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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.

Tax Tip of the Week | No. 336 | The Tax Extenders in Detail January 6, 2016

Posted by bradstreetblogger in : Deductions, General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | January 6, 2016 | No. 336 | The Tax Extenders in Detail

Congress finally passed “The Protecting Americans from Tax Hikes Act of 2015”. This was the long anticipated bill that will finally extend more than 50 tax provisions that have left tax payers in doubt over the last several years.  One nice thing about this last-minute tax bill, unlike in prior years, is that many of the tax laws have been marked permanent. Others have been extended through 2019 and others through 2016.  So we will at least know what the tax laws will be for two whole years! The following is a summary of the major “Extender” changes:

Permanent Changes:

The Research & Development credit;

Increased expensing limitations and treatment of certain real property as Section 179 property;

The exclusion of 100% of gain on certain small business stock;

Reduction in S corporation recognition period for built-in gains tax;

The enhanced Child Tax Credit;

The enhanced American Opportunity Tax Credit;

The enhanced Earned Income Tax Credit;

The deduction for certain expenses of elementary and secondary school teachers;

The deduction of state and local general sales taxes;

The special rule for contributions of capital gain real property made for conservation purposes;

Tax-free distributions from individual retirement plans for charitable purposes;

The charitable deduction for contributions of food inventory;

The tax treatment of certain payments to controlling exempt organizations;

Basis adjustment to stock of S corporations making charitable contributions of property;

The employer wage credit for employees who are active duty members of the uniformed services;

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;

The treatment of certain dividends of regulated investment companies;

The Subpart F exception for active financing income;

The minimum low-income housing tax credit rates for non-federally subsidized buildings;

The following provisions were extended and modified through 2019:

Bonus depreciation, at 50 percent for 2015-2017 and phased down to 40 percent in 2018 and 30 percent in 2019;

The Work Opportunity Tax Credit, modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) to 40 percent of the first $6,000 of wages;

The New Markets Tax Credit, providing $3.5-billion allocation each year through 2019, the carryover period for the credit has also been extended to 2024.

And the following are revived and extended through 2016:

Modification of the exclusion of mortgage debt discharge;

Mortgage insurance premiums treated as qualified residence interest;

The above-the-line deduction for qualified tuition and related expenses; and,

Over a dozen incentives for energy production and conservation.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 327 | Expired Tax Provisions: No Relief in Sight? November 4, 2015

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

Tax Tip of the Week | November 4, 2015 | No. 327 | Expired Tax Provisions: No Relief in Sight?

For the last several years, taxpayers have faced great uncertainty determining whether they can depend on tax incentives to help them lower taxes.  These have become known as the “51 Tax Extenders”.  Last December, Congress extended most of these provisions for one year retroactively to the beginning of 2014, but not going forward, so they expired again at the end of 2014.

Unlike many previous years, Congress did not spend much time or effort this summer working to fix the extenders situation.  So, as we enter the last quarter of 2015, with most of the tax incentives expired, it’s a good time to review which provisions might get a last minute reprieve.

We will look at the major pending extenders for individuals, businesses and energy-related provisions:

–    Educator’s $250 above-the-line deduction for classroom supplies
–    Exclusion from income for discharge of debt on a primary residence
–    Deduction for mortgage insurance premiums (PMI)
–    Deduction of sales taxes in lieu of state/local taxes
–    Special rules for capital gain treatment of conservation easements
–    Option to use above-the-line deduction for tuition expenses
–    Option for those over age 70.5 to make tax-free contributions in lieu of taking taxable RMDs.

–    Research & Development credit
–    Employee wage credit for active duty and reserve military employees
–    15-year straight line cost recovery for leasehold improvements
–    Section 179 and Section 168 accelerated depreciation options on capital purchases

Energy-related tax incentives
–    Several credits for renewable and energy-efficient fuels
–    Several credits for energy-efficient building construction

If history is any guide, and Congress finally acts, it will be at the last minute. This makes tax planning on many issues nearly impossible.  With the election nearing, the situation this year may be worse than normal.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.

Tax Tip of the Week | No. 284 | Tax Extenders Passed January 7, 2015

Posted by bradstreetblogger in : General, Section 168, Section 179, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Tax Tip of the Week | Jan 7, 2015 | No. 284 | Tax Extenders Passed

In case you didn’t hear…

Just before Christmas, Congress finally passed the “tax extenders” for 2014. These “extenders” refer to a set of about 60 tax incentives that are scheduled to lapse after a certain number of years.  We have seen Congress act at the last minute three times in the past:  October 2008, December 2010 and January 2013.

Perhaps Finance Chairman Ron Wyden (D-, Oregon) said it best: “Congress is turning in its tax homework eleven-and-a-half months late and expects to earn full credit”.

In any event, we now know for sure that we can use the following popular tax breaks when preparing your 2014 tax return:

–    Section 179-businesses can elect to immediately deduct up to $500,000 for equipment purchases vs. depreciating over a number of years
–    Bonus Depreciation- allows businesses to claim an additional 50% first year depreciation on new equipment purchases
–    Teachers Classroom Expense Deduction- $250 maximum
–    Mortgage Insurance Premium Deduction (PMI)
–    Higher Education Deduction- $4,000 maximum
–    State and Local Sales Tax Deduction-in lieu of income tax deduction
–    Mortgage Debt Exclusion-if primary home is foreclosed
–    Charitable Distributions from IRAs –if over 70.5 years old
–    Charitable Deduction if making a Conservation Easement
–    Research Tax Credit
–    Work Opportunity Tax Credit
–    100% Exclusion for Gain on Qualified Small Business Stock

These are only some of the most commonly used tax incentives that were extended for 2014.  Also note that all of these incentives are subject to various rules and regulations.

Also be aware that Congress granted these extensions for 2014 only! Hopefully, we will not have to wait so long to know what the 2015 tax code will look like.

We’ll keep you posted.


You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.