Update to California Real Estate Finance, 4th Edition

Update to California Real Estate Finance, 4th Edition

Minnie Lush and David Sirota

On August 5, 1997, President Clinton signed an important and wide-ranging tax bill. We are including this update to ensure that you have the most current and accurate information possible. Specifically, the new tax law includes the following changes:

A new $500,000 exclusion from capital gains tax for profits on the sale of a principle residence by taxpayers who file jointly. (Single-filers are entitled to a $250,000 exclusion.) The exemption may be used repeatedly, as long as the homeowners have occupied the property as their residence for at least two years. This new provision is effective retroactively to May 7, 1997. Homeowners who sold their homes, or who entered into binding sales contracts between May 7 and August 5 may choose whether the sale is governed by the old law or the new one.

For most homeowners, the net result of the new law is that they will never pay capital gains tax on the sale of their homes. Of course, sellers of higher-bracket homes, or those who have accumulated profits over time that exceed $500,000 will continue to face federal capital gains taxation. Individual state tax laws may or may not change to reflect the federal reforms.

The applicable capital gains tax rate is reduced. In addition, a new 1998 tax law reduces, retroactively for sales or exchanges after 1997, the required holding period for a noncorporate taxpayer from 18 months to 12 months for long-term capital gain. The mid-term type of capital gain has been eliminated. [NEW 1998 AMENDMENT]

First-time home buyers may make penalty-free withdrawals from their tax-deferred individual retirement fund (IRA). The limit on such withdrawals for a first-time down payment is $10,000.

The $125,000 one-time over-55 exclusion is eliminated.

Rollover of gains from old to newer properties is eliminated.

The federal estate tax exemption will be incrementally raised to $1 million in assets by the year 2007, from the current level of $600,000.

In California, a seller or seller’s agent must disclose to a prospective buyer that the property is located within one or more of six specified natural hazard zones (effective June 1, 1998). These six zones are: SEMA flood hazard zone, an area of potential flooding after a dam failure; very high fire hazard severity zone; a wildland fire area; an earthquake fault zone; and a seismic hazard zone. Additional geological hazard disclosures may be required.

Update to California Real Estate Finance, 4th Edition

Minnie Lush and David Sirota

To help students prepare for their exam, six new review and sample exam questions covering the new tax provisions are reprinted below.

1. T, a single person, bought her home eighteen months ago, and has found a new job in another city. U and V are a married couple who file jointly, but have owned their nine-bedroom home for only three years. Now, U and V want to move to a small condominium unit. W, a single person, has owned his home for seventeen years, and will use the proceed from his sale to purchase a larger house. Based on these facts, which of these people is entitled to the $500,000 exclusion?

a. T only c. U, V and W only

b. U and V only d. W and T only

2. For purposes of determining capital gains tax liability, all of the following factors are relevant considerations, EXCEPT:

a. the marital or filing status of the taxpayer.

b. the profit on the sale of the property.

c. how long the taxpayer has lived in the home.

d. whether or not the taxpayer is over 55 years old.

3. What is the capital gains tax exclusion available to homeowners who file their income taxes singly?

a. $125,000 c. $250,000

b. $225,000 d. $500,000

4. If a jointly-filing homeowner realizes a profit from the sale of his or her home that exceeds $500,000, what is the result?

a. The homeowner will not pay capital gains tax if he or she is over 55.

b. Up to $125,000 of the excess profit will be taxed as a capital gain.

c. The excess gain will be taxed at the homeowner’s income tax rate.

d. The excess gain will be taxed at the current applicable capital gains rate.

5. One result of the new tax law enacted in 1997 is that most homeowners

a. will pay capital gains tax at an eight percent lower rate on their home sales.

b. may use a one-time $500,000 exclusion if they file their taxes jointly.

c. will never pay capital gains tax on the sale of their homes.

d. will be permitted to use the $125,000 over-55 exclusion more than once.

6. C is a single person who is buying her first home. D and E are a married couple, who are selling their large condominium and using the proceeds to purchase a small house in the country. F is single, and is selling a modest two-bedroom house in order to purchase a condominium of approximately equal value. Which of these taxpayers will be permitted to make a penalty-free withdrawal from their IRA to assist with their purchase?

a. None of them c. D and E only

b. F only d. C only

Answer Key 1. b 2. d 3. c 4. d 5. c 6. d

Update to California Real Estate Finance, 4th Edition

Minnie Lush and David Sirota

Additionally, the following corrections should be made to California Real Estate Finance, Fourth Edition:

Pg. 79 Question 7 choice d should read "Private lenders."

Pg. 113 Question 4 choice c should read "semi-fiduciaries."

Pg. 202 Question 4 choice a should read "pay the senior loan balance in full." Question 4 choice d should read "change the terms of the junior loan."

Pg. 328 Under Example, the first sentence should read "…five months’ taxes ($1,200 ) 12 = $100; $100 x 5 = $500)…"

Pg. 338 Question 1 should read "An example of active notice is a/an:"

Pg. 339 Question 10 should read "Which of the following amounts is the interest adjustment on a new $100,000 loan at 9 percent interest…"

Pg. 352 The second sentence in the fourth paragraph should read "This premium is 6 basis points or .06 % (.0006)."

Pg. 387 The word "redemption" should be deleted from question 9.

Pg. 475 Chapter 3, question 7 should be "a."

Chapter 5, question 3 should be "a."

Chapter 6, question 1 should be "c."

Chapter 12, question 8 should be "a."

Chapter 13, question 10 should be "c."

Chapter 15, question 1 should be "c ($3,400 x .15 = $510; 510 ¸ 12 = $42.50; $42.50 + $100 = $142.50)."