Q:

Subject: Sale of a Timeshare at a loss

Kerry, how do you treat the sale of a two week timeshare unit purchased in 2001 and sold in 2005 at a loss on your 1040 Federal Tax Return and also on your state tax (CA)?  Can you deduct the loss on Schedule D? I have received a Form 1099S.  The instruction there tells you that if the real estate is not your main home you must report it on Form 4797, and/or Schedule D (Form 1040).  CONFUSED!  Can you help, please.  Thank you. 

A:

The sale price definitely needs to be reported in order to match up with the 1099–S amount.  To leave it off completely will allow IRS and FTB to assume it to be 100% profit.

Which schedule you will need to use, as well as whether the loss is deductible, depend on how you have been using the timeshare. 

If you have been using the timeshare as a business property, and depreciating it accordingly on your business schedule, the sale will be reported on Form 4797 and the net loss, after accounting for depreciation recapture, will be deductible on Page 1 of your 1040.

If the timeshare was only used as a personal second or vacation residence, the sale needs to be shown on Schedule D, but the loss is not deductible or available to be used to offset other capital gains.  There has long been a double standard in the tax code making gains on the sale of personal use property potentially taxable, while denying any loss deductions for personal use property.

With other kinds of real estate, a case could possibly be made that it was acquired for investment purposes, making a loss deductible.  Since it has long been widely known that timeshares are the worst possible investment, with zero chance of resale profit, that wouldn’t fly in your case.

These have long been the rules.  Any competent professional tax advisor should be able to work with you on this.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for responding so quickly to my query re how to report the sale of a timeshare unit at a loss.  I very much appreciate it and the answer you provided. 

 

It seems that not many people are paying attention to a key new feature in the QuickBooks 2006 programs.  Twice in the past week, bookkeepers for clients have sent me QuickBooks 2006 data files in the much larger QBB format instead of the much smaller QBM format.  Here is one message that I wrote back to one of the bookkeepers.

I downloaded the file and will look it over and give my comments.

With QB 2006, please use the new Make Portable Company File feature to create a much smaller sized file (QBM) than you get when you make a QBB backup.  With this file, the QBM is only  3.3 mb, while the QBB you sent was 24 mb.  This will save us all a lot of upload and download time.

I commented on this new feature on my website shortly after the new program was released:

Backing Up Data Files
The regular QBB backup file doesn’t shrink the size as much as it used to. It used to go to about one-fifth the size of the full QBW file. The first file I worked with had a QBW of 25.4mb and a QBB of 17.0mb

They do have a new type of backup, called a Portable Company File, that you access through the File menu. It makes a file ending in QBM. With the data file I previously mentioned, it was only 3.2mb in size.

When you create a QBX Accountant’s Review copy, it was the exact same size as the QBM file.

I had also updated the instructions for sending me QB files to include this new QB 2006 feature. 

Thanks for your help.

Kerry

 

Q-1:

Subject: blog question

 

I invested in a startup S corp about four years ago.  So far there has been no income and there is still hope of getting a lucrative government contract

sometime in the future.  The company has incurred lots of expenses in trying to get it going but the tax form, K-1 shows no losses.  The accountant says

they are capitalizing everything as start up costs.  Can they take a more aggressive posture and under what circumstances? I know my loss is limited to my investment.

A-1:

There is a quite a bit of flexibility in deciding which exact costs are capitalized as pre-operations start-up costs, to be amortized in future years, and currently deductible operating costs.  All of the shareholders should consult with the corp’s tax accountant to establish a policy that you can all agree on for handling the different kinds of expenditures.

I just consulted my favorite reference, TMI’s The TaxBook, and it has a good summary of the rule that allows S corps to elect to deduct up to $5,000 of organizational costs plus $5,000 of start-up costs, with the excess amortized over 180 months.  The actual statement (on page 24-10) shows that these deductions are to be reduced dollar for dollar by the amount total start-up or organizational costs exceed $50,000.  You and your fellow shareholders should check with the corp tax accountant to see if this would apply in your case.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,  Thanks for your response.  To clarify, this business depends on getting a government contract.  Most of the dollars have been spent on

consultants and paperwork to get the contract.  These would seem to be operating costs rather than organization costs.  Could the shareholders

agree on writing these off before getting the contract?

A-2:

There is some flexibility in regard to what costs have to be capitalized and held off to be amortized against future income.  However, there are fewer options with this when you aren’t producing any income at all.  If you were making a lot of small sales while building up for the big payoff from the anticipated government contract bonanza, you would have a better rationale for deducting more as current operating costs than would be the case if the only money your business is ever expecting to ear is that future contract. 

You should all coordinate with your professional tax advisor on how you all feel comfortable in booking the various kinds of expenditures you have.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your advice.  Unfortunately you seem to agree with the company’s tax preparer.

Q:

Subject: Recapture

Hello,

I happened upon your website and was interested in what you said about the recapture tax rates.  I wanted to know one more thing on that subject:

Using a rental property as the subject for discussion, is the recapture tax rate on the amount recaptured from depreciation still 25%?  Or do we use the Long Term Cap Gains rate of 15%?

Where is that written in the IRS Tax code?

Thanks for your time

A:

Depreciation recapture has been around for decades and is accepted as part of the tax benefit concept.  Basically, if depreciation expense has been allowed or allowable to reduce your ordinary income tax, its recapture should also be subject to ordinary income taxes.

With one basic exception, all depreciation recapture is reported on Form 4797 and is subject to ordinary income tax rates.  The one main exception is straight line depreciation on Section 1250 property, which includes most kinds of real estate, which has a special federal recapture rate of 25%.  If accelerated depreciation was used, the excess over what the straight line method would have been is taxed as ordinary income.

In the sale of a rental property, it is often the case that depreciation recapture on the structure (Sec. 1250 property) is taxed at the 25% rate, while depreciation on other separately identified assets, such as appliances and fixtures (Section 1245 property) are taxed at the normally higher ordinary income tax rates.

The special 15% long term capital gain tax rate only applies to any gain remaining after accounting for the depreciation recapture.

Your personal professional tax advisor can better assess how these rules will work in your case.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks so much for your useful info.  It was quite helpful to me.

 

A comparison of three do-it-yourself tax prep programs: TaxCut, TurboTax, TaxAct.– As with all postings on such programs, I must add my warning that these programs epitomize the term GIGO (garbage in, garbage out).

Static tax scoring at the Treasury Department may soon be a thing of the past – The fact that our rulers have relied on the concept that changes in tax policy have no effect on taxpayer behavior for so many decades is the big scandal that nobody on the Left wants to address. 

 Everson Says IRS Could Collect Up to $100 Billion More Per Year – If they were only given more power and money.  Can anyone say “biased tax gap analysis?”

Q:

Subject: question for blog

 

Kerry:

 

Someone (my girlfriend) had the poor sense  to work in a start-up and the start-up fails (all within the tax year) and the business is closed and the  owner (who registered with the IRS via an EIN) did not report/deposit all withholdings (this is probable as there is no W-2 to be had) :

 

I know how to file her tax return using the last paystub and the appropriate IRS self reporting form in lieu of a W-2; but my question is will she be liable for payroll and withholding taxes deducted but not remitted by this so-called fiduciary/agent  employer (if of course all wages were not appropriately reported/deposited)

A:

Unless your girlfriend was in a position within the company to have some control over the payment of bills, she shouldn’t have any problem with IRS.  It is the responsible parties within the company, those who chose to use the money for other things than paying IRS, who will receive the wrath of the IRS and be hit with major penalties.  IRS considers those people to be thieves, who stole the employees’ tax money, and will act very aggressively to recover it from them.  The powerless employees whose money was stolen will not be penalized, and will receive the same credits with the government as if the full amount of the taxes had been forwarded to IRS.

If your GF did have any power over the company checkbook, she should retain the services of an attorney and work on negotiating the scope of her liability with IRS.

If she attaches Form 4852 (Substitute For W-2) and includes an explanation of what happened and how her figures were determined, she shouldn’t have any problem and her 1040 will be processed just as if she had her actual W-2. 

Kerry Kerstetter

 Follow-up:

Thanks Kerry

 

 

Employer-Reimbursed Medical Benefits Excludable by Employee, Deductible by Employer; Burden of Proof Shifted to IRS – I have long worked with small business owners and explained many of the lucrative tax benefits of hiring their own kids and spouses, such as employee benefits, including medical costs and education assistance which are deductible on the business schedule, but not income to the family employees.  This case is a good example of how that works, including a common misconception that I have had to fight with IRS over on a number of occasions, that benefits can be in lieu of actual wages.

The amounts paid to the husband, which were in lieu of compensation, were reasonable because they were substantially less than the wife would have had to pay someone else to perform the same duties.

 

 

Tools That May Make Tax Time Easier for Property Owners – While this article from the WSJ speaks highly of the Quicken Rental Property Manager program, I am still adamant that QuickBooks is a much better double entry accounting system for keeping track of all kinds of business activity, especially rentals.  I prepare hundreds of tax returns a year for clients who use the Class function in QB to easily get a P&L for each separate property, making it a very easy task for me to enter the details into Schedule E and Form 8825.

IRS Updates Tax Gap Estimates – No surprise here because IRS had earlier told us to expect a new SWAG from them. It’s also not surprising that so many others are swallowing these figures as gospel, such as TaxAnalysts.  The fact that these higher tax gap calculations are being used to justify more money and power for IRS couldn’t possibly have influenced their measurement of something that is inherently impossible to measure with any precision, could they?

Feds bust father & daughter tax preparers in Wichita for claiming bogus deductions on their clients’ returns.

Despite Federal Tax Credits, Solar Power Isn’t for Tightwads

Even with the new federal credit, it often takes 20 or more years to recoup the initial investment through energy-bill savings.

Taking Inventory of Your Home To Get Adequate Insurance – Dealing with insurance adjusters can often be worse than IRS auditors.

Q:

Subject: Illinois State Taxes

 

Kerry Kerstetter: We are considering moving to Illinois and I find their residential real estate taxes are double ours in KS. Is there a site or resource that has a net, bottom line analysis of all state’s total taxes, so one can compare them to determine the most expensive/least expensive? Thanks! 

A:

Check the following that I found via a quick Google search

http://www.stateline.org/live/ViewPage.action?siteNodeId=136&languageId=1&contentId=28297

http://www.taxadmin.org/fta/rate/tax_stru.html

http://www.taxfoundation.org/publications/show/335.html

http://www.retirementliving.com/RLtaxes.html

Good luck.

Kerry Kerstetter