Tag: capital gains tax

The Tax Cuts and Jobs Act (TCJA) and Code Section 1031

The Tax Cuts and Jobs Act (TCJA) and Code Section 1031The Tax Cut and Jobs Act (TCJA) was signed into law on December 22, 2017, and took effect on January 1, 2018. Included in the political promise of tax simplicity and historically large tax cuts to middle-income households were amendments to existing tax code, including Code Section 1031. Investment property owners will continue to be able to defer capital gains taxes using 1031 tax-deferred exchanges, which have been in the tax code since 1921.

What changes under the new tax law?

The tax law repealed 1031 exchanges for all other types of property that are not real property. This means 1031 exchanges of personal property, assets that can no longer be exchanged including collectibles, franchise licenses, and patents, aircraft, machinery, boats, livestock, and artwork.

What didn’t change for 1031 exchanges?

Real estate exchanges are subject to the same rules and requirements as prior law. Taxpayers must still identify their replacement within 45 days and exchange within 180 days. All real estate in the United States, improved and unimproved, also remains like-kind to all other domestic real estate.  Foreign real estate continues to be treated as not like-kind to real estate.

Are there timing considerations?

Pursuant to the transition rules, a personal property exchange to be completed in 2018 would be afforded tax deferral under the prior law if the relinquished property was sold or the replacement property was acquired by the taxpayer prior to December 31, 2017.

What about cost segregation?

A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income taxes. Taxpayers entering into a 1031 exchange who are contemplating a cost segregation study, need to consider the disallowance of personal property as like-kind to real property. Reclassifying asses to shorter recovery periods will increase annual depreciation deductions, but can potentially cause gain recognition from the exchange.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different, especially when real estate is involved – so don’t go it alone! Check out the New Tax Law Explained! for Individuals and then contact me at [email protected] or 201.655.7411 to discuss tax planning and your real estate investments under the TCJA.

 

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.

Tax Planning Strategies – Minimizing 2016 Individual Income Taxes

It is never too early to get a jump start on tax planning. Why not start now and minimize your end of the year holiday stress? These tax planning techniques could help you reduce 2016 taxes.

Make Charitable Contributions

Tax planning strategies for 2016Making charitable contributions is a great way to reduce your taxable income. The most common type of donation is a monetary contribution. Taxpayers are allowed to make tax deductible monetary contributions to qualified organizations in amounts up to 50% of adjusted gross income.

Additionally, donating securities is an excellent way to support a charitable organization and avoid paying capital gains tax.  When you donate securities that were held for more than one year, the contribution is deducted at fair market value and capital gains tax is avoided.  This strategy works best with appreciated securities.  Unlike monetary charitable contributions, donating securities to qualified organizations are limited to 30% of adjusted gross income.

Plan for Capital Gains

If capital gains are expected to be significant in 2016, consider selling some securities in your portfolio at a loss and generate capital losses. Capital losses are netted against capital gains to calculate the net taxable amount. Furthermore, if capital losses exceed capital gains, taxpayers may take a capital loss deduction up to $3,000 in the current year and carry forward the remainder to future years.

For example, if a taxpayer sells two securities, one with a gain of $50,000 and one at a loss of $65,000, a $3,000 capital loss deduction is allowed in the current year. The remaining $12,000 capital loss is carried forward to the following year.

Avoid Alternative Minimum Tax

The alternative minimum tax (AMT) has a significant impact on tax planning for high income individuals.  AMT limits certain benefits and itemized deductions you might otherwise be eligible to receive. In years where taxpayers will be subject to AMT, one strategy is to accelerate income or defer tax deductions. This will help avoid AMT either in the current year or over multiple years.

For example, if you are subject to AMT and will not receive any benefit for state tax payments in the current year, defer those payments, if possible, to the next year when you’re not subject to the AMT.

If you’re not in the AMT for the current year, pay any state taxes before the end of the year, which may be due in April, to accelerate the year of the tax deduction. The IRS has the following tax tool to help determine if you might be taxed under AMT (https://www.irs.gov/individuals/alternative-minimum-tax-assistant-for-individuals).

Prepay Deduction Items

Another way to reduce taxable income in 2016 is to prepay 2017 real estate taxes, state and local income taxes, and other miscellaneous itemized deductions.  Itemized deductions are recognized in the year they are paid, not the year they are due. If a taxpayer itemizes and has the option to accelerate 2017 expenses to 2016, this will increase deductions in 2016 which will decrease adjusted gross income.

Before implementing this strategy confirm you will not be subject to the AMT and your overall itemized deductions will be greater than the standard deduction. You should also consider itemized deduction limitations that may be greater due to higher income in 2016.

You may benefit from implementing at least one of these tax planning strategies. They are just a few of the methods to reduce taxable income and should be implemented on a case-by-case basis. At KRS we work with our clients to develop fluid tax plans and minimization strategies.

If you would like to learn more about tax planning and how to implement strategies to reduce your taxes, please contact Maria Rollins, CPA, to set up a consultation.

Choosing The Right Accounting Software

Get the Accounting Software Your Small Business Needs to Succeed

If you are looking for an accounting system for a small business you may want to start by reviewing the features included in prepackaged solutions such as QuickBooks or Xero. These are relatively inexpensive and can be set up and functioning quickly with some user training.

Businesswoman working on laptop.Depending upon the version purchased, these packages will offer the user the ability to perform basic bookkeeping functions such as

  • Creating estimates and invoices
  • Syncing bank or credit card accounts
  • Printing checks
  • Reconciling bank accounts
  • Exporting data to Excel
  • Maintaining a General Ledger
  • Providing basic financial reports such as Balance Sheet and Profit & Loss statements.

If not offered in the basic versions, more advanced features may include preparation and printing of 1099’s, payroll, inventory tracking, time & billing, budgets, and enhanced financial reporting. In addition to the pre-packaged accounting software, there are many add-on applications that can automate many business processes.  For example, applications are available to provide point of sale solutions, enhanced inventory management, paperless bill-pay processes, employee expense/reimbursement processing and sales tax automation. There are even CRM and document management add-on applications available to help manage and grow your business.

Do your homework before buying accounting software

Not every app will integrate with every software package or version so it is important to do your homework. And if remote access is important to you, many packages offer both cloud-based and desktop versions of their software. Be sure to compare the features offered in each since certain functionality may be available in one and not the other.

It is also important that the system you use for your business provide an audit trail and the ability to lock down closed accounting periods. These functions will protect the integrity of the data and limit unauthorized posting or deletion of data.

Accounting software for a growing business

So what do you do when you believe you have outgrown the small business packaged software solutions such as QuickBooks or Xero?

First, be certain that it is the accounting software that you have outgrown and not your operational software. For example, a large volume distributor may have intricate inventory management, markup and costing operational needs that are best managed through industry-specific operational software. If this is your dilemma, then it is not only necessary to evaluate the accounting functions of the software; most often, the operational functionality will take the lead in the selection process.

Although they are getting better, we often see excellent industry-specific operational systems that lack functionality and integrity on the accounting and financial reporting side. In these circumstances, it is important to determine if the benefits of operational reporting outweigh the accounting functionality. If so, some customized software enhancements may be needed at additional cost. These operational and accounting software packages will be much more costly than packaged software and require significant training for all users. Most often it is recommended to run a new system simultaneously with the prior system until the integrity of the data can be tested and trusted.

In either scenario your accountant should be able to help you in the software selection process. He or she should understand your business operations, user needs and reporting requirements and be able to offer valuable insight in your selection process. Your accounting software should allow you to process transactions efficiently and provide financial reporting that will help your business be more profitable.

If you have questions about choosing the right accounting software for your small business, KRS CPAs can help. Give me a call at 201.655.7411 or email me at [email protected]

Understanding IRC Code Section 1031 and Why You Should Care

Hint: it’s about deferring capital gain taxes

1031 exchange
1031 exchanges,also called like-kind exchanges, offer tax benefits when structured properly.

If you think this is one of those dry topics about taxes, think again. It’s important information for anyone selling a commercial real estate property who cares about being protected from capital gains taxes and growing their portfolio.

Continue reading “Understanding IRC Code Section 1031 and Why You Should Care”