Minimum wage, maximum folly – Whenever our rulers stick their noses into trying to artificially manipulate market forces, the results are always completely opposite from their stated goals.  Will they ever learn to butt out?  Not in this lifetime.

When Unmarried Couples Tie the Real-Estate Knot

When they audited the IRS  

Sneak-a-taxes

Q:

Subject: Primary Residence Tax Exemption

I have a question regarding the tax exemption on the sale of a primary residence.

I called the IRS and based on what they told me it didn’t sound like I would not qualify.

I am in the military and relocated to Yuma in February 2004. 

I did a build contract on a house in December of 2003 prior to moving to Yuma, AZ.

The house was not completed until August 15 2004.

– The house is a 4 bedroom 2 bath 1768 sq ft.

–  At the time that I purchased the house in December of 2003 it was only my girl friend, domestic partner of 4 years, and myself.  We both have 2 children each from a prior marriage.  I have a son 14 and a daughter 11 and she has a son 12 and a daughter 8.  We had only anticipated having our children during visitations.  Since moving to Yuma 3 of them have come to live with us full time and still a possibility of the 4th coming too as there is a custody hearing pending.

–  We want to buy a bigger house 5 bedroom 2 bath 2200 sq ft to better accommodate everyone.  The 4 bedroom is workable, but it is a small 4 bedroom and very cramped for 6 people.  There has been about $90,000 in equity increase in my current house, the new house I would like to upgrade to will cost $235,000 I will be using all of the equity from the sale of our current house towards the new house and is a big consideration prior to entering a contract that I might get stuck paying money out of pocket to cover the 15% in taxes on the capital gains of my current house.

Is there any more information out there to clarify whether or not I would qualify for an exemption under 2 years?  By the time the new house would be completed I will have lived in my current house about 16 months.

Thank you for your time,

A:

Your use of a double negative regarding what the IRS told you has me confused.  However, it really doesn’t matter in the least since it is a well documented fact that over half the time anyone calls IRS, they are given completely wrong answers.

As you should know, the burden of proof in any tax matter lies with you.

This means that, in the highly unlikely chance that an IRS agent were to challenge you, if you feel confident that you could defend your position that when you moved into your current home, you had no idea that there was a likelihood of your needing to house six people on a full-time basis, and that this requirement came as a complete surprise to you, you would qualify for the pro-rated tax free exclusion of the gain on your home sale.

Assuming the house is just in your name, you would qualify for $342.46 ($250,000 / 730 days) of tax free profit for each day that you owned and occupied the home.  You cannot count the time before you actually moved into the home.  Working backwards from your guesstimate of a $90,000 gain, you would need to have lived in the home for at least 263 days to exclude all of it.  From your description, this sounds like it will be no problem.

What you do with the sales proceeds, as well as how much you spend on a new home, are completely irrelevant.  What is helpful for your case is the fact that you are buying a much larger house based on square footage and number of bedrooms.  This would go a long ways in supporting your contention that you were essentially forced to sell the old home prior to two years because of the unexpectedly larger family size.  It would be a much different story if you were buying a new home of the same size as your old one. 

So, the more I think about this set of facts, the more confident I feel that you do qualify for the pro-rated exclusion.

I hope this helps.  Your personal tax advisor should be able to work out more specifics for your case.

Kerry Kerstetter

Q:

Subject: stock options

Dear TaxGuru,
My broker did Not include my Stock Options transactions in my 1099-B, and i can’t find in the instructions for Schedule D, or anywhere on any IRS publication how to deal with stock options. Are these transactions invisible ? Do stock options have to be reported ? if so, how ?
Thank You Much.

A:

Stock option transactions do have to be reported on Schedule D in the year in which the deal is closed.

Because puts and calls often cross over into different tax years, and are frequently done in different directions, stockbrokers don’t need to send this data to IRS because it isn’t as easily matched with Schedule D as regular stock sales. This in no way lessens your obligation to report each closed deal on your tax returns.

The timing of when to report these transactions can be a little tricky. My advice is to engage the services of a tax pro who understands how these work to make sure it’s done properly. This is not something you want to try on your own. Even many tax pros screw these up all of the time, so make sure whoever you hire has experience entering puts and calls on Schedule D.

Good luck.

Kerry Kerstetter

Q:

Subject: Setting up corporation

Which state is most favorable for establishing a corporation?  I will be operating out of Virginia.

At current, I operate a small business out of Georgia under Sole-proprietary structure.

A:

That is not something that can answered quickly.  There are pros and cons to each state. 

Where you actually charter the corporation isn’t as important as where your corporation actually conducts business.  One of the most common mistakes I see people make is assuming that just by incorporating in a tax free state, they are automatically exempt from state income tax.  It becomes a very expensive lesson for those people when they learn that any state in which your corp operates will require that you file corp tax returns and pay its state income and franchise taxes, regardless of where the corp is chartered.

There are ways to source and shift income into tax free states that will depend on what kind of business you will be running.  You will need to work with a tax pro who is familiar with state taxes and strategies for shifting and sourcing income into the lowest tax states.

Good luck.

Kerry Kerstetter

 

There is still no shortage of confusion over the differences between C and S corporations, as I’ve been trying to explain for so many years now.  Some typical examples:

Q:

Kerry,

 I saw your article on C Corp vs. S Corp on your website. I am a CPA with a handful of small business clients. I have a real estate broker client wanting to incorporate. My gut reaction was to recommend S Corp due to double taxation but after reading your article, I am second guessing myself.

I’m tempted to recommend C Corp so that she can deduct her health insurance and other out of pocket medical expenses thru corp. I assume we could take care of the double taxation issue at year end by bringing the profit down by either additional wages or retirement plan contributions. Any advice would be appreciated.

A:

We have dozens of Realtor clients who are saving huge amounts of taxes for all of the reasons that I spell out in that piece contrasting C & S corps, not just the health insurance.

Kerry Kerstetter

 

Q:

Hi Kerry,       

        I’m in North Carolina my CPA advised me to start an S-Corp and I did

so.   I’m a recruiter and have little overhead and have billed around $36K

my first qtr.  What are your thoughts on this?  Should I have started a

C-Corp instead?

A:

I really don’t have enough information to be second guessing your CPA.

However, I do frequently find people jumping into S corps without properly thinking things through.  If your CPA didn’t take into consideration the various points I covered on my web page comparing S & C corps, he may have steered you wrong.

More often than not, a profitable business can save huge amounts of taxes by using a C corp instead of an S.

Good luck.

Kerry Kerstetter