Accounting Blog

Understanding the Differences Between Home Renovations

Some improvements are likely to increase your home’s value. However, others may actually decrease potential buyers’ interest in your home. So, put away your toolbox until you know more about projects that typically don’t pay.

 

Too Much Improvement

When you remodel your house, it should be in keeping with your neighborhood. Having your house stand out as the nicest one by far is often not a good thing when you’re trying to sell. Too much improvement may not pay off since the market price of your house may be limited by your neighborhood’s home values.

 

House Unusual

Unusual renovations, such as converting a garage into a home gym or adding a backyard basketball court, could turn off potential buyers. You also may want to stick with standard sizes for countertops and kitchen and bathroom fixtures.

 

Amateur Workmanship

Don’t do it yourself if you’re not handy. First of all, the results will probably show that you didn’t hire a professional. And secondly, structural mistakes and building code errors will show up during a home inspection. If your home fails an inspection, you could either lose a sale or be forced to lower your selling price.

 

To learn more about how to make most of your home as an asset give us a call today. Our trained staff of professionals is always available to answer any questions you may have.

 

…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).

Understanding the Tax Ramifications of Investing in Rental Real Estate

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 fidesense.” Examples of such management decisions provided by the IRS include approving tenants and deciding on rental terms.

Selling the Property

The 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, the 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.

…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).

Want to Defer Capital Gains – Use a Property Swap

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, so give us a call today to discuss your personal situation.

…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).

What You Need to Know Before You Rent Your Vacation Home

Renting out a second home can help defray the cost of owning and maintaining the property. And there may be valuable tax benefits from the rental arrangement as well. Here are some things to think about if you are going to rent out a vacation property.

 

Two Week Rule

 

Your rental income won’t be taxable as long as you limit the number of rental days to 14 or fewer each year. In this situation, you won’t be able to deduct your rental expenses (other than property taxes and qualifying mortgage interest).

 

More Than 14 Rental Days

 

Once you exceed 14 rental days, all rental income becomes taxable to you. But you may deduct various rental expenses. There are different limits on rental deductions depending on your personal use of the home.

 

  • All expenses associated with renting out the property, such as utilities and maintenance, are potentially deductible if you limit personal use of the home to no more than the greater of (1) 10% of the total number of days the home is rented or (2) 14 days. However, if there’s a rental loss, the tax law’s passive activity rules may limit your loss deduction.

 

  • Where personal use exceeds the 10% or 14-day threshold, your tax deductions for rental expenses generally will be limited to the amount of rental income you collect. No loss is allowed.

 

To learn more about vacation homes and taxes, 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).

What are the Deductions for Charitable Donations

If your contributions to charity begin and end with check writing, you may be missing out on some satisfying volunteer opportunities — and a few tax deductions. IRS rules allow you a number of tax breaks for contri­butions other than cash that you make to qualified organizations.

 

Deduct Getting There and Back

 

You can deduct the costs of going to and from a location where you volunteer your services. You can also deduct the costs of driving for the organization — for example, to pick up or deliver items. To compute your deduction for charitable driving, use a standard mileage rate of 14 cents per mile or deduct the actual cost of your gas and oil. Either way, parking fees and tolls are also deductible.

 

Recoup Your Expenses

 

Out-of-pocket expenses you pay in giving services to a qualified organization may count as a charitable donation if you’re not reimbursed for them. You cannot deduct your personal expenses, such as child-care costs, even if they are necessary for you to volunteer. You may, however, deduct the costs of buying and cleaning a uniform you’re required to wear while volunteering if it is not suitable for everyday use.

 

No Time To Volunteer?

 

Many charities accept noncash donations. Giving investments that have increased in value can be a smart tax move. Instead of selling the investment and paying capital gains tax, give it to a qualified organization. If you held the investment for more than one year, you generally can deduct its fair market value at the time of the donation. Remember that you’ll need a receipt from the organization to claim a tax deduction and other records also may be required.

 

Some Restrictions

 

Contributions must be made to qualified organizations that meet IRS guidelines. Not sure? The IRS has an online tool (Exempt Organizations Select Check) on its website (www.irs.gov). Or call the IRS at 1-877-829-5500.

 

Things you can’t deduct include contributions to a specific individual; the value of your time or services; personal expenses incurred while volunteering, such as the cost of meals (unless you must be away from home overnight); and appraisal fees to determine the value of donated property.

 

Connect with us today for more information on charitable donations.

 

…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).

Does the Sale of Your Home Qualify for a Federal Income Tax Exclusion?

You’ve sold your home and made a nice profit on the sale. So you may be wondering if Uncle Sam is entitled to a cut. Although gain on a home sale is potentially taxable, you may qualify for a federal income-tax exclusion.

The Rules in General

If you’re a single taxpayer, you may qualify to exclude gain of up to $250,000 if you owned the home and used it as your principal residence for at least two of the five years before the sale. Married couples who file jointly may exclude up to $500,000 of gain as long as one spouse owned the home — and both spouses used the home as a principal residence — for two of the last five years.

The Frequency Factor

The exclusion is generally available to sellers only once during a two-year period. A married couple is entitled to the $500,000 exclusion only if neither partner used the exclusion within the two-year period that ended on the sale date.

Reduced But Available

Even if you don’t meet the criteria described above, you may still qualify for a reduced exclusion (of less than $250,000 or $500,000) if the primary reason for the home sale was a change in the location of your employment, a health condition, or certain other “unforeseen” circumstances. The affected individual can be you, your spouse, a co-owner of the residence, or a person sharing your household. You may also qualify for the reduced exclusion if you sell your home to care for a sick family member.

Additional restrictions on gain exclusion may apply if you’ve rented out your home, maintained a home office, or turned a second home into a principal residence.

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).

Do You Need a Donor Advised Fund?

Are you looking for a different way to give to your favorite charities? If you are, you may want to consider a donor-advised fund.

Donor-advised funds are a popular option because they offer several attractive benefits: relatively modest contribution guidelines, little to no set-up costs, few ongoing responsibilities, name recognition if desired, and the ability to consolidate contributions and thereby make a greater impact.

Fund Basics

With a donor-advised fund, you make a contribution (or series of contributions) to the fund and recommend how you would like your gifts to be disbursed. Generally, the donor’s recommendations will be followed, but the sponsoring organization has the final say as to how the money is actually distributed.

Tax Benefits

As the donor, you can potentially take advantage of these tax breaks:

  • An immediate deduction that reduces your federal taxable income (subject to certain tax law limitations)
  • Avoidance of capital gains taxes on appreciated assets you donate directly to the fund
  • A reduction in the value of your estate, potentially saving future estate taxes

Do Your Research

If you are interested in setting up a donor-advised fund, do your homework. Ask the sponsoring organization what types of assets it will accept. Funds also may have minimum contribution requirements to establish a named fund. Make sure you understand what restrictions apply to grants, what fees are involved, and what services are offered to help donors. And find out whether the fund will continue in perpetuity or end when you die.

To learn more about Donor-advised funds, give us a call today. Our staff of professionals is always happy 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).

Alimony and the IRS – What You Need to Know

If you and your spouse are ending your marriage, you’ll have many decisions to make. You will have to divide your belongings in a fair and equitable way. If you have children, you’ll have to work out custody arrangements. You may even have to decide who keeps the cat or the dog.

Another important decision you’ll face is whether alimony payments will be part of your divorce decree. This decision can have significant tax consequences for both of you. The IRS rules regarding alimony payments are complex. Before your divorce agreement becomes final, both you and your spouse should understand the tax implications of your arrangement.

The Rules

Alimony payments are tax deductible by the person who pays them and are considered taxable income to the recipient. However, to be tax deductible, alimony payments must meet certain requirements. For one thing, payments can’t be voluntary — they must be required by your divorce or separation agreement. Payments must also be in cash. You can’t, for example, do yard work or buy your ex a new TV and have that count as alimony, although you can agree to cover a specific expense such as the rent or mortgage.

You and your former spouse must be living apart for payments to qualify as alimony. And payments must stop if the recipient dies. If payments are to continue, none of the payments — even those made while the recipient is living — are deductible. However, if alimony payments stop because your ex-remarries, their deductibility is not affected.

Child Support Is Different

Unlike alimony payments, payments made for child support are not tax deductible by the person paying them, nor are they considered taxable income to the person who receives them. If alimony payments will decrease once a child reaches a certain age, the differential is treated as nondeductible child support.

Your tax situation and that of your spouse may affect your decision to designate payments as tax-deductible alimony or nondeductible child support. Our tax advisors can offer you the guidance you need, so give us a call today.

…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).

Completing a Successful Dentist Practice Merger

Sally McKenzie examines some of the issues surrounding the merging of one dental practice with another practice, or multiple practices. She notes the importance of completing an analysis of both practices’ business operations, employees, and their job descriptions: “you might find the practices have different job descriptions, different practice management software, even different philosophies of care.

Once those differences are identified, work together to develop a business plan that combines the best of both practice systems.” She also advises keeping employees informed about any merger move and creating a collaborative environment which does not allow an “us vs. them” mentality to take hold. Meanwhile, merging will mean more patients, and preparations for this must be considered. “Create a plan beforehand while keeping in mind that you might need to make changes to the schedule, such as adding hours to accommodate increased demand,” advises McKenzie.

Keep Reading on Dentistry IQ

…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).

Are There Advantages to Owning a Second Home?

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 motorhome of any size or value.

Provided the boat or motorhome 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.

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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