Q:

Subject: Estate Tax

 

My mother is selling her home of 20 years and moving closer to us. My father died 10 years ago. Does she qualify for up $500k estate tax exemption or is she only qualified for the $250k? Her home is on the market for $400k.

 

Thanks

A:

This is the kind of thing your mother should be discussing with her personal professional tax advisor rather than relying on second hand advice from strangers on the internet.

What you are referring to is income tax not estate tax.

Assuming your mother is single, she would be entitled to a possible maximum exclusion of $250,000 of profit from the sale of her home.

Your father’s share of the profit was already wiped out when he passed away.  When a person dies, his heirs receive the property at its stepped up fair market value (FMV) as of the date of death (DOD), effectively cancelling out the accrued profit. 

In your mother’s case, she would have inherited half of the home from your father.  You didn’t say where she lives.  If she lives in one of the nine community property states, the cost basis for the full home was stepped up to its FMV at the DOD, and her gain will only be based on the appreciation since then.  If she lives in a non-community property state, the cost basis of her original half remains the same as before your father’s passing; but the cost basis of the half she inherited is stepped up. 

She really needs to work with a qualified tax professional to calculate her cost basis in the home, which will take into account the FMV as of your father’s death. as well as the cost of any improvements to the property she has paid for since then.  When her tax pro figures her adjusted cost basis and deducts that, plus selling costs, from the $400,000 sale price, I am betting that the net profit will be well below the $250,000 threshold, making all of it tax free for her.

I hope this helps.

Kerry Kerstetter  

 

Q:

Subject: S Corps & Rentals

Kerry

 

    I read with interest the e mail about short term housing being a Sch C business. I currently have plans to turn

a vacation home into a short term rental. I approached my tax guy about this problem and he said I could

include the rental in my already existing S Corp (retail) and file Form 8825 on the rental income thus avoiding FICA.

I receive a hefty pay check from the corporation. Can this dual purpose exist in a single corporation?

 

    Later I got to thinking about the liability issue. Wouldn’t the corporation have to own the rental property? On the other hand,

my original corporation operates out of my home. Is my home at risk because the business operates out of it? My tax person

didn’t seem sure on these points. What’s the best setup?

 

    Thanks  

A:

I can’t possibly know enough about your unique circumstances to advise a specific course of action.

However, you mentioned several issues that you need to explore in more detail with your current tax pro, or one with more experience in this area.

First is the fact that a corporation can conduct more than one kind of business and is not restricted to only the original activity.  It is very common for corps to add new business ventures all the time, just as individuals do.  Your existing S corp could operate rental properties.

The issue of avoiding FICA tax only applies of there is going to be a net profit after all expenses, including depreciation.  If you’ve seen my comparison of C and S corps,  you know that profitable businesses can often have lower taxes via a C corp.

Depreciation can only be claimed by the actual owner of the property.  While transferring ownership of your property to a corp might sound like a good idea, the long term effect could be expensive.  Capital gains tax rates are generally higher for corporations than for individuals. 

What some people do is own the property in their own personal names, and then lease it to their corp, which in turn operates the B&B or other rental activity.  Any experienced tax pro should be able to help you with such a configuration.

There are obviously a gamut of pros and cons to every possible scenario, making an easy “one size fits all” answer impossible to find.  Make sure all of these points are covered in your discussions with your tax pros.

Good luck.

Kerry Kerstetter

 

Q:

Subject: additional paid in capital

 

C-corp has accumilated additional paid in capital,  can this capital be taken out of the corp by shareholder? is this taxable to the shareholder or just the shareholder taking out his equity?

 

thanks

A:

This is the kind of thing you should be discussing with your personal professional tax advisor rather than relying on  advice from strangers on the internet.

Basically, any time you are repaid for your capital investment in a corp, you will need to show that on Schedule D of your 1040.  It won’t necessarily be taxable because you can deduct your cost basis that you allocate to that particular payment, which is normally the exact same amount for payments taken from the Paid in Capital account.  It’s not costly tax-wise, but is a big nuisance to have to report.

This is why it is generally better to keep the capital accounts as low as possible and use loans to transfer money between the corp and the owners. None of the principal payments in either direction has to be reported on your tax return, although interest payments obviously do.  This is something I learned almost 30 years ago, when I first started working on corporate tax returns, and any experienced tax pro should understand.

Your personal tax pro can give you more specific advice for our unique situation.

Good luck.

Kerry Kerstetter

 

Which is Better: Roth IRA or 401(k)? – From Gail Buckner.

Maker of Tax Software Opposes State Filing Help – And this is a surprise to whom?

Q:

Subject: How long to wait for a refund?

Dear Mr. Kerstetter,

I wonder if you could point me to a simple explanation of what happens if you think you deserve a rebate but the taxing authority thinks you’ve paid the right amount?

I would assume they would at least have to tell you that they disagree with your tax return.

Also, how long should it take to hear back?  I filed my taxes in the last week of March, and received my Maryland refund a couple of weeks later, but I still have not heard anything from California.

Thanks for your time.

A:

It is normal practice for IRS and State tax agencies to send taxpayers a notice if any change is made to the tax return that was filed.  The explanations often leave a lot to be desired, but there is notification of a change.

If you have heard nothing from the FTB, you may want to contact them to see if they even received your 540.  Tax returns do get lost in the mail every day.  You may need to send a replacement copy if they have no record of receiving the one you mailed in March.  You should also know that they advise to wait eight weeks after submitting a tax return before getting concerned.  They process a lot more tax returns than any other state, and thus take more time to get refund checks out.

You can call the FTB at 1-800-852-5711 or try to locate info on your taxes online via their website.

Good luck.

Kerry Kerstetter

 

Q:

Subject: question

 

We need to help a family member track down his assets (bank accounts, CDs, etc.)  His wife had taken care of all this, and since her death several

years ago, he has lost track of important details.

 

Do you have any suggestions as to who we might hire to help us do this on his behalf?

 

Thank you,

A:

It’s been a while since I mentioned Mark Colgan’s excellent resource for people in your situation, his Survivor Assistance Handbook.  It is packed with tips on how to take care of matters such as tracking down a decedent’s various assets. 

You can order the handbook from Mark’s website. 

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your helpful reply!!

 

 

Q:

Subject: LLC vs S-Corp

Kerry,

You raised some interesting points to consider when choose b/t a S-corp and C-corp. I wanted know what you thought the important points to consider when choosing b/t a S-corp and a LLC taxed as a partnership (besides the fringe benefits).

Thanks again for your input.

A:

Listing all of the distinguishing factors of LLCs and S corps isn’t the way to approach this.  What you and the business’s other owners need to do is all meet with a qualified professional tax advisor, who should ask you a ton of questions related to the business goals, before mutually working out what would be the best entity for that particular business venture.

Good luck.

Kerry Kerstetter