Retirement Plan and IRA Rollover Advice

When moving your retirement money to an IRA, you should follow this one rule of thumb.

If you fail to follow the rule I’m about to reveal, you can face two big problems.

• First, your check will be shorted by 20 percent.
• Second, you will be on the search for replacement money.

Here is this very important rule of thumb that you need to follow: Move the money using a trustee-to-trustee transfer. Nothing else.

There are two types of transfers that can be used to move qualified plan distributions into IRAs in a tax-free manner: (1) direct (trustee-to-trustee) rollovers and (2) what we will call traditional rollovers.

If you want to do a totally tax-free rollover, do nothing other than the direct (trustee-to-trustee) rollover of your qualified retirement plan distribution into the rollover IRA.

This is easy to do. Simply instruct the qualified plan trustee or administrator to (1) make a wire transfer into your rollover IRA or (2) cut a check payable to the trustee of your rollover IRA (this option is less preferable than a wire transfer).

Your employee benefits department should have all the forms necessary to arrange for a direct rollover.

If you want to discuss the trustee-to-trustee rollover with me, please don’t hesitate to call me on my direct line at (805) 264-3305.

Sincerely,
Bob
Robert W Craig, EA Tax Services

P.S. Also use the trustee-to-trustee rollover when moving your IRA to another IRA.

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Tax Traps to Avoid in Retirement

Tax Traps to Avoid in Retirement
By Charles Sherry, M.Sc.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world, nothing can be said to be certain, except death and taxes.”

It’s a quote that comes down to us from Benjamin Franklin, who uttered the phrase in 1789.

Taxes–federal, state, local, sales tax, property tax, gasoline tax, payroll tax, tolls, fees, taxes on capital gains, dividends and interest, gift tax, inheritance tax, and cigarettes and alcohol. There has even been a rising chorus that is calling for a special tax on junk food.

Yes, Ben Franklin nailed it. We can’t escape taxes. Before we jump in, let me say that this is a high-level summary. It’s designed to educate and avert surprises. Planning for tax outlays doesn’t reduce the discomfort that goes with paying Uncle Sam. But preparation can reduce the tax bite and eliminate unexpected surprises.

As I always emphasize, feel free to reach out to me with specific questions, or consult with your tax advisor.

That said, let’s get started.

1. Estimated quarterly tax payments may be required.

If you have never been self-employed, you are accustomed to having federal, state (if your state has an income tax), and payroll taxes withheld from each paycheck.

When you stop working, there are no more W-4s to complete and no one is withholding taxes for you. But that doesn’t absolve you of your year-end tax liability.

You can make estimated payments each quarter. You can also have taxes withheld from your pension, social security, or IRA distribution.

If you have yet to file for social security, you may choose to have Social Security withhold 7%, 10%, 12% or 22% of your monthly benefit for taxes. Or you may decide not to have anything withheld.

But make sure enough is withheld or your estimated quarterly payments are sufficient. Otherwise, you may face a penalty.

Does it sound complicated? You don’t have to go it alone. Tax planning is a part of retirement income planning. If you have any concerns or questions, please reach out to me.

Check out this IRS link: https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

Link to IRS Withholding Calculator: https://www.irs.gov/payments/tax-withholding

2. Social security may be taxed.

If you file as an individual and your combined income (adjusted gross income?+ nontaxable interest?+?half of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

If the total is more than $34,000, up to 85% of your benefits may be taxable. Additionally, 13 states–Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia–tax Social Security.

3. Beware of the required minimum distributions for retirement accounts.

Let me put this right up front: failure to take the required distribution could subject you to a steep penalty.

Required minimum distributions (RMDs) are minimum amounts that retirement plan account owners must withdraw annually starting with the year they reach 70½ years of age or, if later, the year in which they retire.

However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, RMDs must begin once the account holder is 70½, regardless of whether he or she is retired (IRS: Retirement Plan and IRA Required Minimum Distributions FAQs).

RMDs are not required for Roth IRA owners.

The first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year.

The RMD rules also apply to SEP IRAs and Simple IRAs, 401(k), profit-sharing, 403(b), 457(b), profit sharing plans, and other defined contribution plans.

If you expect to have large RMDs that could push you into a higher tax bracket, it may be beneficial to begin taking distributions prior to 70½. Or, you could convert some of your IRA into a Roth, which will help shelter gains and future distributions from taxes. You pay a tax upfront, but it’s one strategy that can help minimize taxes long-term.

4. The hidden cost of selling your primary residence.

Downsizing can generate cash and reduce your daily expenses. But beware that it may also trigger a tax liability.

If you’ve lived in your primary residence for at least two of the last five years prior to selling, you can exempt up to $250,000 of the profit from taxes if you are single and up to $500,000 if you are married. If you are widowed, you may still qualify for the $500,000 exemption (IRS: Publication 523 (2017), Selling Your Home).

The sale may also trigger the 3.8% tax on investment income. It’s a complex calculation that can ensnare single filers who have net investment income and modified adjusted gross income above $200,000 and $250,000 for married filers. (IRS: Questions and Answers on the Net Investment Income Tax).

The decision to sell shouldn’t be strictly governed by the tax code. However, it’s important to understand the tax ramifications. Timing income streams might be beneficial if a sale will trigger a taxable event.

There are other methods to lower your taxes, including charitable donations. How we structure retirement income, your investments, and distributions from retirement accounts can help to reduce the tax burden. If you need assistance on any of the points I’ve shared, we are happy to assist. Please email me at rcraig1044@aol.com or call me at (805) 264-3305 and we can talk.

Bob

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Proving Travel Expenses After Tax Reform 2018

As you likely know by now, your travel meals continue under tax reform as tax-deductible meals subject to the 50 percent cut.

And tax reform did not change the rules that apply to your other travel expense deductions.

One beauty of being in business for yourself is the ability to pick your travel destinations and also deduct your travel expenses. For example, you can travel to exotic locations using the seven-day travel rule and/or attend conventions and seminars in boondoggle areas.

From these examples, you can understand why the IRS might want to see proof of your business purpose for any trips, should it examine them.

With deductions for lodging, a meal, or other travel expenses, the rules governing receipts, business reasons, and canceled checks are the same for corporations, proprietorships, individuals, and employees. The entity claiming the tax deduction must keep timely records that prove the four elements listed below:

1. Amount. The amount of each expenditure for traveling away from home, such as the costs of transportation, lodging, and meals.
2. Time. Your dates of departure and return, and the number of days on business.
3. Place. Your travel destination described by city or town.
4. Business purpose. Your business reason for the travel, or the nature of the business benefit derived or expected to be derived.

When in tax-deductible travel status, you need a receipt, a paid bill, or similar documentary evidence to prove:

• every expenditure for lodging, and
• every other travel expenditure of $75 or more, except transportation, for which no receipt is required if one is not readily available. I suggest saving ALL receipts regardless of amount.

The receipt you need is a document that establishes the amount, date, place, and essential character of the expenditure.

Hotel example. A hotel receipt is sufficient to support expenditures for business travel if the receipt contains:

• the name of the hotel,
• the location of the hotel,
• the date, and
• separate amounts for charges such as lodging, meals, and telephone.

Restaurant example. A restaurant receipt is sufficient to support an expenditure for a business meal if it contains the:

• name and location of the restaurant,
• date and amount of the expenditure, and
• number of people served, plus an indication of any charges for an item other than meals and beverages, if such charges were made.

You can’t simply use your credit card statement as a receipt. Like a canceled check, it proves only that you paid the money, not what you purchased. To prove the travel expenditure, you need both the receipt (proof of purchase) and the canceled check or credit card statement (proof of payment).

In a nutshell, a travel expense is an expense of getting to and from the business destination and an expense of sustaining life while at the business destination. Here are some examples from the IRS:

• Costs of traveling by airplane, train, bus, or car between your home and your overnight business destination
• Costs of traveling by ship (subject to the luxury water travel rules and cruise ship rules)
• Costs of renting a car or taking a taxi, commuter bus, or airport limo from the airport to the hotel and to work destinations, including restaurants for meals
• Costs for baggage and shipping of business items needed at your travel destination
• Costs for lodging and meals (meal costs include tips to waiters and waitresses)
• Costs for dry cleaning and laundry
• Costs for telephone, computer, Internet, fax, and other communication devices needed for business
• Tips to bellmen, maids, skycaps, and others

The travel deduction rules are the same whether you operate your business as a corporation or a proprietorship, with one important exception. When you operate as a corporation during the tax years 2018 through 2025, you must either:

• have the corporation reimburse you for the expenses, or
• have the corporation pay the expenses.

If you would like my help in planning the business and personal parts of your next trip, please don’t hesitate to call me.

Sincerely,
Bob
Robert W Craig, EA Tax Services (805) 264-3305

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2018 Client Business Meals Update

Here’s the updated strategy on deducting business meals with your clients or customers: deduct your client and business meals as if tax reform never took place. At first glance it appeared that the new tax law that went into effect on January 1, 2018 would disallow business meal deductions along with entertainment. Looking deeper it appears that was not their intent.

Wow. Is this aggressive? Not if:
• the IRS comes out with regulations that follow a model set by the American Institute of CPAs, or
• the Joint Committee on Taxation in its explanation of the Tax Cuts and Jobs Act (TCJA) states that client and business meals continue as deductions, or
• lawmakers enact a new tax code section that authorizes client and business meal deductions.

How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.

Let’s put it this way: if you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:

• The name of the person you had the meal with.
• The name of the restaurant where you had the meal.
• A short description of the business discussed.
• If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and itemized list of food and drink consumed.

If you want to discuss the business meals deduction with me, don’t hesitate to call.

Note that meals associated with customer or client entertainment (eg, eating while at the theater or baseball game) are NOT deductible due to the new tax law in 2018. Business deductions for entertainment are gone-period.

Sincerely,
Bob (805) 264-3305

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Tax Reform Changes the Alimony Game!

Tax reform changes the alimony game.

This may or may not have any relevance to you, but if it does, you will want to move quickly.

The Tax Cuts and Jobs Act (TCJA) eliminates tax deductions for alimony payments that are required under post-2018 divorce agreements.

More specifically, the TCJA’s new denial of alimony tax deductions applies to payments required by divorce or separation instruments:

• executed after December 31, 2018, or
• modified after that date, if the modification specifically states that the new TCJA treatment of alimony payments now applies.

Example. Betsy is divorcing Tim, and Betsy will pay $120,000 a year in alimony. If Betsy can deduct the $120,000 in her 50 percent combined federal and state income tax bracket, her net cost is $60,000 ($120,000 x 50 percent).

To look at the alimony in another light, with no tax deduction Betsy has to earn $240,000, then pay taxes of $120,000 in her 50 percent bracket, before she can give Tim the $120,000.

Regardless of how you look at the cost of alimony, the loss of the alimony tax deduction is huge.

Note: You deal with a judge (court) to finalize the divorce. This could take some time, so don’t procrastinate, or you’ll surely miss the deadline.

To qualify as deductible alimony, your divorce must satisfy a list of specific tax-law requirements. We should review your divorce if you are in this process.

Sincerely,
Bob
Robert W Craig, EA Tax Services (805) 264-3305

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Time Limit to Correct Social Security Earnings Statement Before It’s Too Late!

Here’s a link to an important article about keeping a eye on your social security earnings records.

There are strict time limits on fixing any errors in your social security earnings record that you need to be aware of. Not correcting the error(s) in a timely fashion could cost you benefits for a lifetime.

http://socialsecurityintelligence.com/check-your-social-security-earnings-statement-before-its-too-late/

If you have any questions about this please feel free to call me.

Bob
Robert W Craig, EA Tax Services
(805) 264-3305

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How To Handle a Traditional IRA Inherited from a Non-Spouse

Traditional individual retirement accounts (IRAs) became available in 1974 and have been around ever since. This makes your odds of inheriting a traditional IRA pretty good.  

The purpose of this letter is to look at some of the rules that apply when you inherit an IRA from someone other than your spouse.

  Traditional IRA Inherited from a Non-spouse

  Death after start date. If you inherit an IRA from an owner who dies upon attaining age 70 1/2 or later, the IRA must distribute any assets that remain to you (the beneficiary) over the longer of your expected life span or the deceased owner’s expected life span (before death).

  With the exception of separate accounts, if there is more than one beneficiary, the rule requires distribution of the deceased owner’s traditional IRA over the longer designated beneficiary’s life expectancy or the owner’s life expectancy. For this tax rule, the beneficiary with the shortest life expectancy (usually the oldest person) is the designated beneficiary.

  If the owner divided the IRA into separate accounts for the beneficiaries, the accounts act as separate IRAs for distribution purposes.

  Death before start date. If the owner dies before his or her required start date (age 70 1/2), the IRA must distribute any remaining assets under either

 

  • the five-year rule, which requires that the IRA distribute the assets within five years after the death of the owner, or
  • the life expectancy rule, which requires that all remaining assets be distributed over the life span of the designated beneficiary.
 

As you receive the monies from the inherited traditional IRA, you pay taxes at ordinary income rates.  

Planning Strategy  

To minimize taxes for your beneficiaries, aim to stretch out the distributions for as long as possible. This makes the five-year plan rarely a good idea. But it does shine the light on youth. The younger the surviving beneficiaries, the more stretch you create.  

By stretching out non-spouse inherited IRA distributions for as long as possible, you can turn a potential tax danger into a tax benefit. IRA stretching is a proven and widely used method in estate planning. It also allows the IRA’s assets to continue to grow tax-deferred, so with wise investments you could create your own legacy.  

You likely need to know the basic rules that apply to inherited IRAs because you have high odds of both inheriting a traditional IRA and leaving one to your named beneficiaries.  

If you would like to discuss IRAs in more detail, simply give me a call.  

Sincerely,

Bob Craig
Robert W Craig, EA Tax Services
431 2nd Street, Suite 3, Solvang, CA, 93463
(805) 264-3305
email: rcraig1044@aol.com

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IRS and Phishing Scams

Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, headlining the annual “Dirty Dozen” list of tax scams for the 2016 filing season, the Internal Revenue Service announced today.

The IRS has seen a surge of these phone scams as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season.

“Taxpayers across the nation face a deluge of these aggressive phone scams. Don’t be fooled by callers pretending to be from the IRS in an attempt to steal your money,” said IRS Commissioner John Koskinen. “We continue to say if you are surprised to be hearing from us, then you’re not hearing from us.”

“There are many variations. The caller may threaten you with arrest or court action to trick you into making a payment,” Koskinen added. “Some schemes may say you’re entitled to a huge refund. These all add up to trouble. Some simple tips can help protect you.”

The Dirty Dozen is compiled annually by the IRS and lists a variety of common scams taxpayers may encounter any time during the year. Many of these con games peak during filing season as people prepare their tax returns or hire someone to do so.

This January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of roughly 896,000 contacts since October 2013 and have become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam.

“The IRS continues working to warn taxpayers about phone scams and other schemes,” Koskinen said. “We especially want to thank the law-enforcement community, tax professionals, consumer advocates, the states, other government agencies and particularly the Treasury Inspector General for Tax Administration for helping us in this battle against these persistent phone scams.”

Protect Yourself
Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via a phishing email. Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.

Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.

Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.

The IRS will never:
Call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill.

Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.

Require you to use a specific payment method for your taxes, such as a prepaid debit card.

Ask for credit or debit card numbers over the phone.

Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

If you don’t owe taxes, or have no reason to think that you do:
Do not give out any information. Hang up immediately.

Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.

Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

If you know you owe, or think you may owe tax:
Call the IRS at 800-829-1040. IRS workers can help you.

Here’s a YouTube video that you may want to watch:
https://www.youtube.com/watch?v=a2kBGBpsfWI&feature=em-subs_digest

Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on IRS.gov.

Bob
(805) 264-3305

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Crazy Tax Rules for Recreational Gamblers

Gambling is an ever-popular pastime, but did you know that gambling can have very serious tax implications?  These are crazy and in my opinion are unfair, but they are in the tax law and courts have had their say to uphold them.

Theoretically, the full amount of gambling winnings (unless you qualify as a professional gambler, which this post assumes that you are not) must be reported on the miscellaneous income line of Form 1040, page 1.  Winnings include cash, prizes, jackpots, lottery winnings, raffles, as well as installment payments on winnings.

For most types of gambling at legitimate gaming facilities, you’ll receive a Form W-2G if you win over certain amounts.  These must be reported on the miscellaneous income line.  When you get one of these forms remember that the IRS also gets a copy of the form, and the IRS computers will be looking for these amounts on your tax return.  If they don’t find them, the computer will spit out a notice of tax deficiency.

Many people think that just because they might win some jackpots, but lose money overall they do not need to report the winnings.  This is not true, they must show these winnings.

That being said, you may (assuming you’ve kept the required proof and documentation) deduct your gambling losses but only to the extent of gambling winnings.  This deduction is taken on Schedule A in the miscellaneous itemized deduction section.  Now gamblers who may not have enough Schedule A deductions itemize cannot get a tax deduction for these losses.

You can see the problem here.  Even though there is technically a deduction for losses to extent of winnings, a taxpayer may not get the deduction and even if they do get to take it, they may not get full benefit due to mathematical computations that have to be made.

In addition, since you must include the entire amount of winnings on page 1, this increased your Adjusted Gross Income (AGI) and this could devastating effects on your taxes since there are a good number of limitations that are driven by AGI.  For example, taxable Social Security benefits are driven higher by a higher AGI figure.  Rental real estate losses are phase out by higher income.  The child tax credit, education credits and other items are potentially reduced or eliminated by higher AGI.  Also any allowable medical deduction on Schedule A is reduced as AGI increases.  These are some but there are more, but you get the idea.

Documentation Wagering Losses: The IRS allows players to simply record the net winning or net loss from each gambling session.  A session is deemed to end when a player cashes out or runs out of money.  At this point it’s possible to calculate how much was won or lost during that particular session.  The taxpayer/player then reports the sum of all the net winning sessions on page 1 of the tax return, and the net sum of all the losing sessions on Schedule A miscellaneous itemized deductions.  Care must be taken to assure that the total net winning session totals are greater than or exceed the total of Forms W-2G’s received and make adjustments to assist the IRS computers in matching the numbers, or there will be a letter from them.

Gambling losses must be adequately documented to be deductible.  Under IRS Revenue Procedure 77-29, an amateur gambler must record the following information in a log or similar record:

  1.  Date and type of specific wager or wagering activity,
  2. Name and location of the establishment,
  3. Amount won or lost
  4. Names of any other people present with you at the gaming establishment,
  5. Slot machine #, table #,
  6. Winning statements and unredeemed tickets,
  7. Bank withdrawal slips, ATM advances and such with the dates showing the source of the ‘gambled’ funds.

    For a handy Gambling Log and info, click below and print out the handout:

    Gambling Log

    There’s no place for gambling when it comes to preparing your federal and state tax returns. Play it safe and take this article to heart if you plan to hit the casino or racetrack. The IRS and courts require that these records are kept in close proximity in time to the gambling trip so don’t wait to recreate the required records, do them now.

    If you have questions on how to do this or think you may have an issue in this area, please call me at (805) 264-3305. Also I have a Gamblers Handout and Log Record available for the asking.

    Thanks for reading. Bob

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Tax Tips for Real Estate Investors

Tips For Real Estate Investors

If you are a real estate investor I’m sure you are familiar with a number of tax laws and strategies that real estate investors encounter frequently and not so frequently. Things like:

*Tax Rules and Solutions at Purchase and During Ownership of Real Estate *Living With the Passive Loss Regulations *Taxation at the Time of Sale *1031 or Like-Kind Exchanges *Real Estate in Troubled Times

More Specifically:

-Passive Loss Limitations may limit the amount of losses you can deduct each year -Depreciation – how to compute and what is the long term effect on my situation -Capital Gains versus Ordinary Gains -Exclusion Rules for Gain on the Sale of a Principal Residence -Converting a Principal Residence to a Rental or Vice Versa -Installment Sales of Real Estate -Office In Home Rules -Repossessions, Cancellation of Debt and Bankruptcy

As an investor you may or may not have a detailed understanding of how these areas affect your taxes and investment. But you should have at least a basic understanding of how different rules affect the types of investments you have. Details on the above are obviously beyond the scope of this text, but feel free to contact us if you feel less than confident in any of the areas or if you are thinking of buying, selling, renting, exchanging, executing a short sale, etc.

Here are some areas I get a number of questions about. If you have any other areas that you have questions, please use the ‘Ask a Tax Question’ button to the right on any page of this website.

1. Repairs versus Improvements – There is a distinct tax difference between “repairs” to a property and “improvements” to a property. On one hand, the cost of repairs made by a business is deductible. On the other hand, the cost of improvements must be capitalized and written off over time via depreciation deductions.

Check out this handout, click here: Is it a repair or improvement?

The life of improvements to a residential rental building is generally 27.5 years. On a nonresidential building it is generally 39 years. A real long time in either case.

A good strategy is to separate repairs from improvements when work is done on a business or rental building. For example, don’t lump standard repairs with a major renovation. If that occurs, it will take longer to write off the cost of the repairs.

Fix the broken window, replace the doorknobs, fix the leaky faucet and the like prior to the more renovation type of work.

A repair keeps the property in good operating condition over the course of its life. Conversely, an improvement extends the useful life of the property, increases its value or adapts it for a different use.

But check this out:

But even the Internal Revenue Manual that tells IRS agents how to audit you admits that distinguishing repairs from improvements is a gray area. You’d think that replacing a roof is pretty clearly an improvement, right? Common sense tells you it adds value and prolongs the property’s life. But a recent tax court case ruled that an investor could deduct a roof as a repair because it just helped keep the property in good operating condition over the course of its existing expected life.

Remember, this strategy is for business property, like rental properties. Personal home improvements are not deductible at all so, in the case of your home or vacation homes, it would be better to lump all little repairs in with a major renovation so it can be added to the cost basis of the property when sold.

2. Cost Segregation

The IRS says your clients can “depreciate” their property over a “class life” intended to approximate its useful life.

Residential property depreciates over 27.5 years. If they have an apartment house worth $500,000, they write off $16,666 per year. Not bad . . . .

Nonresidential property depreciates over 39 years. If they have, say, a medical office worth$500,000, they write off $12,820 per year. Not as good as the apartment – but still not bad.

But all real estate includes specific, identifiable components that depreciate faster.

For example, land improvements depreciate over 15 years. These include paving, landscaping, underground utilities, and site lighting.

And personal property depreciates even faster – just 5 to 7 years. For residential property, this includes flooring, cabinets and countertops, appliances, window treatments, and wall coverings. For commercial and industrial property, add equipment foundations, exhaust and ventilation systems, security systems, and electrical distribution systems.

If we just take the 27.5 or 39 year depreciation we could be wasting thousands in tax deductions we can take today.

A “cost segregation study” is an in-depth analysis, performed by specially-trained experts, that lets them identify and reclassify costs that qualify for faster depreciation.

Faster depreciation translates into immediate tax savings.

The best part is, new IRS rules let owners “catch up” any deductions they missed as far back as 1987. Without even amending old returns! You can do that simply by filing IRS Form 3115. And you can claim those savings in a single year.

That makes cost segregation the closest you’ll come to a real “tax time machine”! It’s all court-tested and IRS-approved. In fact, the IRS offers a 136-page Audit Techniques Guide that details exactly what to do and how to do it. It’s not for everyone but it can make a big difference in the right situation.

3. Depreciation Recapture

Remember that when a property is sold, all depreciation taken over the life of the investment will reduce your cost basis increasing the gain on the sale.

4. Converting Personal Residence to a Rental

You can convert a personal residence to a rental property and if time limits are adhered to, you can still take at least a portion of your tax exclusion for the sale of a personal residence. If you rent it out after 2008 there will be a proration of the exclusion. This can get complex so check it out with an your tax advisor or call us.

You can also go the other way and convert a rental property to your residence and if you live and own it for a long enough period you may be able to exclude some of the gain. Again, a complex issue, call us if you need help.

5. Inherited Property

If the owner of real property passes away, be sure to get an appraisal of the value of the property at the date of death. This will be the new basis for gain or loss on sale and for depreciation. You should get this appraisal even if there is no estate tax return (706) filing requirement.

Also important is if you own property with your spouse make sure that title is held as community property with right of survivorship (if you’re in a community property state such as California). This way the property will get a full step up in basis on the death of the first spouse. If you have a living trust, be sure to run this by your attorney or tax person to ensure it is setup properly.

Call me if you wish to discuss any of these issues. Thank you, Bob (805) 264-3305

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