Tax Guru – Ker$tetter Letter

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Archive for November 28th, 2007

Selling mixed use property

Posted by taxguru on November 28, 2007


Subject: Exchange Question


My wife and I live in the front house. When does the rental back house cease becoming a 1031?  Does not receiving rent make it no longer a 1031(for how long)? Is there a statute of limitations for it to qualify as exempt?  I don’t want to pay a capital gain tax on it when I sell this 2on1 Calif. property.



This is the kind of thing you really need to be handling with a professional tax advisor to ensure that you are doing things properly.

From your very short description, it sounds like you have what’s called a mixed use property; part residential and part rental.  For IRS purposes, it is treated the same as two separate properties, with the personal residence portion of interest and property taxes deducted on your Schedule A and the expenses for the rental portion on Schedule E.  The actual allocation of joint expenses may not be 50/50 if the two halves of the property are not equal in size and/or value.  An experienced tax pro can help you come up with an appropriate allocation between the two halves.  The cost basis of the property also needs to be allocated between the personal residence and rental portions, with deprecation claimed on the rental portion, which will reduce its cost basis (aka book value).

In regard to the treatment of a sale of the property, the portion of the sales price that is allocated to your primary residence will be treated as a Section 121 possibly tax free sale, as I have explained on my website.  

The portion of the sales price allocated to the rental half will not be eligible for the tax free exclusion, and will need to be set up as a Section 1031 exchange if the taxable gain warrants it.

If I’m reading into your question properly, and you are asking how long it will be until the rental portion of the property can become eligible for the tax free Section 121 treatment, the answer is never, as long as it is being rented.  If the tenants leave and you convert the rental part to be an extension of your own primary residence, the clock can start on the personal use test, which is generally two years.

You didn’t say how you acquired this current property.  As an added twist, if you acquired it via a 1031 exchange, you will have had to own it for at least a full five years prior to its sale in order to be able to utilize the Sec. 121 tax free exclusion.  Again, an experienced tax pro can assist you with this rule.

I hope I hit on your situation.  Working directly with a professional tax advisor will result in more usable numbers for your precise situation than the generalities I have to use.

Good luck.

Kerry Kerstetter



Posted in 1031, humor, realty | Comments Off on Selling mixed use property

Which has better career potential?

Posted by taxguru on November 28, 2007


If you don’t mind me asking, if you had to do it all over again, would you still go the route of the CPA?  I have often thought it more lucrative to do a law degree than the CPA.  But, my heart and my god given skills are more directed towards the CPA than a Law degree and, after all, money isn’t everything (as you are well aware based on your move from California to Arkansas. 

Anyways, sorry to talk your ear off.  You are kind of like the Michael Jordan of CPAs, so I certainly enjoy speaking with you and listening to an advice you may have for a budding CPA.



You really should do what you feel most passionate about so that your career doesn’t become the kind of drudgery that most people who are W-2 wage slaves find themselves in.

As you may or may not know, I entered college with a major of Political Science, with the intention of going on to law school and then possibly into politics.  I accidentally ended up in a class called Accounting For Non-Business Majors just because at that time Freshmen registered last and that was the only class I could find to take along with the first Poli-Sci class.  It was eye opening for me and it clicked as nothing has ever before.

Looking back those 30+ years, I was indeed fortunate to have found myself in that class and I would not change my career to anything else.

Looking forward, it is obvious that there will never be a shortage of work for accountants, whether in taxes or management accounting.  Tax laws are changing daily and will never reach the level of simplicity that we all wish for.  Our rulers will never allow that to happen.  The levels of record keeping and reporting to so many different constituencies continues to grow almost exponentially, with new laws, such as The Sarbanes-Oxley Act, mandating more accounting details. 

I don’t know the numbers, but it seems that there are far too many lawyers already out there.  There are so many that they have to run all kinds of ambulance chasing style TV ads to recruit clients.  I have had attorneys as clients who openly expressed envy at the fact that my clientele is forced by law to use my services each year, while theirs only showed up for special situations.  

I obviously don’t have the crystal ball answer you may be looking for; but I hope this helps in your career path.

Good luck.




Posted in cpa | Comments Off on Which has better career potential?

IRS Drops Interest Rate

Posted by taxguru on November 28, 2007

They just announced that, for the first quarter of 2008, their rate will drop to 7.0% from the current rate of 8.0% that has been in effect since July 1, 2006.


Posted in IRS | Comments Off on IRS Drops Interest Rate