Monthly Archives: December 2009

Estate tax vanishes Jan 1: But watch out for capital gains tax

If you thought inheritance taxes were complicated before, just wait for January 1.

The inheritance tax is abolished starting January 1. But it only stays abolished until December 31, 2010. On January 1, 2011, the old inheritance tax system returns, except that the amount that is free of inheritance tax changes to $1 million per person. Make sense? Of course not.

There is a new wrinkle that makes it all even more confusing. It’s this: Under the “old” system that expires December 31, 2009 and the new system that starts January 1, 2011, assets that the deceased owned received a “stepped-up basis.” This  means that the value of an asset is reset to its value on the deceased’s date of death. For example, if a client bought a house in 1980 for $100,000 then died in 2009 when the house was worth $300,000, and the house was sold after the deceased’s death, so no capital gains tax was due when the asset was sold because the “basis” or cost of the house was increased to $300,000. This applied to all property owned by the deceased.

Well, the stepped-up basis rules all change on January 1, 2010. Now, “stepped-up basis” is replaced by the term “carry-over basis.” This means that the basis of the deceased property owner carries over to the heirs and is not stepped-up (but of course there are exceptions, naturally).  If the asset is sold, capital gains tax must be paid by the heirs.

The new rules on carry-over basis are:

  1. $1.3 million or less in property still gets a stepped up basis.
  2. Any amount inherited over $1.3 million does not get a stepped-up basis. If this property is sold, capital gains tax will be paid by the heirs on the gain.
  3. An additional $3 million can be left to a surviving spouse and will get a stepped-up basis.

Complicating matters even more, Illinois decoupled from the federal inheritance tax system for a few years. This made is possible for large estates of over $2 million to pay inheritance tax to Illinois, but not to the U.S.  Thankfully,  for 2010, there is no Illinois inheritance tax to worry about.

What to make of all this? It is wise to review your will or trust with your attorney to address these complicated and ridiculous rules to be sure that you don’t call into a carry-over basis trap.

Still waiting for new form 5405

For closings after November 7, 2009, a new form 5405 is required to file for the $8000 first-time buyer tax credit and the $6500 move-up buyer tax credit as I discussed here.

Please don’t use the 2008 Form 5405 for closings after November, 7, 2009, because your tax refund will not be processed.

The IRS website is saying that the new form will be issued by January 8, 2010, so it won’t be too much longer.

What’s easier: Modify your loan or win the lottery?

A loan modification happens when a homeowner is a few months behind on mortgage payments. The lender agrees to modify the loan and adds the missed payments to the end of the loan in an attempt to help the homeowner avoid foreclosure.

The problem is that lenders reject many applicants for loan modification and most of those granted are temporary.  Matt Hernacki points out that a homeowner has about the same chances of winning the lottery as he or she does of getting a loan modification.

All of the generic media stories about foreclosure tell homeowners to “communicate early” with their lender. It’s a sad truth that the lenders are overwhelmed with delinquent mortgages. They really have no interest in talking with borrowers. They pay lip service to loan modifications and really do nothing to help the homeowner in trouble.

Buyers will need to wire funds to closing

In addition to the new HUD-1 form that will have to be used for closings after January 1, 2o10, buyers will have to wire funds to closing if they owe more than $50,000.00 to close.

Very few buyers wired funds to closing in the past. Most obtained a cashier’s check for the funds due at closing. Cashier’s checks will still be accepted for amounts under $50,000.oo.  The definition of “good funds” will include a title company check obtained from a sale closing.

New HUD-1 form released

Anyone that participates in real estate closings is dreading the new HUD-1 form that is required beginning 1/1/10.

The new HUD-1 form (this is the closing statement that shows all of the sellers and buyers costs and their “bottom lines”) includes a third page that references the good faith estimate given to the buyer by the lender.  It directly compares the figures from the good faith estimate with the final, actual figure.

It’s a step in the right direction, but it strikes me as complete overkill.  Predatory, overcharging lenders were a problem 4 years ago, not now.


Wait for new form to file for real estate tax credit

It’s great that the$6500 move up buyer tax credit was added and that the $8000 first-time buyer credit was extended.  But, IRS is advising buyers to wait until the end of December to file for the tax credit until it issues a new form 5405 that reflects the new changes.

Real estate writer Ken Harney (a consistently excellent writer) says that if you file for the credit using the “old” form 5405 (which is still on the IRS website), it is likely that the tax rebate will linger or not be processed at all.

So anyone who bought after November 6 of this year should wait until later this month for the new form 5405 before amending their 2008 taxes.