Principal Residence Gain Exclusion - it's not what it used to be

Somebody had to fund the benefits of the Housing and Economic Recovery Act of 2008 (P.L. 110-289) , and that may very well be you. In order to offset an estimated $2 billion of the cost of the legislated federal relief and stimulus, one of our favorite real estate tax avoidance strategies was dealt a serious blow.

Prior to amendment, Internal Revenue Code Section 121 generally allowed a taxpayer to exclude from taxation the gain from the sale of a principal residence if it was so used by the taxpayer for at least two of the five years preceding the date of the sale. Gain was fully excludable up to $250,000 in the case of a single taxpayer and up to $500,000 in the case of a married couple. This allowed us to avoid recognition of gain on the sale of business or investment property simply by living in it for at least two years before the sale. This was an easy and safe tax avoidance strategy for people who wanted to dispose of rental property or a vacation home without having to reinvest the proceeds in like real estate.

Effective Jan. 1, 2009, gain realized from the sale of a principal residence must be allocated between periods of qualified use and nonqualified use in determining how much of it may be excluded from recognition. Nonqualified use is defined as use other than as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse, and will result in at least partial taxation of gain.

Example: A taxpayer owns two properties. One is his principal residence in Boulder which he purchased in 1992. The other is a Vail vacation condo purchased Jan. 2, 2009 for $400,000. His plan had been to sell the Boulder house this fall, pocket the cash, and then move into the Vail condo on Sept. 2, 2009, when it will be worth no more than what he paid for it. The former investment property was to be converted to his next principal residence eligible for full gain exclusion merely by his living in it for the next two years. He was then going to sell it on Sept. 2, 2011, for $650,000 (happy days are here again), and pocket the entire $250,000 gain tax-free. Although that would have worked in the past, under the amended law, the taxpayer is going to have to write a check to Uncle Sam.

Let’s look at the math: The period of ownership from January 2009 through September 2011 is 32 months. The period of nonqualified use of the Vail condo before it was converted to the principal residence was eight months, or 25 percent of the time the taxpayer owned the condo. That means that $62,500 - or 25 percent - of the $250,000 gain is now taxable.

It does not matter if there was no appreciation during the period of nonqualified use. It does not matter if the property was purchased with the genuine intention of making it the principal residence as soon as possible. Gain will be taxed if there was any nonqualified use after 2008.

Although the portion of the gain from the sale of property converted from investment or business use will be reduced the longer the taxpayer occupies it as his principal residence, it will never be entirely eliminated. At least for now, this loophole has been substantially narrowed, and we will need to look to other strategies to shelter, defer and exclude gain from the disposition of real estate.

While economists see improvement coming, real estate lags behind

Economists are touting the end or near-end of the recession this quarter, but the real estate market – which lags the condition of the economy by six to 12 months – continues to reflect the struggles we experienced from the summer of 2008 through early 2009.

Ken Hotard, senior vice president of public affairs for the Boulder Area Realtor Association, says with the delayed summer sales he expected, he thought the July market statistics for Boulder County would have showed more gains than the “modest improvement” from June’s sales they reflected.

“The reality is sales in July are down 10 percent from last year; but month-to-month, comparing June with July, it was stable,” he says. “An additional few homes sold in the market over that period – not a robust market. I expected to see more improvement than that. I’m a bit disappointed that we didn’t see more strength. But we continue to see difficulty with residential lending and the jumbo loans are still very difficult to get at this time.”

The market is still driven by economic uncertainty and tighter financial markets, Hotard says.

“Some folks are adjusting prices to move property but in a lot of cases, there’s only so far you can go,” he says.

Hotard adds, “I think home prices are holding up pretty well in this market. Boulder had only a 2.2 percent decline; given the weakness of the market, that’s astonishing. And its average sale price year-over-year increased almost a half percent.”

While the economy may have hit bottom and is on its way up, it’s going to take some time before the real estate market reflects those improvements, he says. Hotard stands by his previous projection that the housing markets will begin a slow but sustainable growth in the second half of 2010.

“I do think we’re on the bottom and I think we’re going to stay there for a while,” he says. “I don’t see the economic recovery necessary to propel area home sales forward.”

People are still losing their jobs and companies aren’t adding enough jobs to support dramatic improvement in the real estate market, though it shouldn’t get worse, Hotard says.

“I think area housing markets are relatively stable,” he says, noting Boulder is doing well compared with other parts of the nation. “We are fortunate to be here.”

And the market continues to offer as a great opportunity for investment, especially as the fall semester of college gets underway, Hotard says.

“It’s a great time for parents to invest, to provide housing for their student to live in and watch that investment grow over the course of that student’s college career,” he says.

National speakers slated for Fall Real Estate Conference

Re/Max of Boulder's Fall Real Estate Conference is set for November 19, 2009. Here's just a teaser on the speakers - more will follow. But save the date!


Paul C. Bishop, Ph.D., Managing Director, Real Estate Research

Paul Bishop is the Managing Director of Real Estate Research at the NATIONAL ASSOCIATION OF REALTORS®. Dr. Bishop leads the Research Division’s survey and market research activities including analysis of real estate business and policy issues.

Prior to joining the NAR in 2001, Dr. Bishop was a Senior Financial Economist in the Division of Insurance at the FDIC. Between 1991 and 1996, Dr. Bishop was a Senior Economist at the WEFA Group in the Regional Consulting and Forecasting Group where he managed the state and metropolitan area forecasting service and worked with clients on numerous consulting projects. Dr. Bishop earned his Ph.D. in economics from the University of Illinois at Urbana-Champaign and resides in Alexandria, Virginia.

Brad Blackwell, Executive Vice President, Retail National Sales Manager
Wells Fargo Home Mortgage

Brad attended the University of Colorado and started his career in Boulder as a loan officer in 1983. Drawing on his 28 years of mortgage lending and banking business experience, Blackwell focuses on capturing opportunities to strengthen Wells Fargo Home Mortgage’s retail market share and market profitability within all 50 states.

Blackwell was named executive vice president, retail national sales manager, in June 2004 after serving three years as a senior vice president, national sales manager, for Wells Fargo Home Mortgage’s Pacific Markets. He led efforts to double Wells Fargo’s retail share on the West Coast.
Blackwell is responsible for leading WFHM’s Distributed Retail sales team of more than 10,000 home mortgage consultants who originate residential mortgage loans in more than 800 stores throughout the country. The Distributed Retail sales team strives to increase market share using WFHM’s innovative lines of prime, subprime, renovation, reverse, builder, and private mortgage banking products and programs.

Contractors combine form and function in designing outdoor living spaces

Not only has outdoor living become more popular in recent years, it’s become more than just decks and patios, according to Remodeling magazine.

Contractors are installing outdoor living rooms with vaulted ceilings, fireplaces and kitchens, and they’re maximizing whatever views the homeowners have. Here are some of the ways you can make your outdoor living space a bigger part of your dream home:

• Instead of just a pool house to go along with the pool, include a studio for art, architecture, pottery or other useful function;

• Make sure your outdoor living structure blends with the existing house and its roof ties to the house’s roof;

• If you’re building a lanai, or porch or veranda, maximize openings and views;

• Find decorative ways to provide the outdoor living space screening, such as a pergola (trellis) and making tall planter platforms part of the deck rail so they don’t take up floor space and can drain onto the ground;

• A covered outdoor structure creates a more interesting roofline and dresses up what otherwise is a simple box;

• Choose materials for your porch or veranda that hold up well in the outdoors and, more specifically, in your climate;

• Build the design of your outdoor space on paper before you physically build it to work out all the bugs;

• A sliding glass door from the interior to the exterior living space could optimize the view of the lake, mountains or other geography outside your door;

• Your outdoor space should face south, if possible, so that the sun passes over rather than shines in your face in the morning or evening;

• Have your contractor coordinate with the landscape designer and pool installer to coordinate placement of larger structures and to hide equipment.

Boulder named best Colorado city for starting up business

Bigger isn’t always better when it comes to business, especially when starting one. And according to BusinessWeek magazine, Boulder is among the best of smaller cities in which to do just that.

In fact, with a population of 91,000 residents, Boulder is just as good of a place to start a business as San Francisco (population 733,000) and New York (8.2 million), according to research conducted by GIS Planning for BusinessWeek.

According to the magazine, Boulder has 4.72 startups per 1,000 people and 73 small businesses per 1,000.

“What sets Boulder apart is the collaborative spirit of the town. When you start a company in Boulder, instead of every other startup in town trying to beat you, every other startup in town instantly becomes your biggest fan,” says Rob Johnson, co-founder of conference social networking company EventVue, in touting the benefits of starting up a business in Boulder to BusinessWeek.

Cost of living and quality of life are drawing entrepreneurs to small cities, and those communities are recognizing entrepreneurs as an important part of their economy by helping retain existing jobs and attracting large corporations, according to the magazine.

In smaller cities, businesses don’t face the competition and higher costs as they would in bigger cities, and they also enjoy a higher profile to attract workers and may receive government incentives to create jobs.

GIS Planning weighed 11 factors to gauge an area’s entrepreneurial climate, including the number of small businesses and startups, the quality of the work force, how many universities were in town, and measures of innovation such as the number of patents issued and the amount of venture capital invested. It sought out one small city (with a population between 20,000 and 200,000) in each of the 50 states to name the best in which to start a business.

BusinessWeek then asked entrepreneurs in each city what people should know about starting a business there. Many said factors such as affordability, availability of talent, existence of a thriving business community and quality of life helped them choose where to open shop.

Out West combines window sales and service to improve transaction, experience

Del Jolly, owner of Out West Windows, doesn’t just sell windows; he also installs them.

In the window business for seven years, Del has worked for several different companies – including the biggest in the state – but he chose to invest in Out West Windows because it offers a wider selection at an excellent price, he says.

Del speaks highly of his installation crew, not just because he’s on it, but because all of them are salesmen, as well.

“We have a great installation crew who are efficient and considerate of you and you’re home,” he says. “We value our clients and want their window-replacement experience to be great. This is why I am your salesmen, and I also do the install. Other companies have salesmen who close the deal never to be seen again while an unfamiliar crew does the install. Because we are small, our salesmen are also on the install crew. I believe it gives the homeowner peace of mind when the salesman comes back to do the work.”

If you’re not sure if now is the time to replace your home’s windows, Del offers several reasons why you should make this wise investment with Out West Windows:

• President Obama recently has allowed for a $1,500 tax credit when you buy new windows for your home, and this write-off ENDS in 2010;
• Using Out West Windows will insure you get a great product at a great price;
• Reduce your heating bill by up to 35 percent;
• Increase the value of your home;
• Dampen noise pollution up to 40 percent;
• Improved security features of new windows over older ones;
• Maintain the temperature in your home during the winter and summer, making your home more comfortable;
• Out West Windows works with multiple window suppliers, insuring that you get the best window for your home.

“The toughest decision is choosing the right company to do the job,” Del says. “After visiting with Out West Windows, I am confident you will have found the right company.”

Out West Windows will provide a free estimate and discuss the many options you have before you invest in new windows. Visit its Web site at, call (303) 506-8563 or e-mail Del Jolly at to learn more about this money-saving home improvement.

Surveys say 3Q will see the last of recession

Surveys of economists by both The Wall Street Journal and Blue Chip Economic Indicators, reported by Reuters, show that most respondents believe the recession has ended already or will end in the third quarter of 2009.

The recession began in December 2007, and has been the worst in U.S. history since The Great Depression of the 1930s.

According to the WSJ, 27 of the 47 economists that responded to the survey said the recession had ended and 11 saw a trough this month or next. "Gross domestic product in the third quarter is now expected to show 2.4 percent growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the 'cash for clunkers' car-rebate program," the WSJ reported.

The employment report for July, in which employers cut only 247,000 jobs and the jobless rate fell for the first time in 15 months, was better than expected and suggests the worst is over, according to the WSJ. Although the unemployment rate is expected to rise to 9.9 percent by December, economists forecast that far fewer jobs will be lost over the next 12 months than they had forecast in July.

About 90 percent of the private economists the Blue Chip Economic Indicators surveyed said believe the economic downturn will conclude this quarter, according to Reuters.

Their assessment followed the release of data showing the gross domestic product (GDP) contracted at a 1 percent rate in the second quarter after falling 6.4 percent in the first quarter of the year. Other recent data, including housing and key labor market indicators, have indicted a bottoming in the recession and the economy close to turning the corner, according to Reuters.

Meanwhile, the Blue Chip and WSJ surveys' findings are similar to a Reuters poll published in July, which predicted growth in this quarter, as well, though a "brisk pace of expansion" was not expected until late 2010.

"Debate now centers on the speed, strength and durability of the recovery," the survey said.

Denver a popular destination for business travelers

With praise for its "beautiful architecture and wide-open spaces" as well as Red Rocks Amphitheater and Black Hawk casinos just a drive away, Denver landed sixth on USA Today’s list of Road Warrior’s top destinations.

The entire state of Alaska, with its friendly people and the beautiful outdoors, came in at No. 1, and Texas had two cities – Fort Worth and Houston – on the list. USA Today’s assembled the top destinations following a survey of business travelers who are volunteer members of its Road Warrior panel. According to the newspaper, about 175 responded.

For these travelers, ample recreational opportunities mean a business trip isn’t just for business, and they get to see and do things they wouldn’t normally at home. The friendliness of local residents or lifestyle can also make or break a destination, according to USA Today. Extreme temperatures can turn off many business travelers from certain places, as can constant sound of slot machines in otherwise popular gambling communities to those who don’t care to gamble.

Here’s a look at USA Today’s Road Warriors’ top 10 favorite business destinations:

1. Alaska
2. Asheville, N.C.
3. Austin
4. Boston
5. Chicago
6. Denver
7. Fayetteville, Ark.
8. Fort Worth
9. Houston
10. Indianapolis