Tax Guru – Ker$tetter Letter

Q:

Subject: Kerry’s Quicken Tips

 

Thanks very much for this free article! This is by far the best information I’ve found anywhere to use Quicken for rentals I am starting.  A point of confusion (from Quicken Forums) I’m still working on is:

 

Do I need 2 accounts for each property, a cost basis account and an expense account?

 

Or is a Cost Basis account per property sufficient, where principle payments and improvements are transferred to it from cash/credit card, and expense reports are generated from classes ?

 

An article in Quicken Forums has one splitting an improvement expense so it is transferred to cost basis account AND is categorized in the  cash/credit card account. I just don’t know how relevant this is.

 

I’ll gladly pay for this info. Thanks

A:

If you are going to properly account for your rental properties, you are in serious need of some training from a professional accountant because I can see that you are very unclear on how things work. 

I don’t have time to give an entire lesson, but here are a few fundamentals that you will need to cover with your personal advisor.

There are basically two types of expenditure – those that affect the balance sheet and those that affect the income statement (P&L). 

Balance sheet payments are generally capital improvements that are set up as fixed assets and depreciated on your tax return, and payments of loan principal, which reduce the loan liability balance. 

Principal payments do not get transferred to the property’s cost basis.  When you book the purchase of your property, you debit the fixed asset account for the full cost and credit the cash you paid and the full amount of the loan.

Income statement expenditures are operating expenses, including mortgage interest.  Because you need to have  a Schedule E for each property, it’s best to set up a Class in your Quicken for each property that will coincide with the Schedule E columns when you run a  P&L with columns by Class.

Good luck.

Kerry Kerstetter

 

Q:

Subject: capital gains tax

 

Hello,

 

I am from Virginia and I have a property(condo) that I want to sell and have lived in for less than two years.  I only want to sell inorder to acquire a larger property for my family.  I have only gained 21,000 of value in my home and want to use that $ for closing costs and expenses.  I do not want to pay capital gains tax and am not sure what the regulations are.  Can you help me out or give me a place where I can get some information?  I have been getting confliction information from many different places.  I only have one primary residence.

 

Thank you

A:

You should be working with a tax pro to ensure that you have properly accounted for the total cost basis of your home.  There is a good chance that you may have overlooked a lot of additional costs that will reduce your net gain.  Your net gain will also be reduced by your selling and closing costs.  Chances are that the actual potential taxable gain will be either nonexistent or so small as to not be worth a lot of worry.

I have a lot of info on home sales here on my main website.

If you do a Google search on my blog, you will also find dozens of posts discussing home sales.

Good luck.

Kerry Kerstetter

Every year – not just every four years.

From a CPA:

Subject: Death of A Partner

Dear Tax Guru…

Re your reply to the 2/14/06 Death of A Partner question:

 

       The person asking the question needs to  be made aware of the IRC Code 754 election that may apply in this situation.

My reply:

 That’s a very good point. 

I will got some info on that posted soon.

Thanks for writing.

Kerry Kerstetter

 

Additional Info:

Proving again why no one reference book can be all things for all people, I compared the info included in both The TaxBook and the Small Business QuickFinder and have to give the nod to QF for including a lot more info on Section 754 than the brief summary in The TaxBook, such as the following quotes from the new QF Online Service, where they have the same content as in the books:

Optional Adjustment to Basis of Partnership Property (Section 754 Election)

Section 754 Election Because of differences between basis and FMV of assets in a partnership, inequities can result when partnership interests are sold or transferred.

Under a Section 754 election, the purchaser’s basis in partnership property is adjusted to reflect the purchase price and the partnership interest. This reduces negative tax effects when basis in acquired partnership property is less than the amount paid for the partnership interest.

Gain upon liquidation of a partner’s interest may occur from a Section 754 election. The election is used to remedy the negative tax consequence when an amount paid for a partnership interest is greater than the partnership’s basis in its assets. Since the election can increase the partner’s ability to deduct depreciation on partnership property, the gain upon liquidation of the partner’s interest may also be increased.

Bush Says Mortgage Interest Deduction Safe – This will hold off the much anticipated burst in the real estate bubble a little while longer. 

Bridging the Gap Between Selling Your Home and Buying a New One

When Entrepreneurs Make a Decision to Hire

Using the Web to Buy a Home