Q:

Subject: section 121

 

Kerry, I saw your article on the internet and would value your opinion on the following situation.  I purchased land to build on 2 years ago.  I built the home and moved in 1 year ago.  My mail has always gone to a PO box.  Could I sell my home based on the land purchase, or does the date I turned on the power at the new residence start my 2 years?  (I did not sell a home in the previous 2 years)

Thank you for your time,

A:

The two years for qualifying for the Section 121 tax free exclusion begins when you both own it and occupy it as your primary residence.  Unless you were living on the lot prior to and during construction (tent, motorhome, etc?), this couldn’t be possible until you actually moved into the completed house.

Kerry Kerstetter

Follow-Up:

Thank you for your response.  I just may contact you again if my accountant doesn’t feel confident about these issues.  I appreciate your time.

 

 

Q:

Subject: depreciating donated property

Hi Kerry,

Thanks for sharing obscure versions of George Harrison’s  Taxman.

Hopefully this question will have a quick answer.  I’ll be brief.

Can a piece of real estate that is donated to a land trust be depreciated by the land trust over 27.5 years?  The property is one acre of lakefront property on Lake Ontario with a single family residence.  I’m attempting to calculate the real costs after taxes if the trust were to hold the property unoccupied.

Thank you for continuing to provide a valuable source of information.

A:

If it is trust that files 1041s, the building portion of the cost should be able to be depreciated during the time it is being used to generate income based on the value used for the transfer into the trust.  Obviously no depreciation could be claimed while it sits vacant unless a sincere effort is underway to lease it.

I’m glad you like the TaxMan songs.  Sherry found a new live version by Nickel Creek last week and I was thinking of posting it.

Kerry Kerstetter

 

The latest Intuit ProConnection newsletter had an announcement of their new free service to remove passwords from data files.  To use it, you need to upload your data file and provide your registration license number.  It currently only works with QB 2005 and older versions of the program.

I haven’t used it and probably won’t because I have been very happy with the speed with which I have been able to unlock QB passwords with the QuickBooks Key program from LostPassword.com.  I have used it several times when clients forgot to send me their passwords, which I usually don’t discover until 10 or 11 at night, when I’m working on their stuff.  Since there is no file uploading required; so it only takes a minute or so to unlock the files.  Unfortunately, they still haven’t updated their program for QB 2006, which more and more of my clients are using. 

I have added info on this new free service to the QuickBooks Resource page on my main website.

Q-1:

Subject: Question on sale of primary residence owned less than 2 years

We are possibly in a situation where we may sell our primary residence that was purchased Jan. 6th, 2005.  My wife (who was only applicant on the mortgage) is pregnant and has been forced to bed rest for a short period of time.  She is a physician although not necessarily the primary wage earner, but due to bed rest is unable to ‘moonlight’ which drops here gross monthly income by roughly $4500 per month.

 

Is this a qualifying circumstance to get a prorated discount on tax on sale?  We purchased the home for $540,000 and are looking to sell for between $750k and $825k.

 

Thank you in advance for your assistance.

 

Sincerely,

A-1:

While it may be possible to justify the use of the prorated exclusion based on your description, I would feel nervous about your use of the term “short period of time” for the disruption in your wife’s income flow.  That would be a harder case to make than a long term reduction in her income due to the need to take off from work for the pregnancy and the post natal time to raise the baby.  IRS could say that a short-term interruption in income could be dealt with without having to actually sell the home, while a longer term reduction would be a valid reason to sell.

You’ll need to go over your facts and circumstances with your personal professional tax advisor to see if s/he will feel comfortable with claiming the prorated exclusion.  If you do decide to claim it, attaching an explanation of the facts to your 1040 will make it slide though with less opposition from IRS.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Thanks for the advice….By the way what is the tax rate on a sale of property owned from 12-24 months?

A-2:

That would be taxed as a long term capital gain, which is a nominal rate of 15% for the Federal.  The actual effective rate will be much higher due to the penalties applied to people with high AGI.

I have the 2006 Federal rates on my website.

State rates differ.

Kerry

 

From WSJ’s free Startup Journal

A look at some small business accounting programs, including my long time favorite.

A list of recommended reference books.

The Feds continue their long, slow crack-down on charlatans in the tax prep community, as well as the people stupid enough to use their services. 

North Carolina preparers using fake numbers

New Hampshire prepare of frivolous returns

Florida promoter of disabled access telephone tax scam

 

 

Q:

Subject: Zero Coupon Treasury Receipt

 

I received the proceeds from an expired instrument purchased at Merrill Lynch, in November, which I reinvested in a 6-month CD with ING.  This was (is) listed in my name for the benefit of my grandson.  I never received any 1099s over the 15 years of its run, and I don’t know if I should declare this as income on my FED and State tax returns.

Any advice most gratefully received,

A:

It sounds as if you are referring to a US Treasury Bill that was purchased at a discount.  If so, you had the option of either reporting a pro-rata portion of the interest as it accrued each year, or waiting until you cash it in and report the difference between what you received and what you pad for it as interest income on your Federal Schedule B.  It would be tax free for state income tax purposes.

While there are some opportunities to avoid tax on some of the income by using it to pay for certain kinds of  education expenses, it doesn’t sound like that applied to you.

You personal professional tax advisor can assist you in more detail with this.

Good luck.

Kerry 

Follow-Up:

Thank you so much for your assistance!  I spent two hours yesterday pouring over Pub. 550 and other IRS ppgs. becoming more and more confused. (My algebra is VERY rusty).