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Tax Tip of the Week | Real Estate – Tax Basis April 24, 2019

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

In an earlier Tax Tip, different tax categories of real estate were briefly discussed. This week we will discuss how a tax gain or loss is treated upon sale by the various classifications as listed below:

1.    Principal residence – Your gain (loss) is calculated by subtracting your tax basis from your sales price. Your tax basis starts with your original cost, adds in any qualifying improvements, and includes most of the selling expenses you incur when sold. Provided certain tests are met, gain is excludable up to $500,000 on a joint return, or $250,000 for a single filer. Exception: Any depreciation taken after May 6, 1997 is usually taxable. Depreciation may have been taken on an office in the home or any business usage. Any loss upon the sale of a personal residence in non-deductible.

2.    Second home – Your tax basis is calculated in the same manner as a personal residence. Any gain is taxed as capital gain. No exclusion is allowed as with a personal residence. No one may designate more than one property as a personal residence. Just as with a personal residence, any loss upon the sale of a second home is non-deductible.

3.    Rental property – The tax basis is calculated in the same manner as a personal residence with one major exception.   Because rental properties are depreciated over time, basis has to be reduced by the depreciation allowed or allowable. Any gain on the sale of a rental property is taxed as capital gain. However, the gain attributable to the depreciation taken could be taxed as high as 25%. This in known as Section 1250 recapture. Any excess gain is taxed as normal capital gain with a maximum rate of 20%. A loss on the sale of a rental property is normally deductible as an ordinary loss (not subject to the $3,000 per year net capital loss limitation).

4.    Investment property – Depreciation is not normally allowed on investment property. A loss is deductible to the extent of capital gains plus $3,000 per year for joint or single filers, and $1,500 per year for a married filing separate return.

5.    Business property – Same as rental property above if owned individually.

6.    Gifted property – Your tax basis in a property received as a gift is the same as the basis was in the hands of the giver.

7.    Inherited property – Your tax basis in an inherited property is generally the fair market value of the property as of the date of death of the decedent, commonly called a “stepped-up basis”.

As noted above, gains and losses are often treated very differently depending upon the type of property. Please understand what your type of property is and that its character may change for a variety of reasons including your intentions. Being able to substantiate all of this may be important.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This week’s author – Norman S. Hicks, CPA

–until next week.

10 Tips for Tiger Woods (Professional Athletes) and the New Tax Law April 17, 2019

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

The odds are good that this Tax Tip of the Week won’t reach more than a handful of professional athletes and maybe not even that many. Regardless, in the world of tax, many similarities exist between a professional athlete and an employee who travels around the country. Sadly, those similarities are the only things that I will ever have in common with the likes of Tiger Woods, Lebron James, Stephan Curry and Tom Brady. The commentary below was taken from an article dated April 23, 2018 by Travis Tandy who is a staff accountant with Ferguson, Timar & Co in Fullerton California. As you read through this article, please note that the tax laws are no different for you than for a professional athlete, especially if your job necessitates travelling between various taxing entities and you have been itemizing your deductions in the past.

                                                        – Mark Bradstreet

Whether you’ve provided tax and accounting services for professional athletes in the past or are just getting started, you’ll want to pay special attention to these 10 key issues that are unique to this type of client. Adding to the special circumstances these athletes have faced in the past year is the new tax law. Many business expenses that are common among professional athletes are no longer deductible or are limited. Tax planning opportunities abound for this type of client as we all sort through the ramifications of the new Tax Cuts and Jobs Act. Here are some of the many things you’ll face.

1. Jock Tax: Under the terms of what is commonly called the “Jock Tax,” athletes must report their income in each state in which they play. An additional challenge from a tax planning standpoint is player trades during the year. We may set up a tax plan, only to have the player traded to a different state or team in which they will play in an entirely different set of states.

2. Residency: Establishing residency can be most challenging for rookie players. Rookies are often young and unestablished outside of their parents’ home state. Veteran players have the benefit of choosing a permanent residency based on their tax situation. The key is to establish residency in a favorable county near the home stadium. Establishing residency can be done simply by finding a living space, obtaining a driver’s license in that state and setting up utilities in the player’s name. Many players choose states like Florida, Texas, and Washington that have no state tax requirements.

3. Charitable Giving/Non-profit: Players can take advantage of their status to help others through charitable giving. This allows them to support a cause close to their heart. You can help by explaining the value of maximizing charitable donations.

4. Agent Fees & Unions Dues: As of the tax year 2018, union dues and agency fees directly related to the generation of W-2 income no longer qualify as an itemized deduction. Rookie players have minimum dues exceeding $17,000 per year and agent fees of around 3%. These once-deductible items will need to be removed from the player’s tax plans moving forward, or different tax structures need to be explored. However, we are working diligently to review the NFL Collective Bargaining Agreement in conjunction with the new tax laws in hopes of changing the way this is handled.

5. Player Fines: Nobody wants to see a situation where a player does something to generate a fine against them. The fines are often donated in the name of the player, turning the fine into a tax deductible expense to the player. Fines not donated to a charity may be considered a necessary and ordinary business expense to the player, subject to new and limiting tax rules.

6. Athletic Equipment: Footballs, golf clubs, tennis rackets, racquetball rackets, basketballs, etc. are considered ordinary and necessary for the player to continue to play at a high level, and to maintain their employment with their team. Again, new tax rules cause us to reexamine the nature of this former itemized deduction. Look for professional athletes to start incorporating themselves to take advantage of more favorable tax provisions.

7. Royalties: Royalties can sometimes be a difficult issue with athletes. Most are unsure of the amount due to them through the year, making tax planning for royalty income a difficult task. Royalty deals also come and go based on player performance. A fluctuation in a multi-million dollar royalty deal can really change the outcome of the player’s tax situation.

8. Unknown increased salaries: It doesn’t happen all that often, but a veteran player may get sent to the injured list for the season. This means a lower paid backup player will be used to replace the player. Players moving from the bench to a starting position receive a significant increase in pay. This can cause a change in their current tax rate and plan.

9. Signing bonuses: The benefit of a signing bonus all comes down to the form in which the bonus is paid out. If the bonus is paid out properly by the league, it may not need to be included in state income.

10: Taxable Swag: Gifts or swag given to players is not truly a gift and it actually comes with a price tag. The items are almost always given in connection with an appearance or as a bonus for the player’s appearance. Unfortunately, the IRS will want a cut of that swag in the form of a tax payment. These fortunate events create additional taxable income for the players often overlooked in the excitement and lack of notice from the agency providing the swag.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Mortgage and Real Estate Scams April 10, 2019

Posted by bradstreetblogger in : tax changes, Tax Tip, Taxes, Uncategorized , add a comment

Computer hackers/cyber-terrorists are drawn to money like moths to a flame. And, significant monies exist in the mortgage and real estate industries. These types of transactions often involve very large sums of money. Since most people purchase and finance real estate transactions only on a sporadic basis they tend to be very trusting not knowing anything differently. Also, many of these financial institutions have streamlined their process via the internet in an effort to reduce their own expenses. This streamlining opens the doors to the criminals who may even be working for another country. Clicking on this link and that link and not knowing what is really behind the curtain is dangerous. Don’t just assume the email addresses, accounts numbers, and phone numbers that were emailed or called to you are correct. This is true not only for those individuals that are not computer and internet savvy but for the general public as a whole. There is nothing ever wrong with sitting down across the table with your representatives from your financial institution and getting their assistance. Monies that have been incorrectly wired to another country are typically irretrievable. You cannot be too careful!

The accompanying article offers further valuable information. 

                                By Mark Bradstreet

The last thing consumers should have to worry about is being scammed when they buy or rent a home, or consider refinancing options. Unfortunately, criminals are getting more creative in how they target their victims, leading to major financial headaches for their unsuspecting victims.

In 2017 alone, 9,645 victims reported real estate fraud, resulting in losses of more than $56.2 million, according to data from the Federal Bureau of Investigation’s Internet Crime Complaint Center.

Many people are too embarrassed to file complaints, making it harder to catch the scammers who repeatedly victimize unwitting homeowners and homebuyers, says Melinda Opperman, executive vice president of community outreach and industry relations with Credit.org — a nonprofit credit counseling agency and member of the National Foundation for Credit Counseling, or NFCC.

“It’s a huge problem,” Opperman says. “A lot of the time, people don’t realize that using public Wi-Fi connections where they conduct personal business through email or websites opens them up to [these scams] because the communications are not secure.”

Here are four common real estate and mortgage scams to keep on your radar — and tips to avoid becoming a scammer’s next victim.

1. Escrow wire fraud

What it looks like: You get an email, phone call or text from someone purporting to be from the title or escrow company with instructions on where to wire your escrow funds. Fraudsters set up fake websites that appear similar to the title or lending company you’re working with, making it seem like the real deal. Scammers use spoofing tactics to make phone numbers, websites and email addresses appear familiar, but one number or letter is off — an easy thing to miss at first glance, Opperman says.

So you follow the wire instructions and assume all is well when, in fact, you’ve just become the latest victim of escrow fraud. The scammers? They’ve withdrawn the funds from an offshore account somewhere and are sailing into the sunset with your hard-earned money. Meanwhile, you have few options for retrieving it.

How to protect yourself: Before you send money to a third party, go back to the original documents you received from your lender and call the phone numbers listed there to verify the wiring instructions you received. Never click on email or text links, or send money online, without verifying wire instructions with a live person on the phone from a number that you’ve called and verified, Opperman says.

Be wary of any email or text requesting a change to wiring instructions you already have, says Odeta Kushi, senior economist with First American Financial Corporation. Always confirm the escrow account number before wiring money, and call your settlement agent to verify the transfer of the funds immediately after you’re done, she advises.

2. Loan flipping

What it looks like: Loan flipping is when a predatory lender persuades a homeowner to refinance their mortgage repeatedly, often borrowing more money each time. The scammer charges high fees and points with each transaction, and homeowners get stuck with higher loan payments they can’t afford after being duped into borrowing most of their home’s equity, Opperman says.

Seniors with memory impairment are especially vulnerable to these scams because they have significant home equity and may not realize they’re being taken advantage of, Opperman says. Predatory lenders convince homeowners they can help them find a better loan product or use a cash-out refinance to pay for home renovations to make their homes more accessible as they age in place, Opperman says.

How to protect yourself: Elderly homeowners who have cognitive issues should involve a trusted relative or friend in any key financial discussion, especially about tapping home equity. If you’ve recently completed mortgage refinance, it’s usually not in your best interest to do another transaction right away, Opperman says.

If predatory lenders are actively seeking you out and you haven’t requested their help, that’s another warning sign that something is off. Work only with known banks or lenders, and question all fees and penalties presented to you, Opperman says. Lenders are required to provide loan estimates and closing disclosures that list all fees and third-party costs; review these documents carefully, or have a trusted advisor do this, if you are refinancing your mortgage.

3. Foreclosure relief

What it looks like: People who fall on hard times and get behind on their mortgage payments can become desperate to save their homes. That’s when scammers, who have access to public records of homes in pre-foreclosure, swoop in with offers of foreclosure relief to capitalize on homeowners’ vulnerability, Opperman says.

“Scammers will claim that they can help homeowners save their homes and reduce their mortgage payments for a large, up-front fee,” Opperman says, “but they often leave our clients in worse financial shape.”

Some fraudsters claim they’re affiliated with the government or government housing assistance programs, and can swindle homeowners out of hundreds or even thousands of dollars in fees, according to the Federal Trade Commission, or FTC.

How to protect yourself: The best way to avoid foreclosure is to work directly with your loan servicer to modify your existing loan, request forbearance, or make some other arrangement. Homeowners can first enlist the help of a HUD-accredited housing counselor to see what options they have, then include their counselor on a three-way call to their lender to find solutions, Opperman says.

“A scammer will tell you not to talk to your lender, and that’s a huge red flag,” Opperman says. “It’s hard to speak to your lender when you’re in imminent default or become delinquent because you’re afraid it might speed up [losing your home]. But you have to open the lines of communication with your lender.”

4. Rental scams

What it looks like: Scammers post property rental ads on Craigslist or social media pages to lure in unsuspecting renters, sometimes using photos from other listings. The scammers, who have no connection to the property or its owner, will ask for an upfront payment to let you see the property or hold it as a deposit. In reality, they’re just looking to get quick cash through nefarious means.

Rental scams are alarmingly common. An estimated 5.2 million U.S. renters say they have lost money from rental fraud, according to a recent survey from ApartmentList. Younger renters are the likeliest victims, with 9.1 percent of 18- to 29-year-old renters having lost money on such a scam, compared with 6.4 percent of all renters, the survey revealed. And of those who did lose money to scammers, one in three lost more than $1,000, likely after paying a security deposit or rent on a fake rental property, ApartmentList found.

How to protect yourself: Be suspicious of anyone who asks for a cash deposit upfront to see a property, says Nicole Durosko of Warburg Realty in New York City. Ensure you’re dealing with the real property owner before negotiating rental terms or seeing a property in person. You can search the local property appraiser’s website to find out who the current property owner is and look for contact information online.

“Avoid doing transactions via email or on the phone,” Durosko says. “It’s best to be face-to-face to confirm the property ownership, sign any required documentation, and [make a] payment.”

Use a check (never cash) to make a payment so you have an automatic receipt of it, Durosko advises. Finally, always insist on speaking with the property owner before signing a contract or making a payment if someone says they’re representing the owner. If someone claims to be a real estate agent, ask to see their license and take a picture of it so you can confirm the information online through your state’s division of real estate licensing, Durosko says.

Next steps to take if you’re targeted

Trust your gut if something doesn’t feel right or seems too good to be true. Work with only professional lenders associated with local and/or national trade associations, and ask for referrals from family members and friends. If you’re an older homeowner (or a caregiver to someone who is), be on your guard when companies pressure you to tap your home equity.

If you suspect a scammer is trying to target you, don’t open any email links or respond to any messages. Instead, report the activity to your local police department. To report fraud, identity theft or financial scams, visit the FTC’s complaint website, click on the FTC Complaint Assistant icon, and answer the questions.

Credit given to:  DEBORAH KEARNS@DEBBIE_KEARNS JANUARY 16, 2019 in MORTGAGES (BankRate)

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | Trusts – The Very Basics April 3, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

While a trust may be considered an “entity”, it is actually a fiduciary relationship whereby a trustee holds legal title to property and has a duty to manage that property for the benefit of others (known as beneficiaries).

A trust is formed by a trust agreement. There are many types and purposes of trusts, so the trust agreement has to be written specifically to accommodate the goals of the one setting up the trust who is known as the grantor. Once the trust has been set up, the grantor, also referred to as the settlor, or trustor, can then transfer property to the trust to be managed by the trustee.

A trust can be revocable, or irrevocable. A revocable trust, sometimes referred to as a living trust, is generally set up by a grantor who is also the trustee and beneficiary, and who retains the power to revoke or amend the trust. These trusts are legal entities, but are disregarded for federal tax purposes. In fact, they usually use the social security number of the grantor, and all income is reported on the grantor’s tax return. As such, a revocable trust does not file its own return.

On the other hand, an irrevocable trust does usually need to file a tax return, and, depending on the trust agreement, any tax due will be paid by the trust, or by the beneficiaries, or in some cases, by both the trust and the beneficiaries. It is usually better tax-wise if the beneficiaries pay the tax due to the short tax brackets applicable to trusts (and estates). The highest tax rate for a trust is the same as an individual’s, 37% for 2018. However, the highest tax bracket for an individual for 2018 begins at a taxable income of $500,000, while the highest bracket for a trust begins at $12,500. Trusts can also be taxable at the state level. For Ohio, trust rules are governed by the Ohio Trust Code which was enacted January 1, 2007.

There are several reasons for setting up trusts. One is to avoid probate. Revocable living trusts are generally used for this purpose. A trust can help your estate retain privacy whereas the probate process creates a public record. In addition, probate fees can be significant.

Another reason for a trust is to help preserve estate exemptions. A-B trusts, also known as bypass or marital trusts, can be used for this purpose. Other types of trusts used for marital purposes include the QTIP Trust and the Power of Appointment Trust.

Irrevocable Life Insurance Trusts (ILIT’s) are used to prevent the taxability of life insurance within an estate. Dynasty Trusts are used to preserve assets for children and grandchildren or other beneficiaries. Incentive trusts can be used to encourage the behavior of beneficiaries, such as getting a college degree, or to address specific problems such as drug abuse. Special needs trusts can be set up for a physically or mentally disabled child. Spendthrift trusts can provide protection from creditors. Spendthrift clauses can be used in other types of trusts as well. Some additional types of trusts include the charitable remainder, charitable lead, Medicaid trusts, grantor retained annuity trusts, and numerous others.

The taxability of these trusts rests with the trust agreement. Before the trust agreement can be drafted, various questions must be answered. Some of the more important ones are:

•    How much control do I want?
•    Who will be the trustee and can the trustee be trusted?
•    Can I fire the trustee and name a new one?
•    Do I want to be able to revoke, or amend the trust?
•    Can I change the beneficiaries?
•    Do I want the income to be distributed?

As you can see, trusts and their taxation are very complicated. If you are considering setting up a trust, please seek the help of an attorney and a tax professional.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Norman S Hicks, CPA

–until next week.