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They're Trying To Take Your Home Exclusion Away!

Diane Kennedy

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Aug 31, 2007
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I'm practicing deep breaths here.... First, here's what is happening (and what I just posted on my TaxLoopholes blog)

With constituents facing foreclosure and an election year looming, the pressure's on Washington lawmakers to give homeowners a helping hand out of the mortgage meltdown. A new bill has just been introduced in Congress (HR 3648) by House Ways and Means Committee Chairman, Charles B. Rangel, D-NY and Jim McCrery, R-La, to provide a tax break to those losing their homes.

You see, when debts get written off or cut down, there's often a nasty little tax whammy that treats the money you no longer owe as income - and then taxes you on it!

For someone who's just lost their home, this extra tax is often crushing, both emotionally and financially. The bill introduced by Rangel and McCrery would require any income generated by the discharge of qualified mortgage indebtedness to be excluded from taxpayer's gross income, and would be applicable for any debt discharges made on or after January 1, 2007.

The Rangel bill is in addition to the proposal made by President Bush a short time ago, where he proposed granting tax relief to homeowners facing foreclosure. He also called on Congress to modernize the Federal Housing Administration (FHA) to help more homeowners qualify for FHA insurance by lowering down-payment requirements, raising loan limits and providing more flexibility in pricing.

Under the Rangel bill, the deduction for private mortgage insurance (PMI) would be extended to amounts paid or accrued after December 31, 2007, but only with respect to contracts entered into after December 31, 2006, and prior to January 1, 2015, according to the Joint Committee on Taxation (JCT) explanation. The PMI provision would allow more people to realize their dreams of owning a home during a time when the market is under stress, Rangel said.

Now to pay for it (because there's always a cost), Rangel and McCrery are looking at the homeowner gain exclusion of up to $250,000 ($500,000 for married filing jointly) of gain realized on the sale or exchange of a home used as a principal address for two of the five years. Under the Rangel bill the gain exclusion amount would be tied to the amount of time actually spent living in the home - meaning you may have to stay for more than two years to get the full deduction. According to the JCT, closing this loophole would raise $2.0 billion from 2008 to 2017. We'll keep our eyes on this one to see what happens in Washington.
 

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Diane Kennedy

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Now - my comment (and my rant)

The original bill had the statement that people were losing their houses through "no fault of their own." And I say "WHAT???" No one held a gun to their heads to take loans that they didn't understand on houses they couldn't afford.

So, now tax relief is in sight for them....but they are going to make the responsible homeowners who bought houses they could afford and make the payments, according to their promises to do so, pay for it!

Look for the 2 out of 5 year rule to change...soon, if this bill gets support. In other words, you won't get the tax free gain you always expected. Or maybe (my biggest fear) you wont' get it if you're subject to AMT.

We're watching this one very closely in the research dept of my company. I think this is a horrible bill and I hope it dies without going further.
 

Russ H

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Diane-

If I'm reading this right, the thing we'd lose is that we would have to live in our primary residences *longer* to get the tax free $250/500K profit if we sell? (or perhaps lose it if we're subject to AMT?)

Am I reading your points correctly?

As an example: Currently, if you're single, live in a house 2 years, and sell, you can net up to $250K tax free after paying down the basis.

But Rangel's idea is to tie it to the # of years you spend there, up to 5. Like 2 yrs=40% of net profit, 3 yrs=60%, 4yrs=80%, and 5 yrs=100%? Or something like that?

Sorry if I sound befuddled. :confused:

The title of your thread references taking away our "home exclusion". Is that what the $250K/$500K tax free on sale provision is called, or is there another huge point in your post that I missed? :smx4:

Yours in bewliderment, :rolleyes:

-Russ H.
 
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Diane Kennedy

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Aug 31, 2007
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Hi Russ;

Sorry for the confusion. I'm so angry about this proposed bill, I'm jumping up and down and not communicating well!

Yes, they are talking about taking away the $250K/$500K and giving us some kind of limited tax relief for owning your home. One proposal is that we would get a percentage of the gain only (so if you made $100K on the house, $40K would be tax exempt and $60K would be taxable) another would be that you have to live in the house 5 years to get the full $500K (for MFJ*).

Either way, the bottomline is that they are giving breaks to people who made bad decisions on their real estate at the expense of real estate investors who were smart with their choices.

:tdown:

*MFJ = Married, filing joint returns
 

KyJoe

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Aug 28, 2007
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They won't take the 250/500k part out. It will never pass, and anyone that can vote won't support someone who pushes it.
 

Russ H

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Either way, the bottomline is that they are giving breaks to people who made bad decisions on their real estate at the expense of real estate investors who were smart with their choices.
As Robin Williams says, "America! What a country!!":rolleyes:

-Russ H.
 
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Diane Kennedy

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Aug 31, 2007
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They won't take the 250/500k part out. It will never pass, and anyone that can vote won't support someone who pushes it.
I hope you're right. My concern is that there is so much talk about these "poor people" who are losing their houses, that the govt is going to step in to do something. And, they need to find the money from somewhere to pay for it.

Did anyone else notice that the PMI deduction is proposed to go away as well? That one will probably be lost, because I don't think there will be as much emotion about it.
 
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Diane Kennedy

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Okay, one more thing....it's like AMT. Once people understand it, or get hit by it, they get mad. But, until then, no one does anything about it.

Congress isn't going to take action about AMT until enough people complain...and the complaints always come too late.
 

andviv

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Diane, what is the text that we should sent to our representatives about this? I think we could work together to create a template letter to send them. And probably should start also making a bit of noise about the AMT as well.

http://www.house.gov/writerep/

I don't want this post to become a political thread, but I think it is needed to raise some awareness about it.

MJ, please let me know if this breaks the rule about political posts and I will delete it right away.
 

ProInvestor

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Aug 15, 2007
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I think something must be done to help people with the subprime mess (interest rates going from 7% to 15%... ouch....), however penalizing tax payers is just plain stupid....

I guess the real problem is that when deficits are run there is no slack in the system.....

andviv in my humble opinion this is not a political issue it is an economic one.
Also it co-sponsored by both Republican and Democrat.... Had to be pro d/r when you have members of both sides supporting the bill.....

Support RonPaul 08! (<- Now thats political!) :iamwithstupid: :smx6: :smx4:

Rgds.
ProInvestor
 

Nate

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I don't really like the idea of helping people that have gotten into this mess, although I hope I don't sound to cold-hearted.

I just say this because I know some of them. Very happy at how low their interest free loans were, not really thinking about what would happen 5 years later. And I don't ever like the idea of one man paying for another man's mistakes.

There is no way to help these people out without taking it from others... Robin Hood coming to my mind again. Money doesn't grow on trees that congress plants, they snake it from the hard working middle-class and rich, at disproportianate amounts.

You give a mouse a cookie, he'll come back for a glass of milk.
 

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S928

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Considering that my future lies in a high cost of living area (CA), I think gain exclusions should be raised ...especially for single people...not eliminated!
 
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Diane Kennedy

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I don't really like the idea of helping people that have gotten into this mess, although I hope I don't sound to cold-hearted.

I just say this because I know some of them. Very happy at how low their interest free loans were, not really thinking about what would happen 5 years later. And I don't ever like the idea of one man paying for another man's mistakes.

There is no way to help these people out without taking it from others... Robin Hood coming to my mind again. Money doesn't grow on trees that congress plants, they snake it from the hard working middle-class and rich, at disproportianate amounts.

You give a mouse a cookie, he'll come back for a glass of milk.
Nate,

I agree. I don't think you're cold-hearted, just rational.

The financing institutions made loans they shouldn't have and people took loans they didn't understand. It seems that those are the responsible parties. It reminds me of parenting, somewhat. As much as I want to protect my 16 year old from every bad thing that could ever happened, if I do, he'll never understand consequences of his actions.

Recently I met a couple that had 9 houses in foreclosure that were financed, at the time, at 125% of value. Values have dropped, so the loans are even more as a percentage of the value. Plus the rates have adjusted and in 8 months (the longest they've held any of the 9), they've never rented them.

Their question was basically, "What do I do now?" My suggestions - rent the property for anything you can get, protect your credit rating (for a couple, try to protect either the husband's or the wife's), renegotiate with the bank - all met with reasons why it wouldn't work. Along with it, they had a real victim mentality. It wasn't "We took loans we shouldn't have", it was "They gave us loans that they never should have."

The part I was curious about, though, was what happened to the money. This is in Phoenix in an area where houses went for about $200,000. So, let's just assume they started with the first house with 10% down (which they said they did), then refinanced for 125%.

Excess loan to value: $50,000

This was then invested in other properties. Okay, let's assume they then bought 3 - $200,000 houses. (Just to keep the math easy, they put $10K in at this point) Refinance again to 125%.

Excess loan to value: $50,000 + $100,000 (They have invested $30,000 of their own money at this point). $100,000 to invest. 3 houses owned.

They then bought 5 more houses. Put the $100,000 down. Took out 125% loans on those five.

Excess loan to value: $50,000 + $100,000 + $250,000 - 9 houses and this is where they stopped. At this point, they have 9 houses that are over-leveraged and $250,000 cash in their pocket.

The question I never could get an answer to is: What happened to the $250,000? They said they needed it to buy the next houses and they absolutely swear that they didn't use the money for anything personal. But even if they held all 9 houses for 8 months (which they didn't), the initial interest rates were so low that it wouldn't have cost that much.

And that's the part that really gets me. There is no such thing as a free lunch, why did they think they could get these loans and never have to worry about paying it back? At what point in those 8 months did they think that maybe they should get a renter in the house?

Up until now, I was hoped people who were in this spot would step up, take the consequences and learn from them. But now, the victim mentality has taken over so that it's someone else's fault, and the government is helping them with that. Not only that, they want to make others pay for it.

What will happen? I suspect that there will be enough outrage that the home gain exclusion won't go away completely. But, I'm afraid it will change. It's going to be more important than ever to plan ahead, pre-emptively, for the tax breaks.
 
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Diane Kennedy

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House Bill passed with an overwhelming majority Friday, 10/5. Now it just needs to get through the Senate and then the President signs off.

The change for home owners will be for anyone who sells a principal residence that wasn't a principal residence for the whole time of ownership. In other words, say you buy a property and hold it as a 2nd home or rental for a few years, than move in. Under the current law, as long as you could prove that you owned it for 2 of the previous 5 years, you have get the tax free gain exclusion.

Effective 2008, you will only be able to take an exclusion for a pro-rata portion of the gain. Let's say you owned a house for 5 years, lived in it for 2 years. In the past, if you were married filing jointly, you'd get $500,000 of tax free gain exclusion. Now, you only get 2/5 (or 40%) of the gain tax-free.

If you owned the property prior to 2008 and rented it out prior, you're grandfathered in. However, if you rent it out post 1/1/08, you'll be subject to this new calculation.

I'll be tracking this bill through Senate on my TaxLoopholes blog. Plus, remember we still have a major AMT issue occuring.

If the House doesn't act within the next couple weeks, anyone making over $45K will be facing AMT. It's estimated right now that 19 - 23 million Americans might be subject to this.
 

MJ DeMarco

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Been very behind in all the posts, but this legislative news is very disturbing.

Its a classic example of the responsible paying for the irresponsible. Those of us who make good choices and are good stewards of our money pay for those who aren't.

My ex-girlfriend owned a moving company and routinely moved people out of foreclosed homes -- common denominator? They always had the best stuff: Lexus's, Hummer H3's, Big TVs' -- these people live outside of their means and want everyone else to pay for their lifestyle.

Too bad we can't legislate stupidity and the politicians that pander to them.
 

Bilgefisher

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Any opinions on why they seem to be going after home owners and RE investors lately? OR have they always gone after them, and Ive been in the dark for years?

I want to make sure I fully understand this, they are chopping the homeowner gain exclusion to pay for the tax relief on people in foreclosure?
 
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Diane Kennedy

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Aug 31, 2007
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Any opinions on why they seem to be going after home owners and RE investors lately? OR have they always gone after them, and Ive been in the dark for years?

I want to make sure I fully understand this, they are chopping the homeowner gain exclusion to pay for the tax relief on people in foreclosure?
It's funny you asked "why" because I was just thinking exactly the same thing.

It used to be that the tax loopholes were always there for business owners and real estate investors -but with this one and AMT, it seems like they are forgetting about tax breaks for real estate and concentrating on business owners.

Cheap, easy to qualify for, loans and a lot of naive investors pushed the real estate market up too fast and too far. There is now a settling in a lot of markets. Maybe Congress is afraid of doing anything to encourage real estate again.

And yes, you understand exactly - the gain exclusion for homeowners who pay their bills and make smart investments is being reduced to pay for people who don't make their payments and didn't make good investments.
 

andviv

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It used to be that the tax loopholes were always there for business owners and real estate investors -but with this one and AMT, it seems like they are forgetting about tax breaks for real estate and concentrating on business owners.
So now we have to start planning to do the REI as companies and not as individuals. The question now is, how do we make that happen? What should be the strategy for flippers, rehabbers, hold-and-rent, etc, etc Maybe we should start all thinking about this.
 
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Diane Kennedy

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Aug 31, 2007
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So now we have to start planning to do the REI as companies and not as individuals. The question now is, how do we make that happen? What should be the strategy for flippers, rehabbers, hold-and-rent, etc, etc Maybe we should start all thinking about this.
GREAT question. In fact, I'm working on a new set of AMT loopholes right now.

Here are my quick answers:

- The GO Zone special tax breaks apply to AMT as well. I have a couple of clients making an absolute fortune in GO Zone. For example, if you have a rental unit (and rents are HIGH) for 3 years in Biloxi, MS, you will get a tax free grant of $37,500. PLUS you get to take 50% bonus up front depreciation on construction.

- C Corp passive losses can go against other income. BUT I'm a little afraid of this strategy because you never want to hold appreciating assets inside a corporation.

- Wherever possible turn your rental properties into business losses.

- Elect out of accelerated depreciation.

- Find out WHY you're subject to AMT and work on that issue. For example, if it's because you have too much cap gains income in relationship to your ordinary income, increase your ordinary income. (In another thread MJ and I had a brief exchange about his strategy on selling late in the year to avoid AMT)

That's a few for now, I'm working on more....
 

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