Tax Guru – Ker$tetter Letter

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Archive for November 26th, 2008

Home conversion not a taxable event…

Posted by taxguru on November 26, 2008

Q:

Subject:  1031 Exchange

Back in 2005 we sold a vacant property and had a gain of $130K and bought a $180K house using a 1031 exchange..  We have had it for a rental for 4 years. 

Due to our financial situation, we have to sell our primary residence at a loss of $40K and move into our 1031 rental house and make it our residence house.
 
Do we have to pay taxes on the original deferred gain on our rental house?    .

A:

Converting a business asset to personal use is not a taxable event, so no tax will be due for the year of the conversion.

However, down the road when you sell this property, you will need to possibly pay tax on some of the gain.  The law was recently changed to require a five year look-back period.  If you occupy the home as your primary residence for a full five years before selling it, you will be allowed to exclude up to $500,000 of profit on its sale.  If you sell the home after less than five years of personal occupancy, the tax free gain will be prorated according to the amount of time it was used as a primary residence.

Your own personal professional tax advisor should be able to explain this to you in more specifics for your unique circumstances.

Good luck.

Kerry Kerstetter

 

 

Posted in 1031 | Comments Off on Home conversion not a taxable event…

Timing of Section 179

Posted by taxguru on November 26, 2008

Q-1:

Subject:  Section 179 question

Can the date of purchase be defined as the date placed in service.  If payment is made this year, can it go toward next year’s expense if not placed into service until then?

A-1:

You seem to be confused about when depreciation and Section 179 expensing become available for business assets.  The key date is when the asset is placed into service; so there isn’t actually any choice here.  If you buy a new item this year and don’t actually start using it until next tax year, the only year you could possibly claim Section 179 would be next year.

Your own personal professional tax advisor should be able to explain this to you in more specifics for your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Thanks, but as a practical matter in my business (I sell software to dentists) the docs expense is when they write the check (or when they charge it to their credit card, or when the first lease payment is made.  Nobody comes around to see if it is being used and when it started being used.

So, you are saying they could opt to pay for it in 2008 and not place into service until 2009, therefore taking the deduction in 2009.  This is requested at the end of the year sometimes if the doc has used up as much 179 expense as he has profit for the current year.

A-2:

Normally, this question goes in the opposite direction.  People assume they can prepay for some business asset in December and claim Section 179 even though it isn’t received or set up for use until next year.

As we all know, the tax system has a lot of the “honor system” built into it in regard to people claiming their deductions in the proper years.  However, IRS does occasionally audit tax returns to verify that things have been handled properly.  A canceled check is not sufficient documentation for a piece of business equipment or expensive custom software.  Auditors will demand to see the purchase invoice and will check the delivery and installation dates to see if the year placed in service matches that shown on the tax return.

I have to say that you are sticking your neck out quite dangerously by daring to give tax advice to your customers.  While they may play fast and loose with the technicalities of the years in which they claim their deductions, you run the risk of being sued by them if any of them were to get into trouble with IRS based on any such advice you provide.  The smart thing for you to do is to advise each of your customers to consult with their own personal professional tax advisors who can work out appropriate strategies for when to pay for and deduct the costs of your software.

Good luck.  I hope this helps.

Kerry Kerstetter

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 179 | Comments Off on Timing of Section 179