2011 federal tax update
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2011 Federal Tax Update. Real Estate & Investment. New Tax Legislation. Real Estate Tax News. Landlord’s 1099 reporting repealed Repeal retroactive to 1/1/11 TIGTA tells IRS to audit more rentals 53% of landlords misreport income $12b of unreported income

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2011 Federal Tax Update

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2011 federal tax update

2011 Federal Tax Update

Real Estate & Investment

New tax legislation


New Tax Legislation

Real estate tax news

Real Estate Tax News


  • Landlord’s 1099 reporting repealed

    • Repeal retroactive to 1/1/11

  • TIGTA tells IRS to audit more rentals

    • 53% of landlords misreport income

    • $12b of unreported income

    • IRS agrees to audit more rental activities

  • Passive loss Form 8582 instructions to be revised





First time homebuyer credit update

First Time Homebuyer Credit Update


  • 2008 Credit payback began in 2010

  • IRS sending reminder letters

  • Reminder: Allowed for purchases through April, 2011 for

    • Extended duty military

    • Foreign service

    • Intelligence community workers

Gain on sale of residence


Gain on Sale of Residence

The $250,000/$500,000 MFJ

Exclusion Rule

The exclusion rule

The Exclusion Rule!


  • $250,000 (or $500,000 if married filing joint) of gain is excluded on sale (or exchange) of principal residence if:

  • Owned for two of last five years,

  • Occupied for two of last five years, and

  • No sale in last two years

How to exclude 500 000

How to Exclude $500,000!


  • Either spouse owns 2 out of 5 years

  • Both spouses use 2 out of 5 years

  • Neither spouse excluded gain in last 2 yrs

  • Must file “Married Filing Joint”

Is this Jessie?

Surviving spouse may qualify for 500 000 exclusion

Surviving Spouse May Qualify for $500,000 Exclusion


  • $500,000 exclusions applies if

    • After 12/31/07

    • Sale within 2 years of death of spouse

    • Immediately prior to death

      • Either spouse owned 2 out of 5 years

      • Both spouses used 2 out of 5 years

      • Neither spouse excluded gain in last 2 yrs

Is this Jessie?

Recent court cases

Recent Court Cases


  • 50% owner gets 100% of exclusion (Hsu)

  • Divided court says must live in house to qualify for exclusion (Gates)

Is this Jessie?

No exclusion for prior non qualified use

No Exclusion for Prior Non-Qualified Use


  • Substantial limitation on vacation homes

  • Gain must be prorated, S/L for qualified & non-qualified time

  • Non-qualified: time not principal residence

  • Non-qualified time doesn’t include:

    • After use as principal residence before sale

    • Temporary absence (up to two years)

Example rent 2 yrs use 3 yrs

Example: Rent 2 yrs; Use 3 yrs


Example rent after personal use

Example:Rent after Personal Use


Example gain before 2009

Example: Gain Before 2009


Qualification for the reduced exclusion rule

Qualification for The “Reduced Exclusion” Rule


  • Homeowner Violates:

    • 2 Year Ownership Rule, or

    • 2 Year Use Rule, or

    • Only Once in Last 2-year rule

  • Because of:

    • Change in Place of Employment

    • Health, or

    • IRS’s “Unforeseen Circumstances”

Converting residence to rental

Converting Residence to Rental


  • Can you convert a personal residence to a rental property? Yes!

  • But watch out –

    • Basis is the lower of cost or FMV at date of conversion

    • Losses resulting prior to rental are not deductible

2011 federal tax update


Foreclosures on the rise

Foreclosures on the Rise


  • Nevada, Arizona, California &Florida still leading the way

    • (RealtyTrac.com)

  • More than 1,000,000 foreclosures in 2010

Cod exceptions

COD Exceptions


  • Excluded by law, e.g., gifts & bequests

  • Qualified student loan COD

  • Cancelled debt would have been deductible

  • Qualified purchase price reduction

Cod exclusions

COD Exclusions


  • Qualified principal residence debt

  • Bankruptcy COD

  • Insolvency COD

  • Qualified Farm COD

  • Qualified real property business COD

Foreclosure results in cod

Foreclosure Results in COD


  • Reduction in debt taxable as ordinary income

    • Form 1099-A (foreclosure sale), but not needed if foreclosure and COD in same year

    • Form 1099-C (loan reduced)

Mortgage modification

Mortgage Modification


  • Foreclosures

  • Deed in lieu

  • Mortgage workout

Foreclosure results in cod1

Foreclosure Results in COD


  • Foreclosure

    • Even a forced sale is a taxable sale

Nonrecourse vs recourse debt

Nonrecourse vs. Recourse Debt


  • Nonrecourse debt (not personally liable)

  • Recourse debt (personally liable)

Foreclosure of nonrecourse debt

Foreclosure of Nonrecourse Debt


  • Sales price = nonrecourse debt

    • Result: No COD

  • Home acquisition debt in 14 states often non-recourse (CA, MT)

    • But, be careful! A refinance changes status of debt

Foreclosure of nonrecourse debt1

Foreclosure of Nonrecourse Debt


Foreclosure of recourse debt

Foreclosure of Recourse Debt


  • Recourse debt must be bifurcated

    • Amount of cancellation of debt &

    • Gain/loss on sale

  • COD income results

  • Refi’s are often recourse debts

Foreclosure of recourse debt1

Foreclosure of Recourse Debt





  • Calculates COD income for

    • Foreclosures

    • Repossessions

Property type matters

Property Type Matters


  • Business, investment or personal

    • Business = ordinary loss on sale

    • Investment = capital loss on sale

    • Personal = non deductible loss on sale

    • What did you do with the money?

Foreclosure of business property

Foreclosure of Business Property


  • Calculate COD

    • Loan less COD

  • Calculate gain or loss on “sale”

    • FMV at foreclosure is sales price

  • Character of gain or loss same as if property sold

Sharon loses las vegas rental

Sharon Loses Las Vegas Rental


Bill loses phoenix rental

Bill Loses Phoenix Rental


Short sale

Short Sale


  • House sold, not enough to pay off bank

  • If “short pay” forgiven by bank, COD results (Stevens)

  • Bank files Form 1099C

108 exceptions to cod income

§108 Exceptions to COD Income


  • Bankruptcy

  • Insolvency

  • Farm debt for solvent farmer

  • Seller financing

  • If payment of liability creates a deduction

  • Discharge of real property business debt

  • Bona fide dispute

  • Qualified home acquisition debt




  • Exclusion does not apply to a debtor in a bankruptcy case

    • The bankruptcy exclusion rules apply

    • Taxpayer may choose insolvency exclusion




  • Taxpayer insolvent to extent liabilities exceed assets

    • Includes house, pension, IRA, autos, furniture, tools, etc.

  • How to calculate insolvency worksheet

  • Pub. 4681

Reduction of tax attributes

Reduction of Tax Attributes


When COD non-taxable, reduce tax attributes in the following order

  • NOLs

  • General business credits

  • AMT Credits

  • Capital losses

  • Basis reduction

  • Passive activity losses

  • Foreign tax credits

Qualified residence debt exception under 108

Qualified Residence Debt Exception Under §108


  • Must meet two requirements

    • Qualified principal residence

    • Qualified home acquisition debt

Principal residence

Principal Residence


Requirement #1: Qualified Principal Residence

  • Same definition as §121

  • Not available for vacation homes, rentals or investment properties

Qualified acquisition debt

Qualified Acquisition Debt


Requirement#2: Original or refinanced debt used for

  • Acquisition, construction or improvement of principal residence

  • Secured by the principal residence

  • Limited to recourse debt under $2 million

  • Mortgage workout debt relief qualifies

Only portion is acquisition debt

Only Portion is Acquisition Debt


  • Ordering rules are required if acquisition debt less than total debt relief

  • Any forgiven home equity debt not used for improvements cannot be excluded

Mortgage debt forgiveness facts checklist

Mortgage Debt Forgiveness Facts/Checklist


  • Must be principal residence

  • Must be acquisition indebtedness

  • Homeowner not bankrupt

  • Homeowner not insolvent

  • Cancellation is not for personal services

  • See Interactive COD calculator on IRS website

Reduce basis of residence

Reduce Basis of Residence


  • Basis of home is reduced by the amount of excluded income

    • Turns ordinary income back into capital gains

Passive activities


Passive Activities

469 passive loss overview

§469 Passive Loss Overview


  • Passive losses only deductible to the extent of passive income

  • Excess losses carried forward

  • Current year passive income may be offset by prior year passive losses

  • Losses are allowed if

    • Complete disposition

    • To unrelated party

    • In taxable transaction

What activities are passive

What Activities Are Passive?


  • Rentals, regardless of level of participation

  • Trade or business, if no material participation

Irs issues 7 rental activity tips

IRS Issues 7 Rental Activity Tips


  • Income reported when received

  • Advance rent reported when received

  • Security deposits not taxable unless kept

  • Property or services in lieu of rent taxable

  • Expenses paid by tenants are income

  • Expenses pertaining to rental deductible

  • All personal use must be pro rated

Rental activities that aren t

Rental Activities That Aren’t!


  • Avg. stay < 7 days

  • Avg. stay < 30 and significant services

  • Extraordinary personal services provided

  • Rental is incidental to non-rental activity

    • Rent to employee at employer convenience

    • Rents < 2% of lesser of basis or FMV

  • Non exclusive use by customers

  • Rental to entity owned by landlord

Why identify activities

Why Identify Activities?


  • Determine if a rental activity

  • Determine if taxpayer materially participates (Sidney Shaw)

  • Determine whether or not complete disposition has occurred

  • Apply pre enactment transitional rules

Considerations when grouping activities

Considerations When Grouping Activities


  • Similarities & differences of businesses

  • Common control of businesses

  • Common ownership between businesses

  • Geographical locations of each business

  • Interdependencies between businesses

  • Also, any other “reasonable method” to determine “appropriate economic unit”

    • Consistency from year to year is required

Statement required to group

Statement Required to Group


  • Grouping election must be annually attached

    • Original grouping rule: 1st year 2nd activity purchased

    • Existing grouping rule: Each year another activity added to or deleted from group

    • Regrouping rules: Original grouping was inappropriate or material change in facts and circumstances

Other provisions of new grouping rules

Other Provisions of New Grouping Rules


  • Activities treated as separate if no grouping election

  • Late election may be available if

    • Timely disclosure made by taxpayer

    • All relevant tax returns filed consistent with desired activity groupings

    • Disclosure is made on tax return in year omission is discovered

      Reasonable cause required if IRS discovers

Passive loss cases

Passive Loss Cases


  • Limited partner may MP

    • 500 hour or

    • 5-of-the-last-10-years or any 3 year personal service activity

  • LLC members not LPs per se (Newell, Garnett, Gregg, Thompson,)

    • IRS says “we quit” - AOD issued

Real estate professional

Real Estate Professional


  • Rental real estate is owned

  • The 50% test

  • The 750 hour test

  • The real estate businesses

    • Development, redevelopment , conversion, construction , reconstruction, acquisition

    • Rental & leasing

    • Operation & Management

    • Brokerage

  • Materially participate

Time test is different

Time Test is Different


  • 50%/750 hour test

    • Either spouse may be RE professional

    • But spouses time may not be combined (Goolsby)

    • Must be >5% owner to count time (Bahas)

    • On-call time doesn’t count (Moss)

  • Material participation test

Material participation for re pro

Material Participation for RE Pro


  • Managing rentals >500 hours

  • Substantially all the work (70%?)

  • Managing 100 hours and no one does more (including property manager)

  • Spouse’s time “tacks”

  • Time that doesn’t count

    • Work not customarily done by owner

    • Counting only the money

What is brokerage

What is Brokerage?


  • IRS argues only brokers can do brokerage, not agents

  • Tax Court disagrees (Agarwal )

    • Brokerage is bringing buyer/seller together

    • Brokerage is not a licensed qualification

  • RE agents/salespersons can qualify for real estate professional relief provision

Aggregation of business and rental by r e professional

Aggregation of Business and Rental by R.E. Professional


  • Each rental a separate activity

  • Unless election made to combine rentals

    • (§469(c)(7)(A))

  • File election in year rental purchased

  • Can be done late, with IRS permission

Real estate professional cases

Real Estate Professional Cases


  • Bed and Breakfast not a real estate activity (Todd and Pamela Bailey)

  • Vacation rental not a real estate activity (Bruce and Judy Bailey)

  • Real estate professional Donald Trask forgot to make §469(c)(7)(A) election

  • Full time engineer misunderstands, and then fails 50% test (Yusufu Anyika)

  • Denelda Goolsby made §469(c)(7)(A) election but time records not credible

Recharacterization required

Recharacterization Required


  • Certain property developed by TP and sold for a gain

  • Renting property to own business

    • Unless written binding contract before 2/19/88 (Farris)

  • Significant participation passive activity net income

  • Qualified working interest in gas and oil

  • Rental from “raw land” (less than 30% depreciable)

  • Passive equity-financed lending activity

  • Intangible property leased by pass-through entity

  • Sale within 12 months of conversion to passive

  • Sale of “substantially appreciated” property

  • Income from a “dealers” investment property

No recharacterization

No Recharacterization


No recharacterization1

No Recharacterization


No recharacterization2

No Recharacterization


Recharacterization required1

Recharacterization Required


  • Renting property to taxpayer’s own business

    • Dental office rented to S Corp. Michael Willock v. Comm.

    • C Corporations - see Gary Beecher v. Comm.

    • S Corporations - see Tony R. Carlos v. Comm.

Passive loss trigger requirements



  • Dispose of entire interest

  • Fully taxable transaction

  • To unrelated party

Weird passive loss dispositions

Weird Passive Loss Dispositions


  • Death: basis increase eliminates losses

    • Only basis decrease triggers loss

  • Installment sale: PAL as gain reported

  • Gift/divorce: Add loss to basis

  • Bankruptcy: COD relief reduces PAL

  • Single activity election: last one sold

2011 federal tax update


1031 overview

§1031 Overview


  • Productive use in trade or business or investment

  • Gain recognized to extent boot received

  • Net mortgage relief is boot

  • Boot is decreased by exchange expenses

  • No actual or constructive receipt (Crandall and Dulin)

Qualified use requirements

Qualified Use Requirements


  • Productive use in trade or business or investment

  • Problem: Personal residence

  • Problem: Vacation homes

  • Problem: Property acquired for exchange

Delayed exchange overview

Delayed Exchange Overview


  • 45 days to identify

  • 180 days to complete exchange

  • Filing on time may reduce the 45/180 time limits

Problems with delayed exchange

ProblemswithDelayed Exchange


  • Miss 45/180 deadline? Gain recognized

    • Even if cash already spent on new property

  • Risks include

    • Death of any party to exchange

    • Divorce of buyer or seller

    • EPA or financing problems

    • Qualified Intermediary steals money (It’s an installment sale! Rev. Proc. 2010-14)

Related party exchanges

Related Party Exchanges


  • Original exchange not qualified for §1031 if either property disposed of within 2 years

    • Using accommodator didn’t help (Ocmulgee)

  • Exceptions

    • Death, involuntary conversion or other non-tax-avoidance purpose

    • Diminish risk of loss

Related party exchange case

Related Party Exchange Case


  • OFI transfers shopping center (w/$6 million gain) to accommodator

  • OFI indentifies commercial property owned by Treaty Fields (a related party)

  • Accommodator sells shopping center

  • Court says OFI-Treaty exchange occurs first followed by Treaty selling w/2 years

  • Treaty’s sale triggers OFI’s $6M gain!

Thank you

Thank you!

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