Sally Nelson and her team of tax specialists at Nelson & Nelson provided me with some very valuable tax updates today.  I was very excited to see that these updates apply directly to real estate and home ownership.  I contacted Nelson & Nelson CPA's and asked their permission to share their tax update with you in my blog and they happily agreed.

Year End Tax Update

Before year end we want to expand on our discussion of the new homebuyer tax credit provision that we touched on in a previous letter.  It is a new and untried concept, so there will probably be unforeseen situations that will need to be worked out as they arise, but for now - this is what is known! 
First-Time Homebuyer Tax Credit
The important thing to remember about this interesting provision, is that it is really a government loan that taxpayers can use to finance a home purchase.  There are many stipulations:
1)  The definition of "first-time" is that the taxpayers did not own a residence during the 3 year period before the purchase.
2)  Residence means principal residence - not a vacation or second home.
3) The benefit is phased out at certain modified adjusted gross income levels
            Single taxpayers                             $75,000-$95,000
            Married taxpayers, filing joint       $150,000-$170,000
4) So far this only applies to houses purchased after 4/9/08 and closed  before 7/1/09, however a house bought in the 2009 period can be claimed on a 2008 extended or amended return, to accelerate the receipt of cash.
5) The credit is limited to the lower of $7,500 ($3,750, for married filing separate) or ten percent of the purchase price (e.g. a $60,000 house would result in a credit of $6,000)
The way it would work is that taxpayers would claim the credit on the tax return for the year of purchase.  It would first be applied to any tax on the return.  Any extra, not needed to pay tax, would be refunded.  If the taxpayer had other credits and withholdings to pay his/her tax, all the credit would go into the refund.   This credit-loan would have to be paid back, over a 15 year period starting the 2nd year after the credit was taken.  It would get paid back as an addition to the taxes owed for those 15 years.  The good thing is that it is interest free.  As an example, if $7,500 were taken in 2008, an additional $500 would get added to the tax bills for 2010-2024.
 So, what happens if....
       The taxpayer dies?    Payback ceases, the surviving spouse owes just ½ the balance.
       The taxpayers get divorced?  Payback is the responsibility of the spouse receiving the home.
       The house is sold?  Payback is completed in year of sale, however the payback cannot be more than the gain on the house.
        The house is bought from a close relative?  The credit does not apply.
This could be a very advantageous benefit for qualifying taxpayers.  

Other Real Estate Provisions. 
 On the 2008/9 returns, taxpayers can deduct up to $500 (if single) or $1,000 (married, joint) of real estate taxes in addition to their standard deduction.  Normally this is only a benefit for itemizers.  
As you know, a gain on the sale of a personal residence is excluded from tax if less than $500,000 ($250,000 if single), as long as the taxpayers have lived in it for 2 out of the last 5 years. If the house had also been used for business or rental, the depreciation taken was recaptured as taxable income at the time of sale, but otherwise the entire gain was excluded.  Now, beginning with 2009, any business use after 1/1/09 will require that the gain be apportioned between personal and business, with the business portion not being eligible for exclusion.  So that means keeping track of those home improvements again, to establish basis if needed. 

Mineral Rights Transactions  
      Whether the sale or lease results in capital gain or ordinary income depends on the nature of the transaction:
     1) Outright sale of the mineral rights on a piece of land is a capital gain transaction.  The gain will be the full amount of the sale, because ordinarily the basis of mineral rights is "0", unless determined at the time of purchase.
    2) If the rights are leased, the landowner receives royalty income, which is ordinary income.  A depletion deduction is allowed.
    3) A sale of right-of-way or easement, that is perpetual and can never revert back to the grantor, is a capital gain transaction.
    4) A payment for use of surface land is rent (ordinary income)
    5)  A working interest in an oil or gas well is considered business income, subject to self-employment tax.