taxes


Governor Signs Important REALTOR® Legislation:
Public Act 96 Provides Significant Tax Relief for Sellers;

Governor Granholm signed 3 significant pieces of REALTOR® supported legislation. First, legislation enabling home sellers to retain 2 principal resident exemptions for property still on the market after the seller has moved elsewhere in the state. The signing of this legislation is a huge step in aiding struggling sellers who have had homes on the market for over a year and have lost their principal residence status on that property.

House Bill 4215, now Public Act 96 of 2008 sponsored by Representative Ed Gaffney (R-Grosse Pointe Farms) enacts that the seller can retain an additional exemption for up to three years on property previously exempt as the owner’s principal residence if the following circumstances are met:

  • the property is not occupied,
  • the property is for sale
  • the property is not leased or available for lease
  • the property is not used for any business or commercial purpose

The Michigan Association of REALTORS® (MAR) was active in pointing out to lawmakers that the struggling economy in Michigan has forced several home sellers to relocate to other areas of the state, in some instances continuing to market a home that they have not lived in for over a year. As a result, the home was no longer treated as a principle residence and the homeowner lost the principal residence exemption. Retention of an existing homestead credit for an unoccupied home that is currently for sale would offer relief to sellers who have had to relocate for whatever reason. The MAR is grateful to Representative Gaffney for being receptive and following through on this very important piece of property tax relief.

Source:  Michigan Association of REALTORS(R)

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I know, it seems to run counter to all we’re hearing about the real estate market, but some people still do realize a gain when they sell.  Today I had a client whose property I have listed ask me about how he’ll be taxed on his gain.  Seems he inherited the property some time ago.  The basics, I told him, are as follows:

Your gain is calculated by taking your net proceeds from the sale and subtracting your adjusted basis.  What’s your adjusted basis?  Well, it’s your basis when you acquired the property, plus any improvements, less any depreciation or partial sales taken.  In other words, its what you bought the property for, plus improvements (that you can prove) minus anything you’ve taken away from the property.

Once you arrive at this figure you can calculate your taxable gain- if you’ve owned it for more than a year, you’ll be at the current long term capitol gain rate.  Otherwise it’s taxed as ordinary income.

 So smart sellers want to know how to avoid this tax… For your home, there’s an exemption that may apply.  For investment properties, you can’t avoid it, but you can defer it by way of a 1031 Tax Deferred Exchange.  In a 1031 you’re rolling your gain over into a new property, as opposed to putting it in your wallet.  This isn’t a casual transaction, and requires an intermediary and some planning.

Now for the disclaimer.  The US Government has a habit of changing the rules for this sort of stuff, so make sure you talk with your CPA or financial professional to make sure you’re using what’s available to your best advantage.