On October 3, 2008, Congress passed and the President signed into law the “Economic Stabilization” legislation, which included numerous tax law changes that are mostly pro-taxpayer. These changes will impact just about everyone, and you are encouraged to review them below. Please call this office if you have questions about any of the provisions or need additional details.

Additional Standard Deduction for State and Local Property Taxes - The tax provision that allows taxpayers who claim the standard deduction instead of itemizing deductions to claim an additional standard deduction for State and local property taxes paid, originally slated for 2008 only, has been extended through 2009. The deduction cannot exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint return filers). No taxes deductible in computing adjusted gross income are taken into account in computing the increased standard deduction.

Refundable Child Tax Credit Eased - Currently, taxpayers receive a $1,000 tax credit for each child under the age of 17. The credit is used to reduce the taxpayer’s tax liability. If the credit is larger than the tax liability, the excess is eligible for a refundable credit called the “additional child tax credit.” The additional child tax credit is equal to 15% of earned income in excess of a threshold dollar amount. For 2008, the threshold amount has been reduced to $8,500 from $12,050, thus increasing the refundable amount for low-income taxpayers.

Income Averaging for Exxon Valdez Litigation Amounts - Effective October 3, 2008, commercial fishermen and other individuals whose livelihoods were negatively impacted by the ‘89 Exxon Valdez oil spill are allowed to average any settlement or judgment-related income that they receive in connection with pending litigation in the federal courts over three years for federal tax purposes. It also allows them to use these funds to make contributions to retirement accounts.

Qualifying Child - The “uniform definition of a child” is used in taxes to determine when an individual qualifies for certain tax benefits including the dependency exemption, child tax credit and earned income tax credit. Acting to close some of the loopholes in various applications of the uniform definition of a child, Congress has made several changes to the qualifying child rules effective beginning in 2009. The new law:

• Requires that a qualifying child be younger than the claimant;

• Requires that a qualifying child be unmarried;

• Restricts qualifying child tax benefits to the child’s parents in certain cases; and

• Denies the child tax credit to taxpayers who are dependents.

Home Mortgage Debt Forgiveness Relief - When a taxpayer defaults on their home loan through foreclosure, short sale or voluntary reconveyance, the amount of the debt forgiven becomes income for tax purposes. Thus, a taxpayer who has just lost their home is also straddled with an additional tax burden created by the debt relief income. Trying to soften the foreclosure problems, Congress, last year, added a provision that allows taxpayers to exclude up to $2 million ($1 million for married individuals filing separately) of home mortgage acquisition debt relief income from a taxpayer’s principal residence. This provision has been extended through 2012.

Deduction for State and Local Sales Taxes - The provision whereby a taxpayer may elect to claim an itemized deduction for state and local general sales taxes instead of deducting state and local income taxes has been retroactively reinstated for 2008 and extended through 2009.

Deduction of Qualified Tuition & Related Expenses -The above-the-line deduction for qualified tuition and related expenses has been retroactively reinstated for 2008 and extended through 2009. This provision allows a taxpayer to claim an above-the-line deduction for qualified tuition and related expenses for higher (post-secondary) education. The maximum deduction is $4,000 for an individual whose adjusted gross income (AGI) for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose AGI does not exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose AGI exceeds the relevant AGI limits, for a married individual who does not file a joint return, or for an individual whose personal exemption deduction may be claimed by another taxpayer for the tax year.

Educator Above-the-Line Expenses - The above-the-line deduction for teachers (kindergarten through 12th grade) has been retroactively reinstated for 2008 and extended through 2009. Eligible teachers may claim an above-the-line deduction for up to $250 annually of expenses paid or incurred for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom. To be eligible for this deduction, the expenses must be otherwise deductible as a trade or business expense.

Tax-Free IRA to Charity Distributions - The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000) from their IRA account to a charity has been reinstated for 2008 and 2009. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions. 

IMPORTANT: You must act quickly to take advantage of this provision for 2008.  If you are over 70½ and are contemplating any size of cash charitable contribution between now and the end of the year, please call to see if making a direct contribution from your IRA can provide you any significant tax benefit for 2008.

Alternative Minimum Tax Relief - For yet another year, Congress has applied a patch to the AMT by increasing the AMT exemption amount and continuing to allow nonrefundable credits, such as dependent care, child credit, education credits and others that most middle-income taxpayers use to avoid this punitive tax. In addition, the amount of long-term unused AMT tax credit that can be applied in the current year was also substantially increased. The following is an overview of these changes:

• AMT Exemption Amount for 2008 Increased - The AMT exemptions have been increased for 2008 to: $69,950 for married individuals filing jointly, $46,200 for unmarried individuals and $34,975 for married individuals filing separately. The AMT phase-out rules remain unchanged.

• AMT Relief for Nonrefundable Personal Credits - Nonrefundable personal credits will offset the AMT for 2008. Those credits include the dependent care credit, elderly and disabled credit, Hope and Lifetime Learning credits, adoption credit, child tax credit, mortgage credit, saver’s credit and certain residential and home energy credits.

• Increased AMT Refundable Long-Term Unused Credits - Prior to this change and for purposes of claiming the long-term unused minimum tax credit, the refundable credit amount was limited to the greatest of (1) $5,000, (2) 20% of the long-term carryover or (3) the AMT refundable credit amount (if any) for the prior year - before any reduction by reason of AGI. Under the Act, the $5,000 limitation has been removed, and the 20% limit has been increased to 50%.

In addition, the Act provides for abatement of any underpayment of tax outstanding on October 3, 2008, which is attributable to AMT on incentive stock options for any taxable year ending before January 1, 2008. The abatement extends to any related interest or penalty.

Home Energy Credit - The credit for certain energy-efficient property installed on the taxpayer’s principal residence that originally expired in 2007 has been reinstated for 2009 only. This provision allows a nonrefundable $500 credit for the installation of qualified windows, skylights, air circulation systems, hot water boilers and other energy-efficient equipment. Biomass fuel stoves that heat the residence or heat water for the residence, and asphalt roofs which include appropriate cooling granuals have been added to the list of qualifying property.

Residential Energy-Efficient Property (REEP) Credit - This credit, which was scheduled to expire after 2008, has been extended through 2016 and includes credit for the installation of solar water heating systems (excluding swimming pools) and qualified fuel cell property. The $2,000 cap on the solar systems credit is removed as of 2009, wind property and geothermal heat pumps are eligible as of 2008, and the credit can now be claimed against the AMT.

Certain Farming Machinery & Equipment Treated as 5-Year Property - For 2009 only, new machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business after December 31, 2008, and which is placed in service before January 1, 2010, is treated as 5-year property.

Plug-In Electric Drive Vehicle Credit - A tax credit for “new qualified plug-in electric drive motor vehicles” purchased before January 1, 2015 has been added. The credit, which is subject to a limit based on weight, is the sum of: (1) $2,500 plus (2) $417 for each kilowatt hour of traction battery capacity in excess of 6 kilowatt hours. The maximum credit for vehicles weighing 10,000 pounds or less is $7,500. Larger maximums apply to heavier vehicles. When the vehicle is used partially for business, the credit is allocated between personal and business credits. This credit has a phase-out provision similar to the hybrid vehicle credit and will begin to phase out after 250,000 units are sold. Watch for more on this when the vehicles become available.

Bicycle Reimbursements Added to Employer Fringe Benefits - Employers are able to provide certain tax-free “fringe benefits” to their employees. “Qualified bicycle commuting reimbursement” has been added to the list of qualified transportation fringe benefits. Up to $20 per month of employer tax-free reimbursement is allowed for reasonable expenses incurred by the employee during that calendar year for the purchase of a bicycle and bicycle improvements, repair and storage if the bicycle is regularly used for travel between the employee’s residence and place of employment.

Contractor Efficient Home Credit - An eligible contractor may claim a business credit for each qualified new energy-efficient home that the contractor constructs and which is acquired by a person from the contractor for use as a residence. The credit is either $2,000 (for a 50% energy reduction in energy usage) or $1,000 (for a 30% energy reduction in energy usage). This credit has been extended through 2009.

Energy-Efficient Commercial Building Property - A deduction is allowed in an amount equal to the cost of “energy-efficient commercial building property” placed in service during the tax year. The maximum deduction for any building for any tax year is the excess (if any) of $1.80 multiplied by the square footage of the building, less the aggregate amount of the deduction for the building for all earlier tax years. This credit is extended through 2013.

Casualty Losses - The $100 floor for personal-use property has been increased to $500 for 2009 only. The 10% of AGI limit on personal casualty losses is waived in federally declared disasters in 2008 and 2009. The 2008 Extenders Act introduces the new definition of a “federally declared disaster,” allows certain casualty losses to be tacked on to the standard deduction, and modifies provisions related to federally declared disaster areas.

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The decline in real estate values present a business opportunity? Real estate rentals historically have been a popular long-term investment, and this market eventually will rebound from its current slump, this is an excellent time to consider such an investment. This material will explain some of the tax ramifications of renting both residential and commercial real estate.

One of the biggest benefits of owning rental property is that the tenants, over time, buy the property for you. In addition, if structured properly, the allowable depreciation deduction will shelter the rental income. Another historical benefit of real estate rentals is capital appreciation. Before acquiring a rental property, there are several things to consider, including:

• after-tax cash flow,
• potential for long- or short-term appreciation,
• property condition (with an eye on when you might get stuck with a large repair bill,
• debt reduction,
• type of tenants,
• potential for rent increases or re-zoning, and
• whether there is community rent control, etc.

Although most of the considerations are subjective, the after-tax cash flow can be estimated fairly easily, as illustrated in the example below.

In this example, there is a column for actual cash flow (after taxes) and another for reportable tax profit or loss. For actual cash flow purposes, we must consider the entire mortgage payment (interest and principal), while for the rental tax P&L, only the interest is deductible, but an allowance for depreciation is included. As a result, in the example, there is a negative cash flow of $1,300. However, for tax purposes, the rental shows a loss of $4,550, primarily because of the depreciation allowance. Assuming that the taxpayer is in the 25% tax bracket, that $4,550 loss yields a $1,138 savings in taxes for the year. Thus, our after-tax cash flow is negative only by $162. You also will need to consider whether your loss deduction is limited by the passive loss rules. Generally, you can deduct virtually all expenses incurred to operate and maintain (not improve) the rental. Improvements must be capitalized and depreciated.

Rental real estate income is business income but is not subject to Social Security taxes. Real estate rentals are also considered passive activities. Generally, passive activity losses are deductible only to the extent of passive activity income. However, where there is active participation by the taxpayer in managing the rental, the taxpayer can deduct up to $25,000 of losses each year as long as his or her Adjusted Gross Income (AGI) for the year is less than $100,000. For higher-income taxpayers, the $25,000 loss exception is ratably phased out between an AGI of $100,000 and $150,000. There is also a special allowance for real estate professionals. Any losses not allowed under these two exceptions are not lost but suspended and carried forward indefinitely to tax years in which your passive activities generate enough income to absorb the losses. To the extent your passive losses from an activity are not used up in this fashion, you will be allowed to use those losses in the tax year in which you dispose of your entire interest in the passive activity in a fully taxable transaction.

When a rental is sold, it is treated as a capital asset, and the gain, except for depreciation recapture, is taxed at capital gains rates. Recaptured depreciation, depending upon your tax bracket, can be taxed up to 25%. Besides outright selling of a rental, there are a number of options such as exchanging the existing rental for another while deferring the gain and avoiding current taxes, selling the property in an installment sale (which spreads the taxable gain over multiple years), or even converting the property to personal use (which forestalls the taxable gain until the property ultimately is sold).

Buying, operating, and selling a rental property can have profound tax ramifications and provide some interesting options not available to other investments. Please contact this office prior to the purchase or disposition of a rental property so that the tax impact can be analyzed prior to making a financial commitment.

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Gentry Realty Webinar

We have just been assigned to handle the lease to purchase program for Monaco (San Simeon). This project is in its final close out and we have 5 units that we are offering.

You will be required to enter escrow with a contingency that they will have a lease tenant that will eventually (within 6 to 12 months) purchase the condo form you at a 7% increase from the price you paid. The return to you is in the mid 20% cash on cash (see attached spreadsheet). This program works because it insures that your have an exit strategy to the purchase. This investment comes with the following aspects:

1. Developer will guarantee rent for a period of one year at 8% of the total purchase price.

2. Developer will pay all HOA for a period of one year.

3. Developer will manage the property for free for one year.

4. Developer will warrant the condo against any mechanical defects for one year.

5. Investor is placed in a priority position for all future deals.

6. Investors re-invest time and time again because of the success. (creating residual income for the agent)

Before you close you will have a tenant and a purchase contract from that tenant to purchase the unit once they qualify. Historically the tenant qualifies 85% of the time. If the tenant does not qualify they are evicted and another tenant is put in their place.

There are a limited number of units available. This program works and has been in existence for over 7 years.

Click Here for Larger View

Property Profile & Pictures

email me for more details elliot@gentryaz.com or call 480-248-0209

LENDER for the project

Sarita Vidal
senior loan officer
p. 602 326 0964
f. 602 441 4417
saritavidal@hotmail.com

The Story:

Ok, yes it is true my net worth in Real Estate was over a million at the age of 25. But don’t salivate too much there Pavlov. I am now 28 so it all happened in early 2005. What has happened the past 3 years in Real Estate? I ask that to make sure that you are awake reading this, ok now that you are awake this is what the Wall Street Journal said two days ago on what happened? May 6^th article The Housing Crisis Is Over- “Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005.”

Confession:

So I admit it, there has been a bust the past three years. My net worth also busted out of its shell, as a dead hen to hatch no more eggs. My Golden Goose was killed. I lost my butt (literally, but it was already gone to start with) Big deal I have a good excuse I was 25 and did not know better. I bought low, did not sell high now I am back to low. I really don’t care too much because I have made my first million and now the second time around I know how to do it and I will for sure do it again. I have learned from my mistakes, ask my beautiful wife Alisa, plus all Millionaires out there say you have to loose it to make it again and the second time is easier. You can follow me and my game plan at Investrip.com, so if you want to be the next millionaire in real estate on your block, log in and log in often. Not only am I and Investrip.com going to make it easier for us to make a Million Bucks, Investing in Real Estate. We will make it fun!!

Game Plan:

How will we do this together with Investrip.com? Wall Street Journal says, “The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.” OK, ask yourself how will we do this again? This is how. NOW IS THE TIME TO BUY, BUY, AND BUY. As the pro said it “when people get greedy I get scared, when people get scared I get greedy.” Where are we going to buy? Follow Investrip.com or call my cell 480-283-4425 to see where the pros are buying.