Tax Guru – Ker$tetter Letter

Q:

Subject: tax exclusion

 

Dear Sir;

 

I am retiring in the Spring and will be moving my legal residence from a condo in Alexandria to our summer home in Michigan.  If I sell the condo I can exercise the $250K cap gains exclusion to cover the $200K cap gains which I expect when I sell the condo.  However I would like to keep the condo, because our children and their families live in the DC area and use it for a winter home.  Can I claim the exclusion if  sell the house to an obliging entity and repurchase it after a week or so (for the same price)??  I realize that I may incur expenses such as transfer fees, etc.  The advantage to me is that after a few years I may sell the condo and move  into a seniors complex.

 

Thank you for your help,

 
A:

 I am not aware of any restriction on repurchasing a residence on which you had claimed the exclusion.  However, doing so as quickly as you intend may open you up for some problems with IRS.  An ironic aspect to the tax laws in this country is the fact that while many of them are clearly intended to motivate behavior, if IRS suspects that the only reason you do something is for the tax benefits, they have the power to nullify it. 

How long to wait before repurchasing the home and avoid IRS accusations of tax motivated behavior is a judgment call that you should discuss with your own personal professional tax advisor.  As background info, a similar situation is with what are called “wash sales” where stocks are sold at a loss and then repurchased.  The tax code has a specific time frame of 30 days before and after the loss sale in which a reacquisition nullifies the ability to deduct the loss. 

The home sale isn’t to trigger deductible losses but is obviously being done so you can start the two year clock for the sale of your new home since only one tax free exclusion can be claimed within a two year period.  Whether an aggressive IRS auditor would try to toss out the tax free exclusion on the first home sale is impossible to predict; but is going to be harder to defend, the less time there is between sale and repurchase.

If the two year clock angle isn’t your motivation for wanting to sell and repurchase the home, you should discuss with your tax advisor holding onto the Alexandria condo and selling it within three years of your moving out.

As additional info to consider, besides the transfer and other related closing costs on the sale and repurchase, you are likely to trigger a reassessment in the home’s property tax valuation, bumping those up.

I obviously don’t have enough info to be able to definitively say whether your plan makes sense or not; but your personal tax advisor should be able to better help you with that thought process.

Good luck.

Kerry Kerstetter

 
Follow-Up:

 Kerry,

Thank you very much for you prompt answer to my question, and since sale/repurchase is not clearly restricted I will pursue it further. As you well know, I must, by law, move my residency to Michigan when I live there most of the year, as will be the case after full retirement..  I have already been investigated by Michigan IRS about not paying MI Income tax and found to be in compliance, since I could show I had worked and lived in VA for more than half of each year.  This was triggered by two addresses and my wife’s residence which is MI, where she lives for 8 month of the year, votes, banks and pays income tax.

The “two year clock angle” is not my motivation.  We will probably keep our home on Lake Superior until we have one foot, maybe both, in the grave. So your suggestion about selling the Alexandria home in three years is an interesting angle, thanks.  However we will probably like to winter in Alexandria area for some time, since both our children (with families) live in the DC area and our son uses the condo often since it is 5 miles from his work whereas his home is 40 miles from work.

Thank you very much for your response,

 

Using Retirement Money Now On a Vacation Home Can Pay Off

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Q:

Subject: Multiple Companies

I have three companies but I want to use one bank account.
I order parts and items for Police Officers in one company.
I order parts for Marine and Sporting in another and
I have a welding Business as the final business.

I have three companies but I have one business bank account.
How can I get this to work properly?
Using QuickBooks Pro 2006

Also if I send you a copy of the QBB’s of each account can you look them over and make suggestions or modify?

This is all new to me. I have been doing this by hand on paper for a couple of years but have decided to try and use QBooks.

Thanks in advance.

A:

Don’t send any files to me. I am not accepting any new clients.

This is a matter that you need to work on with your own professional tax advisor, who should be able to help you set up your QB in a way that is properly coordinated with the related tax returns.

Whether you can operate multiple businesses out of a single bank account depends on the ownership of those businesses. If they are all owned by the same entity, a single bank account can work, as long as you properly use the QB Classes to separate the activity for each business. This would be okay if all of the businesses are owned by you individually and you report them on Schedules C with your 1040, as well as if they are all owned by a single corporation. You would use one QBW data file.

If the businesses are each owned by separate entities, such as a different corp for each one, you must have a separate bank account for each, as well as a separate QBW file for each. Money can be transferred between the accounts if necessary in ways approved by your professional tax advisor.

Again, any competent tax advisor should be able to help you set this up properly.

Good luck.

Kerry Kerstetter

Q:

Subject: Questions after reviewing your web site

 

Hello.  I ran across your web site while looking on the web for information about how to handle a specific issue.  I was unable to find something specifically on point, so I wonder if it would be acceptable to throw the question your way.  Three questions, actually.

 

1.  In a single member LLC, how should the owner’s draw (payments for activities which are the basis for the LLC’s existence) be accounted? What type of QB “account” is Draw?

 

2.  I often receive payments from clients that comprise both professional fees and reimbursed expenses.  Based on advice I received some time ago, I have been grouping them together.  Yes, that results in tax payments based in part on the reimbursement, but it is balanced by the deductions taken on the expenses; besides, I was informed that was the appropriate way to handle it.  Your web site discusses contra expenses, and indicates that the reimbursements should be allocated to the same account as the expenses.  Is the difference between the way you’re handling it and the way I’m handling it a matter of tidiness, or are there different consequences?  (It also seems to me that there is a question of how clients would report the payments if they issue a 1099, since my reporting ought to match theirs.)

 

3.  On a related point, if I charge a surcharge on advanced expenses, is there any reason that those payments cannot be grouped with fees (assuming that there is no sales tax issue)?

A:

If you have truly reviewed my websites, you should know how important I believe it to be that business owners work directly with qualified professional tax advisors before deciding which kind of entity to use, as well as how to operate with the one that is selected.

As is far too often the case, it appears that you set up an LLC without understanding how they function.  Now that it is established, you still have the choice of how it is to be taxed, as a Schedule C on your 1040 or as a corporation (C or S).  That choice should only be made with the assistance of a tax pro. 

The treatment of owner’s draw will be different depending on how the LLC is taxed.  Your personal tax pro should be able to explain the differences.

With reimbursements received, there are different ways in which they can be handled on the books.  Because some entities have taxes based on gross revenues, I am a fan of keeping that figure down to the lowest legally allowed.  The way I usually handle it depends on a number of factors.  Generally, we post the receipts back to the original expense account only if they are separately designated on invoices and if they are for the exact same amounts.  If those costs are marked up when passed along to the customers, all amounts received should be processed through the revenues account.

In regard to the 1099 matching issue, you should understand that payments to most corporations are not required to be reported on 1099s, while payments to unincorporated businesses are.  However, from your email signature, it appears that you may be an attorney, in which case payments to your corp are required to be reported to IRS on 1099s.  IRS has singled out incorporated attorneys for tighter reporting that for any other kind of corporation.  This may or may not influence your decision as to how to tax your LLC.

Good luck.  I hope these comments help.

Kerry Kerstetter