Subscribe to this newsletter! subscribe unsubscribe

Table of Contents

• Extension of tax breaks enacted.
• IRS issues final regulations for domestic production activities deduction.
• Guidance issued for energy efficient commercial building deduction.
• Supply contracts included in tax-deferred exchange were like-kind property.
• IRS explains down payment assistance to home buyers.
• Questions and Answers
• Could your residence be the ultimate tax shelter?
• What are the tax advantages to selling income rental property to a family member?
• Can a single person meet an exception to the rules for time to live in a principal residence if he or she develops a disability and needs to sell the home?
• Can I deduct the loss of trees on my property?
• Will my Mom have to pay income taxes if we buy her portion of our house?
• Do you have other tax issues?
• Subscribe to the Real Estate Tax Letter

Extension of tax breaks enacted.

President Bush signed the Tax Increase Prevention and Reconciliation Act on May 17, 2006.

Here are a few of the provisions enacted:

• Extension of reduced tax rates for long-term capital gains and qualified dividends through 2010.
• Extension of alternative minimum tax relief (increased exclusions) for 2006.
• Extension of increased limit for expensing business assets through 2009.
• Changes in requirements for offers in compromise, including required tax deposits and potential for automatic approval, effective for offers submitted on or after July 16, 2006.
• More children up to age 17 subject to Kiddie Tax, effective 2006.
• More taxpayers eligible to convert regular IRAs to Roth IRAs for tax years beginning after 2009.

You should consult with your tax advisor about how you are affected by this new tax law. Also, be aware that more tax legislation may well be passed during 2006.

Return to Table of Contents

IRS issues final regulations for domestic production activities deduction.

The IRS has issued final regulations for the domestic production activities deduction. Real estate development and construction, engineering and architectural services performed in the United States can qualify for this deduction. The deduction was enacted as part of the American Jobs Creation Act of 2004. The deduction for 2005 and 2006 is up to three percent of the lesser of the taxpayer’s taxable income or qualified production activities income. The deduction is also limited to 50% of domestic W-2 wages. The accounting rules are extremely complex. If the deduction applies to you, consult with your tax advisor for details. (T.D. 9263.)

By the way, there was a severe cutback to the limitation based on wages in the Tax Increase Prevention and Reconciliation Act. Effective for tax years beginning after May 17, 2006, the W-2 wages for the limitation will only include wages relating to production activities.

Return to Table of Contents

Guidance issued for energy efficient commercial building deduction.

Congress enacted a deduction for the costs of improving the energy efficiency of commercial buildings in the Energy Tax Incentives Act of 2005. The provision applies to improvements placed in service after December 31, 2005 and before January 1, 2008. The maximum deduction is $1.80 per square foot of the building when a 50% energy savings target is achieved. A reduced deduction is available when smaller energy savings are achieved.

The IRS has issued guidance explaining how building owners or leaseholders can qualify for the deduction. The taxpayer must get a certification that the required energy savings will be achieved before claiming the deduction. The taxpayer is required to retain the certification as part of its tax records.

The Department of Energy will create and maintain a public list of software that must be used to calculate energy savings for providing the certification. A process is included for software developers who want their software to be included on the list.

(Notice 2006-52.)

Return to Table of Contents

Supply contracts included in tax-deferred exchange were like-kind property.

The Tax Court ruled that supply contracts were covenants running with and appurtenant to real property, so they were like-kind property and not boot. The supply contracts required the owner of a coal mine to supply an electric utility of coal. The exchange was of operating coal mines for operating gold mines. The gold mines had no supply contracts. The IRS tried to segregate the supply contracts from the mines in analyzing eligibility for exchange treatment. (Peabody Natural Resources Co. v. Commissioner, 126 T.C. No. 14 (5/8/2006).)

Return to Table of Contents

IRS explains down payment assistance to home buyers.

The IRS has issued a ruling explaining how an organization that supplies down payment assistance to home buyers can qualify as a tax-exempt charity. If the organization qualifies, a home buyer who receives assistance may treat the amount received as a tax-exempt gift and include the amount as part of the investment in the home.

The IRS has made it clear that if a seller sets up such an organization, it won’t qualify as a tax-exempt charity.

(Rev. Rul. 2006-27.)

Return to Table of Contents

Questions and Answers

Dear readers:

Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" where you should be able to find the answers to most of these questions.

Question

What are the tax advantages to selling income rental property to a family member? I own a rental house that I would like to sell to my son.

I can carry the mortgage myself.

The value of the property is about $200,000.

Answer

There are advantages and disadvantages of selling property to a family member.

You should consult a tax advisor to see if it makes sense in your situation, including the terms of the note.

You should also have an attorney help you with documenting the transfer and deed of trust.

Advantages

Future appreciation and future income from the property won’t be included in your taxable estate, if you have one.

If your son uses the property as a principal residence, he will be able to claim the homeowner exclusion of gain when he sells it in the future.

You will be taxed at the low federal tax rate that currently applies to long-term capital gains (15%, expiring after 2010).

Your son will receive a new depreciable tax base.

You will receive cash that you can reinvest or use for your personal living expenses.

You won’t have to continue maintaining the house, including worrying about whether a renter will damage it.

Disadvantages

You will lose control of the house, including who will own the property after your death.

You will lose the cash flow from renting the property.

Children often don’t honor their obligations to make payments on loans payable to their parents. It’s hard to foreclose on a mortgage from your children.

You should have the house appraised to determine a fair market value for the property and use it for the sales price.

Question

Can a single person meet an exception to the rules for time to live in a principal residence if he or she develops a disability and needs to sell the home?

Answer

Yes. The exception applies to health changes. (Internal Revenue Code Section 121(c)(2)(B).)

Question

I lost a lot of trees in a storm at our residence, and they were not covered by insurance. Can I deduct some amount for them on my personal income tax returns? The same storm flattened about 25 acres of timberland that I was about to harvest last winter. Is this deductible on a tax return for the farm?

Answer

Trees for a personal residence are considered part of the whole property. The casualty loss is measured by the excess of the fair market value of the property before the storm over the fair market value after the storm, limited to the tax basis of the property. You might need to get an appraiser involved. The government allows clean up costs, including removing the trees, pruning damaged trees and replanting as an indication of the amount of the loss.

The loss of trees raised for harvesting is different. The loss is based on the tax basis of the trees.

I recommend that you get professional help to report these deductions.

Question

My wife and I own our home free and clear and my mom is also on the deed. We are going to borrow $20,000 against the house and pay my mother $10,000 to get her name off the deed. Will she have to pay income taxes for this transaction? The finance company says the interest rate will be 12% because of our credit. Can we get a better rate?

Answer

Sales between family members are complex. You should have an appraisal to determine the fair market value of your mother’s share. Assuming it’s $10,000 and that the home is her principal residence, there will be no tax. If the home isn’t her principal residence, the excess of the sales price over her tax basis (tax cost) will be taxable long-term capital gain.

As to the interest rate, my best advice is to shop at other sources, including banks and savings and loans.

---

Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

Return to Table of Contents

Do you know about our other newsletters?

For general tax developments, tax planning ideas, business development ideas and book reviews, subscribe to Michael Gray, CPA's Tax & Business Insight at taxtrimmers.com/subscribe2.shtml.

Have employee stock options? Subscribe to our free newsletter, Michael Gray, CPA's Option Alert! To learn more, visit stockoptionadvisors.com/subscribe.shtml.

Return to Table of Contents

Subscribe to the Real Estate Tax Letter

Did you find this newsletter helpful? If so, subscribe now!

Subscribe to this newsletter! subscribe unsubscribe

Return to Table of Contents

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.