Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for February 18th, 2005

Posted by taxguru on February 18, 2005

Q:

Subject: Exchange Question
 
Hi,

I am writing from Maryland. Last year I sold a piece of land in West Virginia to purchase a primary residence in Maryland. When I originally purchased the land 6 years ago my intent was to build a primary residence on it. I had some financial troubles and deferred building the house. My personal situation changed and I needed to buy a home in Maryland closer to family and work. I ended up selling the land and used every penny as a down payment on my new house which is worth about 10 times the price of what I sold the land for. It doesn’t seem fair that I have to pay capital gains tax, I never intended to keep the land as investment to make money. In addition, I paid out over $1800 in West Virginia property tax over 6 years.

Thank you,

 

A:

As I’m assuming your personal tax advisor has already told you, the fact that you didn’t originally intend to hold that land for appreciation purposes isn’t relevant.  All IRS cares about is how the property was actually used and the fact that you sold it for more than you bought it for.  You should have already been deducting the property taxes on Schedule A in the years in which they were paid.

It’s too late now to change the consequences for you; but for future reference, as well as for others in similar circumstances, there was a way in which you could have legally avoided taxes on the land sale.  I’m assuming that you didn’t bother to consult with a tax pro prior to selling the land, or else this idea would have been brought up.

While a 1031 exchange directly between an investment property and a primary residence is not legal, a two step approach is frequently used in situations similar to yours.  You could have used Sec. 1031 to reinvest the land proceeds into a rental house.  After renting the home out for a reasonable period of time, you could then convert it into your primary residence. 

I hope you have better luck next time, tax wise.

Kerry Kerstetter

 

Posted in 1031 | Comments Off on

Depreciating Living Beings

Posted by taxguru on February 18, 2005

Q:

Subject: can i deduct myself?
 
I’ll assume you’ve already seen this link:

I particularly like the concept of depreciating an ostrich during it’s reproductive period.  I have successfully produced two children.  Do you think I could depreciate myself over 82.5 years (or whatever the going rate is nowadays)?

Thanks for your wonderful website (taxguru.net).  It is the first thing I read every morning.

 

A:

I did see that article.  Depreciating breeding animals is really nothing unusual. I have prepared hundreds of returns doing just that, including horses, cattle, llamas, dogs, and even some kangaroos and wallabies for some clients here in Arkansas.

I realize that you were making a joke about depreciating yourself. However, never missing an opportunity to clarify mystical and arcane tax issues, I do want to comment. 

First is the reason for depreciating an animal or any other asset on tax returns.  This is only allowable for business assets which are being used to earn potentially taxable income. 

When we set up animals for depreciation, we need to establish the appropriate cost basis to use.  For animals that were purchased, we use the amounts paid.  For animals that were born on the client’s premises, there is no new out of pocket cost, so those animals can’t be depreciated. 

So, assuming you were in the business of professionally breeding humans, I’m afraid that your own body has a cost basis of zero.  You didn’t pay anything for it, as it was a gift to you from our creator.

To follow that chain of thought a little further, if a person were to pay for a body part that is to be used in a business enterprise, that cost could be depreciated on the person’s tax return.  I’m sure this is done for show biz celebrities for their cosmetic surgeries and other enhancements that help them earn more money.

Thanks for writing and giving me an interesting topic to discuss.

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on Depreciating Living Beings

Depreciating Living Beings

Posted by taxguru on February 18, 2005

Q:

Subject: can i deduct myself?
 
I’ll assume you’ve already seen this link:

I particularly like the concept of depreciating an ostrich during it’s reproductive period.  I have successfully produced two children.  Do you think I could depreciate myself over 82.5 years (or whatever the going rate is nowadays)?

Thanks for your wonderful website (taxguru.net).  It is the first thing I read every morning.

 

A:

I did see that article.  Depreciating breeding animals is really nothing unusual. I have prepared hundreds of returns doing just that, including horses, cattle, llamas, dogs, and even some kangaroos and wallabies for some clients here in Arkansas.

I realize that you were making a joke about depreciating yourself. However, never missing an opportunity to clarify mystical and arcane tax issues, I do want to comment. 

First is the reason for depreciating an animal or any other asset on tax returns.  This is only allowable for business assets which are being used to earn potentially taxable income. 

When we set up animals for depreciation, we need to establish the appropriate cost basis to use.  For animals that were purchased, we use the amounts paid.  For animals that were born on the client’s premises, there is no new out of pocket cost, so those animals can’t be depreciated. 

So, assuming you were in the business of professionally breeding humans, I’m afraid that your own body has a cost basis of zero.  You didn’t pay anything for it, as it was a gift to you from our creator.

To follow that chain of thought a little further, if a person were to pay for a body part that is to be used in a business enterprise, that cost could be depreciated on the person’s tax return.  I’m sure this is done for show biz celebrities for their cosmetic surgeries and other enhancements that help them earn more money.

Thanks for writing and giving me an interesting topic to discuss.

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on Depreciating Living Beings

Posted by taxguru on February 18, 2005

Tax Panel Seeks Public Comment

  1. Headaches, unnecessary complexity, and burdens that taxpayers – both individuals and businesses – face because of the existing system.
  2. Aspects of the tax system that are unfair.
  3. Specific examples of how the tax code distorts important business or personal decisions.
  4. Goals that the Panel should try to achieve as it evaluates the existing tax system and recommends options for reform.

 

Posted in Uncategorized | Comments Off on