December 21, 2007

After the Real Estate Bubble

          burst, the homeowner needs to know the tax strategy for selling real estate at a loss.  Since 1990, the real estate market has moved in one direction, up.  Now we need to revisit the strategies last used 17 years ago, after the last real estate downturn.
          A tax loss is generally not allowed for tax purposes on the sale of a personal residence.  A tax loss is only allowed if the taxpayer is treated as having converted the home into business or income producing property.  This is easier said than done.  The IRS is not overly inclined to recognize such a purported transformation.  Whether a former personal residence has been converted to income producing property qualifying for a loss deduction is a question of fact.
          The Supreme Court has said a conversion to income producing purposes at the time of a sale must be shown by acts which specifically devote the property to business purposes.  This may likely include any business act or operation, which devotes the property exclusively to the production of taxable income, such as renting the property.
          While no single factor is definitive and all the facts and circumstances must be considered, five factors often considered by the IRS and the courts are:

1. the length of time the house was occupied as the individual’s residence before placing it on the market for sale,
2. whether the individual permanently abandoned all further use of the house,
3. the character of the property (recreational or otherwise),
4. offers to rent, and
5. offers to sell.

          While it is sometimes hard to extract basic principles from cases that reach contradictory results, these are a few guidelines that should be followed:

• discontinue any and all personal use of the residence
• treat the rental of the property as any other serious business enterprise (keep proper business records, have a business plan that projects income and expenses, etc.)
• actively attempt to rent the property (list it with a real estate broker, advertise, etc.)
• rent the property at its fair market value to unrelated third parties, if possible
• employ a straightforward lease
• treat as income producing property on the taxpayer’s tax return reporting income and claiming appropriate deductions.

          The tax loss available to an individual converting a home into investment property may be smaller than expected because the basis is equal to the lesser of the actual cost or fair market value when it is converted to a rental property. Federal Tax Weekly Alert 8/23/07 p.405

Same Sex Divorce

          Just as I said in a previous newsletter, same sex marriage brings same sex divorce.  Thank goodness, say I, lawyer that I am.
          A lesbian couple from Rhode Island married in Massachusetts argued that they should have the same right as heterosexual couples to divorce in their home state.
          But, Rhode Island law is silent on the legality of same sex marriages.
          Lawyers for the women told the Supreme Court the only question to consider was whether Rhode Island could recognize a valid same sex marriage from another state for the sole purpose of granting a divorce petition.  They stressed the case has no bearing on whether homosexual couples can get married in Rhode Island.
          Attorney General Patrick Lynch, earlier this year issued a non-binding advisory opinion saying the State would recognize same sex marriages performed in Massachusetts.
          The litigation and fees go on.
          Stay tuned! N.Y. Sun 10/10/07

We hope you take the time to enjoy family and friends during the holiday season
and
Have a safe, healthy and Happy New Year.

       

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