Home Ownership

As a CPA, I came across this website and joined just last week, and I just came across your question.

First, assuming that you and your husband are each first-time homebuyers, you’re correct that you could use up to $10,000 from your traditional IRA penalty-free for a down payment.

Second, the mechanics of how to do it are a little more involved. If it were possible, I think the best course of action would be to have the bank transfer the money directly to the title company (or whoever is handling closing). This way, you never actually take possession of the money. If that were not possible, I’d have the bank make a check out to payee specified by the title company (or whoever is handling closing). A bank should be willing to at least do that much. If a bank was unwilling to do even that much, I suppose you could resort to taking out the money yourself, but then you leave yourself in a weaker position (from an audit perspective) if you were ever audited. Why put yourself in a position where you have to defend or explain or prove that you used the money correctly when you can avoid the problem altogether?

Third, come tax time next year, the bank should issue a Form 1099-R for the distribution. You’d have to prepare your tax return correctly, to report to the IRS that you qualify for the exception to the 10% early withdrawal penalty because you used the money for a first-time home purchase.

Finally, keep in mind that the $10,000 is a lifetime limit, to be used only one time.

Happy house hunting!

If you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income.
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
This exclusion was scheduled to expire for debt discharged after December 31, 2012. ATRA, extends the exclusion to debt that is discharged before January 1, 2014.

When services are performed in the parents’ home according to instructions by the parents, you are considered an employee of the parents and do not have self-employment earnings

Household employees include baby sitters, nannies, housekeepers, drivers, caretakers, health aids, private nurses, maids, gardeners, and others who work in or around your private residence as your employees. Household workers who are under age 18 during any part of the calendar year are exempt from the FICA tax for the entire year even if the wages exceed $1,800 if the household employment is not their principal occupation. A full time student is considered a full time occupation. Workers you get from an agency are not your employees if the agency is responsible for who does the work and how it is done. Self-employed workers are not considered your employees. In the current year, if you paid a household employee cash wages of $1,800 or more in a calendar year, you generally must withhold social security and Medicare taxes from all cash wages you pay to that employee. Household employers must file IRS Schedule H to pay the social security and federal unemployment tax and any withheld federal income taxes. A household employer is not required to withhold federal income tax from a household employee's wages. Federal income tax withholding occurs if the employee requests and the employer agrees.

For certain designated reasons such as job relocation, illness or other unforeseeable events, you can qualify for a partial exclusion.
The calculation of the exclusion is basically the number of months you lived in the house divided by 24 times the exclusion.
If married the total un-prorated exclusion is $500,000 if not married the total un-prorated exclusion is $250,000.
Therefore, if you are married and lived in the house for 1 year (12 months) then 12/24 x $500,000 = $250,000 exemption on the sale of your primary residence.

A "After acquired clause" is a contractual clause in a mortgage agreement stating that any additional mortgage able property attained by the borrower after the mortgage is signed will be regarded as additional security for the obligation addressed in the mortgage.

Bank collection float is the time that passes between when a check is deposited into a bank account and when the funds are available to the depositor, during which period the bank is collecting payment from the payer's bank.

If you pay a household worker such as a housekeeper, babysitter, nanny, maid, gardener or other household helper less than $1,800 in the current year, you will not have to pay Social Security or Medicare taxes on behalf of the worker. The $1,800 threshold has been raised to $1,800 in the year 2013. Payments made to students under the age of 18 for domestic services are exempt from employment taxes. You do you have to pay employment taxes on behalf of a worker who is considered a self-employed "independent contractor". Also exempt are payments to workers who are employees of the agency you contract with.

Generally, it is not the type of business that matters, but the credit worthiness of the guarantors, the financial performance of the business and the collateral pledged. The real issue is that often service based businesses have very few hard assets such as inventory, equipment or accounts receivable to pledge as collateral, but banks and the Small Business administration require some form of collateral. Business owners often pledge personal assets to obtain a loan.