Financial Tips

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Installment Sale to the Rescue

You’ve finally found a buyer for the rental property, land, or business you’ve been trying to sell but the buyer doesn’t have enough cash to pay the full purchase price in a lump sum. So you agree to an installment sale. The buyer will make a partial payment now and pay you the balance over several years, with interest. The deal’s done, now what about your taxes?

Pay as You Go

Because you’ll receive the payments over more than one tax year, you can defer a portion of any taxable gain realized on the sale. You’ll report only a proportionate amount of your gain each year (plus interest received) until you are paid in full. This lets you pay your taxes over time as you collect from the buyer.

Reduce Surtax Exposure

The installment sale also might help limit your exposure to the 3.8% surtax on net investment income. Capital gains are potentially subject to this surtax (in addition to regular capital gains tax) but only in years when your modified adjusted gross income (AGI) exceeds a threshold amount: $200,000 if you file as a single or head of household taxpayer, $250,000 if you file a joint return with your spouse, and $125,000 if you are married and file a separate return.

If your AGI is typically under the threshold, recognizing a large capital gain all in one year could put you over the top, triggering the additional 3.8% tax. By reporting your gain on the installment method, you may be able to stay under the AGI threshold and minimize your tax burden.

Take Note

The installment sale method isn’t available for sales of publicly traded securities and certain other sales. And you have the option of electing out of installment sale treatment and reporting your entire gain in the year of sale. Electing out may be advantageous under certain circumstances: for example, if you have a large capital loss that can offset your entire capital gain in the year of sale. Contact your tax advisor for information that pertains to your particular situation.

Renting Residential Real Estat – A Tax Review for the Nonprofessional Landlord

Investing in residential rental properties raises various tax issues that can be somewhat confusing, especially if you are not a real estate professional. Some of the more important issues rental property investors will want to be aware of are discussed below.

Rental Losses

Currently, the owner of a residential rental property may depreciate the building over a 27½-year period. For example, a property acquired for $200,000 could generate a depreciation deduction of as much as $7,273 per year. Additional depreciation deductions may be available for furnishings provided with the rental property. When large depreciation deductions are added to other rental expenses, it’s not uncommon for a rental activity to generate a tax loss. The question then becomes whether that loss is deductible.

$25,000 Loss Limitation

The tax law generally treats real estate rental losses as “passive” and therefore available only for offsetting any passive income an individual taxpayer may have. However, a limited exception is available where an individual holds at least a 10% ownership interest in the property and “actively participates” in the rental activity. In this situation, up to $25,000 of passive rental losses may be used to offset nonpassive income, such as wages from a job. (The $25,000 loss allowance phases out with modified adjusted gross income between $100,000 and $150,000.) Passive activity losses that are not currently deductible are carried forward to future tax years.

What constitutes active participation? The IRS describes it as “participating in making management decisions or arranging for others to provide services (such as repairs) in a significant and bona fide sense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

A gain realized on the sale of residential rental property held for investment is generally taxed as a capital gain. If the gain is long term, it is taxed at a favorable capital gains rate. However, the IRS requires that any allowable depreciation be “recaptured” and taxed at a 25% maximum rate rather than the 15% (or 20%) long-term capital gains rate that generally applies.

Exclusion of Gain

The tax law has a generous exclusion for gain from the sale of a principal residence. Generally, taxpayers may exclude up to $250,000 ($500,000 for certain joint filers) of their gain, provided they have owned and used the property as a principal residence for two out of the five years preceding the sale.

After the exclusion was enacted, some landlords moved into their properties and established the properties as their principal residences to make use of the home sale exclusion. However, Congress subsequently changed the rules for sales completed after 2008. Under the current rules, gain will be taxable to the extent the property was not used as the taxpayer’s principal residence after 2008.

This rule can be a trap for the unwary. For example, a couple might buy a vacation home and rent the property out to help finance the purchase. Later, upon retirement, the couple may turn the vacation home into their principal residence. If the home is subsequently sold, all or part of any gain on the sale could be taxable under the above-described rule.

Selling Inherited Property? Tax Rules That Make a Difference

Sooner or later, you may decide to sell the property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.

Your Basis

When you sell the property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death (or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).

These basis rules can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.

For example: Assume your Uncle Harold left you stock he bought in 1986 for $5,000. At the time of his death, the shares were worth $45,000, and you recently sold them for $48,000. Your basis for purposes of calculating your capital gain is stepped up to $45,000. Because of the step-up, your capital gain on the sale is just $3,000 ($48,000 sale proceeds less $45,000 basis). The $40,000 increase in the value of the shares during your Uncle Harold’s lifetime is not subject to capital gains tax.

What happens if a property’s value on the date of death is less than its original purchase price? Instead of a step-up in basis, the basis must be lowered to the date-of-death value.

Holding Period

Capital gains resulting from the disposition of inherited property automatically qualify for long-term capital gain treatment, regardless of how long you or the decedent owned the property. This presents a potential income tax advantage since the long-term capital gain is taxed at a lower rate than short-term capital gain.

Be cautious if you inherited property from someone who died in 2010 since, depending on the situation, different tax basis rules might apply.

Deductions for Long-Term Care Insurance

Many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case. If you are thinking about buying long-term care insurance, you’ll be interested to know that, within limits, premiums paid for qualified policies are deductible as an itemized medical expense. For 2019, premiums for qualified policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses, exceed 10% of your adjusted gross income.

The typical long-term care insurance policy will pay for the nursing home, home care, or other long-term care arrangements after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.

Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2019 are:

Long-Term Care Insurance Premium Deduction Limits, 2019
Age Premium Limit
40 or under $420
41-50 $790
51-60 $1,580
61-70 $4,220
Over 70 $5,270

Source: Internal Revenue Service

These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $10,540 ($5,270 × 2). Keep in mind, however, that, for individuals under age 65, itemized medical expenses are deductible only to the extent that they, in total, exceed 10% of adjusted gross income (AGI).

As everyone’s situation is different, consider contacting your tax and legal professionals to discuss your personal circumstances.

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Deducting Business Expenses: Your Motor-home or Recreational Vehicle

Here’s an idea: Why not purchase a motorhome or recreational vehicle and deduct it as a business expense?

As long as you use it for business this could be a really sweet deal. And if you just happen to use it for pleasure once or twice, that’s no big deal, right?

You won’t be the first person to think of this and if you don’t follow the IRS rules, you won’t be the last to experience the consequences. The courts and the IRS have battled this discussion out several times. Both have been challenged trying to confirm when the motor home is a business vehicle and when it is a business lodging facility.

Does it matter?

It does. The business aspects of owning a motorhome will qualify for tax deductions, but this comes with a set of rules.

Bear this in mind: if you travel for business and plan to deduct your motorhome as a lodging facility, be sure to count the number of nights you use it for business purposes and use that to measure the number of permissible deductions.

On the other hand, if you use your motor home or RV as a second home, you would deduct the business percentage of its use for business travel without having to consider Section 280A impediments.

It can be complicated, so be sure you understand the guidelines.

Before you can deduct the business expenses associated with your motorhome you need to determine what it actually costs to operate the business-related usage. Along with depreciation and interest or lease payments, be sure to add insurance to the equation.

Take into consideration all of the expenses associated with maintaining your RV. Here are a few other expenses to include in your calculation:

  • Motor oil
  • Gas
  • Car Washes
  • Tires
  • Licensing Fees
  • Property Tax
  • Parking
  • Tolls

Of course, you’ll only be limited to deducting your business-related expenses. Will painting or wrapping your recreational vehicle with advertisements qualify when deducting personal miles?

You know the answer….

It will not.

Maintain Good Records

The best way to ensure you maximize your allowable deductions on your motorhome or RV is to keep impeccable records. Keep a mileage log and record every single trip—business and pleasure. Make sure you have accrued more than 50 percent business nights.

Even if you think you have a great memory, don’t store this information in your head. Record every single night you use your motorhome for business or personal lodging.

Last but certainly not least, keep IRS Section 280(f)(4) top of mind. This section says the use of your motorhome for overnight business lodging produces deductions for business travel and that business travel is not subject to the vacation home rules.

For a clear explanation of tax deductions for motorhomes or RVs, contact one of our tax professionals. Better to plan ahead than to clean up a mess after the fact.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Putting a Value on Donated Property

Donating noncash property valued at more than $5,000 to a charitable organization generally requires a qualified appraisal that meets IRS guidelines.* Fair market value is the price that property would sell for on the open market. Its principles — willing buyer and willing seller, no compulsion to buy or sell, and reasonable knowledge of the relevant facts — remain mainstays of the valuation rules. However, the IRS cites other factors that may be considered in making the determination.

Cost or selling price. The price paid for an item can be an accurate measure of fair market value when the transaction and the donation dates are close and no change has occurred that would affect the item’s value.

Sales of comparable properties. Sales prices of comparable properties may be used to help determine value based on the degree of similarity of the property, the time between the sale and the donation, and the sale conditions.

Replacement cost. The cost of buying property similar to the donated item may be a consideration. An appropriate amount for depreciation must be deducted.

Opinions of experts. The expert should be knowledgeable and competent, and his or her opinion should be thorough and supported by facts.

Choosing a Qualified Appraiser

A qualified appraiser is someone who

  • Has earned an appraisal designation from a recognized organization or has met certain education and experience requirements.
  • Regularly prepares appraisals for a fee.
  • Is not an “excluded individual.” In general, this would include the donor; the donee; a person who sold, exchanged, or gave the property to the donor or acted as a transfer agent; or a person “related to” any of the above. (Other exclusions apply.)

A qualified appraisal must be signed and dated. The appraisal must be made no earlier than 60 days before the valued property is donated.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

 

* IRS Publication 561, Determining the Value of Donated Property

 

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IRS Requirements for Documentation for Charitable Donations

Recently, the U.S. Tax Court denied a taxpayer’s claimed deductions for over $27,000 of charitable contributions because the taxpayer had failed to properly document them.

 

Individual taxpayers and business owners claiming deductions must be able to substantiate them according to specific rules established by the IRS. Watch out for these common pitfalls.

 

Donations. Cash contributions of less than $250 require a bank record or written receipt indicating the name of the organization and the date and amount of the contribution. For noncash donations, you need a receipt and a record showing the donee’s name and a description of the gift. If the value of any gift equals $250 or more, you also need a contemporaneous written acknowledgment, a statement of whether the charity provided any goods or services in exchange for the gift, and, if so, a description and a good faith estimate of the value. Additional rules apply to contributions of noncash property of more than $500.

 

Hobbies. Deductions for hobby expenses are strictly limited. If you wish to claim the full extent of any expenses, you must be prepared to show that your activity qualifies as a business. The IRS will presume it’s a business if you can show a profit in three of the past five years. If that isn’t the case, then you should be prepared to produce evidence to satisfy a number of more subjective tests to avoid application of the tax law’s “hobby loss” restrictions.

 

Divorce. Alimony payments are tax deductible, but payments for child support are not. Taxpayers should retain their final divorce decree and any agreements for child support and/or separate maintenance in case the IRS questions claimed deductions. Also, retain any agreements regarding who will claim exemptions for dependent children. For capital gains purposes, save cost records for both jointly owned and settlement property.

 

Business expenses for travel, meals, and entertainment, and transportation. Generally, you must retain documentation to establish the amount, time, place, and business purpose for each expenditure. Specific expense categories may have additional requirements.

 

Business use of an automobile. Maintain records for the cost of the car and any improvements; the date you started using it for business; the mileage, destination, and business purpose for each trip; and the total mileage for the year. When you use the actual expense method rather than the IRS standard mileage rate, you also need records of your operating costs, such as gas, oil, repairs, maintenance, and insurance.

 

Home office. Be prepared to produce records that substantiate your claimed expenses and show regular and exclusive business use of that part of the home.

 

To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

The Ins and Out of Donating Stock to a Charity

What could be sweeter than helping out your favorite charity and snagging a tax deduction to boot? But giving cash isn’t your only option. Donating stock or mutual fund shares that have appreciated in value since you acquired them may be a tax-smart move.

When you donate securities you’ve held for longer than one year, you generally can claim an income-tax deduction in the amount of their fair market value. And, since you’re not selling the shares, you won’t have to realize the gain or pay capital gains tax on the appreciation. Although you could donate securities with unrealized short-term gains, your deduction would typically be limited to your cost basis.

Keep in mind that charitable gifts are deductible only if you itemize deductions on your income tax return. Your tax advisor can give you more information.

Give us a call today, so we can help you determine the right course of action for you.

 

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

What are Substantiate Charitable Contributions

If you want to take a charitable contribution deduction on your income tax return, you need to substantiate your gifts. You must have the charity’s written acknowledgment for any charitable deduction of $250 or more. A canceled check alone isn’t enough to support your deduction.

It’s your responsibility to obtain the charity’s acknowledgment (receipt), and you need to have it when you file your return. The acknowledgment must include:

– The amount of cash you contributed

– A description of any property you gave

– A statement as to whether the charity provided services or goods (a meal or tickets, for example) as full or partial consideration for your donation, plus a description and good faith value estimate of the services or goods

A charity may acknowledge each gift of $250 or more separately, or it may give you a single statement covering all your gifts. The charity does not have to place a value on the property you donate. That’s still up to you.

Also, a charity must provide you with an acknowledgment for a donation of more than $75 that is partially a contribution and partially in exchange for goods and services from the charity. This acknowledgment must:

– Tell you that your deductible contribution amount is the donation minus the value of the goods or services

– Give you a good faith estimate of the value of the goods or services

IRS regulations on substantiating charitable deductions cover two more contribution types:

– Goods Or Services That Don’t Have Substantial Value

A charity doesn’t have to include token items in its acknowledgment. Examples of these items include posters, mugs, and key rings.

– Payroll Deduction Contributions

Donations that employers make on behalf of employees who have signed payroll deduction authorization cards can be a problem because the charity lacks the individual donor information needed to prepare its acknowledgments. To substantiate these payroll deduction contributions, you can use employer documents that show the amount withheld (payroll stubs, W-2 forms, or other employer reports) plus the charity’s pledge card or other documents with a statement that you received no goods or services in exchange for your contribution.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).v

Is it Time for a Home Equity Loan?

Unlike the interest on consumer loans, home equity loan interest is tax deductible if certain requirements are met. Thinking of capitalizing on the equity in your home? Here are a few factors to weigh.

 

TAX CONSIDERATIONS

The interest you pay on a home equity loan of up to $100,000 ($50,000 if you are married filing separately) which is secured by your home generally qualifies as an itemized deduction. But there are other considerations.

 

Asking Zmarta Lainaa rahaa, a loan and mortgage professional, it’s clear that, to find out whether a home equity loan is your best financing option, you must compare the effective after-tax interest rate on the home equity loan with the interest rate available on consumer loans. To calculate a home equity loan’s effective after-tax interest rate, subtract your marginal income-tax rate (your tax bracket) from 100% and multiply the result by the home equity loan’s interest rate.

 

Example. If your marginal income-tax rate is 25% and you can secure an 8% home equity loan rate, the effective after-tax interest rate of the loan will be 6% (100% – 25% = 75%; 8% ´ 75% = 6%). Thus, if the lowest consumer loan interest rate available to you is higher than 6%, the home equity loan may be the better choice.

 

OTHER CONSIDERATIONS

Remember that you will need to pay off the home equity loan when you sell your home. So before you go through the trouble and expense of getting a loan, consider how long you plan to live in your current home. And while home equity loans can be a tax-smart financing option, you should also consider the risks associated with pledging your home as collateral if you become unable to make the loan payments. There may also be some costs associated with obtaining a home equity loan.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

…from the Team of Professional at RE-MMAP We are just a click or call away. www.re-mmap.com and phone # (561-623-0241).

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