Today’s podcast is highlighting some of the changes that came from the American Recovery and Reinvestment Act of 2009 – otherwise known as the Tax Stimulus Package. In particular, we are going to be talking about Section 25A, which is the Hope Scholarship Credit. Remember, a tax credit is like a negative tax. It offsets dollar for dollar your liability to the government, and it is better than a deduction.

Old Section 25A on Steroids

Here are some of the enhancements for tax years 2009 and 2010. This has been entitled by the government, The American Opportunity Tax Credit. But, it is really just an enhancement of Section 25A, which is for the Hope Scholarship Credit. Under the old Hope Credit, you were able to take a credit for one hundred per cent of the first $1,200 expended for tuition and related expenses. Then you were able to take a credit for fifty per cent of the next $1,200. So, the maximum credit under the old rule was $1,800…

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Section 102 of the internal revenue code says that an heir (beneficiary who inherits property) that receives property as a “gift, bequest, devise, or inheritance” takes that property tax-free. It states “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance”…

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Many people ask me questions along the lines of “Over the years, I have invested a large amount of money into an investment property. How does this affect my taxes if I sell the property or if I die?.”

First, I would like to talk about the sale vs. 1031 exchange part of the question, and then I would like to go into the ramifications of dying while owning the property…

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Normally in a 1031 exchange, you defer all of your capital gains (both from appreciation in value and depreciation deductions taken over the years) by acquiring a like-kind replacement of equal of more value; and equal of more equity.

In Tax Law – Nobody Wants Surprises

There are some situations when the relinquished property will have some tax complications (snakes in the grass) that could cause you to unexpectedly to recognize gain. To make matters worse, the surprise gains could be characterized as ordinary income and taxed at higher rates than mere capital gains rates…

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Cars and trucks are getting more like-kind. The IRS recently issued a private letter ruling (LTR 200912004) specifically to a tax-payer that was a rental car company that conducted ongoing 1031 like-kind exchange programs. So, every time they disposed of their old rental cars, those were the disposition of “relinquished properties”. Every time they brought in new cars into their rental fleet, those were the “replacement properties”. This was an ongoing cycle, a program of exchanges that had been incorporated into their business model to have the most efficient (tax neutral sale) disposition of their properties. This particular taxpayer had a conundrum, because appreciable personal property such as rental cars are broken into different asset classes…

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