Archive for the ‘Internal Revenue Service’ Tag
Relief if You Paid Tax on a Short-Sale 2011-2013
Filed under: Foreclosures and Short-Sales, Residence Sale | Tags: 580(b), 580e, anti-deficiency, Barbara Boxer, California, cancellation of debt, Chief Counsel, debt, exclusion, Foreclosure, Franchise Tax Board, FTB, Internal Revenue Service, IRS, nonrecourse, principal residence, qualified debt, qualified principal residence indebtedness, recourse, refund, section 121, Senate bill 458, Senate bill 931, Short-Sale
Leave a comment Originally published in the Cedar Street Times
February 21, 2014
Hopefully we are nearing the end of the short-sale and foreclosure saga that has continued since 2008. My litmus test based on tax return filings is indicating that things are much closer to being back on track. Prior to 2008, it was all about 1031 exchanges. Those turned off like a faucet when the markets crashed, and then short-sales and foreclosures took center stage. I have seen those tapering off over the last couple years, and I am starting to see 1031 exchanges again. The cycles continue!
But before we leave short-sales and foreclosures in the dust, there is a possible silver-lining handed down by the IRS and FTB in the last few months. Taxpayers that generated income tax as a result of a short-sale in California on their principal residence, retroactive to January 1, 2011, may be entitled to a refund.
California Code of Civil Procedure Section 580b has been dubbed California’s “anti-deficiency laws” for years. It had a positive effect on homeowners because it basically said if you had never refinanced your home and you lost it in a short-sale or foreclosure that you could not be pursued for the balance you still owed (the deficiency), and the remaining debt would not be taxable income to you because the debt was considered nonrecourse debt.
This, however, left many people out in the cold that had refinanced. Suddenly, it was a different ball game if you had done a refinance (and who didn’t during the run of good years up through 2007!?), and the debts were then allowed by lenders to be treated as recourse debts and they could pursue your personal assets. Alternatively they could cancel the debt if it was not worth pursuing, leaving you with taxable income for the amount cancelled.
Congress stepped in (and California generally conformed) during the housing crisis and enacted favorable legislation which said you could exclude cancellation of debt income generated by your personal residence. The catch, however, was that the debt had to be “qualified debt.” In short, if you lived off the equity in your house by refinancing to pull cash out and did anything with it other than improve the property, then you were not eligible for the exclusion on that portion and would still have to pay tax.
Then, a few years ago, California passed Senate bills 931 and 458 which were codified into law as California Code of Civil Procedure Section 580e as of January 1, 2011. This resulted because some unscrupulous lenders were entering into short-sale agreements to allow sellers to go through with the sale of their property for less than the amount owed to the bank, but then still pursuing the seller for the remaining debt after the fact (often a big surprise to the seller). California’s enactment of this law was good news for homeowners because it basically said, even if you had refinanced, but had entered into a short-sale agreement with a lender, then you could not be pursued for the remaining balance owed and that lenders would basically have to cancel the debt. Of course, cancelling the debt could mean tax was owed, but that was still better than being pursued for the remaining balance!
Finally, in November 2013 a letter from the Office of the Chief Counsel at the IRS written to Senator Barbara Boxer, due to an inquiry from her, stated that the IRS would treat any debt pursuant to California’s 580e as nonrecourse debt! The Chief Counsel’s office at California’s Franchise Tax Board followed up with their own letter a month later saying they will conform to the IRS interpretation.
This means that anyone who filed a tax return in 2011 or 2012, or even this year, and reported cancellation of debt income related to the short sale of a principal residence, should consider filing an amendment for a possible refund. It is still possible to have income tax, primarily if you did not live in the house for two of the last five years prior to your short-sale. The reason is that when a home is disposed of with nonrecourse debt, the total amount of debt outstanding at the time of the short-sale becomes the sales price of the home. You then subtract your cost basis, and the difference is your gain on sale. However, if you lived in the home for two of the last five years, then you get a $250,000 gain exclusion for filing as a single status, and $500,000 gain exclusion if married filing jointly, pursuant to IRC Section 121.
You need to act on this during the next year if your short sale was in 2011 as the statute of limitations expires three years after filing.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Happy 100th Birthday Federal Income Tax?!
Filed under: General, Tax Collections | Tags: 100 years, 16th Amendment, 1913, Abraham Lincoln, apportioned, Civil War, Commissioner of Internal Revenue, Congress, direct taxes, excise taxes, Federal Income Tax, Internal Revenue Service, ratification, Sixteenth Amendment, Supreme Court, tariffs, Tax rates, unconstitutional, Woodrow Wilson
Comments (2) Originally published in the Cedar Street Times
October 18, 2013
On October 3rd, our nation’s federal income tax turned 100 years old. Usually lots of people show up for anyone turning 100, but sadly, for the federal income tax, there was no grand party. In fact, most of its closest friends – the 106,000 employees of the Internal Revenue Service were at home due to the government shutdown! Americans celebrating the federal income tax would be lackluster at best – maybe on par with the excitement of throwing a party for your boss. But let us at least pay some tribute to this system and perhaps gain a little more perspective
The roots of the income tax go deeper than 1913. Abraham Lincoln set up the first income tax in 1862 in order to finance the Union efforts in the Civil War, and he established a position called “Commissioner of Internal Revenue” to handle this job. The tax was a temporary tax and expired in 1872. It provided about 21 percent of the cost of the war efforts, and about 10 percent of Union households were touched by the income tax.
Tariffs and excise taxes were the typical means of generating most revenue before and after the Civil War, but the country was looking for a better system. In 1894, Congress tried to reenact the income tax but it was shot down by the Supreme Court which declared it unconstitutional. The Constitution basically said that direct taxes had to be apportioned to the states based on relative population. An income tax clearly violated that since it was not divided out based on population but different to each person based on each individual’s income.
During the early 1900s, there was a growing movement by the people in support of a permanent income tax that would mainly be levied on wealthy individuals. Tariffs and excise taxes hit low and middle income people squarely on the shoulders since a much higher percentage of their total income was taxed as a result. The only way to have an income tax, however, was by laying the groundwork to make it constitutional via an amendment.
Three main campaign issues defined the election of 1912: monopolies, women’s suffrage, and tariffs. Woodrow Wilson wanted to break up monopolies, he dodged women’s suffrage by saying it should be decided at the state level, and he wanted revenue reform. He was elected with nearly 82 percent of the Electoral College vote and the next year the 16th amendment was ratified which states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
I have a facsimile on my office wall of the first income tax return in 1913. It was three pages long with one page of instructions (2012 instructions were 214 pages by comparison). Adjusted for inflation in today’s dollars, if you made less than $70,000 as a single individual, you had no income tax liability. If you made between 70,000 and $465,000, you were assessed a one percent income tax! The top bracket was only seven percent, and assessed to those filers making over $11.6 million in today’s dollars.
Compare that to 2013…our bottom tax bracket is 10 percent assessed on single individuals making between $10,000 and $18,925, and our top bracket is 39.6 percent assessed on individuals making over $400,000. In fairness to history, after the first three years tax rates started rising and they skyrocketed during World War I when the top bracket hit 77 percent on earnings over $15 million in today’s dollars.
Since 1975, there have been dozens of court cases from crafty people trying to figure out how they can get out paying income taxes. The cases involve everything from claims that ratification procedures of the sixteenth amendment in certain states were not properly followed right down to claims that differences in punctuation and capitalization marks in versions ratified by the various states means the ratification was null and void. None of the ratification cases have ever been victorious and the courts have ruled ratification arguments are now frivolous or fraudulent.
The federal income tax is quite resilient, and has spent its entire life being pulled in many directions. I am sure it will soon get over any hurt feelings from not having a 100th birthday party as did the Department of Labor, the U.S. Forest Service, and the National Archives. Maybe on its 200th birthday it will get a cake.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 