Q:

Subject: sale of personal residence

I bought a lot in 3/04. Sold my house in 8/04. built a new house and moved in 1/05. I now want to sell and move to a place with less mildew problems. Is there any exchange possibilities? If not when does the 2 years start/end.

Any help would be appreciated

A:

Since you have been using this property as a personal residence, it is not eligible for a 1031 exchange.

Your only possible way out of a taxable gain would be if you can get a doctor to verify in writing that the mildew problem is a health hazard for you.  In that case, you would be eligible for the prorated exclusion of  $342.47 per day that you lived there ($684.93 per day if married), starting from when you moved in.  Any gain above that would be subject to tax, which is why you also want to do a thorough job of accounting for your cost basis in the lot and home so that your gain is as small as possible.

You can see more on this on my main website.

Your own personal tax advisor should be able to provide more specific numbers for your unique situation.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Vacant Land Sale Question

Hi.  I am hoping you can answer my question.  We bought out house in June 04, it has two parcels…one the primary residence sits on, the other is an adjoining lot.  We are selling the lot for 150K.  Are the proceeds subject to taxation, if so, how much?  Any help would be appreciated.  Thank you!

A:

It depends on a couple of things. 

What was the lot used for?  If it was an extension of your living space, it could qualify for the tax free exclusion, as long as you sell the actual residence portion within two years of selling the lot.

I covered this on my website under the topic of  “Vacant Land.”

If it wasn’t used as part of your living space, it will not qualify for the primary residence tax free exclusion.  However, if you have been classifying the lot as “investment property” it could be disposed of under Section 1031, which would require you to follow all of its rules, as described at www.tfec.com.

Your personal tax advisor should be able to give you more specifics for your unique situation.

Good luck.

Kerry Kerstetter

 

Follow-Up Q:

I really appreciate your prompt response.  Nice to know someone cares out there!  Just to clarify, if I sell the lot (which is part of our primary living space), we would absolutely have to sell our main home within two years or face taxes retroactively on the vacant land sale?  Thanks again.

 

 Regards,

A:

There’s actually another twist to your situation as well, which is why you really need to be working one on one with a tax pro.

Assuming that you moved into the home in June 2004 and didn’t just buy it then, you need to be concerned about the two year rule.  If you sell your home before the two year anniversary of occupying it, you will need to have a valid reason (health, employment, or other unforeseen event) in order to qualify for the pro-rated exclusion.  If you have no such reason, you will have to pay taxes on both portions of your sale, the lot and the home.

However, if you sell the home after June 2006 and before the two year anniversary of the lot sale, you should be okay.

One more warning. The issue of selling the lot before the two year anniversary of its purchase is in the infamous gray area of tax law.  Some people think that would automatically disqualify it from the tax free exclusion, unless it is due to the unforeseen circumstances; while others believe the date of the sale of the main home dictates the treatment of both portions of the sale. 

All of this discussion assumes that there will be a large profit on the sale of the lot to be concerned with.  Your original
question was unclear on how the lot was acquired.  If it was bought in a separate transaction from the home purchase, you will have to use that price as its cost basis.  However, if it was lumped in with the home purchase, you have some flexibility in allocating the purchase price between the two portions, as long as no such allocation was specified in your purchase contract. 

I have had several cases similar to this, where a client has spun off some land shortly after purchasing a large parcel.  Since the sales took place shortly after the purchases, I had no qualms about allocating the same amount as the sales prices as the cost bases of those particular parcels.  This gave them a break-even on the sale, or a loss after deducting selling costs.  That is something you may want to look into when you discuss your particular situation with your own personal tax advisor.

Good luck.

Kerry Kerstetter

Q:

Subject: Question regarding C corp Taxation…

Hi Mr. Kerstetter,

I love your website and appreciate your frank opinion on all topics. I am a CSU Hayward grad as well, Year 2001. I wanted understand more about tax benefits on C corps, I am starting a business franchising Pizza from PapaJohn’s in the east bay area. My family also owns a farming operation of Almonds. I have created 2 corporations and will be handling the books for both. Couple of questions that come to mind are:

– If I do not distribute any profits from any of the corporations, do I still have to pay taxes?
– Can I use the un-distributed income from a corporation towards buying more land and not pay any taxes on that income?
– If i show a loss on my corporation, is that perfectly ok and there is no limit to number of years I can do that for?
– Finally, I have read on 179 but still not very clear that what can I write off? Can you give me specific examples of types of writeoffs people do?
– If I buy a vehicle for pizza business and use that heavily what are my write-offs on that?

I hope you can answer these questions, I have been long searching for answers and validation on these but never found a straight answer.

Final question is about, if we had to hire you a s tax advisor and accountant for filling our taxes, what would that cost us?

Thanks

A:

You do really need to be working with a tax pro who can assist you with these kinds of things.  I wish we could help you; but we already have too many clients to take care of; so we are not accepting any new ones at this time. In fact, we are actually still cutting back on clients, trying to find the right balance of workload, so that I’m not so backlogged with projects.  I have no idea how long that will take.

Unfortunately, we don’t have anyone else to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you.

Your questions here are all extremely basic.  So, for the benefit of my readers, I will cover them briefly.

Distributing corp profits – With an S corp, there is no difference whether the profits are paid out to the shareholders or not.  With a C corp, if you don’t bleed out the profits by making deductible payments, the tax rate can get pretty expensive at the corporate level.

Buying land won’t do anything to reduce the corp’s taxable income.

Corporate net operating losses can currently be carried forward up to 20 years.  This rule is changed occasionally by our rulers in DC.

I have a ton of info on Section 179 on my website.

How to handle vehicle expenses depends on who owns the vehicle (you personally or the corp), as well as the percentage of miles driven for business versus personal.  Any competent tax pro should be able to give you more specifics for your situation.  

Good luck.

Kerry Kerstetter