario	CA	$362,800	-2.60%	-6.80%
98	Santa Ana-Anaheim-Irvine	CA	$682,300	-3.10%	-6.10%
99	San Diego-Carlsbad-San Marcos	CA	$598,700	-3.40%	-5.70%
100	Las Vegas-Paradise	NV	$296,000	-7.90%	-5.00%

What happened? What's being done about it?

Mon, 05 Jan 2009 13:44:00 -0400

An article written by Benny Kass for INMAN NEWS covers the financial "melt down", some of its causes and an insight into current and proposed "fixes" in place. It's news you will find interesting, informative and useful in looking ahead to 2009 and beyond. Some things you NEED to know NOW.

Problems can creep up in foreclosures, HOAs, sales contracts

Benny L. Kass

Inman News

Another phrase has been added to the real estate lexicon: "mortgage meltdown."

Many of us used to call some of the practices that led to the meltdown "predatory lending." But because most of the people who were preyed upon were poor, uneducated and often minorities, our national leaders largely ignored the problem. We kept hearing that no one really could define the concept of "predatory."

But now that millions of Americans are facing foreclosure, governments at all levels are trying to find solutions. Recently, President Bush announced that his administration has brokered a deal with the mortgage industry whereby certain loans would be frozen for up to five years. Certain adjustable-rate mortgages that were originated between Jan. 1, 2005, and July 30, 2007 -- and were scheduled to be increased between Jan. 1, 2008, and July 31, 2010 -- would remain at the original rate. According to Bush, the government "should not bail out lenders, real estate speculators or those who made the reckless decision to buy a home they knew they could never afford. Yet there are some responsible homeowners who could avoid foreclosure with some assistance. …"

Accordingly, a private-sector group of lenders, loan servicers and mortgage counselors have created the "HOPE NOW Alliance," whose function is to help "struggling homeowners find a way to refinance" their existing subprime or adjustable-rate mortgage. (For more information call 1-888-995 HOPE, or visit www.hopenow.com.)

The tax code has been a major problem facing homeowners who arrange with their mortgage lender to forgive a portion of their debt. To add insult to injury, our tax laws required those taxpayers to pay income tax (called "phantom income") on the money they did not have to pay their lender.

Congress finally got its act together and on Dec. 20, President Bush signed into law a temporary change to the tax code. For the period Jan. 1, 2007, through Dec. 31, 2009, homeowners will not have to pay tax on any debt that is cancelled.

The law does not protect speculators or investors. It applies only to principal residences -- that is situations where the taxpayer has owned and lived in the house for two or more years. And only the original loan can be cancelled debt free; if you have a second deed of trust (mortgage) the "phantom income" tax will still apply.

The law also extended the right to deduct private mortgage insurance for three more years.

All of these actions will help solve the current "mortgage meltdown" crisis. But as we enter into a new year, there are other real estate issues confronting consumers. Here are some New Year's resolutions Iam recommending for legislators, lenders, appraisers, title companies, and -- most important -- consumers.

Are you are in the market to buy a house (whether it is a single-family, condominium or cooperative)? Shop around for your mortgage. Many new-home builders will offer you a cash discount if you use the lender's "preferred lender" and its "preferred title company." Sometimes these discounts are worthwhile, but sometimes the extra charges imposed by that lender and the title company exceed the amount of the discount. You may be able to save more money by using your independent lender and title company -- even without the discount.

Are you thinking about buying into a community association -- whether it is newly developed or an existing property? Read the legal documents carefully. In many jurisdictions, a seller of a condominium unit or homeowner-association house must provide you with a package of documents, including the operating rules and regulations, the budget, and an updated financial accounting. This is important information. Especially today, when delinquencies and foreclosures are on the rise, you want to assure yourself that the association is in good financial shape. The last thing you want is to learn -- shortly after you become a member of the association -- that there will be a large special assessment to cover any shortfall.

Are you planning to capitalize on the financial problems of others? There are a lot of people who are looking to buy homes either from a bank that has taken title by way of foreclosure or directly from homeowners who are desperate to sell so as to avoid foreclosure. Indeed, many speculators and investors are starting to show up at foreclosure sales hoping to get a good deal.

If this is something you are considering, you must do your homework very carefully. Make sure that you carefully inspect the house. If the current owner is reluctant to give you this opportunity, move on to another property. I have recently been contacted by several investors who bought a house sight unseen, only to learn that the occupants are refusing to move or that when they left the property, they took a lot of the major appliances with them. There is nothing that I can do to help these new homeowners.

You also have to have a complete title search done before you go to closing -- even if you plan to pay all cash. Distressed properties can carry a lot of problems -- such as tax liens, unpaid assessments, or judgments against the current owners.

Are you planning to buy a new-built home from a developer? Is the home ready for occupancy or will the builder complete the house only after you sign a sales contract? If the home has not been finished, your contract must contain an absolute, firm settlement date. Many new-home sales contracts contain what is known as a "force majeure" clause, which basically is a catch-all phrase for developers to say, "Sorry, your house won't be ready for several more months, because of matters outside of my control." I recommend deleting that concept from all new-home (or condominium) sales contracts.

Additionally, most new-home contracts are, in my opinion, completely one-sided in favor of the developer. For example, although the house may not be ready for settlement for several months, you are obligated to get firm financing immediately. Should interest rates increase -- as they may very well in the coming year -- you may be stuck with a monthly mortgage payment that you did not anticipate or cannot afford. You should be required to get a mortgage loan commitment only when the builder is ready to sell it to you. You can, however, get a preliminary letter from your lender (I call it a "comfort letter"), which will satisfy the seller that you are a serious buyer; but this is not a firm loan commitment.

Are you on the board of directors of your community association? If so, is your money secure? This past year, there have been several cases throughout the country where the property manager embezzled millions of dollars of association funds. There are a number of steps that must be taken to protect those funds, such as:

all checks over a certain amount must be co-signed by a board member;

all reserve accounts can be accessed only by two board members, and not the property manager, and

proper insurance coverage must be in place. You should consult your insurance agent for more details.

Finally, I have to repeat my longstanding plea to mortgage lenders. Please simplify your legal documents so that every consumer can understand the terms and conditions that are imposed by the promissory note and the deed of trust. And why not go back to the good old days when potential homeowners had to sign only four documents: the note, the mortgage, the settlement sheet (called a HUD-1) and the Truth-in-Lending statement?

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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