The Downside of Watching Your House Rise in Value: Capital Gains Tax

buying-home-selling-your-house“Did you hear how much that house down the street just sold far?!” If you live in a place like the Bay Area of California, that’s a sentence you’ll hear repeated at every neighborhood gathering — usually followed by details about what a fixer-upper the place was, how many offers came in, and how many tens of thousands over asking price it actually sold for.

Then everyone goes a bit quiet, secretly calculating, “If that dump went for over a million, then my place must be worth . . . WOW!”

Yes, it’s fun to be back in a time of home appreciation. Such rises in value haven’t happened in every part of the U.S., but in the places where they are happening — such as in the cities of New York, Los Angeles, San Francisco, Boston, and San Diego — the numbers are truly eye-popping.

As soon as your home appreciation goes over $250,000 (for individual homeowners) or $500,000 (for married homeowners filing jointly), however, the fun is tempered by a look down the road, as you remember capital gains taxes. Real estate gains like these catapult you right over the IRS exclusion, into a world where you might actually owe a chunk of change when you sell.

This issue was recently pointed out by Ron Lieber of The New York Times, in an article whose title offers the best advice around: “House Value Jumping? Save Your Home Improvement Receipts.” According to Lieber’s research, 3.8% of single homeowners and 1.2% of married homeowners already need to worry about paying capital gains tax upon sale, based on their home’s appreciation since they purchased.

But, as Lieber also reminds us, home appreciation isn’t as simple as merely subtracting your purchase price from your sale price. You can reduce your “profit” by factoring in (among other things) the money you poured into improving your home along the way. As Nolo’s Stephen Fishman further explains, “The cost of home improvements are added to the tax basis of your home. “Basis” means the amount of your investment in your home for tax purposes. The greater your basis, the less profit you’ll receive when you sell your home.”

But you’ve got to be able to prove the amount you spent on improvements. The IRS auditor isn’t going to be impressed by you pointing to your lovely new kitchen countertops if you don’t have the receipts to back it up. See “Tax Reasons to Keep Good Records of Home Improvements” for details on what records to keep.

TIME TO CHANGE YOUR WITHHOLDING?

Taxpayer situations change from year to year for a variety of reasons – new job, house purchase, additional dependent(s), windfall income and/or changed deductions. Depending on your situation, this might mean you should consider a change in your withholding so you hit the necessary target of required annual pay-as-you-go payments, without allowing your employer to overwithhold, which will result in your achieving nothing more than making an interest free loan to Uncle Sam until you later file and collect your refund.

Thus, if this is you, check out Form W-4 and give an updated version of the form to your employer. Check out Publication 505 and also consider going to www.irs.gov where you will find a handy withholding calculator which may be of help.

Employer May Not Refuse to Hire Applicant Based on Suspicion of Need For Religious Accommodation

Epic2arly last week, the U.S. Supreme Court handed down its decision in EEOC v. Abercrombie & Fitch Stores, Inc. In that case, a young Muslim woman who wore a hijab (a religious headscarf) to her interview was denied employment because the headscarf violated Abercrombie’s “look policy,” which did not allow head wear of any kind. Without discussing the policy with the applicant, Abercrombie simply denied her employment.  (For more about the facts of this case, see our previous post, How Explicit Must a Request for Religious Accommodation Be?)

The Supreme Court ultimately held that Abercrombie engaged in religious discrimination by refusing to hire the applicant, Samantha Elauf. In doing so, the court rejected Abercrombie’s argument that it didn’t actually know that Elauf wore the headscarf for religious reasons. The Court held that actual knowledge is not a requirement for religious discrimination under Title VII. It was enough that Abercrombie suspected that Elauf would need an accommodation and that this was the motivation behind its refusal to hire her.

The Court’s holding suggests that Abercrombie should have notified Elauf about the “look policy” during the application process and explored possible accommodations with her. The result makes practical sense. How would Elauf have known that she needed an accommodation if she wasn’t aware of the company’s “look policy”?

The takeaway from this decision is that employers need to consider offering religious accommodation to employees, even if the employees don’t specifically request it. When an employer has reason to suspect that an employee may need an accommodation, it should broach the topic with the employee. However, employers acting on such suspicions must be careful not to engage in stereotyping that could lead to discrimination claims.

The best approach is to stick to objective facts and company policy. For example, it could lead to trouble to ask an applicant, “Do you wear a headscarf because you are Muslim?” Instead, simply inform the applicant of the company’s established policy that head wear of any kind is not allowed, and then ask if that would present any issues for the applicant. This puts the ball in the employee’s court and gives her the opportunity to request a religious accommodation if she needs one. (For more information on religious accommodation, see our Religious Discrimination page.)

MORE IRS LENIENCY REGARDING 60 DAY ROLLOVER RULE

The Internal Revenue Code says that amounts withdrawn from an IRA are not taxable as long as the entire amount is “rolled” back into the same or another IRA no later than 60 days after the distribution. Sometimes taxpayers don’t quite comply with the 60 day timeline for one reason or another, and the same Internal Revenue Code does enable IRS to allow more time in cases where failure to do so would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.

In PLR 201523023, IRS did just that in a case where the taxpayer’s failure to accomplish a timely rollover was due to an IRA custodian’s administrative procedure of not accepting “starter checks.”

Is a “Negligent” Threat Really a Threat?

Federal law makes it a felony to transmit in interstate commerce “any communication containing any threat  . . . to injure” someone. Anyone who sends a message intending to make a threat, or knowing that the communication will come across as a threat, has the state of mind required for a conviction under 18 U.S.C. § 875(c).

But what about someone who sends a message and doesn’t—but should—know that the recipient will view it as a threat? Has the sender violated section 875(c)? That was the question before the U.S. Supreme Court in Elonis v. United States, decided on June 1. (575 U.S. ___ (2015).)

Self-Expression or Something More?

The defendant in Elonis posted on Facebook what the Supreme Court termed “self-styled ‘rap’ lyrics” containing “graphically violent language and imagery.” He posted them under a pseudonym or stage name, sort of in the way that Marshall Mathers performs as Eminem. The posts often appeared “with disclaimers that the lyrics were ‘fictitious,’ with no intentional ‘resemblance to real persons.’”

The violent posts began after the defendant’s wife left him and took the couple’s two children. They led the wife to seek a protection-from-abuse order, which a court granted. Other subjects of the postings included co-workers, an unspecified kindergarten class, and law enforcement.

Here’s an example of the posts, this one in response to the protective order and accompanied by a link to Wikipedia’s page on freedom of speech:

“Fold up your [protection-from-abuse order] and put it in your pocket

Is it thick enough to stop a bullet?

Try to enforce an Order that was improperly granted in the first place

Me thinks the Judge needs an education on true threat jurisprudence

And prison time’ll add zeros to my settlement . . .

And if worse comes to worse I’ve got enough explosives to take care of the State Police and the Sheriff ’s Department.”

Lyrics like these resulted in five counts of violating section 875(c).

“Reasonable Person”

At trial, the judge instructed the jury that that the defendant could be guilty even if he didn’t intend the posts to be threats: The issue for the jurors was whether a reasonable person in the defendant’s position would anticipate that the statements would be interpreted as “serious expression of an intention” to inflict harm.

The jury convicted the defendant on four of the five counts, landing him a prison sentence of almost four years.

“Guilty Mind”

Before overturning the convictions, the Supreme Court explained the principle that “wrongdoing must be conscious to be criminal.” With rare exception, proof of every crime must require evidence of a “guilty mind.”

Chief Justice Roberts, writing for the majority of the Court, noted that the “reasonable person” standard regularly applies in civil lawsuits. But this standard—which asks whether someone has behaved negligently—doesn’t have much of a place in the criminal law.

Because of the jury instruction, the verdict in Elonis turned not on whether the defendant actually did, but whether a reasonable person would, regard the words in question as threats. To Roberts and company, the instruction violated a core principle: that federal criminal liability generally depends on the defendant’s state of mind.

The Court’s decision means that, at least when it comes to alleged threats under section 875(c), negligence doesn’t suffice for a conviction.

As for whether recklessness is enough, we still don’t know. The Court decided to leave that one for another day.