Be Wary of Signs and Ads Offering To Pay Cash for Your Home

This reminds me of a consultation I had last week with a client who was considering selling her house. First, she was worried about her taxable gain because she couldn’t recall how much she had paid for the property seven years earlier. When I discovered that she was looking at selling for only $80,000, I explained that her cost basis was irrelevant, since she qualified for up to $250,000 of tax free gain.

Then, she explained the second area of concern. The buyer was going to pay her with a check for $40,000 and the other $40,000 in actual cash. He had stipulated that a condition of the sale was that she could not deposit the cash into her bank account. She claimed that he was a prominent local business owner, and that the source of the money was legitimate, and that was how he always did business. After more questioning, she explained that the offer was $9,000 under the most recent appraisal and she wasn’t desperate to sell.

While she wasn’t in the business of selling real estate, so that filing Form 8300 (Report of Cash Payments Over $10,000 Received In a Trade or Business) with IRS for the cash received wouldn’t technically be mandatory, the situation struck me as having potential to fall under the following from the 8300’s instructions.

Voluntary use of Form 8300. Form 8300 may be filed voluntarily for any suspicious transaction (see Definitions) for use by the IRS, even if the total amount does not exceed $10,000.

Suspicious transaction. A transaction in which it appears that a person is attempting to cause Form 8300 not to be filed, or to file a false or incomplete form. The term also includes any transaction in which there is an indication of possible illegal activity.

When I explained that the potential penalty for not filing the 8300 could be the full amount of the cash received ($40,000), my client decided it would be best to stay away from a sale under these suspicious conditions. While the $40,000 cash the buyer was offering could very well be perfectly legitimate, the fact that he wanted it kept secret sends up red flags with any normal person.

When a Partnership Is Right for You – The extremely dangerous general partnership format has been becoming less popular each year, especially as the more protective LLC format has grown in prevalence.

Q:

Subject: TAX QUESTION

Hi Kerry,

I had heard a rumor that “the only kind of stock options that can be invested in ( or played ) in a self-directed Roth IRA is…..

Covered Calls. ”     True ??  False ???  

My wife  & I both have a Roth IRA,  and we are doing some “covered calls” and also “credit spreads”, straddles, and others……

Are we in trouble already ??

A:

You need to track down the documentation for that rumor because I have never heard of any such restriction.  I checked some of my reference materials and websites (such as rothira.com and fairmark.com) and couldn’t find any mention of such a specific limitation on acceptable investments.

It has always been my understanding that Roth IRAs are allowed to invest in any of the same kinds of things as conventional IRAs, which generally fall under the “prudent man” type of umbrella.  Highly speculative and risky investments, such as lottery tickets, wouldn’t meet the prudent man test; so if any of your options trading techniques fall into that category, you might have a problem defending it.

For self directed accounts, there is generally a governing document that spells out the rules, usually in a very general sense.  If your account’s governing documents don’t specifically mention a limit on the kinds of investments that are acceptable, the general rule should apply.

Basing investment and tax strategies on word of mouth rumors that have passed though who knows how many people already is crazy.  So, anybody who is claiming to have such information that is counter to conventional wisdom should be required to back those statements up with something more substantial than “a friend of a friend told me.”

That’s the best I can come up with.  Please pass on anything more definitive that you come across.  In the meantime, I wouldn’t worry about what you are doing, especially if your Roth accounts are making profits because that on its face would prove that the investments are good.

Kerry

First Follow-Up:

Kerry,

  As always you are wonderful.  Yes I agree that whoever says such things should back them up, etc,etc. but, I wouldn’t trust anything they

would produce as backup.  I trust you, your experience and backup.  You have confirmed basically what I thought to be true.

  I figured that if it wasn’t allowed, then our brokerage wouldn’t allow us to do it. (because some brokerages won’t let their customers do these

kinds of transactions but ours is fairly liberal, therefore, it must be legal for a Roth IRA)

 

  My ultimate “backup” is you. “You’re the Guru”, you’re to “go to guy”.

 

  Thanks for letting me interrupt your day, I appreciate your time and efforts….

My Reply:

You’re absolutely right that, even though they aren’t infallible, stockbrokers that handle IRA accounts should be up on any restrictions of the kind you mentioned.

Kerry

Second Follow-Up:

Talk about timing, 

I swear, I didn’t ask these guys for anything…It just showed up in my mail…..kinda makes you go , “Hmmmmm”

  

——————————————-

Dear Mr. …,

You have requested the ability to engage in options combination trading (including American-style spreads) in your IRA account, for which Delaware Charter Guarantee & Trust Company acts as trustee.  Certain of these transactions may only be recorded in margin accounts according to requirements of applicable rules. 

Accordingly, optionsXpress has approved your IRA account as a Limited Margin Account.  As a Limited Margin Account, you will be permitted to engage in combination options trading, including American-style spreads; however, you will not be permitted to engage in other margin transactions (i.e. utilizing lending).

Please refer to sections 31-34 of your account agreement for margin terms that apply to your IRA account.  Also, please refer to the Margin Risk Disclosure Statement, which is provided to all margin accounts and available on our website.

Your IRA account continues to be subject to the terms of Delaware Charter’s Self-Directed Individual Retirement Trust Agreement. If you have any questions, please contact customer service at 1-888-280-8020 or through the Live Help banners on our website.

Sincerely,

Fred E. Cadena
Assistant Vice-President, Risk and Margin
optionsXpress, Inc.
Member NASD | SIPC 

 
Final Words:

That does seem to be very coincidental timing.

Does your agreement with them have some kind of Big Brother clause, allowing them to monitor your emails?

Kerry

 

From the daughter of a long-time client:

Subject: Hi Mr. Kerstetter

Hello Mr. Kerstetter,
I’m …’s daughter and just recently used H&R Block’s website to attempt to file my 2005 taxes and ran across some trouble. When I called my dad, he suggested I get in touch with you! I hope you’re well, it’s been a long time. 🙂

Basically, I can file the 1040EZ, and don’t make a ton of money, but when H&R Block’s website did the math, it looked like I owe the IRS over $500. I’m not sure if I filled everything out correctly, and thought maybe you could  offer a tip or two, or if it wouldn’t take long, maybe we could go over the information via phone? Maybe there’s something I’m missing?

My dad trusts you, and speaks so highly of you, especially with regard to your expertise in this area, so I would be very appreciative of any perspective you might be able to offer.

Thanks Mr. Kerstetter,

My reply:

Trying to do your own tax return is not a good idea.  If you’re still doing the music thing, there are hundreds of possible deductions that you could easily be claiming that could zero out your taxes.  That would require you to file a full 1040 with a Schedule C for your music business.  You shouldn’t use any of the EZ or other short forms because they don’t allow for the kinds of deductions to which you are entitled.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances, ideally someone who has experience working with musicians. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you at.

I wish I could be of more assistance; but I wish you the best of luck.  

Kerry Kerstetter

 

Interesting articles from Nolo Press:

Preparing for a Business Audit – Some good tips from Nolo. However, the best strategy would be to work with a tax pro who can help you avoid saying the wrong thing to an auditor, a very common way people cut their own throats.

When & Whether to Sell Your Business

Top Myths About Retirement Plans

Minimal Requirements for Working as an Independent Contractor

Q:

Subject: S-corp vs C-corp question

Dear Kerry,

First of all, thank you very much for all your postings on the Web. I recently came across your writings and found them very helpful and much more concise than I was able to get from anyone else.

My question is, I’ve incorporated this year (2006) in CA and my accountant at the time suggested that I should apply for S-corp status. So we did file Form 2553 and got approved. However, after reading your pages, I’m now thinking a C-corp might actually be more beneficial for me, especially since I don’t intend to take all the money out of the corporation, but let it sit there and get invested in the corporate accounts.

I was wondering, since I have not yet filed any taxes yet, if I still have the option to go ahead and file as a C-corp when I file for the first time. If not, are there any other remedies?

Thanks very much,

A:

Now that you have been approved by IRS as an S corp, they will be expecting an 1120S, so that is what you must file.  You committed to that status by sending in the 2553 and can’t just ignore it because you have changed your mind.

You should work with an experienced professional tax advisor to see if it makes more sense to revoke the S election and switch back to a C corp or just start up a new C corp.  As I’ve mentioned several times, the downside to a conversion is that you will be stuck with a December 31 fiscal year-end. 

As I’ve also frequently mentioned, there are plenty of times when having both an S and a C corp make a lot of sense.  I have no way of telling if that is the case for you.  Only a thorough interview with an experienced tax pro will determine if that is a better way for you to deal with your current situation.   The downside to having two California corps would be the hassle and expense of filing two tax returns each year, plus the $800 minimum annual tax for each corp.

Another topic that you should discuss with your personal professional tax advisor is whether any of your business operations can be set up in another state, such as Nevada, in order to avoid the high taxes in the PRC.  This is a tricky issue, but an experienced tax advisor should be able to see if that is a realistic possibility for your unique circumstances.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

I appreciate your help and quick reply.

Best