- The Washington Times - Monday, November 30, 2009

Have you made home improvements? They yield no current deductions but are added to your home’s cost basis - the figure used to determine gain or loss on a sale of the property. Hence, improvements reduce any taxable profit when you eventually sell.

Like most home sellers, you are well aware of rules that relieve you of taxes on a home-sale gain of as much as $250,000 when you file an individual Form 1040 and up to $500,000 when you file a joint return. However, many of you are unaware that anyone with a gain greater than the exclusion threshold of $250,000 or $500,000 is stuck with taxes on the excess. No longer are sellers allowed to postpone taxes on their entire gain by buying another home that costs more than what they received for the one sold.

In the event the Internal Revenue Service questions your sale, the audit will be less traumatic and less expensive if you have kept meticulous records that track the dwelling’s basis. Those records should include what you paid originally for your property, plus settlement or closing costs, such as title insurance and legal fees, as well as what you later shelled out for improvements, such as adding a room or paving a driveway, as opposed to routine repairs or maintenance that adds nothing to the place’s value, such as painting or papering a room or replacing a broken windowpane.

Attention, owners of vacation homes: Some of you should avoid renting them out for more than 15 days.

Do you own a vacation home (or year-round home, for that matter) near annual events where rents soar for short periods - for instance, Indianapolis for the Memorial Day race, Louisville during Kentucky Derby week, or Augusta, Ga., during the Masters golf tournament? With the blessings of the IRS, you can rent out your home, pocket the rent checks and sidestep taxes on the rental income. Just make sure to rent out your cottage or condo for fewer than 15 days during the year, and you do not have to declare any of the income you receive.

Go beyond the 15-day limit, and all the rental income becomes reportable on Form 1040’s Schedule E. Carefully review the rules; the tax collectors can be sticky.

Another break for vacation-home owners ends: The law allows individuals who sell their principal residence (year-round home) to escape taxes on a profit of as much as $500,000. To qualify for the exclusion, they must own and use the dwelling as a principal residence for at least two years out of the five-year period that ends on the sale date.

Previously, they could claim an exclusion, then occupy a vacation dwelling for two years and qualify for another exclusion. Legislation that took effect at the start of 2009 limits the amount of the exclusion when a second home becomes the principal residence. In the case of sales after 2008, the new rules prohibit any exclusion for post-2008 periods of “nonqualified use” - IRS lingo for periods during which the former second home was not used as a principal residence.

Losses on home sales: Because of the depressed housing market, there has been an unceasing increase in the number of sellers suffering losses on sales of personal residences.

The tax code has always prohibited write-offs for such losses. It treats them as nondeductible personal expenditures. Contrary to what many owners mistakenly think, mortgage debts do not enter into the calculation of gain or loss on a home sale.

c Send comments to www.ju lianblocktaxexpert.com

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