Q:

Subject: We have two homes and…

we want to get married.  His home has 400,000 equity and mine has 500,000.  We were going to sell mine that will hit two years in March.  If we got married in January and sold in March…could he qualify with me as this being our primary res.? And we would move into his. OR does he have to live here with me to qualify?

A:

You will only qualify for a $250,000 exclusion.  Your example sounds just like the following from the IRS website:
 

Example 1 ­ one spouse sells a home.

Emily sells her home in June 2004. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2004.

Basically, the only way to increase that exclusion above $250,000 would be to add your fiance’s name to the title and have him occupy it as his primary residence.  It’s worth $342.47 of tax free gain for each day that he meets the ownership and use test.

What you really need to do is make a thorough and complete calculation of the cost basis of your home so that you can keep your gain to the lowest amount possible.  The amount of equity you may have in the home is a completely different number than your cost basis or your potential profit.  If you haven’t been keeping track of how much you have invested in the home, you need to get started reconstructing that ASAP.  Be sure to include the costs of any appliances, furnishings and fixtures that you will be including  as part of your home sale.

And most important, work with a tax pro who understands how to minimize the taxation of home sales. 

Good luck.

Kerry Kerstetter

 

I received this in response to one of my QuickBooks tips on setting up reports.

Subject: Please help me with your expertise

For example, Sherry’s Tax Free Exchange Corporation holds millions of dollars in trust for clients to reinvest. I wanted to use QuickBooks to keep track of each client’s funds balance without having to keep separate records. QuickBooks doesn’t allow a report of an account’s activity to be sorted by the memo field, which is where I include the client’s name for checks written and wires sent. I found that I could go into the liability account I have set up for client trust funds and reverse the memo and payee entries (using Windows copy & paste) so that the client’s name was in all of the payee fields for all of the activity related to him. I configured (and memorized) a report to list all of the activity in the Client Trust Funds sorted and subtotaled by Payee. It allows me a perfect reconciliation of exactly how much money we are holding for each client.

 

 Will you kindly tell me the configuration of your report to list all activity in the Client Funds sorted and subtotaled by Payee?  Many thanks.

A:

I tried to save my report as a template that you could import and use; but it wouldn’t let me.

What I set up was really just a basic Transaction Detail By Account for the Trust Funds Liability account totaled by Payee.  I set the date range very wide and well into the future to cover all activity for several years to come.

In order to print out just the activity for any one client’s trust fund activity, I check the box next to “Page break after each major grouping” in the “Print Report” window.

Good luck.  I hope this helps.

Kerry Kerstetter

Q:

TP buying a replacement property thru his newly formed one member LLC. He lends his LLC $ 100 to be able to buy this property in cash. If he turns around and refinance it for $200, can he distribute it without paying any income tax?

A:

It will depend on his basis in the LLC, normally by the balance in his capital account.  If it has a positive credit balance of more than $200,000, such a distribution would have no tax effect. 

However, if a $200,000 distribution puts that capital account into a negative debit balance, the excess is required to be reported as taxable income to him.

A common way around this is to avoid pushing the capital account into a negative balance and post any payment amounts that would do so as a “Loan To Member: on the LLC’s books.  To better document the status of a loan between TP and the LLC and protect against any possible IRS reclassification, it would be a good idea to draw up a loan agreement and have TP actually make payments on that loan.

I hope this helps.

Kerry Kerstetter

 

Q:

Mr. Kerstetter,

Great web site!  I am a CPA in South Carolina.  I have received an IRS Summons for me to appear with any records I may have regarding a former client.  The summons came from a local agent in the small business/self-employed division.  All source documents/records were returned to the client previously. 

It has always been my understanding that in tax prep engagements (non-attest work), my responsibility is to only keep a copy of the tax return for my files.
Do you agree?

Lastly, any words of advice on how to proceed based on your experiences would be greatly appreciated.  I am a little concerned about having a conversation with an agent regarding a former client that I am not representing in an exam.  The last thing I want to do is to say or do anything that would damage some position or strategy the taxpayer or their representative may have taken that I am not aware of.
 
Any thoughts/advice would be most welcome.

Thanks in advance,

 A:

 It sounds like a standard wide net fishing expedition by the IRS agent to round up documents that the taxpayer has refused to provide willingly.  Such a request in no way means that you have or ever had any legal requirement to retain any original source documents or copies of them.  Even if you only have copies of the 1040s that you prepared, IRS agents prefer to ask us preparers for them rather than wait the several months it would take to obtain them from inside the IRS system.  What they would also need to see would be copies of any worksheets that you used as part of the tax prep process that weren’t attached to the return that was filed.  For example, some preparers do not attach detailed depreciation schedules to their 1040s (a big pet peeve of mine).

As we all know far too well, only attorneys have client confidentiality protection, and we mere CPAs have to do what IRS demands in this regard.  I have never thought that to be morally right; but unfortunately, the courts have always helped IRS enforce those kinds of summons in support of their perceived mission – more money for the government. 

In regard to how I would respond to the summons, I would make photo-copies of the 1040s for the years being requested, along with any backup worksheets or other documents, such as client organizers, that are in your files.  I would then mail them to the agent.  In regard to personally discussing anything with the auditor, I don’t see how the summons covers that.  I would just send copies of the documents you have, along with a signed statement that these are all inclusive of what you have in your possession for that client; and refuse to have any conversations with the auditor, where he will try to get you to say something incriminating about your former client.

Of course, if the former client’s case goes bad and he is indicted on criminal tax evasion charges, there is always a chance that you could be subpoenaed as a witness and have to testify at the trial.  It sounds like that kind of situation would be a long ways off; so hopefully you won’t have to go through that.

Good luck.  I hope this helps.     

Please let me know if there are any strange twists to this that you wouldn’t mind sharing with me and my readers.

Kerry Kerstetter

 Follow-Up:

 Kerry,

You are exactly right.  It is the standard fishing expedition.  I get a strong sense the taxpayer has been unwilling to cooperate.

I will compile more complete notes on this and forward to you.  It may be helpful to someone else later on.

Thank you very much for your help and info.  I look forward to staying in touch.

Best regards,