Final Home Sale Exclusion Regulations,
Late IRA Rollover Relief, Student Loan Interest.
Volume 12, Number 52,
Issue 599
IRS Releases Final Home Sale Exclusion Regulations. If you have owned your home and used it as your "principal residence" for at least two out of the last five years, you can exclude up to $250,000 of the gain ($500,000 on a joint return) when you sell it. The IRS recently issued new regulations that, in several situations, expand this rule. For example, contrary to an earlier IRS position, the new regulations generally allow you to exclude gain that would otherwise be allocable to your "qualified home office" (except for depreciation taken on the home office after May 6, 1997). The new rules also allow you to exclude gain when you sell land adjacent to your residence so long as the land is sold within two years of the sale of your home and the land has been owned and used as part of your residence for at lease two years during the five year period ending with the date of the sale. The regulations provide rules that will automatically allow you to claim a portion of the exclusion when you have not owned and used the residence for the required two-year period, but you sell the home because of a change in place of employment, health reasons, or certain unforseen circumstances. For example, the regulations say that you are automatically entitled to pro rate the exclusion if you sell your home: for health reasons and pursuant to a physician's recommendation; because of an employment change satisfying a 50-mile test; or because of a divorce, a legal separation, or a natural disaster.
IRS Grants Relief for Late IRA Rollovers. If you receive a distribution from your IRA or qualified retirement plan, and you want to avoid taxation, you typically must roll the distribution over into a new IRA or qualified retirement plan within 60 days. You generally are allowed only one tax-free rollover of an IRA each year. If an IRA account is rolled over more than once each year, the amount involved in the second rollover is taxed and could be subject to a 10% penalty. However, there are no limits on the number of times you may have direct "trustee-to-trustee" transfers of your account between IRA trustees. If you wish to change your IRA trustee (e.g., move your IRA from one financial institution to another), please call us and we will assist you with a trustee-to-trustee transfer.
The IRS generally allows extensions only where the taxpayer intended to rollover the funds at the time of withdrawal and illness, death, bad advice, or misunderstandings of the law caused the taxpayer to fail to complete the rollover within the 60 day period. Obtaining an extension of the 60-day rollover is a time-consuming process. The best policy is always to complete the rollover within the 60 day period. Or, better yet, don't rollover at all. If you wish to change plan trustees, then simply transfer the funds using a trustee-to-trustee transfer. In a trustee-to-trustee transfer, the check for the amount transferred should be written to the new trustee, not to you.
Final Regulations for Student Loan Interest. You may deduct (whether or not you itemized deductions) up to $2,500 of interest on qualified student loans. Your deduction phases out as your adjusted gross income increases from $100,000 to $130,000 on a joint return (from $50,000 to $65,000 on a single return). In recently released regulations, the IRS says that loan origination fees or late fees on qualified student loans will generally be deductible as interest. The regulations also say that any payment you make on the loan will first be applied to interest that has accrued and remains unpaid before it will be applied to outstanding principal. Furthermore, if someone else pays your interest, the payment will be treated as a gift to you, and you will then be treated as paying the interest yourself. If you paid any student loan interest in 2004, be sure to provide me with Form 1098-E. This will help me determine your interest deduction for 2004.
David B. Robinson, CPA
This issue is dedicated to the Virginia Assistive Technology Loan Fund Authority. Learn more about them at www.atlfa.org
Index of Previous Issues of Tax Fax
