Contractor’s energy-efficient home credit eligibility requirements changed
IRS Notices 2008-35 & 2008-36

For a builder to qualify for the energy efficient home credit, a home must be certified to provide a certain level of heating and cooling energy consumption below a comparable home built according to previous International Energy Conservation Code requirements:

  • for manufactured housing, at least 30 to 50 percent; and
  • for non-manufactured housing, at least 50 percent.

Additionally, a certified home must have “building envelope component improvements” providing for heating and cooling energy consumption at least ten percent below a comparable home.

Deduction guidelines for owners of energy-efficient non-residential property
IRS Notice 2008-40

Before an owner of a non-residential property may claim the deduction for the installation of energy-efficient lighting in a building, the following criteria must be met:

  • the lighting must have been placed in service in 2007 or 2008; and
  • the owner must obtain a certification stating:
    • that the energy consumption and costs were calculated with qualified computer software; and
    • that the owner has received an explanation of the projected annual energy costs.

A reduction of lighting power density does not require the use of qualified computer software or a determination of the projected annual energy costs.

A list of the qualified software can be found at http://www.eere.energy.gov/buildings/info/tax_incentives.

§1031 Safe harbor for rented vacation homes
Amended by Rev. Proc. 2008-16

The Internal Revenue Service (IRS) will not challenge the qualifications of a vacation home as like-kind property in a §1031 transaction if the use of the vacation home by the owner and his family is limited to occasional personal-use. To qualify a vacation home under the safe harbor rules as either §1031 like-kind property sold or the replacement property, the following criteria are applied:

  • the owner of the vacation home must own the vacation home for at least 24 months immediately preceding the sale;
  • the owner must rent the vacation home at a fair rental price for 14 days or more in each of the two 12-month periods immediately preceding the sale; and
  • the owner’s personal use of the vacation home may not exceed the greater of 14 days or ten percent of the days the unit was rented in each of the two 12-month periods immediately preceding the sale.

These safe harbor provisions are effective for §1031 transactions involving vacation homes occurring on or after March 10, 2008.

Editor’s note — Safe harbor rules need not be followed if the taxpayer complies with the long-standing general (court-established) rule applicable to vacation homes. [See first tuesday journal June 2008 issue; Moore, TC Memo 2007-134]

Profit on sale of principal residence previously held as a vacation home not taxed
A couple moved into their vacation home permanently, keeping their prior residence as their mailing address and converting it into their business office. After more than two years’ occupancy as their principal residence, the couple sold the vacation home and moved back into their former residence. The couple claimed the profit from selling the vacation home was excluded from taxation since it was their principal residence for more than two years. The Internal Revenue Service (IRS) claimed the profit from the sale of the vacation home was taxable since the couple retained ownership of their former principal residence and used it as their mailing address, thus making it their principal residence. The Federal Tax Court held the profit from the sale of the property they owned and previously held as a vacation home was excluded from taxation since the couple had lived in it for more than two years as their principal residence.

Profit from sale of adjacent lot owned by family partnership is taxed
Additionally, the couple claimed the profit from the sale of a lot adjacent to the vacation home which was vested in a family partnership was also excluded from taxation since the lot was used as part of the vacation home owned and occupied by the couple as their principal residence. The IRS claimed the profit from the sale of the lot was taxable since it was not owned by the couple, but rather a family partnership. The Federal Tax Court held the profit from the sale of the adjacent lot was taxable since it was owned under a family partnership and not directly by the couple. [Farah v. Commissioner (2007) TC-Memo 2007-369]

Bonus depreciation for tenant improvements made in 2008
Public Law 110-185

Tenant improvements (TIs) made to leased non-residential property depreciated using a modified accelerated cost recovery system (MACRS) are eligible for bonus depreciation under the Economic Stimulus Act of 2008. This bonus depreciation allows for a bonus of 50 percent of the first-year depreciation of TIs placed in service during 2008, evidenced by a binding written contract of the purchase, construction, or production of the improvements. No bonus depreciation is allowed if the property improved is sold in the same year the improvements are placed in service.

Developmental rights acquired in a §1031 transaction are like-kind property
IRS Letter Ruling 200805012

An individual owned two properties. He sold one of the properties. The proceeds from the sale of the property were used to purchase development rights for the property he retained. The development rights acquired were recorded and subject to property taxes as would be required had the fee interest been transferred. The Internal Revenue Service (IRS) held that since the development rights constituted an interest in real estate under state law, the rights were like-kind property. The sale of the one property to finance the purchase of development rights for the property retained by the taxpayer was a qualified §1031 transaction exempting from taxes the profit taken on the property sold.