- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/31/2006 09:51:00 PM Send this post:

Would you accept this as a valid hundred dollar bill?



This was actually used by a bonehead here in Arkansas.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/31/2006 06:57:00 PM Send this post:

The Sleeter Group has some good info on the new features of the latest version of QuickBooks.

New Features of QuickBooks 2007

Awesome QuickBooks Add-ons for 2007

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/31/2006 09:50:00 AM Send this post:

Q:

Subject: C corporations

 

Kelly

 

I read your artical on the tax benefits of having a C corporation Versus an corporation. My son set up an S corp. about three years ago herein California. He paid a lot of money to set it up with a lawyer. We knew nothing about the difference between the two and less about the tax ramifications. I would like to know if we can still change to a C corporation? what would need to do? 

 

He set up the business as an entertainment business ( record label and other types of entertainment), can he change this to some other type of business? Thank you

A:

The attorney should have explained the tax implications to the S corp election before it was done, or at least advised your son to seek advice from a tax pro if s/he wasn't knowledgeable on the points I cover in my article, as is the case for many attorneys.

Your son should consult with a professional tax advisor ASAP as to the best setup for his unique situation.  The S corp may be a fine arrangement, or a C corp may be better.  As I mentioned in my article, converting an S corp to C doesn't give you as much flexibility as starting up a new C corp, especially in the area of the fiscal year.  A new C corp can select any month end; while a converted S corp is required to stick with the December 31 year end. 

There may also be a good case for leaving the S corp as is and also having a C corp.  Too many people think everything has to be operated through one entity, when there are in fact many benefits to having multiple different kinds of entities.  There is obviously more bookkeeping involved, but the benefits often outweigh those extra costs.  An experienced tax pro can help decide which structure or structures makes the most sense.

Once a corp is established, it is not required to limit itself to its original type of business.  It can operate any kind of legal business enterprise.  That is another common misconception, that each type of business has to have its own separate corp.  The reporting for each type of business may be handled a little differently; but they can all be run through one corporation, if that makes the most sense.  Using QuickBooks with a Class for each type of business makes keeping track of these an easy task.  An experienced tax pro can assist with this.

I hope this helps.  Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/30/2006 08:45:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/30/2006 08:39:00 PM Send this post:

IRS offers solid -- but cheap -- tax advice to bootstrapped bizs – And worth every penny.  While you can get plenty of basic info for free from the IRS, that can in no way substitute for the advice of an experienced tax pro, who can work with your unique circumstances.    

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/30/2006 08:15:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/30/2006 02:51:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/30/2006 02:28:00 PM Send this post:

Q:

Subject: Question about s-corp vs c-corp

I have a simple question regarding a s-corp vs. c-corp. I am partners with two other investors in commercial real estate that we rent. Currently we are an s-corp. The property is showing a profit of over $250,000 per year so each partner is reporting $83,333 income. We are not taking any money out and are not planning to for 5 years. We want to expand the business in the future so that is why we don't take any profits. As you know we are getting hammered on taxes. We all have other jobs to provide income to live on so we don't need the money right now. After 5 years or so we might sell out. My questions are:

1. Would a c-corp be to our advantage?
2. Should we switch back to an s-corp in the future?
3. Can we switch to a c-corp this year to cover any profits for 2006?

Can you give me any other suggestions or places to look for information about this subject?

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you at. 

One aspect to your situation on which I can advise is for you to stop thinking of an all or nothing approach.  You don't need to limit yourselves to one single corporation to run your business projects.  There are many benefits to using multiple entities for tax saving as well as liability protection reasons.  A good tax advisor should be able to explain how these would work for your unique circumstances.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/29/2006 03:53:00 PM Send this post:

From a reader:

Subject: A small favor

 

Mr. Kerstetter,

 

Kerry, please take a moment and review the content of our website: www.realestate4ira.com. I would be interested in knowing if you were familiar with these types of investments? If any synergies exist that we should discuss? And, if there would be any interest among your associates and Tax Guru Blog readers in knowing more?

 

Thank you in advance,
Steven Berman
Principal and Realtor

My Reply:

Steven:

Thanks for passing along that link.  As you may know if you have read any of my writings, I am a huge believer in real estate investments as the most reliable method to accumulate wealth, including in retirement accounts.  Unfortunately, most retirement plan custodians have a very limited range of investment vehicles, consisting mostly of stocks and CDs.  I have noticed a recent trend offering REITs, TICs and other fractional interests in real estate, of which I am not a big fan.  Owning and controlling property directly, so as not to be at the mercy of unknown and often unaccountable folks, is the safest way.

I checked your website and like that you cover a lot of tax efficient ways of owning real estate.  I am  a little confused in regard to your logistics of working with retirement accounts.  Do you act as retirement account custodians to handle the ownership for people or do you have a prototype master plan that they can use with their own personal financial advisors? 

I am interested in learning more about your services because I have constantly heard from frustrated clients and readers who want to use their retirement accounts for real estate investments but can't find plans that will accommodate that.

Thanks for any additional info you can provide.

Kerry Kerstetter

Follow-Up:

Kerry,

Please call me on my cell phone when you have a few minutes during the day… I will happily explain our services to you.

Steve

I Replied:

Steve:

I was hoping for some links to textual material that I can post on my blog and website about using IRA accounts to invest in real estate.  Do you have anything written up on that, especially a list of custodians who can handle such self directed accounts?

Thanks for any info you can provide.

Kerry Kerstetter

From Steve:

Kerry,

No problem, actually that list and their links are on the Resources page of our website www.realestate4ira.com.

I would still like to take around ten minutes to discuss things with you at a 30,000 foot level. As you know we are the ones that bring the transaction together. In that role we act as a "general contractor" linking out clients to self-directed custodians, non-recourse mortgage lenders, even to accountants and attorneys and other consultants, if need be.  We have found it essential that we help provide any other resources they may require.

Ninety percent of the time we are buyers agents, but will act as selling agent for select clients. None-the-less, we are fiduciary to our clients (i.e., buyers) but are paid by the property sellers through a traditional real estate commission arrangement, nationwide.

Steve Berman

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/29/2006 03:41:00 PM Send this post:

Tax Panel Backs More IRS Clout  – Real estate related tax breaks may be under attack.

Home Renovations That Pay Off When It Comes Time to Sell – It’s always good to know which kinds of improvements have the best return on investment.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/27/2006 09:52:00 PM Send this post:

IRS Going Slow Before Election – The funniest thing about this article is the ridiculously phony shock from people, including former IRS Commissioners, over the fact that the IRS’s behavior is influenced by political concerns.  I’m sure fellow victims of the Clinton IRS hit squad share my wish that such were the case; but we all know that all presidents have used the IRS to punish their foes and assist their friends.  It’s just one of the perks of the job. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/27/2006 05:23:00 PM Send this post:

I've long supported the idea of allowing people to vote for NOTA rather than having to choose the lesser evil. Leaving an elected office empty wouldn't be any worse than filling it with the kind of spendaholics that we have to choose from.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/27/2006 01:14:00 PM Send this post:

Taxifornia, here we come – And people get upset at my reference to my former home state on the Left Coast as the PRC?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/26/2006 09:43:00 PM Send this post:

Accounting students help audit white collar crimes – A great idea.  Why just teach the students about old cases from textbooks, when they can dig in and work on real life ones?  And it’s not like there’s a chance of ever running out of real life cases to work on.  Also, as every real world accountant knows, the hands-on approach will teach the students a hundred times more practical skills than any textbook study possibly can.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/26/2006 03:20:00 PM Send this post:

Q:

Subject:  C Corp questions

 

Hi,

 

I found your website while researching the following:

 

LLC filing as C-corp question

--------------------------------------------------------------------------------

Could you please give me some feedback on the best way to handle the following?

1. 2005 1120 was filed showing consulting fees as an expense. The consulting fees were actually paid to the sole shareholder. There is no payroll set up for the corp. How should this be handled on the shareholders return? Any changes for the corp return?

2. Sole shareholder personally owns the truck which is used 100% for this C-Corp. Mileage has previously been claimed on this vehicle in a prior year (before corp) as unreimbursed business expense. How would it be handled now that it is totally used for corp business? Could the C-corp lease the vehicle from him?

3. Home-Office deduction for C-corp? Would it be best to lease the office space to the corp?

Any suggestions are greatly appreciated!

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  There are pros and cons to each of the various options you mentioned, as well as dozens you didn't.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. In fact, you were crazy to set up your corp without the advice of a qualified tax pro because s/he could have steered you in the best direction for some things that cannot be changed, such as the fiscal year.

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you at.

In regard to the consulting payments made by your corporation to you, you need to report them on Schedule C of your 1040, which, after any related expenses you may have paid personally (+ home office, etc), will be subject to the 15.3% self employment tax.  A good tax advisor can help you find other ways to draw money out of your corp that aren't subject to SE tax.

Amending things to reclassify those payments as W-2 wages would be a very costly mistake, subjecting you and your corp to a lot of penalties with both IRS and your state tax agency; so it would be most prudent to continue with the way those payments have already been classified, as non-employee compensation (1099-MISC) consulting.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/26/2006 12:45:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/25/2006 11:04:00 PM Send this post:

From the November issue of Practical Accountant:

What's Different About Holistic Financial Planning?

Work with Clients To Prevent Fraud

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/25/2006 10:07:00 PM Send this post:

10 mistakes that made flipping a flop – Learning from other persons’ mistakes is a much better way to learn what not to do than making them yourself/. This guy’s venture into get rich quick real estate investing is a textbook case in how to really screw things up. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/25/2006 01:30:00 PM Send this post:

Find what your mutual fund fees really are – They’re as sneaky as our rulers in DC are at hiding the true costs.

Figuring IRA Withdrawals When Your Beneficiary Dies, and Essential IRA Records – From Gail Buckner

Corporations vs. LLCs – From Nolo

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/24/2006 11:06:00 PM Send this post:

Q:

Subject: quick question 

 Kerry,

Hi there- it was great to find your site.   I have a quick question on the Section 179 deduction – and please forgive my lack of expertise in the tax law: say you spend $100K on equipment – does that mean that you totally deduct that amount, saving ~$40K (assuming 40% tax rate?).  Does the ~$400K limit mean that you can save only up to approximately 40%*$400K = $160K in taxes?  How do you quantify what you spend on all Section 179 eligible items  - just adding them up?  It seems weird to me that the fed would actually penalize a company for making >$400K in capital expenditures that would fit the Section 179 law.

Also, can you claim this tax on money spent on upkeep and maintenance on equipment?

Thanks for listening~

A:

While using a taxpayer's tax bracket percentage as a guide can give you a quick & dirty idea of the tax savings from a deduction, such as Section 179, the actual savings will be different because of the sneaky way in which taxes are actually calculated, such as using AGI as a trigger to reduce or eliminate several tax credits and deductions.  Any item that reduces AGI will have more of a tax saving impact than just the tax rate percentage.

You are misinterpreting the $400,000 issue ($430,000 for 2006).  What the tax code does is phase out and eliminate the Section 179 deduction for any taxpayer that has acquired a huge amount of new qualifying business equipment.  This is intended to eliminate this tax break for what our rulers consider un-deserving "evil big businesses" and focus this special deduction on smaller companies.  However, any company acquiring that much new stuff will still be claiming a substantial normal depreciation deduction, especially if it chooses to use an accelerated method of calculating it.

In regard to qualifying the amount spent on new qualifying equipment, any business that intends to do so must have a good set of accounting records and can run reports of the new items posted to the equipment fixed asset accounts. 

Costs posted to expense accounts, such as repairs and maintenance don't qualify for the Section 179.  However, since you are already deducting those costs as normal operating expenses, it ends up working out better that way.

I hope this helps you better understand this issue.  If you personally are involved in running a business that may be considering utilizing it, you should be working directly with a professional tax advisor who will be able to better illustrate how it will affect your unique situation.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/20/2006 04:33:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 10:10:00 PM Send this post:

Q:

Subject: tax exclusion

 

Dear Sir;

 

I am retiring in the Spring and will be moving my legal residence from a condo in Alexandria to our summer home in Michigan.  If I sell the condo I can exercise the $250K cap gains exclusion to cover the $200K cap gains which I expect when I sell the condo.  However I would like to keep the condo, because our children and their families live in the DC area and use it for a winter home.  Can I claim the exclusion if  sell the house to an obliging entity and repurchase it after a week or so (for the same price)??  I realize that I may incur expenses such as transfer fees, etc.  The advantage to me is that after a few years I may sell the condo and move  into a seniors complex.

 

Thank you for your help,

 
A:

 I am not aware of any restriction on repurchasing a residence on which you had claimed the exclusion.  However, doing so as quickly as you intend may open you up for some problems with IRS.  An ironic aspect to the tax laws in this country is the fact that while many of them are clearly intended to motivate behavior, if IRS suspects that the only reason you do something is for the tax benefits, they have the power to nullify it. 

How long to wait before repurchasing the home and avoid IRS accusations of tax motivated behavior is a judgment call that you should discuss with your own personal professional tax advisor.  As background info, a similar situation is with what are called "wash sales" where stocks are sold at a loss and then repurchased.  The tax code has a specific time frame of 30 days before and after the loss sale in which a reacquisition nullifies the ability to deduct the loss. 

The home sale isn't to trigger deductible losses but is obviously being done so you can start the two year clock for the sale of your new home since only one tax free exclusion can be claimed within a two year period.  Whether an aggressive IRS auditor would try to toss out the tax free exclusion on the first home sale is impossible to predict; but is going to be harder to defend, the less time there is between sale and repurchase.

If the two year clock angle isn't your motivation for wanting to sell and repurchase the home, you should discuss with your tax advisor holding onto the Alexandria condo and selling it within three years of your moving out.

As additional info to consider, besides the transfer and other related closing costs on the sale and repurchase, you are likely to trigger a reassessment in the home's property tax valuation, bumping those up.

I obviously don't have enough info to be able to definitively say whether your plan makes sense or not; but your personal tax advisor should be able to better help you with that thought process.

Good luck.

Kerry Kerstetter

 
Follow-Up:

 Kerry,

Thank you very much for you prompt answer to my question, and since sale/repurchase is not clearly restricted I will pursue it further. As you well know, I must, by law, move my residency to Michigan when I live there most of the year, as will be the case after full retirement..  I have already been investigated by Michigan IRS about not paying MI Income tax and found to be in compliance, since I could show I had worked and lived in VA for more than half of each year.  This was triggered by two addresses and my wife's residence which is MI, where she lives for 8 month of the year, votes, banks and pays income tax.

The "two year clock angle" is not my motivation.  We will probably keep our home on Lake Superior until we have one foot, maybe both, in the grave. So your suggestion about selling the Alexandria home in three years is an interesting angle, thanks.  However we will probably like to winter in Alexandria area for some time, since both our children (with families) live in the DC area and our son uses the condo often since it is 5 miles from his work whereas his home is 40 miles from work.

Thank you very much for your response,

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 09:31:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 08:45:00 PM Send this post:

Using Retirement Money Now On a Vacation Home Can Pay Off

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 08:43:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 08:02:00 PM Send this post:

Q:

Subject: Exchange Question

How do I determine the basis of the new property with consideration of both properties being mortgaged?  (Increase in net or decrease in net)

 Is there a gain realized if the property’s FMV I am receiving is less than that of the property I disposed of?

 Thanks,

A:

When you prepare the 8824 to report the exchange to IRS, it will end up with the basis of the new replacement property.  The 8824 is a complicated and convoluted schedule; so most tax prep software programs have worksheets to assist in putting the right figures in the right place, including the amounts of debt on both the original and replacement properties. 

Some other programs also have handy 1031 worksheets, such as the TaxTools program from CFS.  There are links to both the 8824 and a separate worksheet here.

Depending on the amount of exchange expenses incurred in the deal, it possible that trading down may or may not result in a currently taxable gain on the exchange. The 8824 and worksheets will give that result.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 04:01:00 PM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/18/2006 03:28:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 09:32:00 PM Send this post:

Q:

Subject: Multiple Companies

I have three companies but I want to use one bank account.
I order parts and items for Police Officers in one company.
I order parts for Marine and Sporting in another and
I have a welding Business as the final business.

I have three companies but I have one business bank account.
How can I get this to work properly?
Using QuickBooks Pro 2006

Also if I send you a copy of the QBB's of each account can you look them over and make suggestions or modify?

This is all new to me. I have been doing this by hand on paper for a couple of years but have decided to try and use QBooks.

Thanks in advance.

A:

Don't send any files to me. I am not accepting any new clients.

This is a matter that you need to work on with your own professional tax advisor, who should be able to help you set up your QB in a way that is properly coordinated with the related tax returns.

Whether you can operate multiple businesses out of a single bank account depends on the ownership of those businesses. If they are all owned by the same entity, a single bank account can work, as long as you properly use the QB Classes to separate the activity for each business. This would be okay if all of the businesses are owned by you individually and you report them on Schedules C with your 1040, as well as if they are all owned by a single corporation. You would use one QBW data file.

If the businesses are each owned by separate entities, such as a different corp for each one, you must have a separate bank account for each, as well as a separate QBW file for each. Money can be transferred between the accounts if necessary in ways approved by your professional tax advisor.

Again, any competent tax advisor should be able to help you set this up properly.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 06:43:00 PM Send this post:

Q:

Subject: Questions after reviewing your web site

 

Hello.  I ran across your web site while looking on the web for information about how to handle a specific issue.  I was unable to find something specifically on point, so I wonder if it would be acceptable to throw the question your way.  Three questions, actually.

 

1.  In a single member LLC, how should the owner's draw (payments for activities which are the basis for the LLC's existence) be accounted? What type of QB "account" is Draw?

 

2.  I often receive payments from clients that comprise both professional fees and reimbursed expenses.  Based on advice I received some time ago, I have been grouping them together.  Yes, that results in tax payments based in part on the reimbursement, but it is balanced by the deductions taken on the expenses; besides, I was informed that was the appropriate way to handle it.  Your web site discusses contra expenses, and indicates that the reimbursements should be allocated to the same account as the expenses.  Is the difference between the way you're handling it and the way I'm handling it a matter of tidiness, or are there different consequences?  (It also seems to me that there is a question of how clients would report the payments if they issue a 1099, since my reporting ought to match theirs.)

 

3.  On a related point, if I charge a surcharge on advanced expenses, is there any reason that those payments cannot be grouped with fees (assuming that there is no sales tax issue)?

A:

If you have truly reviewed my websites, you should know how important I believe it to be that business owners work directly with qualified professional tax advisors before deciding which kind of entity to use, as well as how to operate with the one that is selected.

As is far too often the case, it appears that you set up an LLC without understanding how they function.  Now that it is established, you still have the choice of how it is to be taxed, as a Schedule C on your 1040 or as a corporation (C or S).  That choice should only be made with the assistance of a tax pro. 

The treatment of owner's draw will be different depending on how the LLC is taxed.  Your personal tax pro should be able to explain the differences.

With reimbursements received, there are different ways in which they can be handled on the books.  Because some entities have taxes based on gross revenues, I am a fan of keeping that figure down to the lowest legally allowed.  The way I usually handle it depends on a number of factors.  Generally, we post the receipts back to the original expense account only if they are separately designated on invoices and if they are for the exact same amounts.  If those costs are marked up when passed along to the customers, all amounts received should be processed through the revenues account.

In regard to the 1099 matching issue, you should understand that payments to most corporations are not required to be reported on 1099s, while payments to unincorporated businesses are.  However, from your email signature, it appears that you may be an attorney, in which case payments to your corp are required to be reported to IRS on 1099s.  IRS has singled out incorporated attorneys for tighter reporting that for any other kind of corporation.  This may or may not influence your decision as to how to tax your LLC.

Good luck.  I hope these comments help.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 06:37:00 PM Send this post:

Actor Wesley Snipes faces 40 years for alleged tax evasion – The idiot fell for one of those bogus tax protestor scams.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 04:32:00 PM Send this post:

Sweat equity in IRA real estate can be no-no – Using IRA money to purchase real estate is often a wise investment strategy; but there are a number of technicalities that need to be complied with.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 02:18:00 PM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 12:05:00 AM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/14/2006 12:00:00 PM Send this post:

Q:

Subject: capital gains on principal home

 

Aloha Tax Guru!

        I have a question for you.  We purchased our Lahaina Hawaii home 12 years ago for $240,000.  We had to move to Lanai (another island) for work, but had plans to move back to Lahaina.  We have been renting a house here and renting out our home in Lahaina.  We now want to sell our home in Lahaina and buy one in Lanai.  We found out homes in the Lahaina area are going for $650,000. If we sell, we would make a profit of $410,000, well under $500,000 allowed for married couples.  However, does our home we are selling count as a primary residence if:

        !)We are renting a home to live in on Lanai

        2)We are renting out our home in Lahaina

        3)We only own one home.

Mahalo for your help! 

A:

You left out the most critical bit of information in determining whether or not you can use the tax free sale of your former residence.  Specifically, how long ago did you move out of that home and convert it to rental? 

As is explained on my website and in the referenced links, if it was less than three years prior to the sale, you should be able to use the Section 121 tax free exclusion.  If it was longer than that, you are no longer eligible and will be selling a rental property.

You absolutely must work with a professional tax advisor on this matter.  If you do qualify for the exclusion, there will still be some depreciation recapture to pay tax on.

If you don't qualify for the exclusion, your advisor can hopefully help you reduce the tax hit via something like a Section 1031 exchange or an installment sale.

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/12/2006 09:38:00 PM Send this post:

Court Ruling Could Force State to Lose $1.5 Billion in LLC Fees – Boo hoo!  The PRC may not be able to rape LLCs with impunity any longer.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/10/2006 09:18:00 PM Send this post:

Q:

Subject: Question

 

Kerry,

I am trying to find out if I can claim the exclusion for primary residence ($500,000 for 2 people) in the case where we are selling our home as a fractional. In our case, we would sell 5 shares and keep the 6th.  Our profit would well exceed the $500,000. We would likely deed over the first three simultaneously and then the 4th and 5th would deed over at a later time. 

 

Do you have any info or advice that you could lend?

Thanks in advance. By the way I found you through a Google search.

A:

It should be possible to achieve your goal of utilizing the $500,000 tax free exclusion for the sale of 83.33% (5/6) of your home.However, there are a number of technical aspects that need to be addressed, which means that you need the assistance of both qualified legal and tax professionals.  If you try to handle this on your own, you could very easily screw it up.
 
Some of the issues you need to address with your professional advisors should include the titling of the shares on the house (individual names vs. a separate entity), as well as whether they will represent actual current ownership or a future remainder interest.  If a remainder interest is involved, a sale to any related parties will not qualify for the tax free exclusion.

You mentioned selling at different times.  If the sales take place in different tax years, this could possibly jeopardize your ability to use the tax free exclusion on more than one 1040.  Again, you should discuss this aspect with your personal tax pro

You should also understand that if you do utilize the full $500,000 tax free gain on the sale of 5/6 of the home, you will not be eligible for any tax free exclusion when you sell the remaining 1/6th share. 

You will also need to work with your  personal tax pro to allocate the cost basis of the home to the portions being sold and the one being retained. 

Good luck.

Kerry Kerstetter

Follow-Up:

kerry,

Thank you for responding to my inquiry regarding the fractional sale of my home. This was helpful. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/10/2006 12:11:00 PM Send this post:

Q:

Subject: Question re Quick Books 2007

 Kerry,

You said in last weeks E-Mail to upgrade to 2007 so I am

 

I checked the QB website and they said for me to upgrade to Pro 2007 (the Basics edition was phased out in 2006) will cost $199.00 as an upgrade.

 

Is there any place to get it cheaper than that?   I thought if you already owned QB, you could download a cheaper update than $199.00....should I check Sam's Club and just buy the software again? 

 

Thanks for your suggestion,

A:

2005 was the last year they sold the basic version. That was a shame because it did everything we needed for tax return purposes, so I always recommended that one.  I guess Intuit was so upset that so many buyers were choosing that inexpensive version that they had to dump it in order to squeeze more money out of buyers who now only have the Pro version on the lowest price end.

$199 is the regular retail price.  Historically, it's always been possible to beat the normal retail prices  at warehouse clubs, eBay and via the banner ads on my websites.

As a test, I just checked those prices and here's what I came up with.

Sam's Club shows it as available on 10/16/06 for $158.18.

Clicking the square banner on my blog, it had the Pro 2007 program as $169.96.

 An eBay search came up with a bid price of $120 and a BuyItNow price of $169.99.

Since you have a Sam's Club right there in Springfield, I would probably pick it up there and not have to worry about shipping costs.  We have to drive 1.5 hours to reach a Sam's in person, so I would probably buy it from them online.

I hope this helps.

Kerry
 

Follow-up:

Kerry,

 

Sam's Club in Springfield did not have the 2007 version, but were selling the 2006 Pro QB for $149.98......I'll go online and see if I can buy it....

 

thanks for the info.

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/09/2006 09:40:00 PM Send this post:

Preserving a Donor's Intent

Interesting dilemma.  Technically, you are not allowed to attach strings to deductible charitable gifts.  However, you assume the charity will use it according to its guiding principles and not in some way contrary to that.  Of course, we see these kinds of problems a lot over time, such as with foundations originally funded in support of capitalistic principles using their money to support leftist causes (Ford Foundation, et al).

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/09/2006 10:27:00 AM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/08/2006 09:59:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/08/2006 09:33:00 PM Send this post:

The insatiable need to steal money from other people may be a lifelong illness for many of our rulers.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/07/2006 05:30:00 PM Send this post:

Q:

Subject: Big Red Consulting / Quickbooks Question

 

Hi Kerry -

 

Came across your comments on your website concerning Big Red Consulting's tool to transfer transaction files between companies and was looking to purchase that. I am, however, always a bit hesitant on downloading a third party tool that comes in contact with company files etc. Also curious on your experience on this tools functionality.

 

- Essentially have two copies of the same company and need to update one computer with some but not all transactions for some vendors (payments, address changes etc) and also invoices. Simply said Computer A contains 90% of the invoice/payment transactions but need to update it with the 10% that is on Computer B without wiping out/replacing the 90% info that is on Computer A.

 

The Big Red website seems to indicate that this is what this tool is designed to do but wanted to see what your experience is on this.

 

Very much appreciate any feedback on this...just want to be sure to get the right tool the first time.

 

Best Regards,

A:

I purchased my first programs from Big Red in April 2002 and have never had any problems when using them.  They have always performed as advertised.  Neither have I ever heard of any problems from others who I have advised to use those programs to perform their specialized tasks.

To be on the safe side and to protect the integrity of your original data files, it would be a good idea to make copies of them to work with in any process that you may be unsure of.  That way, you will always have to option of going back to the pre-modified state.

I hope this helps you feel more comfortable in utilizing the handy tools that Bid Red has for working with QB files.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks Kerry - Appreciate you get getting back to me.

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/07/2006 02:22:00 PM Send this post:

From a reader:

Subject: Re: Inflation Adjustments To Capital Gains

Many thanks for the link to the Capital Gains Index pdf file.

This is Henry Paulson's chance to leave a real legacy at Treasury; it could be backed up by Ben Bernanke who made a good case for the necessity of raising the national saving rate to help offset the looming entitlement disaster.

The Coming Demographic Transition: Will We Treat Future Generations Fairly?

 

Indexing cost basis would encourage more saving via lower tax rates. ( I can almost hear certain Senators supported by the MSM howling about how indexing would benefit the eeeevil rich plus how the government is going to lose so much of our money.)

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/06/2006 08:21:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/05/2006 10:25:00 PM Send this post:

I received the following email this morning:

Subject: CapGains Indexing - Legal Brief

 

Hi Kerry:

 

Pete Sepp with National Taxpayers Union here; we corresponded several years ago about a legal brief that our foundation helped to prepare on how the President could order capital gains indexing without an act of Congress. You had expressed interest in seeing an online copy. Just thought you'd like to know that we have FINALLY been able to scan and post the whole 90-page document on our website. I invite you to check it out at:

 

www.ntu.org/pdf/CapGains_Index_92.pdf 

 

Enjoy! Pete

Pete Sepp
V-P Communications
National Taxpayers Union
703-299-8667
pressguy@ntu.org

I wrote back:

Pete:

Thanks for passing that along.  I'm also glad to see that you posted it to the Latest News section of your website.

I have been assuming that the conclusion reached back then is still the same now and have been hoping that Bush 43 can be more forceful on this issue than his father was and not rely on official legislation to enact this COLA indexing.

I wrote about this most recently a month ago, but will update my website and blog for this new pdf file.

Thanks for keeping me in the loop.

Kerry Kerstetter

I have since updated my website page on this topic to include a link to the new PDF version of this report.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/05/2006 09:06:00 PM Send this post:

Experts Say Retirement Portfolios Should Include Real Estate – Sounds familiar. Real estate is so much more reliable (as a tangible asset) and less volatile than are stocks.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/05/2006 08:40:00 PM Send this post:

Q:

Subject: Section 179 expense

Dear Sir:

I have dealership costs associated with a Coastal Vacations Level I, Level II and Level III that exceed $18,000.  First, could these possibly qualify as a Section 179 expense for 2005.   These are deeply discounted Lifetime Vacation Memberships that must be purchased in order to sell dealerships at Level III.   Or, does that just refer to things like computer equipment and vehicles used by a sole proprietership.

This business had no receipts, so is it possible to take a Section 179 expense of any kind, or must I have had receipts to cover the amount I would like to expense.  Would I only be able to deduct this expense once I had income from this business?

Your response would be greatly appreciated.

A:

As you can see on the page describing the Section 179 qualifications, it is only used for tangible business assets. There is no way in which memberships in a travel club or multi-level program would qualify for such classification. 

Those costs would need to be amortized over their useful or class lives, which a qualified professional tax advisor can help you determine.  And that would only be possible if you are able to prove that they are being used for potentially income generating business purposes and not for your own personal pleasure.  I'm not personally familiar with this MLM; but many similar travel club programs routinely give the absolutely false advice that their costs are fully deductible.  People are frequently getting into trouble with IRS for trying to deduct these kinds of personal travel costs because they do not have a true for-profit business set up.

If you are serious about running your multi-level business as a legitimate for-profit enterprise (the only way in which you can deduct any related expenses), you need to be working directly with a professional tax practitioner.  To not do so will severely jeopardize your ability to convince IRS that you have the required profit motive and aren't just doing the travel club thing for your personal enjoyment.

Your personal professional tax advisor will be able to assist you in determining what kinds of things are deductible, both with and without any income generated from that business.

Good luck.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/05/2006 01:06:00 PM Send this post:

From a reader:

Subject: IRS joke

From Jay Leno, about those two weeks in July when the  Dodgers forgot to win:

"[That's] 11 losses out of 12 games. In fact, today the IRS said they would no longer let the Dodgers deduct their bats as a business expense."

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/05/2006 12:54:00 PM Send this post:

Income tax cuts benefit all payers  – Hard to believe that a leftist paper like USA Today would print anything disputing the party line that only evil rich folks benefit from tax rate cuts.

There's no 80 percent solution for retirement

 New Rules Encourage Investing in 401(k) Retirement Plans

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/02/2006 02:27:00 PM Send this post: