Tax Law Changes for 2008 - What to Expect When You’re Filing Next Year

There are a number of important tax law changes that take effect this year, including three changes that will affect some homeowners. There are also changes that impact business owners.

While you won’t see the impact of these changes until you file your returns early in 2009, it helps to know about them now so you can keep proper records and make the smartest decisions for your money.

Take a few minutes to review the changes so you can keep them in mind as you devise your 2008 tax strategies.

Changes for Homeowners

Homeowner’s Exemption: In the past, taxpayers have taken the opportunity to convert a rental property or vacation home into their primary residence and then later sell the property. This allowed them to take advantage of the Homeowner’s Exemption which allows a taxpayer to exclude up to $250K ($500K for married couples) of gain realized on the sale of a primary residence. An example of a common strategy has been:

• Taxpayer acquires rental property in 2000 for $100K.
• Taxpayer rents the property out for three years.
• In 2003, taxpayer moves into the property as his/her primary residence.
• In 2005, taxpayer sells the property for $600K.
• Taxpayer (married couple) avoids paying taxes on the entire gain ($500K).

Effective January 1, 2009, the Homeowner’s Exemption exclusion will not apply to gain that is allocable to periods of “non qualified use”.

Non qualified use refers to periods that the property was not used as the taxpayer’s primary residence. In our example above, the three (3) years the property was rented out is considered non qualified use, so three fifths (3/5) of the gain is ineligible for tax exclusion.

There are a couple of important considerations for this change. Non qualified use prior to January 1, 2009 is not taken into account. So a property rented from 2006 to 2009, then lived in from 2009 to 2011 would qualify for the full exclusion. Also, the allocation rules only apply to periods prior to conversion to a primary residence. If a property was lived in for 2 years, then rented out for 3 years, and sold, the taxpayer will still receive the entire exclusion amount.

First Time Home Buyers: In some cases, first-time homebuyers can get a temporary refundable tax credit equal to 10 percent of the purchase price of a home, up to $7,500 (or $3,750 if married filing separately). This credit is effective for homes purchased on or after April 9, 2008 and before July 1, 2009. This credit must be repaid, interest free, in equal installments back to IRS over 10 years. If the residence is sold the credit may need to be repaid sooner. Review the details of your situation with your CPA.

Local Real Estate Taxes: Homebuyers that purchased, or refinanced, a home with less than 20 percent down must now impound their real estate taxes into their monthly house payment. This is also true for homebuyers that purchased homes using a Federal Housing Administration (FHA) loan. If you are an Alternative Minimum Tax (AMT) filer, check to see if your 2008 real estate tax payments are fully deductible.

Mortgage Relief: In 2007 the IRS passed the Mortgage Forgiveness Debt Relief Act that made changes to the federal tax treatment of cancelled debts, foreclosures, repossessions, and abandonments on a principal residence.

This act is applies to mortgage debt canceled on or after January 1, 2007, and before January 1, 2010. In these cases the IRS generally allows taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. This rule does not apply to rentals or investment properties that are “upside down” (debt owed is greater than current market value of property). Again, contact your CPA to discuss the specifics of your situation.

Vehicles and Mileage

The soaring gasoline prices have lead to the introduction of two new vehicle related tax changes: New SUV and Truck Deduction: Recent high gas prices left automakers with large inventories of SUVs and trucks and lead them to lobby Congress for help. They won. Congress introduced a one year tax break for vehicles over 6,000 pounds that are purchased for business use. If you purchase a new SUV or truck before the end of 2008 you can deduct up to the first $25,000 of the purchase price. The actual deduction is based what percentage of business use is dedicated to this vehicle. Additionally, a generous first-year depreciation deduction is available on these vehicles.

Mileage Deduction: The IRS has raised the business mileage deduction rate from 50.5¢ to 58.5¢ per mile, for business miles driven beginning July 1, 2008. opesadvisors.com

Business Deductions

For tax years beginning in 2008, the IRS has nearly doubled the amount of deductible Code Section 179 expensing. Businesses can deduct $250,000 for qualified depreciable tangible personal property used in the active conduct of a trade or business. (The threshold for reducing the deduction has been raised to $800,000.) If you are a fiscal year-end filer and your fiscal year ends in 2008, you must wait a year to have these new rules apply to your business.

The new law also raises the first-year limit on depreciation from $3,060 to $11,060 for new passenger autos and $11,260 for vans and trucks that weigh less than 6,000 pounds and are designated for business use. One problem is that the IRS excludes “luxury autos” from the depreciation rule. The IRS interprets a “luxury auto” as costing over $15,000 for an auto and $16,000 for a truck or van.

Contact your CPA to verify limits, property qualifications and to find out how these changes might affect your corporate year-end tax planning.