Tax-Free Capital Gains Benefit Expires December 31, 2010
By Michelle C. Carr-Crowe and the Get RE$ult$ Team, Your San Jose Lynbrook and Cupertino Homes Experts
The biggest threat to a seller's bottom line in the coming years isn't only the potentially declining market values or the affect of short sales and foreclosures on home values: it's that the Tax-Free Capital Gains Benefit expires automatically on December 31, 2010.
Unless the U.S. Congress extends them, under Section 102 of the 2007 Act the current capital gains rate reductions will sunset December 31, 2010, at which time the rates will revert to 20 percent and 10 percent.
According to scuttlebutt from the real estate lobby, any extension looks unlikely to pass due to the current economic hardships endured throughout the nation.
Many Silicon Valley homeowners, from San Jose to Cupertino to Saratoga, were unaware that this tax benefit will no longer exist for them after the end of this year. Although it's always possible it may be extended as is, or revert to the previous benefit (a one-time benefit after age 55), the current benefit automatically dies at the end of this year.
For seniors who've paid off their mortgage and lived frugally for years, this loss can be huge.
For example, if $500,000 is NOT tax-free, the rate reverts to 10 percent and 20 percent - which at least number is $50,000 and $100,000 respectively (or a year or two's worth of nursing home care).
Currently, anyone who has lived in and owned a principal residence for two of the past five years can qualify for a portion of tax-free capital gains. For a married couple the benefit amount is up to $500,000; for a single person, the benefit amount is $250,000.
IRC § 676 provides that a grantor (the person who creates and funds the trust) is treated as the owner of the property when the grantor retains the power to revoke the trust and revest title in him or herself. The 2003 Act does not change this provision. This means that the $250,000 exclusion ($500,000 if married filing jointly) applies to a sale or exchange by a revocable living trust so long as the grantor of the trust and owner of the property before it was conveyed to the trust are the same person and that person, either as owner or grantor, has owned and used the property as his or her principal residence for two of the previous five years. Simply put, the grantor remains treated as the owner of the property, which makes the transfer into the trust a non-taxable event.
It's important to know that IRC 1031 ("like kind" tax-deferred exchange) does NOT apply to any owner-occupied residence.
As always, consult with your tax and legal advisors before committing to any real estate transactions so you understand the full financial impact to your bottom line.
If you live in San Jose, Saratoga, Cupertino or anywhere in Silicon Valley, remember the biggest threat to your bottom line after 2010 is that the Tax-Free Capital Gains Benefit expires automatically expires at the end of this year.