Grossbach Zaino & Associates, CPA's, PC


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A Property Exchange Can Defer Taxes

If you are fortunate enough to own real estate that has appreciated substantially, you may be hesitant to sell the property and reinvest in another property because of the taxes you’d have to pay on your profit. Instead of selling, you might want to consider a “like-kind exchange.”

A like-kind exchange is a property swap. When all tax law requirements are met, a like-kind exchange allows you to defer your gain for tax purposes.

An Example

Pete exchanges a tract of land worth $500,000 for a building, also appraised at $500,000. He originally paid $300,000 for the land and he made no improvements to it. Because the deal is structured as a like-kind exchange, Pete’s $200,000 gain on the land ($500,000 value minus $300,000 cost) is tax deferred.

Tax deferred doesn’t mean tax free. For tax purposes, Pete’s cost basis in the building he acquired in the exchange is $300,000, the same as his cost basis in the land he gave up. So, if Pete were to turn around and sell the building for $500,000, he’d have to report a taxable gain of $200,000 at that time.

Which Assets Qualify?

The like-kind exchange strategy is available for investment property and property used in a trade or business. Real estate has to be exchanged for real estate, and personal property for personal property. Inventory and shares of stock aren’t eligible for like-kind exchange treatment, and various other restrictions apply.

Making a Deal

A like-kind exchange can be accomplished when properties are not of equal value. Typically, the owner of the less valuable property turns over enough cash (or other assets) to even out the exchange. Or one owner might agree to assume the other’s debt. Note that transactions involving cash, additional assets, and debt relief are not completely tax deferred.

Other variations on the basic like-kind exchange are possible. For example, it’s possible to structure an exchange that isn’t simultaneous. Or more than two property owners can be involved in the deal.

In the right situation, a like-kind exchange can be a significant tax-saving opportunity. We’d be happy to discuss it with you.


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A Second Home’s Built-in Advantages

Whatever the location, size, or value of a second home, certain tax advantages are built in. However, your opportunity to benefit from them depends on how you use the property.

Personal Use

Both property taxes and mortgage interest are as deductible for a second home as they are for your primary residence — and are subject to the same limitations. If you file a joint return, you cannot deduct interest on more than $1 million of acquisition debt ($500,000 for married persons filing separately) on one or two homes.

Two tax advantages of home ownership are not available for a second home — the immediate deduction of mortgage points when purchasing and the capital gain exemption when selling. Both tax breaks require the home to be your “principal residence.” However, you can deduct the points on your second home’s mortgage over the loan’s term.

Rental Use

More tax advantages become available if you forgo some of your personal use in favor of renting out your second home for part of the year. But there may be drawbacks as well.

If you rent out your home for 14 or fewer days during the year, you do not have to report rental income on your tax return, regardless of the amount, and there is no effect on your mortgage interest deduction. But you cannot deduct any rental expenses.

If you rent out your property for more than 14 days during the year, all rental income becomes taxable from day one. However, rental-related ownership expenses — including depreciation, maintenance, and utilities — become tax deductible. Your personal use of the second home affects the deductible amount. When personal use is more than 14 days (or 10% of the number of days your home is rented, whichever is greater), the maximum deduction is 100% of the rental income. Note that allowing relatives to use your vacation home usually counts as personal use, regardless of how much they pay for the privilege. And, if a friend rents your home for less than the fair market rate, that also counts as personal use.

If your vacation home qualifies as a rental property (i.e., personal use doesn’t exceed the allowable limits), a deduction is allowed only for mortgage interest allocated to rental use. That could be important. If you were to rent your second home during July only, for example, then only 1/12 of your interest expense would be deductible.

Deducting Losses

What if your rental expenses exceed the rent you collect? Only an “active” investor can deduct rental losses. If you actively participate in managing the rentals and maintaining the property, you can apply up to $25,000 of losses each year against your regular income. This loss deduction is phased out for taxpayers with adjusted gross income between $100,000 and $150,000. But, if you hire a manager, you become a passive investor and can use rental expenses to offset only rental income. However, you can carry any excess deductions forward to future tax years.

Your use determines the tax treatment of a second home. Before you decide to rent your second home for more than 14 days a year, carefully weigh the benefits and disadvantages.

Deductible Yacht and Motor Home Financing

Your second home doesn’t have to sit on a fixed foundation to qualify for tax advantages.

According to the IRS, a facility qualifies as a residence if it has sleeping, cooking, and bathroom accommodations. Therefore, your yacht or smaller boat can be a second home. So can a motor home of any size or value.

Provided the boat or motor home secures the purchase loan, your mortgage interest is as deductible as it would be on a more conventional second home. The same $1 million limit on total debt to buy or improve your residences also applies.


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Business Auto Deductions

Do you drive your car for business purposes? The costs of operating and maintaining your vehicle are potentially deductible. Here are some guidelines.

Two Methods

The IRS provides two basic methods for computing deductions for the business use of an automobile.

Actual expense method. With the actual expense method, you deduct the actual costs of operation, including licenses, registration fees, garage rent, repairs, gas, oil, tolls, and insurance. Additionally, you may claim depreciation deductions (and/or elect expensing under Section 179). If the car is leased, you deduct your lease payments rather than depreciation. (Certain limits apply.)

Standard mileage rate. Alternatively, you may choose to use an IRS-provided standard mileage rate. With this method, you multiply the number of business miles you drive during the year by the applicable rate (57.5¢ per mile for 2015). When you use the standard mileage rate, you don’t separately deduct expenses such as gasoline, oil, insurance, repairs and maintenance, depreciation, or lease payments. However, business-related parking fees and tolls are separately deductible.

Which Should You Use?

Generally, you will want to use the method that produces the largest deduction. If your vehicle is costly to own and operate, the actual expense method may be more advantageous. Conversely, if your vehicle is fuel efficient and/or inexpensive, the simpler standard mileage rate method may be a better choice.

With either method, the IRS requires that you keep records that substantiate your business use of the car: the date, place, business purpose, and number of miles you travel. When you use the actual expense method, you’ll also need records substantiating the amount and date of car-related expenditures. You can avoid having to retain receipts by using the standard mileage rate.

If you decide to use the standard mileage rate for a car you own, you may switch to deducting your actual business-related car expenses in a later year. However, you won’t be able to claim accelerated depreciation deductions for the car. With a leased car, you have less flexibility. If you choose the standard mileage rate the first year, you must use it for the entire lease period.

Personal and Business Use

If you use your car for both personal and business purposes, you must keep track of your mileage for each purpose. To figure the percentage of qualified business use, you divide the business mileage by the total mileage driven. Then multiply that percentage by your total expenses.


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’Tis the Season

At the end of the year, companies often celebrate the holidays by having office parties or giving gifts to their employees. The following are some general guidelines as to what is taxable and what is not.

 

Gifts. Employers can give their employees merchandise of nominal value — hams and turkeys, for example — with no negative tax consequences. Such items are de minimis fringe benefits that don’t have to be included in the taxable compensation of the recipients if making a general distribution is seen as a means of promoting goodwill.

 

Parties. In most situations, the tax law limits a company’s deduction for business meal and entertainment expenses to 50% of the expenses. However, like the holiday gifts just described, an occasional party given for employees and their guests is also considered a de minimis fringe benefit. The 50% deduction limitation does not apply.

 

Achievement awards. Employers sometimes use a holiday get-together as an occasion to hand out achievement awards to employees in recognition of length of service or safety. Again, the full cost of such awards is deductible — and their value need not be included in the employees’ compensation — if various tax law requirements are met. In general, the cost of all awards made to one employee during the year may not exceed $400. A higher $1,600 limit applies if the awards are made under a written plan or program that doesn’t discriminate in favor of highly compensated employees as to eligibility or benefits.


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Business Travel Expenses

Employers and employees who travel for business may deduct certain types of travel expenses. Following are some general guidelines.

 

Business Travel

 

Generally, the round-trip cost of traveling for business is deductible whether the taxpayer stays away from home overnight or not. However, the IRS makes an important distinction between “business transportation” — a broad label that would apply to round-trip travel during the day — and “business travel,” which includes an overnight stay. For qualifying business travel, the taxpayer is allowed to deduct the entire cost of lodging and incidental expenses (as well as 50% of meal expenses).

 

To qualify for business travel status, the business trip must:

 

  • Involve overnight travel

 

  • Be temporary — expected to last one year or less

 

  • Be away from the “tax home” — generally, the taxpayer’s principal place of business

 

Substantiation

 

To deduct travel expenses, employers may want to first consider implementing an “accountable plan.” Generally, an accountable plan requires that the employee adequately account for the business expense and return any unaccounted for advances within a reasonable period of time. Accountable plans benefit both the employee and the employer because expense reimbursements/advances that are properly accounted for are free of income-tax withholding and the employer’s and employee’s shares of FICA taxes.

 

Employees potentially may deduct unreimbursed ordinary and necessary business travel expenses. However, this deduction must be taken as an itemized deduction, and only the amount exceeding 2% of adjusted gross income will be deductible.

 

Employees should be careful to meet the IRS’s substantiation requirements. Generally, employees will be required to retain receipts and keep a logbook recording specific expenses related to business travel.


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New Tax Law Provisions To Note

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

 

Return due dates

 

The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

 

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

 

Basis reporting

 

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

 

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

 

Mortgage information returns

 

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.

 

* Surface Transportation and Veterans Health Improvement Act of 2015


Leave a comment

New Tax Law Provisions To Note

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

 

Return due dates

 

The new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

 

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

 

Basis reporting

 

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

 

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

 

Mortgage information returns

 

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.

 

* Surface Transportation and Veterans Health Improvement Act of 2015