President Bush Signs Housing Act of 2008 with Changes to Tax Free Exclusion on Sale of Home

President Bush signed the Housing and Economic Recovery Act of 2008 yesterday, which contained some surprises.

Reduced Tax Free Exclusions on Sale of Home

The Housing Act included provisions that may reduce the amount of the tax free exclusion available to a taxpayer upon the sale of their primary residence if they had also used the home as a vacation home, second home, rental property, investment property or in their trade or business. These uses are referrred to as "non-qualified use."

Section 121 (121 Exclusion)

The current exclusion falls under Section 121 of the Internal Revenue Code. A taxpayer can exclude up to $250,000 in capital gains (per taxpayer; $500,000 for married couple filing jointly) from their taxable income if they have lived in their home as their primary residence for at least a total of 24 months out of the last 60 months.

Changes under the Housing Act of 2008

The Housing Act of 2008 will now prohibit a taxpayer from excluding part of the capital gain based on the number of years (percentage of total use) that the property was used for non-qualified use such as personal vacation usage or if it was held as rental property. These changes are summarized here.

1031 Exchange Workshop in Irvine, California

07/30/2008
11:30 AM — 2:00 PM

1031 exchange workshop on the requirements, structures, processes, strategies, and compliance issues necessary to successfully complete a 1031 exchange. Continuing education credits available for Realtors, CPAs and CFPs. It's NOT just another 1031 exchange seminar.

Learn more

Intermediate Level
Irvine, California

The Fallout From Starbucks!

Those who are familiar with the commercial real estate market, or those who are 1031 exchange investors that acquire triple net leased properties through their 1031 exchanges, have probably heard about the announcement that Starbucks is closing 600 plus stores, and those who are not in real estate may have heard about it on the news.

It was certainly a surprise to hear that, but once you really think about it there is really no surprise at all. It will have some pretty significant consequences for landlords, developers, 1031 exchange investors, brokers and others.

I just read a blog post by Eric Odum entitled Starbucks: Do Not Foresake Me, Oh My Darling! It is a must read

Combined 1031 Exchanges and 121 Exclusions May Be Changed

This should be good news for the 1031 exchange business, but not for taxpayers.

The House of Representatives has passed the Housing Bill, which has now been sent to the U.S. Senate for debate and vote. The Housing Bill contains a provision that will significantly change the structure of a combined 1031 exchange with a 121 exclusion.

Here is the down and dirty. The current language in the Bill says that a taxpayer can not exclude gain from a sale of property for the time that the property was used for non-qualifying uses (i.e. rental, investment, use in a business, etc.).

This means that if a taxpayer 1031 exchanges into property the gain that was deferred from the 1031 exchange could not be excluded under Section 121.

The U.S. Senate has to pass it and then the President must sign it, so a lot can change between now and then. We will keep you updated.

What Is Cost Segregation?

Cost Segregation Tax Savings Benefit Analysis

If you as a commercial real estate investor have completed a 1031 exchange and the replacement property you purchased cost more than the property or properties you sold, you may be eligible for substantial state and federal tax savings that you can only obtain through a cost segregation study.

A cost segregation study is a strategic analysis that allows owners of commercial real estate to increase their cash flow by accelerating depreciation-related tax deductions. To do so, the study identifies, segregates and reclassifies property costs currently being depreciated over the typical 39-year depreciable period to shorter depreciable periods of 15, 10, 7 or even 5 years. This means you can enjoy tax deductions right now that you’d otherwise have to wait years to receive. So you’ll not only increase the net value of current tax savings, but also boost your cash flow.