Home Sweet Homestead

I have been getting lots of questions about homestead tax lately. People want to know where to claim it on their 1040, how much money they will get back on their taxes from "homesteading", whether homestead taxes are deductible...there just generally seems to be a lot of confusion.

First, a homestead is a classification given to a piece of property you own. Generally it means that a particular piece of property is your principal and primary residence, i.e. your homestead.

Second, there are no homestead taxes. Rather, the designation of a piece of property as your homestead enables you to 1) exempt a portion of the property's value from local real estate taxes and 2) limit the appreciation on your assessed value to a specified percentage each year. In highly appreciating real estate markets this is the biggest value to the homestead exemption. By capping the annual appreciation your property taxes are kept from running out of control as property values in your area go through the roof.

Third, IRS has no part in your homestead exemption. However, in tax matters where a principal residence argument is being made or in which state income taxes depend on the state of residence the location of your 'homestead' can play a key role.

Fourth, homestead exemptions are granted at the county level. The county property appraiser will usually specify a list of documents or criteria that helps them insure you are in fact using the property as your principal residence. For more information on Manatee County homestead requirements visit Sarasota County residents can visit this site.

One final note. Home buyers should be careful when trying to estimate property taxes on a potential real estate purchase. If past property taxes are used as a guide and the property has been homesteaded for a long period of time the taxes will be fairly low due to the annual appreciation cap.The homestead exemption does not carry from one property owner to another when that property changes hands. Expect the tax assessor to revalue the property closer to current fair market value after the sale takes place.

If you have questions about homesteading property give me a call.

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Unforseen circumstances and home sale gain exclusion

For several years home owners have enjoyed the exclusion of up to $500,000 of capital gains upon sale of their primary residence ($250,000 for single taxpayers). This exclusion applies if the home has been the taxpayer's primary residence for at least 2 of the last 5 years. But what happens if you sell your primary residence before reaching the 2 year mark? Recent private letter rulings provide some hope for people caught in this predicament.

While private letter rulings cannot be used as precedent to argue your case before IRS they do indicate the Service's thinking on certain matters. In this case several very different scenarios were reviewed by IRS and the taxpayer was allowed to exclude a portion of the home sale gain from taxation. The cases at issue involved...

  • A couple who moved because they found they had purchased in a VERY bad neighborhood. Note that one of the taxpayers and the taxpayers' child were assaulted so don't consider using this as a broad argument to move into a more desirable area. IRS probably won't buy it.

  • A family who moved to keep their children in the same school district. The family kept the previous home and rented it out because they planned to move back there eventually. When the family expanded the old home was too small and they sold it. A portion of the gain on this sale was able to be excluded.

  • A couple who was forced to sell their home in an age restricted retirement community because their daughter and grandchild had to come live with them and were not old enough to live in the community.

All of these cases appealed to the "unforeseen circumstances" provision of Internal Revenue Code Section 121(c). IRS provides several 'safe harbor' situations that are automatically deemed to qualify as unforeseen circumstances. These include death, divorce or involuntary conversion of the residence. Additionally, the law allows IRS to designate other events as unforeseen. The above cases are examples of such designations.

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Cost to extend temporary tax cuts

Busweek_tax_breaksThis is an intersting table pulled from the Dec 26th issue of Business Week. It highlights the cost of extending several tax breaks set to expire over the next few years.

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The good kind of procrastination

When you read the January newsletter you'll see that I'm a big fan of David Allen's book "Getting Things Done." David's own blog highlights an interesting article on procrastination by Paul Graham. It's not always what you're doing that makes the difference, more often than not it's what you're not doing.

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Tax Law Changes…not really

Not much new happened in 2005 and there won't be much different about 2006. Some of the more prevalent changes are highlighted below.

Uniform definition of a child for purposes of determining the dependency exemption, head of household filing status, the earned income credit, the child tax credit and the credit for daycare expenses. In the past each of these had their own definition of 'child' and sometimes they were at odds with one another. Now a four part test applies to each. To qualify as a child the individual must meet the age, relationship, support and residency tests. Overall this is a good thing since it makes the job of tax return preparers a little easier.

Mileage rates increased as usual but this year the spike in gas prices following Katrina got the Service's attention and they temporarily propped up rates even higher. The result is that 2005 has two mileage rates, those before August 31 and those after. Before August 31 the mileage rate for business use was 40.5 cents per mile. After August 31 it rose to 48.5 cents per mile. Similar increases were put into effect for charitable miles related to providing Katrina relief.

For 2006 the mileage rates are 44.5, 14 and 18 cents per mile for business, charitable and medical mileage respectively.

The push for alternative fuel vehicles was also cheered on by IRS with the elimination of the 50% reduction in the credit for electric and clean fuel vehicles.

You can read the full take from IRS here.

View the Axiom Professional Group, P.A. web site  or return to the Axiom web site articles page (both links will exit the blog site).