Archive for the ‘principal residence’ Tag

Relief if You Paid Tax on a Short-Sale 2011-2013

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.

Unmarried with Children – Head of Household

Originally published in the Cedar Street Times

March 8, 2013

Article on Unmarried People Living Together with Children

I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate.  With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!

When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married.  Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.

Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children.  This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.

For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.

A qualifying child is someone who must generally be under 19 (24 if full-time student).  The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child.  The child cannot provide over half of his or her own support, and the child cannot file a joint return.

Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption.  (If they cannot decide, tie-breaker rules exist.)  Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household.  You cannot split up the benefits between parents.

If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent.  Or maybe one or both have children from prior partners that live with them and could qualify them as well.  (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B.  This also qualifies B for head of household.)

Let us assume both unmarried people living together each have a qualifying child.  Can they both claim head of household?  If their households are maintained in separate dwellings, the answer is almost always yes.  But what if they live under the same roof?  Can you maintain separate households in the same house?

The answer to this depends on whether they are acting as a family unit or not.  IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts  and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single.   But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household.  If you share a biological child as well, it will be nearly impossible for you to make this argument.  But never say never!

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.