From Mallard Fillmore:

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Q:

Subject: tax guru question

 

Greetings Kerry,

I just have one question. First of all, I really enjoyed your site. Very informative. My questions is what is the penalty for filing your taxes as a single when in reality you are married. Even though I am married, I recently got seperated from my wife. I was planning to file as a single and so was she. Thanks for your help.

A:

You both are treading into dangerous territory if you are serious about filing as Single when you were legally married as  of 12/31/05.

If there are kids involved and you  meet several qualifying tests, you and/or she may possibly qualify to use the generous Head of Household status.  Your professional tax advisor can help you determine if you qualify.

If you don’t qualify for HoH status, you need to either file a joint return or as Married Filing Separate, which does have several penalties built into it.  To file as Single is technically filing a fraudulent tax return, which then gives IRS a lot of power over you, including the assessment of penalties and the removal of the statute of limitations.  With a normal honest tax return, IRS has three years to come after you.   With a fraudulent tax return, they have forever to come after you.

Give those points some deep consideration before sending in a 1040 claiming a bogus filing status.

Kerry Kerstetter

Follow-Up:

Thank you very much for your help.

 

Q:

Subject: Property Mgmnt /QB’s

Kerry after reading through your website I have come to the conclusion that you may be the only “QBGURU” that could efficiently help if you will?

 I am very familiar with QB’s but am finding it difficult to set up rental property in QB’s so that I may track income and expenses as well as the security deposits.  Without going into too much detail and wasting your valuable time maybe you are willing to help me with this?  

 Much thanks,

A:

It’s very easy to do with the Class feature.  Set up a class for each property and when entering each income & expense item, assign the appropriate class.  You can also use sub-classes to group properties, such as by address or by owner if you are doing property management for other people.  When setting up your P&L, just specify that the columns should be arranged by Class and then you will get a separate side by P&L for each property.  I use this every day when working with clients’ books to prepare their tax returns and it works beautifully. I explained Classes on my website.
 
Security deposits need to be treated a little differently because QB doesn’t allow you to set up a Balance Sheet with columns by Class.

There are two main ways I have seen for keeping tabs on security deposits.  One way is to have a sub-account for each tenant.  The problem with this approach is that it makes the Chart of Accounts grow rather large and unwieldy.  Accounts for tenants who have left can be tagged as Inactive after being zeroed out; but there could still be a lot of accounts to wade through.

The other approach is the one I use for keeping tabs on the trust funds Sherry’s exchange company is holding for client reinvestment.  There is just one current liability account called Client Trust Funds.  Each entry in and out is tagged with the customer name.  We run transaction history reports with totals by Customer in order to see a detail of each client’s account.  This could just as easily be done for tenants.  In order to print out a detail for just one client (tenant), we check the box called “Page break after each major grouping” and it puts each client on a separate page.  We page though to find the client we want to print out and just print that page.

I hope this helps.  It’s really pretty easy; but you can probably get some personal assistance from a QB ProAdvisor in your area.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Seminar

I’d like to echo the sentiments of one of the recent emailers who said they would come to a seminar of yours. I live in Washington DC but would travel

anywhere to hear you speak and share your knowledge.

Please consider it. Thanks.

A:

I appreciate that feedback.  I am not a big fan of long distance travel, so the chances of my doing any live seminars outside of our local area are very slim.

However, I am looking into the logistics of doing some online seminars and will probably be doing a few live mini-seminars in the local area that we will tape and make available via CD and MP3 download. 

I will definitely announce anything in that regard on my blog.

Thanks for writing.

Kerry Kerstetter

 

Q:

Subject: Questionable taxes due for 2006?

My partner an I are co owners / co borrowers of a residence we have resided in since 2000. We are in the process of disolving this partnership and she will be buying out my share of the property and assuming all loans and debits. My question is, on the money I receive, will I need to pay taxes on it for the year of 2006? The residence was not sold nor refinanced but her att. said we needed to have the residence appraised and that the monies given to me have to be filed as income? Can you Help???

It sounds like you are selling your half of the home to your co-owner; so this will need to be reported on Schedule D of your 1040.

You didn’t give any figures, but if your profit on this sale is under $250,000, it should be tax free. 

You should have been keeping tabs of your cost basis in your half of the home, starting from the original purchase and including any capital improvements you’ve made up until the time of your sale.  Subtract that from the value you assign for the buy-out and you will have your profit.

If the profit on your half of the home is over $250,000, you will have a taxable long term capital gain.  What you do with the money will make no difference whatsoever on the taxation of the home.

This isn’t very complicated, so any tax pro should be able to help you report it properly on your 1040.  I have all of the rules on home sales on my website.

Good luck.  I hope this helps.
 
Kerry Kerstetter

 

Q:

Subject: C vs S

 

Hi Kerry,

 

Very informative site.  Which entity is better when a Company is sold?  Assuming a typical transaction would be an asset sale.

 

Thanks

A:

There are too many possible variables for there to be a universal answer to that.  It all depends on the facts and circumstances.

Kerry Kerstetter

 

Q:

Subject: Sale of Personal Residence 

Hi Kerry,

 

I have received conflicting advise and found you during my research on the internet.

 

I own a condo in which I have considerable equity and lived in for 17 years. Nearly 3 years ago I bought a townhome and borrowed against the condo equity for my down payment. For a variety of reasons, I didn’t decide to sell the condo until this past month. Here is my dilemma:

 

At the end of May I will have been living outside of the condo for three years and will lose my exemption benefit. The condo needs some work to get full value and I fear that by the time I get the work done and can find a buyer that I will not be able to close in time to preserve my exemption. Since the condo needs work, I thought that perhaps I could sell the condo to an LLC or S or C Corporation which I control and then fix it up and sell it, essentially flipping the property. Or selling it to a relative to accomplish the same thing.

 

I’ve been told by one CPA that neither sale would be respected by the IRS and another says there are no rules about sales to relatives or to entities that are controlled by the seller – except for the remainder interest discussed on your site. I haven’t been able to find any discussion of similar circumstances by searching the web. I’m simply looking for a way to preserve my exemption as my gain will be considerable.

 

Thanks for any insight or direction you can provide.

A:

I’m not aware of any new restrictions on sales to related parties since my earlier posting about selling a home to a controlled LLC.

One of the nice benefits of producing this blog is the volume of feedback it receives, especially if another tax pro thinks I missed something or misstated any facts.  So far, nobody has piped up with any arguments over that issue; so it seems that it should work for your particular situation.

Good luck.

Kerry Kerstetter

 

Q:

Subject: hsa

I couldn’t find any info on your site regarding health savings accounts? Could you direct me to the area so I can research? Thanks and I do enjoy the site.

Best-

A:

I haven’t posted much on HSAs because I still don’t have a lot of real life hands-on experience with them.

I did include some links in my blog to other resources that did have pretty good explanations of how HSAs work, such as the following.

HSA Insider website

Free WSJ article on how they work

I hope this helps.  As these plans grow in usage, and I have more chances to see how they function in the real world, I’m sure I will be posting more info about them on my website and my blog.

Good luck.

Kerry Kerstetter