1977, February, Pg. 274. Tax Tips.

6 Colo.Law. 274

Colorado Lawyer

1977.

1977, February, Pg. 274.

Tax Tips

274Vol. 6, No. 2, Pg. 274Tax TipsResidential Real Estate Sales

Although entities outside of the legal profession, such as real estate brokers and title companies, have taken over some of the lawyers' practice in the real estate field, it is still probably true that a substantial part of a general practitioner's services deal with real estate transactions. In the area of residential real estate sales, the attorney can provide a service in income tax planning and advice which may not be provided when the transaction is handled without an attorney's advice. This column will touch upon the major considerations in connection with the income tax planning of a residential real estate sale.

Taxation of the Residential Real Estate SaleIf a personal residence is sold at a loss, the loss is generally not deductible because it is personal in nature. In today's real estate market, however, the loss on the sale of a personal residence is very rare. If a personal residence is sold at a gain, the gain is taxable in the year of closing unless it falls within one of the exceptions described in this article. If the gain is immediately taxable, it will qualify as the sale of a capital asset and if held for the appropriate period of time, a long term capital gain. Through the calendar year 1976, the holding period for long term capital gains was six months. For the calendar year 1977, the holding period is nine months, and for the calendar year 1978 and thereafter, the holding period is one year. If the transaction qualifies, it may also be reported on the installment sales basis.

Prior to the execution of the original sales contract, the attorney should assist the client in calculating the amount of taxable gain that will be incurred in the sale and the actual amount of income tax. Depending upon the client's other income, you will often find that the income tax will be much less than the client anticipates. Be certain that you check to see whether the minimum tax on tax preferences will apply since the 1976 Tax Reform Act increased the minimum tax rate from 10% to 15% and reduced the exemption to $10,000 or 1/2 of the regular income taxes paid, whichever is greater. One-half of the capital gain incurred in the sale of the personal residence is a tax preference to...