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I have been living in a rent stabilized apartment and a buyer has paid me $100,000 to move out.
I am in a 30% tax bracket. Can I claim any tax deductions on this amount?
a tax deduction? no but the good news is you do get a break as long as you lived there more than 1 year and get special capital gains rates depending on youre tax bracket.
payout
the bad news is that added to your other income may trip the amt tax on everything else so it can cost you alot more.
we don't know your taxable income but i will guess the payout will be taxed at 15% or 20% .
that added to your other income makes the amt tax a possibility. in that case i can't guess but it may cost you 7-15k extra plus state and local taxes.
Last edited by mathjak107; 09-12-2014 at 10:38 AM..
Really stretching it here, but if a rent-stabilized apartment is one's primary residence (which it is by definition) then isn't the first $250,000 in "capital gains" exempt? Or is that too clever by half?
sorry but it won't qualify , you don't the property . you only hold lease rights . lease rights are not ownership of a property. you just own a contract that someone wants to buy out from you. it has nothing to do with owning your own home. this has already been ruled upon.
it isn't actually a rule at this point as to whether or not personal lease rights and not investment lease rights qualify as a capital asset and get special long term capital gains rates as there was only a private letter ruling on this not a revenue rule. a private letter ruling is an an answer from the Irs when a tax payer asks for guidance on a subject.
The IRS does have the option of enacting the personal content of a private ruling and issuing it as a revenue ruling, which becomes binding on all taxpayers but the IRS. in this casehave not done so and it only remains a private letter ruling.
according to turbo tax at this stage there is noooooooooooooo official general ruling on the fact that a buy out of a lease on a personal residence even qualifies for long term capital gains officially. private letter rulings are on a case by case and may or may not hold true as a policy.
here is what turbo tax accountants had to say when questioned on the subject:
"After a day off and more research, and consulting with my colleagues, the capital gain treatment seems defensible, although some sources (including the one I originally found) indicate that it is ordinary income. As you have found, the guidance on this issue is not clear-cut.
There are two IRS decisions that specifically address this. One, a Private Letter Ruling (PLR 8704009), determined whether the payment made to a tenant can be excluded from gain under the "sale of a personal residence" rules. The IRS determined, in that case, that a life interest in a rent-controlled apartment is not a "personal residence" and denied the exclusion. However, it did allow the capital gain treatment.
Another, Revenue Ruling 88-29, came to the same conclusion regarding the exclusion of gain for a personal residence, but made no mention at all about whether the transaction itself was subject to capital gain treatment."
Last edited by mathjak107; 11-18-2014 at 03:35 AM..
as you see above one private letter ruling allowed the tax payer to take the long term capital gains rate on the sale of the lease but denied considering it for the personal residence exclusion.
the next tax payer that asked also got denied on the personal residence exclusion issue but was not given the go ahead to take it as a long term capital gain.
these private letter rulings can go either way so it is not a given that you will not be challenged if you take it as a long term capital gain. you may end up having it decided in your case that a personal lease right is not an investment lease right and so it only qualifies as ordinary income.
i would take it as a long term capital gain if i was in that position but i would have to not be surprised if it is challenged.
the cloudyness is because while lease rights are capital assets that has only been ruled on when they were outright investments and not a by product of living in a personal residence which was a place to live and not an out right investment..
Last edited by mathjak107; 11-18-2014 at 04:02 AM..
It seems like the answer to this is not really so clear cut. If it were me, I would treat it as a long term capital gain. Chances are you will never get audited so the question will not even come up.
If it does get questioned, you have plenty of evidence to back up your choice. It's not fraud or tax evasion. The worst case is that the IRS will make you pay back the additional taxes. Audits usually occur a few years after the fact, so even if you have to pay back the money you had that extra capital for several years with which you could have used to invest.
In terms of the state/nyc local taxes which have no special treatment, I would assume that if one was moving to a lower tax state they may be able to work out a different payment structure to avoid paying NY taxes? That savings alone would be enough for a down payment in parts of Florida. Not sure how common it is to do negotiate this or if it's possible at all.
the property has to be your principal residence if stabilized so moving does not negate that for tax purposes. you owe ny the taxes as it was your home when earned.
the property has to be your principal residence if stabilized so moving does not negate that for tax purposes. you owe ny the taxes as it was your home when earned.
OK I guess the key is that it has to be your principle residence and if you move prior to forfeiting the right to the lease then it sorta changes everything. But I'm sure something can still be worked out to get around this, but it's not really in the landlords interest to go through too much trouble drafting complicated real estate docs.
it is bad enough a landlord has to pay a tenant to leave but to help them commit tax fraud is a bit much to ask.
personally i would like to see it taxed as ordinary income for the receiver. it was not an investment and they had no capital at risk in the process.
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