Friday, October 7, 2016

Converting a home into rental property

You have decided to move to another residence, but find it difficult to sell your present home. One way to weather a soft residential selling market is to rent out your present home until the market improves. If you are thinking of taking this step, you no doubt are fully aware of the economic risks and rewards. However, you also should be aware that renting out your personal residence carries potential tax benefits and pitfalls.

You generally are treated like a regular real estate landlord once you begin renting your home to others. That means you must report rental income on your return, but also are entitled to offsetting landlord-type deductions for the money you spend on utilities, operating expenses, and incidental repairs and maintenance (e.g., fixing a leak in the roof). Additionally, you can claim depreciation deductions for your home. You can fully offset your rental income with otherwise allowable landlord-type deductions. However, under the tax law passive activity loss (PAL) rules, you may not be able to currently deduct the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won't affect your converted property for a tax year in which your adjusted gross income doesn't exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don't exceed $25,000.

You should also be aware that potential tax pitfalls may arise from the rental of your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for home sellers if you finally sell the home at a profit. In general, you can escape taxation on up to $250,000 ($500,000 for certain married couples filing joint returns) of gain on the sale of your home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So renting your home out for an extended time could jeopardize a big tax break. Even if you don't rent out your home so long as to jeopardize your principal residence exclusion, the tax break you would have gotten on the sale (i.e., exclusion of gain up to the $250,000/$500,000 limits) will not apply to the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997, or to any gain allocable to a period of nonqualified use (i.e., any period during which the property is not used as the principal residence of the taxpayer or the taxpayer's spouse or a former spouse, such as a rental) after Dec. 31, 2008. A maximum tax rate of 25% applies to this gain (attributable to depreciation deductions).

Some homeowners who bought at the height of a market may ultimately sell at a loss. In such situations, the loss is available for tax purposes only if the owner can establish that the home was in fact converted permanently into income-producing property, and isn't merely renting it temporarily until he can sell. Here, a longer lease period helps an owner. However, if you are in this situation, you should be aware that you probably won't wind up with much of a loss for tax purposes. That's because basis (cost for tax purposes) is equal to the lesser of actual cost or the property's fair market value when it's converted to rental property. So if a home was bought for $300,000, converted to rental property when it's worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.

The question of whether to turn a principal residence into rental property isn't easy to resolve. We can review your situation in detail and guide you to an answer that makes the most sense for you.  Contact us at

Wednesday, September 7, 2016

Retention of Tax Records

How long you should retain your personal income tax records? You may have to produce those records if IRS (or a state or local taxing authority) audits your return or seeks to assess or collect a tax. In addition, lenders, co-op boards, or other private parties may require that you produce copies of your tax returns as a condition to lending money, approving a purchase, or otherwise doing business with you.
Keep returns indefinitely and the supporting records usually for six years. In general, except in cases of fraud or substantial understatements of income, IRS can only assess tax for a year within three years after the return for that year was filed (or, if later, three years after the return was due). For example, if you filed your 2015 individual income tax return by its original due date of April 18, 2016, IRS will have until April 18, 2019, to assess a tax deficiency against you. If you file your return late, IRS generally will have three years from the date you filed the return to assess a deficiency.
However, the three-year rule isn't ironclad. The assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, where no return was filed for a tax year, IRS can assess tax at any time (even beyond three or six years). If IRS claims that you never filed a return for a particular year, keeping a copy of the return will help you to prove that you did.
While it's impossible to be completely sure that IRS won't at some point seek to assess tax, retaining tax returns indefinitely and important records for six years after the return is filed should, as a practical matter, be adequate. If you file a return electronically, the company that prepared and/or filed your return is required to provide you with a paper copy of the return. Be sure to get and retain that copy.

Property Records
Records relating to property may have to be kept longer. The tax consequences of a transaction that occurs this year, such as a sale of property, may depend on events that happened years ago. The period for which you should retain records must be measured from the year in which the tax consequences actually occur.

Separation or Divorce
If separation or divorce becomes a possibility, be sure you have access to any tax records affecting you that are kept by your spouse. Or better still, make copies of the tax records, since relations may become strained and access to the records may be difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return, and a deficiency may be asserted against either spouse.
Your records should include a copy of the divorce decree or agreement of separate maintenance, which may be needed to substantiate alimony payments and distinguish them from child support or a property settlement. Your records should also include agreements or decrees over custody of children and any agreements about who is entitled to claim an exemption for them.
Retain records of the cost of all jointly-owned property. Also, get records as to the cost or other basis of all property your spouse or former spouse transferred to you during your marriage or as a result of the divorce, because your basis in that property is the same as your spouse's or former spouse's basis in it was.

Electronic Records Storage
You may keep your records in electronic form instead of or in addition to keeping paper copies. The periods for which the records should be kept are the same as for paper records. If your tax records are stored on your computer's hard drive, you should back it up to an external storage device or on paper.
To safeguard your records against loss from theft, fire or other disaster, you should consider keeping your most important records in a safe deposit box or other safe place outside your home. In addition, consider keeping copies of the most important records in a single, easily accessible location so that you can grab them if you have to leave your home in an emergency.

Loss of Records
If, in spite of your precautions, records are lost or destroyed, it may be possible to reconstruct some of them. For example, a paid tax return preparer is required by law to retain, for a period of three years, copies of tax returns or a list of taxpayers for whom returns were prepared. Most preparers comply with this rule by retaining copies (sometimes for a longer period than the legally required three years) and can furnish a copy if yours is not available.
 Similarly, other professionals who assisted you in a transaction may retain records relating to the transaction. For example, a stockbroker through whom you bought securities may be able to help you to determine the basis of the securities, and an attorney who represented you in the purchase of your home may retain records relating to the closing.
Nonetheless, because you can never be sure whether third parties will actually have the records you need, the safest course of action is to keep them yourself, in as safe a place as possible.

If you have any questions or wish to discuss this matter further, please let us know.

Friday, February 5, 2016

2015 Tax Law Changes You Won't Want to Miss!

Tax laws constantly changing can be confusing for most taxpayers. Often times, tax laws are changed with few people outside the tax profession ever noticing. Some provisions to tax laws are still being phased in from prior years and there are uncertainties about which tax breaks will be extended for future years.

In 2015, congress passed the “Protecting Americans from Tax Hikes Act of 2015” (PATH), which brought relief of uncertainties for many tax laws. We have outlined some important changes, permanent provisions, and extended provisions, that were included in the PATH bill.

Changes in 2015

Health Insurance Penalty

If you did not have full health coverage in 2014 and did not qualify for an exception, chances are you only paid $95 per person or 1% of your household income as a penalty.

For 2015, this penalty is significantly increased. If you are not fully covered by health insurance and do not quality for an exception, you will be paying $325 per person or 2% or your household income, whichever is greater.

Caution: Some exceptions require you to apply for a certificate from the state or federal marketplace. This needs to be done promptly in order to have the required exemption certificate number for the tax return.

IRA Rollovers

Before 2015, taxpayers could easily “borrow” retirement money by withdrawing funds from one IRA and waiting 60 days before they rolled it over into another IRA. Taxpayers did not have a limit on the amount of rollovers.

As of 2015, taxpayers are limited to one rollover in a 12-month period. However, if you are moving IRA funds using “trustee-to-trustee” transfers, there is no limit.

Some Individual Provisions Made Permanent

Enhanced Child Tax Credit: In addition to a $1,000 credit per qualifying child, parents are entitled to an additional refundable credit equal to 15% of earned income in excess of $3,000. In 2017, the threshold would have been raised back to $10,000; however, the $3,000 threshold was made permanent.

Enhanced American Opportunity Tax Credit: Taxpayers are entitled to a $2,500 credit for four years of post-secondary education, with phase-outs beginning at $80,000 (if single) and $160,000 (if married filing jointly). The credit would have been reduced to $1,800 with lower phase-out thresholds in 2017; however, the $2,500 credit was made permanent.

Enhanced Earned Income Credit: The enhancements to the Earned Income Credit were set to expire in 2017. The passing of the PATH bill made the enhanced credit for families with three or more children permanent and increased the phase-out for married couples filing jointly to $53,267.

Educator Expense Deduction: The $250 educator expense deduction for K-12 supplies is now a permanent deduction. Furthermore, the deduction will be indexed for inflation, meaning educators will be receiving a higher deduction in future years.

Charitable Donations: The deduction for charitable contribution of real property for conservation purposes is now permanently allowed. Taxpayers over 70 ½ may make donations directly from an IRA and will not be taxed on the amounts (up to $100,000). A shareholder in an S Corporation will be required to reduce his/her basis in the S Corporation’s stock under Section 1366 only for his/her share of the basis of property contributed by the S Corporation; not the fair market value.

Individual Provisions Extended

Bonus Depreciation: The 50% bonus depreciation was extended for property placed in service during 2015 through 2019; the 50% rate is phased down to 40% for property placed in serviced during 2018 and 30% for property placed in serviced during 2019

Energy Incentives: A $500 credit for the purchase of certain non-business energy-efficient property has been extended for two years. Also, Section 179 expensing of certain heating, cooling, and lighting improvements to commercial property has been extended for two years.

Business Provisions Made Permanent

Enhanced Section 179 Deduction: The Section 179 Deduction limit is now permanent at the $500,000 level. However, businesses exceeding a total of $2 million of purchases in qualifying equipment have a phase-out dollar-for-dollar and completely eliminated about $2.5 million. Additionally, the Section 179 Deduction will be indexed to inflation in $10,000 increments in future years.

Abbreviated 15-Year Life: Qualified retail, restaurant, and retail improvements can be depreciated over the shortened 15, rather than 39, year recovery life. This abbreviated asset life has been made permanent.

Thursday, November 5, 2015

10 Money-Saving Tips You Don't Want To Miss

“It’s not your salary that makes you rich; it’s your spending habits” – Charles A Jaffe

Have you ever looked at your bank account and it’s a lot lower than you expected? You aren’t alone. More than half of Americans feel they have financial problems and are underprepared for financial emergencies. It can be difficult to figure out where to start, but we’ve got 10 tips to help get your finances on track.


Bend, Don’t Break! Learning how to budget is the first step on the path to financial stability.

A budget is a breakdown of what you have coming in each month versus what you’re spending. The goal with a budget is to know exactly where your money is going so you can make sure it fits your needs.  Monitoring your budget takes time and effort, but it can help you avoid the dreadful feeling that comes with not having enough money when you need it.

Emergency Fund

The rule of thumb is to save enough to cover three to six months of living expenses. The reality is: it depends on your situation.

Your emergency fund is money set back to pay for expenses and debt should your worst-case scenario happen to you.

Retirement Plan Contributions

Would you turn down free money!? A 401(k) or similar employer-sponsored retirement plan can be a powerful resource for building a secure retirement. Many employers will match part of your contributions, which means: Free Money!

Don’t ignore low income earning years either.  If you are making less than $30,500($61,000 joint) you may be eligible to receive a tax credit for retirement contributions that you make – up to 50% of your contribution.

Section 125 Plan

Medical and Childcare expenses add up quickly, but if your employer offers a Section 125 Plan, you could be saving a minimum of 25% in taxes on those expenses.

A Section 125 Plan allows you to pay medical and childcare expenses pre-income and employment taxes. The employer plan offers the largest savings, but there is also a tax credit available on your tax return, if you don’t use a 125 plan.

Eliminate Personal Loans

Plain and simple: Interest on personal loans is non-deductible. This means you are not getting any benefit by paying interest on these types of loans.

The faster you pay off loans that have non-deductible interest, the more money you will be saving.

Buy a House

Once you have enough saved to put 10% toward a down payment, buy a house as soon as possible.

Banks will normally allow you to borrow up to 90% of the value of a home. But, beware of PMI! You can avoid paying mortgage insurance (PMI) by using an 80% mortgage and a 10% home equity loan. This will also lower your monthly mortgage payments!

Health Savings Account

Paying for your own health insurance? Consider buying a high deductible health insurance plan and contributing to a Health Savings Account (HSA).

A high deductible health insurance plan can cost less than other health plans, covers the entire family under one deductible per calendar year, and pays 100% of covered expenses after the deductible is met. It also makes what would likely be nondeductible out of pocket medical expenses actually become pre-tax. 

Contributions to a HSA are tax deductible and can be used toward your out of pocket medical costs. With a HSA, distributions (including earnings) are not taxed as long as you use them for qualifying medical expenses.   The HSA account is yours and can be used for your family’s medical expenses anytime in the future.

Roth IRA

Holding off on saving for your retirement now – in the hopes of making up for it later – could be the costliest mistake you ever make.

Roth IRAs offer tax-free growth on earnings, qualified distributions are entirely free from tax, and contributions can be withdrawn any time. You can’t afford not to have one – unless you make too much money at which point the IRS does in fact tell you that you can’t have one!

Deductible IRA

Really need a tax deduction?

Deductible IRAs allow you to make contributions that are deductible on your tax return.  The rules get a little tricky if you have a retirement plan at work but you should still see if you are eligible. Earnings are tax-free, but watch out for distributions because they are taxable and required once you reach age 70!

Eliminate Debt

Making extra payments on your loans will reduce interest and allow you to pay them off sooner. Imagine how much more fun and freedom you can have without any debt hanging over your head.