Month: November 2016

How to Ruin a Like-Kind Exchange

How to ruin a 1031 exchangeRecently, I had a taxpayer call me regarding the sale of a rental property. The taxpayer sold the property for approximately $500,000 and there was approximately $100,000 of tax basis remaining after depreciation. The combined federal and state tax exposure was almost $100,000.

The taxpayer indicated he wanted to structure the sale as a like-kind (IRC 1031) exchange as he had already found a replacement property and wanted to defer the income taxes. My first question was, “Did you already close on the sale?” The taxpayer’s response was, “Yes, I received the funds, and deposited the check directly into my bank account.”

It was not fun for me to relay this to the taxpayer, but I had to let him know his receipt of the funds caused a taxable event. I further explained that to structure a 1031 exchange properly, an intermediary was needed to handle the sale and related purchase of the replacement property. Once the taxpayer received the funds, it became a taxable event.

Getting a Like-Kind Exchange Right

To avoid the same error, taxpayers should contact their advisors before completing the sale transaction. I have worked with taxpayers who did not realize a like-kind exchange was available to them, and was able to properly structure the transaction in mere days before the closing of their property.

Following the specified guidelines to completely defer the tax in a like-kind exchange are critical. If you anticipate a sale of real estate and want to defer gain recognition, consult with your tax advisor before closing the sale.

We’ve Got Your Back

Check out my previous blog, Understanding IRC Code Section 1031 and Why You Should Care for more details on properly deferring tax in a like-kind exchange transaction. If you have questions about this type of transaction, give me a call at 201.655.7411 before you close on the sale.

Is your small business prepared for the new employment tax filing deadline?

Be Aware of New W-2 and 1099 Filing Deadlines

In an effort to combat fraud, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was enacted. It revises the filing deadline for Form W-2 and certain types of Form 1099.New Filing Deadlines for W2 and 1099s

Without proper planning, these revisions can cause some real stress for small businesses.

In the past, there were always two dates to consider when filing your employer tax forms. Forms were due to recipients on January 31st and forms were due to the government agencies (IRS and Social Security Administration) on February 28th.

Effective with 2016 tax forms, W-2’s and 1099’s with Box 7 entries are now due by January 31st for both recipient and government agency filings.  Form 1099 box 7 reports non-employee compensation.

In practice, we have found that many businesses do not have correct recipient information for employees and independent contractors, and unfortunately do not realize this until it is time to prepare the recipient copies of the forms. In the past, the issuer had until February 28th to track down or correct any incomplete recipient information.

If you fail to file a correct W-2 or 1099 information return by the due date, and you cannot show reasonable cause, you may be subject to a penalty. There are also penalties if you report an incorrect TIN (taxpayer identification number) or fail to report a TIN. Accordingly, collecting correct information timely is very important.

Complying with PATH

Our recommendations to businesses to assure compliance with the new due dates are as follows:

  • Verify the accuracy of all employee information NOW
  • Review all vendor files NOW and confirm that all applicable files include the vendor’s name, address and TIN
  • Obtain Form W-9, “Request for Taxpayer Identification Number and Certification”, for each new vendor PRIOR to issuing any payment to the vendor
  • Contact all vendors with missing information NOW to allow sufficient time to receive the correct information (it may be difficult to secure the correct information if you no longer do business with the vendor)

Due to the shortened filing deadline between the end of the year and the filing due date, it is essential that you have all the complete and accurate filing information by early January.

We’ve Got Your Back

At KRS we assist our business clients with employer tax reporting as well as tax planning and compliance. Feel free to contact partner Maria Rollins at 201.655.7411 if you have any questions relating to the filing deadlines or any tax compliance issues.

Real Estate Trends – Foreign Sellers

Foreign Capital and U.S. Real Estate

Understand FIRPTA withholding rules There have been continued international capital inflows into U.S. real estate assets and the trend is expected to grow. Political uncertainty and global economic factors continue to drive foreign money into the United States, long considered a safe haven.

The U.S. property market is the most stable, transparent in the world, making it an easy investment choice. According to research firm Real Capital Analytics, foreign purchases of U.S. real estate assets rose to $62 billion over the 12-month period ending in October 2015.

It should be expected that these foreign investors will eventually reposition their assets and liquidate certain holdings based upon expected returns and market changes.

Understand the Foreign Withholding Rules

Buyers of real estate from foreign sellers, escrow agents and closing agents who close on such transactions need to be aware of the federal withholding requirements set in the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

Under FIRPTA, the buyer of U.S. real estate from a foreign person or entity must withhold tax equal to 10% of the “amount realized” from the sale. The amount realized includes the total amount received for the property including cash, the existing balance of mortgages encumbering the property, and any non-cash personal property.

Withholding under FIRPTA

Withholding is required when the seller is a foreign person (including non-resident alien individuals, partnerships, trusts and estates, and certain corporations domiciled outside of the United States). At or before the closing, if the seller signs a certification of non-foreign status stating under penalty of perjury that he is not a foreign person, the buyer can rely on that unless he has actual knowledge that it is not accurate. If the seller is able to sign the certification, no withholding is required, but the buyer must retain the certification for five years after the transfer.

If the seller is a foreign entity or person, the buyer must withhold the 10% and remit the tax to the IRS within 20 days of the date of closing. If the buyer fails to do so, the buyer is liable to the IRS for the tax that should have been withheld, plus penalties and interest.

Reduced Withholding

If the ultimate tax liability is expected to be zero or less than the required 10% withholding amount, the foreign seller can apply for a withholding certificate to request a reduction in the withholding amount. This is done by filing IRS Form 8288-B.

There are exceptions to the withholding requirements, including property used as a home and 1031 exchanges, but both are not without specific qualifications.

When purchasing real estate from a foreign seller, it is important for buyers to consult with their advisors to ensure compliance under FIRPTA.

At KRS CPAs, our team supporting commercial real estate is knowledgeable about FIRPTA rules and can assist you. Contact me at [email protected] or 201.655.7411.