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Q:

Subject: Quickbooks Classes

 

Hi!

 

After reading your page on the web on classes we are playing with combining our 12 QB data files into one. The question that we have is about sub-classes. We have 10 properties that are under the owner’s Tax ID and two other properties that we manage that have 2 different Tax IDs. Is it possible to have the first 10 as subclasses with our owner as the class and have the other 2 under their own separate classes?  Or, do we need separate data files for each Tax ID number? What is the best way for both ease of use and, more importantly, tax purposes?

 

Thanks, 

A:

I guess it would depend on what the purpose of your bookkeeping is.  If you are acting as a property manager, you could have one master data file and have a class for each owner, with subclasses for each property.  You could then print out separate P&Ls for each owner. 

This would work well for P&L purposes, but wouldn’t do the job properly if you are keeping track of all of the assets and liabilities and each owner needs a balance sheet, which can’t be separated by class.  In that case, a separate data file for each owner would make the most sense because you could prepare all of the different financial statements required for each owner’s income tax return, as well as 1099s.

I hope this helps.  If you have more details on what accounting services you provide for the other property owners, I might be able to provide more setup advice.

Kerry Kerstetter 

 

Q:

Subject: I would like to get some advise

 

Dear Tax Guru,

I have come across your website after doing a google search for “S Corporation vs: C Corporation”. I was so happy to find you! I started a business in 1992, and paid big bucks to an accounting firm to advise me on the best way to set up the business. They advised me to elect the “S” corp, and only explained the advantages of doing so, and none of the disadvantages. Boy was I shocked the first year I had to pay personal income taxes on $80,000 of income that I never received, and never would receive. I am not trained in accounting or finances, but even I figured out that being a c corp was more beneficial to me in many ways. No accountant that I ever talked to about this has agreed with me, or helped me figure out how to change the situation. They seem to think that the more taxes I pay, the better.

 

Therefore, I would like to set up an appointment to talk to you about my situation, and the best way for me to proceed. 

 

Thank you in advance,

A:

It does sound like you do need to find a personal tax advisor who is on the same page of wanting to help you minimize your taxes.  It is a disgrace that so many tax pros do consider it their purpose in life to assist the government in collecting more taxes.  How they can have a clear conscience when charging their clients for that kind of work has always stumped me. 

There are plenty of that type of tax pro around the country.  However, there are also plenty of tax pros who share my philosophy that we should be helping our clients to do everything legally available to minimize their taxes.

I wish I could be of more help to you; but I already have too many clients to take care of; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone 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.

Good luck.

Kerry Kerstetter

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From the WSJ’s free RealEstateJournal:

Large Price Increases Result In Tax Hits for Home Sellers – While many aspects of the tax code have periodic inflation adjustments, our exalted rulers in all of their wisdom, when they established the $250,000 per person tax free exclusion for residence sales, didn’t consider it necessary to allow for any such adjustments.

 

Google and Craigslist May Weaken Realtors’ Hold on Home Listings – Allowing the power of the internet to be utilized in this way is an excellent step in the right direction for property owners; while obviously not so good for Realtors, who are losing their monopolies on property info. 

 

As Market Cools, Fewer Investors May Purchase Investment Homes – Is the air leaking out of the speculation bubble?

 

Real-Estate Brokers Step Up Rebates to Home Buyers – Classic supply and demand reaction.

 

The New Rules of Real Estate For a Cooling Housing Market

Q:

Subject: Home Sales

Dear Tax Guru,

I have read your Web page, on tax issues pertaining to the sale of my primary residence, however, I have a home sale question, that I am receiving conflicting answers from friends. Could you possibly respond to my query ?

I have filed my tax return for the past 35 years as ” Married Filing Individually-Head of Household “

My husband lives out-of-State, and also files “Married  Filing Individually”

My husband and I have been seperated for 35 years, and the ownership of the Home is in my name only.

When we seperated, my husband agreed to the changing of the DEED to my name solely.

We did not divorce, as he provides me with health coverage from his retirement plan.

I would like to sell my home this year and am wondering whether I am entitled to the entire $500,000 exclusion on the Sale of my Home. I am concerned about the technicalities of the IRS Regulations on the sale of my home–that is to say, that by still being married, and filing Married but Individually, my husband has the right to $250,000 Capital Gain Exemption on his tax return or am I entitled to the entire $500,000 exemption.

My husband has not resided in mmy home for 35 years. Before I sell my home in Long Island, I would like to be sure that I would be entitled to the entire $ 500,000 exemption ?

Could you advise me on this matter, as I am so confused and fearful of making a mistake. Thank you,

A:

Your first very big mistake is soliciting tax advice from friends.  That’s crazy.  You should be working with a professional tax advisor on matters such as this.   I hope you don’t get all of your medical advice from your friends as well.  Tax issues are just like medical ones, unique to the individual person and very technical.

From the way you described your situation, you would only be entitled to an exclusion of $250,000 of profit on the sale of your home because you are the only person who meets the tests.  If your husband had lived in the home for at least 24 months out of the 60 months prior to its sale, you would be able to claim a full $500,000 exclusion if you file a joint 1040. 

This really isn’t even a gray area.   The IRS rules are very clear on this point. 

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

• You are married and file a joint return for the year.
  
• Either you or your spouse meets the ownership test.
  
• Both you and your spouse meet the use test.
  
• During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

If the house is fully in your name, the sale will be reported fully under your SSN and you will have to show the full sales price on your 1040.  Your husband won’t have to show anything on his separate 1040. 

Again, you should consult with a professional tax advisor to see if there are more details in your life that would warrant a different answer.  There may also be some tax saving strategies that could help, such as adding your husband’s name back onto the deed.  An experienced tax pro should be able to suggest ideas such as that.

Good luck.

Kerry Kerstetter

Follow-Up:

Dear Kerry,

Thank you for the response to my query on Home Sales, i.e., the $500m or $250M capital gains exclusion based on joint or filing
singly returns deduction. I think it was very kind and generous of you, to return an answer by E-Mail, and I want to express my gratitude
to you, for taking time to assist me. You are indeed a humanist at heart, and I grateful you have that quality.

Thank you,

 

Q:

Subject: Schedule E Improvements vs Repair Expenses

 

Mr. Kerstetter,

 

How are you today?  I need your “guru” thoughts on improvements versus expenses on a residential real estate rental.  I saw your website and though I would see if you could give me your thoughts on this.

 

If you buy a new oven/dishwasher for a condo rental because the ones currently in the rental are not functional is this a repair or do these items have to be depreciated as seperate assets?  It is really black and white when you buy a furnishing like beds and couches for the rental- because those aren’t repairs they are adding value.  But on the replacement of a fridge/oven/microwave/dishwasher/washer/dryer that already existed in the apartment it seems as though this could be considered a repair expense.  Your expert thoughts would be greatly appreciated?

  

Best Regards,

A:

You really need to be working on matters such as this with a tax pro so that you don’t screw things up on your own.

New appliances do need to be set up on the depreciation schedule and deducted over their useful lives.  Trying to deduct them as repair expenses is one of the fastest ways to have your tax return flagged for an audit.

This actually balances out if you set the rental property up properly on the depreciation schedule when you first placed it into service.  While not all people do this, you are allowed to separate out the values of the appliances and other assets that are separately identifiable from the overall purchase price and put them on their own lines of the deprecation schedule, with their own lives, which are usually much shorter than the 27.5 years that you have to use for the structure.

This technique isn’t very complicated and has been around for decades.  Any tax pro who is experienced with properly handling rental properties can assist you with this, including how to adjust for a failure to do a proper allocation several years after the original purchase, such as is probably the case for you.

Good luck.

Kerry Kerstetter

 

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