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TAX-FREE GAINS FROM HOME SALES

27 OCT TAX-FREE GAINS FROM HOME SALES

One of the most significant tax advantages to owning a home comes at the back end of ownership, when you decide to sell it for a profit. A homeowner can exclude up to $250,000 of such profit from the federal capital gains tax. For married couples filing a joint tax return, the exclusion jumps to $500,000.

This big tax break does come with some basic requirements. It applies to the sale only of a principal residence, not of a vacation home or investment property. With some limited exceptions for poor health, job changes, and unforeseen circumstances, the taxpayer must have owned and used the home as a primary residence for at least two of the five years preceding the sale of the home. (But the two years need not be an uninterrupted time span.)

If the history of the home includes some business use, the owner cannot exclude that part of the gain that is equal to the depreciation claimed while the house was used as rental property. This scenario could arise when the owner rents out the house for a period of time but then moves back in, sells it, and otherwise qualifies for the exclusion related to that sale.

There is another two‑year rule that comes into play after a taxpayer claims the home‑sale exclusion. There is no limit to the number of times that the exclusion can be claimed for multiple sales, but, as a rule, once the exclusion is claimed, the taxpayer must wait two years before claiming another such exclusion.

For a married couple to qualify for the exclusion, it is sufficient if either spouse meets the ownership requirement. However, both spouses must meet the use requirement. Neither spouse is rendered ineligible for the exclusion because he or she had already excluded the gain on a different primary residence during the two years preceding the date of the current sale.
By Tyler McLeod 29 Jul, 2020
Estate Planning has likely been on many people's minds during the past few months due to the pandemic, and many may have wondered how to create a Will, Trust or Power of Attorney during a time when many people want to reduce face to face contact with other people. The typical estate planning documents consist of a Will, Power of Attorney for Financial and Health Care Decisions and a Living Will (Declaration for a Natural Death). The following are three different options for creating these documents during a pandemic: Option 1- ONLINE LEGAL SERVICE The first Option, which has no doubt become more popular during the pandemic, is to use an online legal service such as LegalZoom to create your Estate Planning Documents. The convenience of this option is the obvious benefit, though most experts in estate planning may tell you that it is a little like using WebMD to do your own heart surgery. In States which do not currently allow Electronic Wills, the online legal service does not completely solve the problem, as you still must sign the Will in the presence of a notary and two witnesses. Therefore, while the online legal service may help you create a Will, it does not help you execute the Will, which is necessary to make the Will legal and give it any effect at all. Option 2- CONTACT AN ESTATE PLANNING ATTORNEY In general, creating a Will with an attorney consists of two meetings. The first in person meeting is the initial consultation with the attorney to provide the attorney with the information regarding family, finances and wishes for the estate plan, and for the attorney to advise the client as to options for the estate plan. Typically, the second in person meeting is when the client comes in to review and sign the documents to complete the estate planning process. In between the first and second meeting, the attorney will work on the documents, and likely communicate with the client via email or telephone to confirm details and discuss any issues which were not discussed in the first meeting. The attorney would then send the documents to the client to review and schedule the second in person meeting in which the client will sign and finalize the documents. Option 3- A COMBINATION OF THE FIRST TWO OPTIONS The third option, and most likely the best option during a pandemic, is using an estate planning attorney who uses technology to minimize the contact between client and lawyer. Attorneys can offer video conferences for the initial meeting, while using client intake forms and email to gather any necessary information or documentation from the client. The first meeting can certainly be avoided through the use of technology, but the second meeting to actually sign the documents is much more difficult to avoid. The main problem with using an online service is you do not have the guidance or instruction of an attorney to assist in helping you create your Will and other estate planning documents. However, using an estate planning attorney to create your Will is difficult during this COVID-19 Pandemic, especially if you are fearful of being around other people, and that is mainly because the law still requires you to be physically present with a notary public and two witnesses during the execution (signing) of the Will. There are many States that have recently issued executive orders which allow for some form of electronic signing for Wills, with the requirements for such varying among the states. However, it appears that many attorneys are not utilizing this option as many attorneys still prefer the in person signing that they have always used in the past. Our firm primarily practices in South Carolina which has not allowed any form of electronic signing for Wills. Our firm is utilizing the third option by offering to use video conferencing technology (typically skype or zoom) for the first meeting and communicating with client using email, text and telephone to gather information and advise of the plan. For the second meeting, since South Carolina does not allow electronic Wills, clients must still come in to sign the documents, but we are taking precautions such as masks, outdoor tables and sanitizing after every meeting. We are trying to make the process as easy as possible to enable people who want the peace of mind of an estate plan while also reducing the risk of in person meetings at this time. If you would like to setup a zoom call for a consultation please fill in the information below to send us a Message and one of our estate planning attorneys will be in touch shortly.
By Tyler Mcleod 06 Feb, 2020
Brown Massey Evans McLeod & Haynsworth, LLC announces that Tyler McLeod has become a Member of the Firm. Tyler McLeod , an associate at Brown Massey Evans McLeod & Haynsworth, LLC for the past five years, has become a Member of the firm. Tyler worked hard and excelled in all areas of his work to earn this opportunity. Tyler will continue to serve his clients in the areas of estate planning, probate/corporate litigation, corporate law, tax law and real estate. He will also continue his work on the Probate Planning Estate and Trust committee on Electronic Wills and work to help develop legislation for an Electronic Wills Act for South Carolina. The firm is very proud to announce Tyler McLeod as a Member of Brown Massey Evans McLeod & Haynsworth, LLC.
By Hayes Wynn 22 Feb, 2015
The U.S. Department of Labor publishes a guidebook to provide businesses with general information on the laws and regulations that the Department enforces. The guidebook describes the statutes most commonly applicable to businesses and explains how to obtain assistance from the Department for complying with them. The authority of the Department of Labor extends to many statutes, but the following are several that affect most employers: Employee Retirement Income Security Act (ERISA); Occupational Safety and Health Act (OSHA); Fair Labor Standards Act (FLSA); and Family and Medical Leave Act (FMLA). The Employment Law Guide: Laws, Regulations and Technical Assistance Services can be accessed at www.dol.gov/compliance/guide.
By Hayes Wynn 30 Jan, 2015
Even if you have a relatively modest estate, life insurance can be an important aspect of estate planning for the obvious reason that it can substantially increase the value of your estate. Where the death of a person is premature and a young family is in need of support, life insurance may be the primary means for the family’s financial survival. Even in larger estates, life insurance can be useful by providing the liquidity necessary to pay estate taxes and expenses without the necessity of selling off assets that a family would prefer to keep intact. Additionally, life insurance, unlike many other assets, does not have to go through a time‑consuming administrative process before it becomes available to beneficiaries. Therefore, life insurance can be an immediate source of funds for a surviving family. Estate Taxes and Life Insurance As is true of any aspect of estate planning, one objective is to minimize the federal estate tax effect that life insurance can have. The primary tax issue that arises is whether the insurance proceeds are included in the estate for federal estate tax purposes. Including the proceeds could generate additional estate tax liability and reduce the amount of the proceeds that are available to the decedent’s heirs. The fundamental rule is that the gross estate will include the value of life insurance proceeds if (1) the proceeds are payable to the decedent’s estate and are thus receivable by the executor, or (2) the proceeds are payable to other beneficiaries, but the decedent possessed at his or her death any of the “incidents of ownership” with respect to any policy. The term “incidents of ownership” is defined more broadly than to be limited to the legal ownership of the policy. The term includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy or pledge it for a loan, and to obtain a loan from the insurer against the surrender value of the policy. There are other indirect ways that the decedent can be found to possess incidents of ownership. For instance, if the decedent is the controlling shareholder of a corporation that possesses an incident of ownership, such possession is attributed to the decedent. Another scenario that will result in the inclusion of life insurance proceeds in the decedent’s estate arises under certain circumstances where the decedent was the initial owner of the policy but transferred such ownership to another person or entity within three years of his or her death. Thus, even where the decedent has rid himself or herself of all incidents of ownership in the policy, there is still the possibility of inclusion under this three‑year rule. Keeping Life Insurance Proceeds Out of Your Estate A common device for handling the life insurance aspect of an estate plan is the life insurance trust. Typically, a person would initiate the life insurance coverage by acquiring the policy. He or she would then transfer all incidents of ownership of the policy to a previously created irrevocable trust, which would be the named beneficiary on the policy. Assuming that the person survived until at least one day more than three years after the transfer of the policy to the trust, there would be no inclusion of the proceeds in the settlor’s estate. If a policy is transferred within three years of death, the proceeds are included in the estate. If the trust itself acquired the policy, the person would never be the owner and the three‑year rule would not apply. The problem would be that the person could neither direct nor require the trust’s acquisition of the policy without risking the possibility that he or she would be regarded as the original owner of the policy for purposes of applying the three‑year rule. Therefore, it is important that the trustee be completely independent of the decedent. An insurance trust can also have the practical effect of serving as a means of coordinating the collection, investment, and distribution of the proceeds of several policies. An insurance trust can hold other assets that the decedent transferred to it during his or her life. The trust can also receive assets “poured over” to it by the decedent’s will. If life insurance is to be an element of your estate plan, it should be carefully integrated with the other aspects of the plan. Be sure to seek the guidance of a qualified professional to assist you.
By Hayes Wynn 17 Nov, 2014
“Eminent domain” is the power of the federal, state, or local governments (and, in some limited circumstances, private parties, such as utilities and railroads) to take, or to authorize the taking of, private property for a public use without the owner’s consent and upon payment of just compensation. That right to compensation is rooted in the federal and state Constitutions. While the delegation of the power of eminent domain is for legislatures, the determination of whether the condemnor’s intended use of the land is for “the public use or benefit” is a question of law for the courts. The public use or public benefit issue has spawned countless legislative and judicial reactions, especially since a controversial U.S. Supreme Court decision on the topic in 2005. In that case, owners of condemned property challenged a city’s exercise of eminent domain power on the ground that the takings were not for a public use but, rather, for the benefit of private developers. The Court held that the city’s exercise of eminent domain power in furtherance of an economic development plan satisfied the constitutional “public use” requirement even though the city was planning to lease the condemned land to private developers for execution of the city’s plan. The plan nonetheless served a public purpose, in the form of enhanced economic development, including such beneficial effects as the increased tax revenues and new jobs expected to come with such redevelopment. Recently a city withstood a similar challenge to its use of eminent domain to acquire an easement on a private landowner’s property in order to expand a sewer system by connecting city‑owned property to a sewer pump station underneath the landowner’s property. The taking was for a public use even though the city ultimately planned to sell its property to a private affordable housing developer, because the sewer easement area would be available to the public at large in accordance with the appropriate rules, regulations, and standards of a metropolitan sewer district. Apart from the constitutional requirements, the taking of the easement satisfied a state statutory mandate that a taking by a governmental entity must be for a “public use or benefit.” Under the public benefit test for eminent domain, the city’s desired use of the condemned property was for “the public use or benefit” because that use would contribute to the general welfare and prosperity of the public at large, not just particular individuals or estates. In the case before the court, extending the sewer lines would allow development of the city’s neighboring property, which the city sought to sell to the private developer to construct affordable housing. The existing pump station had sufficient capacity to service the city’s land, and requiring the city instead to construct a sewer pump station on its land would have resulted in wasteful and unnecessary duplication of the city’s resources. These facts added up to a public use or benefit justifying the taking, notwithstanding some benefits undeniably accruing to private parties as well.
By Hayes Wynn 06 Oct, 2014
The purpose of recreational‑use tort immunity statutes, which are common across the country, is to encourage private and public landowners to make their property available for public recreational use. To advance this public interest, these laws usually immunize the owners or occupants of real property from negligence liability toward people entering the land for recreation, often on the condition that the property is made available for use free of charge. Typically the statutory immunity stops short of protecting defendants from liability for greater degrees of wrongdoing, such as acts or omissions that can be characterized as willful, malicious, or grossly negligent. Originally the perceived need for immunity arose because of the impracticability of keeping large tracts of mostly undeveloped land safe for public use, but the concept has evolved so that it need not necessarily involve vast expanses of wilderness. The conditions for recreational‑use immunity can vary somewhat with the wording of the states’ statutes, requiring case‑by‑case rulings depending on the facts before a court and the wording of each state’s law. In keeping with a commonly recognized rule of statutory construction, because recreational‑use immunity statutes limit common‑law liability that predates such laws, a court must strictly construe language in the statutes in order to avoid any overbroad statutory interpretation that would give unintended immunity and take away a right of action for injured persons. When a golfer at a city‑owned golf course slipped and fell on a walkway leading to a tee box, he claimed that the walkway was dangerously steep and narrow, causing his injuries. The city defended on the basis of a state recreational‑use immunity law. Before an intermediate appellate court, the city prevailed on one issue, about the golf course’s coming within the statute, but the case was sent back to the trial court for resolution of a second issue, concerning the legal status of the injured golfer. The golf course was sufficiently similar to “park” lands to be included in the definition of “premises” under the recreational‑use immunity statute even though there is no express mention of golf courses by the legislature. The golf course fit within the common definition of a “park,” as it was a parcel of property kept for recreational use that was designed and maintained for the primary purpose of allowing users to engage in a recreational activity. Not only that, but the statute’s list of types of land uses constituting covered “premises” includes a catch‑all reference to “any other similar lands.” However, for the immunity to apply to the city, it was also necessary for the golfer to have been a “recreational user” under the law. This, in turn, meant that the golfer must have paid either no admission fee or no more than a “nominal fee,” to use the term from the statute. In this case, there was no question that a fee was paid to play golf, but since the lower court had not reached the question of whether that fee was “nominal,” it would have to decide that issue. Generally a nominal fee is one charged only to offset the cost of providing the educational or recreational premises covered by the immunity statute. Some of the factors affecting this issue might include, for example, the amount of the fee, the extent to which it approximates the value of the service received in exchange for it, and the fees charged for similar recreational uses in the community. In something of an ironic twist, if it were to be found that the golfer had paid no more than a “nominal fee,” then in exchange for that inexpensive round of golf, the golfer will have ultimately paid a higher “price” in the form of being precluded from recovering damages from the golf course owner for negligence.
By Hayes Wynn 22 Sep, 2014
A power of appointment is the power given to someone to allow that person to designate who will receive property or an interest in property. The creator of the power is called the donor, the individual having the power is the powerholder, and the possible recipients of the property are permissible appointees. Powers of appointment used for estate planning have many variable forms. The powerholder may hold the power in a fiduciary capacity (such as the trustee for a trust) or nonfiduciary capacity. The power may be presently exercisable by the powerholder or may be exercisable only in the future, such as by the powerholder’s will. The powerholder may or may not be the creator of the power. There may be multiple powerholders who must act jointly or a single powerholder. The persons in whose favor the power may be exercised may be unlimited, including the powerholder (sometimes called a general power of appointment), or may be limited. The beneficial interests that may be created in the appointees in whose favor the power may be exercised may be unlimited or limited. Various legal consequences in regard to powers of appointment will be affected by the restrictions imposed on the powerholder. The trustee of a trust, a common type of powerholder, may be given discretion by the donor to invade principal for a life income beneficiary or for some other person, or discretion to pay income or principal to a named beneficiary, or discretion to allocate income or principal among a defined group of beneficiaries. In short, the discretion given to the trustee gives the trustee the power to designate beneficial interests in the trust property as future developments indicate. This discretion in the powerholder underscores the primary advantage of using powers of appointment—they provide flexibility to adjust an estate plan to deal with circumstances that may arise years, or even decades, after the estate plan is created. The flip side to this flexibility is the power of appointment’s main disadvantage for some—it means that the donor must give up some control over the ultimate disposition of assets in the estate. There are other potential ramifications for powers of appointment that should be taken into account. For example, assets subject to a general power of appointment will be included in the estate of the powerholder, which could create unfavorable tax consequences. In addition, an improperly exercised limited power of appointment may become a general power of appointment under the law. All in all, whether to use a power of appointment and, if so, with what characteristics, are questions best answered with the advice of a lawyer well versed in estate planning.
By Rooted Grow360 05 Sep, 2014
The ageless advice to read, understand, and expect to be bound by language in a contract you sign is as sound now as ever. It is especially important with respect to contracts to buy real property, where the financial stakes are often high. Jerome contracted to buy property, delivering a $5,000 deposit to be credited toward the purchase price. An addendum to the contract agreed to by the parties stated that in the event the seller breached the agreement or defaulted, Jerome was entitled to the return of his earnest money and cancellation of the contract, as his “sole and exclusive remedy.” When the seller did not close on the deal within the time set by the contract, according to Jerome because there had been a defect in its title to the property that was later remedied, Jerome sued to enforce the contract. That is, he sued to force a sale of the property to him, as he was not content with the prospect of simply getting his $5,000 back, terminating the deal and returning to square one. A court held Jerome to the terms of the contract addendum, ruling that he was entitled to no more than his money back from the seller. In some cases, an aggrieved party may be relieved of the limitations or burdens of a contract when the unequal bargaining positions of the parties are such as to deprive the aggrieved party of a meaningful choice and where the terms of the contract are unreasonably favorable to the other party. Jerome made this argument in an attempt to rid himself of the limitation on his contractual remedy, to no avail. The problematic addendum, in bold language no less, warned the parties to read it carefully before signing and included an acknowledgment that Jerome was knowledgeable and experienced in financial and business matters and able to assess the transaction’s merits and risks. The court also declined to find that limiting Jerome to the return of his earnest money deposit was unreasonably tilted in the seller’s favor. It simply restored the parties to their positions prior to signing the contract. In a loose sense, Jerome may have been the “victim” of a broken contract, but he was not such a disadvantaged victim under the law as to be entitled to set aside any of the terms of his contract, including the one that boxed him in when he was seeking a remedy. No less important than reading and understanding all parts of a real estate sales agreement is the need to be up front with the other party to the transaction about the condition of the property, especially as to a problem that is not obvious. In another case, this was an expensive lesson to learn for a seller of a home who was less than forthright with the buyer about defects in a basement wall. In the litigation that ensued when the buyer sued the seller for fraud and negligent misrepresentation, the buyer testified that at first he was actually impressed with the finished basement in the house, with its drywall all around and a polished floor you could eat off of. But some months after he moved in, the buyer noticed a worsening problem with water leaking from one of those basement walls. When workers removed the drywall to explore further, they exposed a basement wall that was bowed, had cracks both small and large, and had mold and mildew. Layers of caulking in some of the cracks suggested that someone had tried in vain to fix the problem on the cheap. The new owner then did fix the problem, but at great expense. Although the seller had answered no on a disclosure form to questions about any known water problems or cracks and settling issues in the basement, other evidence suggested that the real answer should have been yes. The seller claimed that he just happened to put up the drywall in the basement as the last item on a to‑do list, at a time when he was not intending to sell the house. Records showed that there was no drywall when the house was first listed and did not sell, but that the drywall was in place less than a year later for the second listing that resulted in the sale. For his lack of candor, the seller paid a high price. An appeals court upheld an award of tens of thousands of dollars in damages to the buyer. In addition to damages for mental anguish, there was compensation to the buyer for those costs of repair he incurred for such items as the installation of an exterior drainage system, the repair of the footer drains, and the installation of multiple straps to repair the bowed wall. Last but not least was a significant award of punitive damages, based on the trial court’s conclusion that the seller had acted with “conscious disregard” for the rights and safety of the buyer, where there was a great probability of causing substantial harm. All in all, the case stands as an object lesson: In selling real estate, as in most undertakings, honesty is the best policy.
By Hayes Wynn 25 Aug, 2014
Estimated tax is the method used to pay tax on income that isn’t subject to withholding, most notably earnings from self‑employment. Many owners of small businesses—whether operated as S corporations, partnerships, limited liability companies electing partnership taxation, or sole proprietorships—pay their estimated tax using the same IRS Form 1040‑ES that individuals use. Payments of estimated taxes are spread out over four payments, falling due in April, June, and September of the current year, and January of the following year. Generally a taxpayer must file estimated taxes if he or she owes $1,000 or more in taxes when an annual tax return is filed. An underpayment penalty can be avoided if tax payments for the year, including withholding and any tax credits, cover the ultimate tax bill, or at least are short by less than $1,000. There are special rules for farmers, fishermen, certain household employers, and some higher‑income taxpayers. A taxpayer who also receives salaries and wages may be able to avoid having to make estimated tax payments on other income by asking his or her employer to take out more tax from such earnings. In addition, in a given year a taxpayer does not have to make estimated tax payments until there is income on which income tax will be owed. Given the difficulty in anticipating the year’s total tax obligation in April, or even June, there are two “safe harbors” for avoiding a penalty for underpayment of estimated taxes: Pay either 90% of your current year’s tax obligation or 100% of the previous year’s tax. Corporations are subject to similar, but slightly different, rules for paying estimated taxes. A corporation must make equal installment payments on the 15th day of the 4th, 6th, 9th, and 12th months of its tax year if the expected tax for the year is $500 or more. Corporations use IRS Form 1120‑W. The safe harbors for corporate taxpayers are each set at 100%. Accordingly, to avoid a penalty, a company should make each payment at least 25% of the current year’s income tax or 25% of the prior year’s income tax, whichever is smaller.
By Hayes Wynn 05 Aug, 2014
There is a federal law that affords consumers significant say over the privacy of their financial information while still allowing financial institutions to share information for normal business purposes. This Act covers banks, savings and loan institutions, credit unions, insurance companies, securities firms, and even some retailers and automobile dealers that extend or make arrangements for consumer credit. There may be more forms of personal information gathered by the institutions than you realize. They may have credit reports and records of how much you buy and borrow, where you shop, and how well or poorly you pay your bills on time. The Act protects your financial privacy in three basic ways: First, in a privacy notice, the institution must tell you what kinds of information it collects and the types of businesses that may be provided with it. Institutions must send out a privacy notice once a year. Second, if the institution is going to share your information with anybody outside its corporate family, it must give you the opportunity to “opt out” of that kind of information sharing. The third layer of protection requires the institutions to describe how they will go about protecting the confidentiality and security of your information. A privacy notice from your bank may not be the kind of mail you rip open with eager anticipation, but you should take the time to look it over carefully all the same. Somewhere in the formal verbiage you should look especially for these items: What kinds of information may be shared, both with affiliated companies and with outsiders? Don’t expect great specificity on this in the notice itself. The Act requires only a description of basic categories of information, with some examples. What information can you not prevent your financial institution from sharing? Recognizing some circumstances in which the institutions should be allowed to share financial information with outsiders without the consumer’s consent, the Act does not allow you to stop the sharing of information that is needed to help conduct normal business (such as for outside firms that process data or mail statements); to protect against fraud or unauthorized transactions; to comply with a court order; or to comply with a “joint marketing agreement” entered into with another institution. How do you go about “opting out” of the sharing of information of outside entities? Sounds simple enough, but the institution may require you to exercise this option by calling a specific phone number or by completing a form and mailing it to a particular address. If you opt out by phone, to be safe you may want to follow up with a written version, keeping a copy for your records.
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