tiDbitS FroM the tA x DeSK
hot topicS AND tipS
FroM our tAx DeSK
By Deborah Aiken
chANgeS to priNcipAL More FLexibiLity With SoLAr,
reSiDeNce gAiN excLuSioN WiND AND geotherMAL thAN
FueL ceLL For tAx creDit
In 2009, changes to the section 121 principal gain exclusion for
those with a second home came into effect. This new rule nar- For purposes of the residential alternative energy credit, solar
rows the potential existing gain exclusion for owners of second water heating and solar electric property, small wind energy
homes, but does not change the rules for those taxpayers with property, and geothermal heat pump property have more flex-
only one home. Under the change, taxpayers must continue to ibility in the statute than fuel cell property. The statute lan-
meet the existing test of living in the home for two of the five guage only states that the site of the installation must be used
years preceding the sale. However, the maximum amounts that as a residence by the taxpayer, not the residence of the taxpayer,
can be excluded from taxation are reduced ratably by the num- making second and vacation homes eligible. However, fuel cell
ber of years in which they owned the home, but did not use it as property qualifies for the credit only if the property is installed
a primary residence. on a property used as a principal residence by the taxpayer,
Example: A taxpayer purchases a second home on Jan. 1, so vacation or second homes do not qualify for the credit as
2009 and sells it on Jan. 1, 2015, using it as a primary residence to fuel cell property.
only during 2014 and 2015. They meet the two-of-five year
test, but because the home was only used as a primary residence
for 33% of the total ownership period (two of the 6 years), the
$500,000 joint ($250,000 single) maximum gain exclusion is WheN DoeS eLigibiLity For
reduced by 66% to $165,000 ($82,500). Sep pArticipAtioN StArt?
There is a grandfathered exception that counts pre-2009
ownership as qualified years and some other exceptions. Assume an employer has a SEP with a requirement that an
employee must work for it in at least 3 of the last 5 years (the
maximum requirement) to receive an allocation under the plan.
To be eligible for the 2009 year, for example, an employee must
royALtieS have worked for the employer for some time (no matter how
oN ScheDuLe c little) in any 3 years in the 5-year period 2004 to 2008. Thus,
an employee that worked for the employer in 2004, 2007 and
You generally report royalties in Part I of Schedule E (Form 2008, must share in the SEP contribution made for 2009.
1040). However, if you hold an operating oil, gas, or mineral
interest or are in business as a self-employed writer, inventor,
artist, etc., report your royalty income and expenses on Schedule
C or Schedule C-EZ (Form 1040).
12 NPA Magazine February 2010
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