Gain or Loss

Gain or loss is the difference between your amount realized and your adjusted basis in the property. In the case of a short sale, the amount realized will be the amount of the agreed upon sale price. In the case of a foreclosure, assuming the lender discharges the balance in foreclosure, the amount realized will generally be the amount of the debt. Special rules apply to debts not fully discharged and to nonrecourse loans. Please consult your tax advisor for more information.

Your adjusted basis in property is generally the amount you paid at purchase, plus improvements, less depreciation claimed.

The rules for the taxation of gains and losses will generally fall into one of three categories:

Personal Residence – Gain is taxable as a capital gain, unless excluded under IRC Section 121. Loss is not deductible.

Investment – Assuming that the property is a capital asset, gain is treated as a capital gain, subject to rules for holding period and subject to depreciation recapture, if applicable. Loss is a capital loss and is subject to capital loss limitations.

Trade or Business – Assuming the property is primarily held for sale in a trade or business, gain or loss may be treated as ordinary income or loss. The majority of cases we currently see involving short sales and foreclosures are properties that have been acquired in more recent years. These troubled situations usually involve a decline in market value that no longer makes the home or investment viable. As a result, property owners are often faced with a loss on the property.

However, sellers should be wary of properties that, even in this declining market, have appreciated in value since acquisition, properties acquired using a like-kind exchange, and properties that have been depreciated for a number of years. Real estate owners with such properties should consider a 1031 tax-deferred exchange prior to the short sale closing or foreclosure.

Sellers should understand whether or not there is a gain or loss on a short sale or foreclosure prior to completing a transaction. A gain may be yet another financial burden in an unpleasant situation. More importantly, a loss on a short sale or foreclosure may be significantly limited depending upon the type of property. In the case of a loss, advanced planning is critical to mitigating a potential mismatch of COD income and loss treatment.

Cancellation of Indebtedness (“COD”) Income

If a property is sold in a short sale, or if a lender forecloses, and the debt is recourse debt, the property owner may have COD income to the extent that the fair market value of the property is less than the unpaid face amount of the debt. COD income is treated as ordinary income and lenders are required to send a Form 1099-C, Cancellation of Debt (COD), reporting the amount of income.

Fortunately, there may be relief available for certain homeowners. Pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, COD income arising from the discharge of “qualified principal residence indebtedness” may be excluded from income.

In addition, there are special rules for the taxation of other COD income. Most notable of the rules are that COD income may be excluded or partially excluded from income if you are insolvent when the debt is cancelled or if the debt is discharged through bankruptcy.

If neither the exclusion for qualified principal residence indebtedness nor COD exclusion rules apply, COD income from many short sales and foreclosures will result in ordinary income.

Income Mismatch

For investments that have turned bad due to the real estate market decline, many short sales and foreclosures may match ordinary income from COD income with limited capital loss deductions.

In fact, we have recently encountered a number of cases involving real estate investment schemes causing this type of problem. In these cases, investors with strong credit have been mislead by promoters of these investments to obtain little or no money down mortgages with the prospect of selling the properties in the near term. Often times, the promoters will offer to find subsequent buyers, to rent the units, or to rehabilitate the properties for future sale as part of the investment scheme. Due to the real estate market decline, these investment schemes have failed and investors are left with properties that are significantly below the amount of mortgages obtained. Investors are often left with no other option than a short sale or lender foreclosure and surprised at a tax bill resulting from a failed investment.

Advanced planning may help to mitigate this potential mismatch. We strongly urge you to consult with a tax attorney or CPA in the event that you are faced with a short sale or foreclosure.

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Sample Inspection Size

The final regulations require the agency to inspect no fewer units than the number specified in the "Low-Income Housing Credit Minimum Unit Sample Size Reference Chart." The reference chart can be found in Rev. Proc. 2016-15, I.R.B. 2016-11, 435, and is borrowed from the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol). Previously, an agency was permitted to inspect 20 percent of the low-income housing units in the project if this was lesser than the number required by the reference chart. This change addresses a concern that limiting physical inspections to 20 percent of units in small projects is not sufficient to ensure overall compliance with habitability and low-income requirements.

All-Buildings Requirement

No change is made to the requirement that an agency must inspect all buildings in a low-income housing project by the end of the second calendar year after the year in which the last building in the project is placed in service unless a project inspection is conducted under the REAC protocol. Suggestions that the IRS dispense with the all-buildings requirement for agencies not using the REAC protocol were not adopted.

Reasonable Notice Time Frame Shortened

A building owner and tenants are allowed a maximum 15 day advance notice that a project will be inspected. The temporary regulations allowed a 30-day notice period. The particular units to be inspected may only be identified on the day of the inspection. The 15 day advance notice limit will also apply to reviews of low-income certifications.

Amendment of Agency’s Qualified Allocation Plan

The final regulations are effective on February 26, 2019. However, an agency only needs to amend it qualified allocation plan by December 31, 2020, to reflect the requirements in the final regulations.

Rev. Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

Underpayment Penalty

The IRS announced in IRS News Release IR-2019-3 that it would waive the underpayment penalty for any taxpayer who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent. However, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has said that the IRS should "do more."

"Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," Wyden said on February 7 from the Senate floor. "That was one small step in the right direction," he added.

Before the IRS’s news release, Wyden wrote to Treasury and the IRS urging the waiver of underpayment penalties for withholding errors related to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Although the IRS did lower the penalty threshold for the 2018 tax year, Wyden stated on February 7 that "nobody should be penalized for the Trump administration’s mistakes on tax withholding."

Democrats are largely opposed to the TCJA as a whole, and claim that Republicans’ tax code overhaul was rushed. Thus, significant tax withholding errors and underpayments are expected to be incurred. "Change the penalty thresholds. Extend safe harbors. Whatever needs to happen," Wyden said.

Additionally, several Republicans have also voiced their concern about the expected increase in underpayment related to withholding. SFC Chairman Chuck Grassley, R-Iowa, recently urged the IRS to be "lenient" on underpayment penalties for 2018, as it is the first tax year since tax reform implementation.

AICPA

The American Institute of Certified Public Accountants (AICPA) has likewise urged Treasury and the IRS to provide more extensive penalty relief. "The substantial uncertainty surrounding the implementation of the TCJA and the updated federal tax withholding tables presented a challenge for many taxpayers in understanding and accounting for their tax liability," Annette Nellen, chair of the AICPA’s Tax Executive Committee said in a recent letter to Treasury and the IRS. The AICPA has recommended an 80 percent threshold for the underpayment penalty waiver.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Craft Beverage Tax Reform

The Craft Beverage Modernization and Tax Reform Bill of 2019 was introduced on February 6 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and Sen. Roy Blunt, R-Mo.

"By modernizing burdensome rules and taxes for craft beverage producers, this legislation will level the playing field and allow these innovators to further grow and thrive," Wyden said in a press release. The comprehensive measure is supported by the entire craft beverage industry, according to a summary of the bill.

Generally, the Craft Beverage Modernization and Tax Reform Bill of 2019 would implement the following provisions:

For Brewers:

• Reduce excise taxes to provide more cash flow to reinvest in personal business growth.
• Simplify rules for ingredient approval and brewery collaboration.

For Vintners:

• Expand the wine producer tax credit.
• Expand allowances for tax purposes on carbonation and alcohol content for certain wines.

For Distillers:

• Establish reduced excise taxes for small craft distilleries.
• Reduce restrictions on tax-free transfers of spirits between distillers.

The bill would also exempt beverage producers from certain capitalization rules for aged products.

"The craft beverage industry is driven by small businesses that support thousands of jobs and contribute billions in economic output," Blunt said in the press release.

As of February 6, the bill has 10 bipartisan cosponsors.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

50-Percent Locational Rule

Many stakeholders have urged the IRS to reconsider its proposed rule requiring that at least 50-percent of gross income of a Qualified Opportunity Zone (QOZ) business is derived from the active conduct of a trade or business within the QOZ. The IRS heard from several of these stakeholders at a full house public hearing on the proposed regulations held last week at IRS headquarters in Washington, D.C.

"[W]e’re concerned that manufacturing businesses, e-commerce enterprises, and others that have the potential to spur significant economic activity could be excluded inadvertently because of this rule," Stefan Pryor, Rhode Island Secretary of Commerce said at the hearing. Additionally, other stakeholders commented that the proposed rule would go against congressional intent.

Comment. There is no locational-related rule for gross income of QOZ businesses included in the law’s statutory language. However, the statutory language does provide a tangible property test to ensure qualifying businesses are predominantly located within the QOZ.

QOZ Business Congressional Intent

To that end, the bipartisan, bicameral tax writers who drafted the original QOZ bill language, too, have urged the IRS to remove the 50-percent gross income locational requirement.

The Opportunity Zone program was enacted under the Tax Cuts and Jobs Act ( P.L. 115-97) in 2017. The program is housed under new Code Secs. 1400Z-1 and 1400Z-2. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bicameral measure sponsored by a group of bipartisan tax writers.

"Since many businesses derive income from the sale of goods and services outside of a single census tract, this would significantly limit the ability for local operating businesses to qualify for Opportunity Fund investment, contrary to congressional intent," the lawmakers wrote in a recent letter to Treasury Secretary Steven Mnuchin. "Even for those businesses who might qualify under this rule, it would impose immense new administrative burdens to track and report the location of each source of business income," they added.

Second Round of Proposed Regulations

Currently, the IRS is working on a second batch of proposed regulations for Opportunity Zones. Those proposed rules "hopefully will see the light of day shortly," Scott Dinwiddie, an IRS official in the Income Tax and Accounting division said at last week’s hearing.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

IRS Cybersecurity

The IRS announced in IRS News Release IR-2018-256 last December that it would stop its tax transcript faxing service for individuals and businesses on February 4, 2019. The IRS cited to reasons of taxpayer security for the change in procedure. To that end, ceasing the IRS’s transcript faxing service would better prohibit cybercriminals from obtaining taxpayer data, according to the IRS.

Grassley, Wyden Urge Delay

SFC Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent IRS Commissioner Charles Rettig a letter earlier this week expressing concern with the IRS’s original timeline for discontinuing the tax transcript faxing service. The bipartisan leaders did not ask the IRS to eliminate its plan to discontinue the particular service. However, they did encourage the IRS to extend the date of discontinuation for the sake of taxpayers and practitioners in light of the recent partial government shutdown, which included the IRS.

"[W]e encourage the IRS to delay its planned discontinuation of faxing taxpayer information until such time that the agency can reasonably resolve the legitimate concerns of the tax-practitioner community about alternatives to the IRS faxing taxpayer information," Grassley and Wyden wrote. "Of course, such a delay should not compromise the security or privacy of taxpayer information."

IRS Extends Transcript Faxing Service

The IRS’s Wage & Investment Division issued a January 30 statement stating that the IRS will extend its transcript faxing service beyond February 4. Additionally, the IRS said it is reviewing options for a new timeline and will provide taxpayers and practitioners advance notice of the new date.

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.