Month: December 2019

Determining Basis of a Principal Residence

Selling your home? Understand ‘basis’ to save tax dollars.

Determining Basis of a Principal Residence
You are probably aware you may be able to claim itemized deductions on your income tax return for real estate taxes and home mortgage interest. Most other home ownership costs are not currently deductible. However, many of these costs will increase your “basis” in the home.

For instance, if part of the home qualifies as a home office or if you rent out a portion of the house, a higher basis translates into a larger annual depreciation deduction. A higher basis can also save tax dollars when you sell the home.

Gain Exclusion

The tax law allows an exclusion from income for the part of the gain realized on the sale of one’s home. The exclusion is $250,000 for single and $500,000 for most married taxpayers.

Some practitioners feel the amount of the exclusion makes keeping track of the basis in the home relatively unimportant. I disagree, as more homes are being sold for greater than $500,000, and more are being sold for gains approaching that amount.

Costs That Are Basis and Additions to Basis

To be able to prove the amount of your basis, you must keep accurate records of your purchase price, closing costs and other purchase expenses, and any later expenses that increase your basis.

Save receipts and other records for all improvements and additions made to your home. Since this is likely to continue for a long period, you should keep these documents together in a folder or binder with a summary list from which you can easily determine your basis at any time. When you eventually sell your home, your basis will establish the amount of your gain. The supporting documentation should be kept for at least three years after you file your return for the sale year.

The principal element in the basis of your home is its purchase price. If you contract to have your house built on land you own, the basis is the cost of the land plus the amount it cost you to complete the house. This includes the cost of labor and materials, or the amounts paid to the contractor, and any architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building the home.

If you build all or part of the house yourself, basis includes the total amount it cost you to complete it. Basis will not include the value of your own labor, or any labor you didn’t pay for.

Costs That Don’t Add to Basis

Amounts spent on the home that do not add to either the value of the life of the property, but rather keep the property in good condition, are considered repairs, not improvements, and cannot be added to the basis of the property. Repairs include:

  • interior or exterior repainting,
  • fixing gutters or floors,
  • repairing leaks or plastering, and
  • replacing broken window panes.

However, an entire job is considered an improvement if items that would otherwise be considered repairs are done as part of extensive remodeling or restoration of the home.

The cost of appliances purchased for the home generally don’t add to basis unless the appliance is considered attached to the house. Thus, the cost of a built-in oven or range would increase basis. However, an appliance that can easily be removed, such as a television set or home entertainment center, would not.

Need Help Determining Your Home’s Tax Basis?

Put the Real Estate Tax Guy on your team. For additional information on the basis of your home, contact me at [email protected] or (201) 655-7411.

Adjusting Your Income Tax Withholding

Adjusting Your Income Tax WithholdingWhen should you revise your tax withholding?

If you receive a large refund from the IRS when filing your income tax return, or owe the IRS a substantial amount when filing, you should consider adjusting your income tax withholding.

Your income tax withholding is based on the number of allowances you claim on your Form W-4, Employee’s Withholding Allowance Certificate. This form is typically filled out when you first start a job with your employer. This determines the amount of income tax that comes out of your paycheck each pay period.

If your withholding is too high, you are, in effect, giving the IRS an interest free loan. Although the overpaid tax will be refunded when you file your return, it would have been better for you to have access to these funds throughout the year. In this case, you should reduce the amount your employer withholds to increase your pay in your paycheck.

Do you owe the IRS too much?

On the other end, there are taxpayers who owe the IRS large balances when filing their taxes. Yes, they have access to their money all year long, but they will have to pay this back on April 15th. Most of the time, this repayment comes with tacked-on interest and penalties from the IRS.

It is your responsibility to change your withholding with your employer. At any time, you can provide them with an updated Form W-4 and adjust your withholding.

When to review your withholding

You should check your withholding anytime there is a significant financial change in your life, including the following:

– You getting married, divorced, or having children.
– Increase or decrease in working wages.
– You or your spouse start or stop working, start a second job.
– Changes in deductions such as: buying house, paying for child care, medical expenses.

It is never too late to change your withholding for the current year. If you believe that you may be substantially over or under withheld, you can make the necessary adjustments to correct that. This is one of the more complex issues that a taxpayer faces.

We’ve got your back.

If you think your situation calls for a withholding adjustment, please contact us today. Contact KRS manager Lance Aligo, CPA, MAS at [email protected]  or 201-655-7411.

What to Know About the Qualified Business Income Deduction

Does your business qualify as a pass-through for tax purposes?

If you’re an entrepreneur and you’ve heard other business owners talking about the qualified business income deduction (also called Section 199A), you’re probably asking yourself, “Should I incorporate to help save on taxes?” and “What entity should I select?”

Qualified Business Income DeductionLots of business folks want to form an LLC because it can save you money on taxes, but there’s a caveat. The new tax law’s 20% deduction on qualified business income is subject to limitations that keep it from being just a giveaway for anyone who runs a business.

To qualify for the full deduction, your taxable income must be below $157,500, or $315,000 if you’re married and you and your spouse file jointly. If your income is below the threshold, you may take the deduction no matter what business you’re in. But if your income is higher, there are limits on who can take the break.

Some fine print about qualified businesses

  • What exactly is a qualified business? The IRS notes this break is for sole proprietorships, partnerships, S corporations, and some trusts and estates. C corporations are specifically excluded.
  • There are special rules and limits for “specified service trades or businesses.” The IRS defines these as businesses such as health, law, accounting, among others, “where the principal asset is the reputation or skill of one or more of its employees or owners.”
  • The deduction doesn’t lower your adjusted gross income, and you don’t have to itemize on your taxes to take it.
  • If you qualify, the 20% break will apply to the lesser of your qualified business income or your taxable income minus capital gains.
  • There’s a wage and capital limitation: it is the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted basis of all qualified property. There is a 20% deduction of REIT dividends and distributions from publicly traded partnerships.
  • In counting qualified business income, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans like SEPs, SIMPLEs and qualified plan deductions are included.
  • You have to decide how you should set up your business. As noted above, multiple entities are eligible for the pass-through treatment, but there are other implications you need to consider, such as how Social Security taxes will be paid.
  • Finally, don’t assume that the creation of a pass-through entity automatically creates a windfall. You’ll want to weigh how much you’ll save on taxes versus how much you’ll pay to set up an eligible entity.

How can you optimize the deduction?

Here are a few ways:

  • Consider operating as a PTP, or publicly traded partnership, which is not subject to the W-2 wage limit or the qualified property cap.
  • Consider multiplying the $157,500 per person threshold by gifting business ownership interest to children or non-grantor trusts.
  • For partners, consider switching from guaranteed payments, which don’t qualify, to preferred returns, which do.

This is just an introduction to a complex topic. Also, new guidance from the IRS may change some of the details, which means many provisions are not etched in stone. For example, the IRS issued in late September Revenue Procedure 2019-38, which offers a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the QBI deduction, under Section 199A.

KRS has your back on understanding pass-through entities

Be sure to get professional advice to make sure you’re making the right decisions about your pass-through entity. KRS CPAs offers unbiased financial and tax guidance to help you with this complicated subject. Contact us today for a complimentary initial consultation.

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