How does the main home exclusion apply to trusts? What are the risks if any for a trustee purchasing a home?
According to Internal Revenue Service (IRS), the homeowners can be rewarded by the federal government by not being charged tax on the profits that they get by selling their primary residence(Irs.gov, 2017). If an individual qualifies for the main home exclusion, he would be exempt up to USD 5,00,000 (for married couples that file jointly) and USD 2,50,000 (for others) of the profits and he can put such tax-free proceeds for any use. This home sale exclusion has been introduced by Congress to encourage homeownership among the population (Connick, 2017). For a home sale to qualify as an exclusion, several criteria have to be met including the seller must have owned the house and used it as his main home for at least 2 years out of the last 5 years before the specific date of sale. The home must not have been acquired through a like-kind exchange during the previous 5 years. The owner did not claim for exclusion for a home sale during the 2 years ending on the particular date of sale(Du & Zhang, 2015).
The tax laws relating to main home exclusion are treated differently based on the kind of trust. There are two types of trusts that are involved in the process namely revocable trust and irrevocable trust. In the case of a revocable trust, the tax laws treat it as a “grantor trust”. Even though the trust has a legal identity of its own, its assets are treated for tax purposes as if they belong to the individual who puts the asset into the trust. So when the trust sells a home, it can claim the main home exclusion. If it meets the stated requirements then there could be an exclusion of tax varying between USD 2,50,000 and USD 5,00,000(Irs. gov, 2017).
The tax rules are very different for irrevocable trusts since these trusts are considered to be separate legal entities. The owner of the home is not treated as the owner of the trust so he is not eligible for main home exclusion. As per law, the actual house owner cannot enjoy any kind of capital gain exemption in this kind of trust model. Often the revocable trusts get converted into irrevocable trusts once the owners die. In case the home was a part of the estate of the deceased owner, then the property would be taxed on the usual basis and there would be no exemption in case of the main home sale.
When a home is purchased by a trust for a beneficiary, it needs to represent a reasonable investment of the trust after taking into consideration all the usual factors as per the state law as well as the trust agreement(Irs.gov, 2017). The trust must ensure to deduct the property tax. The fiduciary duty of the trust includes the proper structuring of the ownership of the house so that there will be limited scope for default.
ESSAY – STUDENT LOAN
What are the key implications of the student loan scheme for an overseas-based borrower in terms of repayments and interest charges? What are the triggers for becoming an overseas-based borrower?
Student loan schemes include various aspects like the terms of the payment; interest rates, etc that have a vital impact on the borrowers including the overseas-based borrowers. The proper control over such aspects can help an individual to save thousands off the student loan. The student loan’s terms of repayments for an overseas-based borrower is a vital element that shows the available time for the borrower to make the due payment to the concerned lender(Inland Revenue, 2017. Similarly, the interest rate that is charged on such student loans has to be properly tracked for the simpler repayment of the borrowed principal and interest(Hillman, 2014).
The key implications of a student loan scheme for an overseas-based borrower are the change in the repayment model of the particular loan amount. In most cases, the minimum repayment amount is calculated and the same has to be paid by the borrower on an annual basis. For example, in New Zealand as per the student loan rules, the annual repayment obligation of the overseas-based borrower is calculated which has to be repaid by him on 31st March of the year or the departure date. The borrowers have the option to make a voluntary repayment of the student loan amount between 30th September and 31st March. Generally, the installment date payments are 50% of the overseas borrowers’ repayment obligation. This aspect could vary depending on the planning of other special arrangements for the student loan scheme(Webber & Rogers, 2014). The obligation relating to the repayment of student loans remains the same if the loan balance reduces. In case there is an increase in the balance, the repayment obligation of the student increases. Based on the total size of the student loan, the repayment model would be designed so that both principal and interest are covered in the repayment model(Hillman, 2014).
In case the overseas-based borrower misses to make a specific repayment on time then he would be charged late payment interest which would increase his amount of payment. If the borrower has certain financial difficulties, he could share the same with the concerned authorities. Several options could be offered to the borrower relating to the flexible payment options(Webber & Rogers, 2014). The problems of the borrowers could be the failure to make several repayments on the student loan, the specific amount that the borrower is behind in paying the payment of the loan, etc. There is some kind of provision for a few overseas-based borrowers to be treated as domestic-based borrowers(Webber & Rogers, 2014).
The main aspects that the overseas-based borrower of the student loan must take into consideration include a particular interest rate is charged to him, the financial obligation does not get deducted from the borrower’s salary automatically, and the ultimate amount that the individual owes is determined based on the size of the student loan and not the income of the individual. Until recently the payment of such student loans was quite high but now new ways are being introduced to remove the associated transaction cost, unnecessary fees, and compounding interest.
As per the Income Tax Act 2007, the DD 2 includes the limitation rule relating to the entertainment expenditure. It expenditures to which this limitation rule applies include various areas such as corporate boxes, holiday accommodations, pleasure craft, entertainment off-premises, and entertainment on-premises (Legislation.govt.NZ, 2017).
References
Connick, W. 2017. Understanding the Home Sale Tax Exclusion — The Motley Fool. [online] The Motley Fool. Available at: https://www.fool.com/taxes/2017/03/03/understanding-the-home-sale-tax-exclusion.aspx [Accessed 12 Sep. 2017].
Du, Z. and Zhang, L., 2015. Home-purchase restriction, property tax and housing price in China: A counterfactual analysis. Journal of Econometrics, 188(2), pp.558-568.
Hillman, N.W., 2014. College on credit: A multilevel analysis of student loan default. The Review of Higher Education, 37(2), pp.169-195.
Irs.gov. 2017.Publication 523 (2016), Selling Your Home. [online] Available at: https://www.irs.gov/publications/p523/ar02.html [Accessed 12 Sep. 2017].
Inland Revenue.2017.Paying off your student loan when you’re overseas (Going overseas with a student loan). [online] Available at: http://www.ird.govt.nz/studentloans/overseas/managing/student-loan-paying-off-overseas.html [Accessed 12 Sep. 2017].
Kelley, S.H., 2017. Factors Affecting Student Loan Default in Proprietary Non-Degree Granting Colleges.
Legislation.govt.nz. (2017).Income Tax Act 2007 No 97, Public Act DD 2 Limitation rule – New Zealand Legislation. [online] Available at: http://www.legislation.govt.nz/act/public/2007/0097/4.0/DLM1513812.html [Accessed 13 Sep. 2017].
Webber, K.L. and Rogers, S.L., 2014. Student loan default: Do characteristics of four-year institutions contribute to the puzzle?.Journal of Student Financial Aid, 44(2), p.2.
