Monthly Archives: January 2016
When Selling Land Around a Principal Residence is Tax-Free
People whose homes are on large tracts of land may sell a portion of the land with or without also selling their homes. Selling only a portion of the land without also selling their principal residence will be a taxable transaction. However, selling the vacant land and, within a certain period of time, selling their principal residence may lead to tax-free treatment of the land sale if certain requirements are met.
Meeting the Tax-Free Principal Residence Requirements
Generally, gain from the sale of a principal residence will be excluded from income (up to $500,000 on a joint return) if three requirements are met:
• The taxpayer owns the property for at least two of the past five years
• The taxpayer uses the property for at least two of the past five years
• The taxpayer has not excluded gain from the sale of a principal residence within the past two years prior to the sale of the current principal residence
When someone lives on a large tract of land on which her principal residence lies, the tract of land is part of the principal residence. Taxpayers in this situation often wonder if selling only the vacant land will qualify for the gain exclusion.
When the Land Sale Qualifies for Tax-Free Treatment
The answer is generally “no,” unless the actual home is also sold within a certain period of time. Specifically, excludable gain from the sale of a principal residence can include gain attributable to vacant land, if
• The vacant land is adjacent to the land containing the dwelling unit of the taxpayer’s principal residence
• The taxpayer owned and used the vacant land as part of her principal residence
• The taxpayer sells the dwelling unit within two years before or two years after the date the vacant land is sold and
• The other principal residence gain exclusion requirements are met with respect to the vacant land
Example: In 2010, Michael buys a home on a 1 acre plot of land. Later the same year, he buys an adjacent 29-acre plot of land. In January 2016, Michael sells the 29-acre plot of land. In December 2016, Michael sells the 1 acre plot containing his home. His total gain is $200,000 ($50,000 gain on the house and $150,000 gain on the vacant land). Since Michael sold the vacant land within 2 years of selling his principal residence and the other gain exclusion requirements are met, Michael can exclude the $150,000 gain on the vacant land as well as the $50,000 gain on his principal residence.
Example 2: Same facts as above except that Michael waits until February 2018 to sell the land containing his principal residence. In this scenario, Michael does not qualify for the gain exclusion on the sale of the vacant land because the sale of his principal residence occurred more than two years after the sale of the vacant land. Michael has a taxable gain of $150,000 on the land sale in 2016. Michael will qualify for the gain exclusion on the sale of his principal residence in 2018.
Example 3: Same facts as example 1 except that Michael sells his principal residence in February 2017. In this situation, the sale of the vacant land in 2016 qualifies for the gain exclusion because the sale of the principal residence was within 2 years. When Michael filed his 2016 tax return, he reported the $150,000 gain and paid tax on it. Since he later sold his principal residence within the required time period, the gain on the vacant land sale qualified for gain exclusion. Michael may amend his 2016 tax return to exclude the gain on the vacant land.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
When Driving from Home to Work is Deductible
When it’s time to deduct auto expenses, people generally know that mileage from home to work (and from work back to home) is not deductible. The reason this mileage is not deductible is because it is considered personal commuting and is therefore a nondeductible, personal expense.
Fortunately for taxpayers, there are three exceptions that allow taxpayers to deduct mileage from home to work (and from work to home).
1. Your Home is Your Principal Place of Business
If your home qualifies as your principal place of business under the home office rules, then your home is considered a business location for auto transportation purposes. This means that driving from your home to other work locations and back home is considered business-to-business mileage and is now deductible.
A home office must be used regularly and exclusively as your principal place of business.
There are two ways to meet the principal place of business requirement:
• You meet the facts and circumstances test which is based on the nature of the work performed at each location and the amount of time you spend at each location
• You perform managerial or administrative work out of your home office, and you do not perform substantial administrative or managerial work at another fixed location
This greater ability to deduct mileage is perhaps the biggest advantage of the home office deduction.
2. Driving to Temporary Work Locations When Taxpayer Has a Regular Work Location Away From Personal Residence
If a taxpayer has one or more regular work locations away from the taxpayer’s personal home, the taxpayer may deduct auto expenses incurred in going between the taxpayer’s home and a temporary work location in the same trade or business.
A work location is temporary if employment at a work location is realistically expected to last (and does in fact last) for 1 year or less. If employment at a work location is realistically expected to last for more than 1 year or there is no realistic expectation that the employment will last 1 year or less, the employment is not temporary, regardless of whether it actually exceeds 1 year. If employment is initially expected to last less than 1 year but at some point the employment is expected to exceed 1 year, then the employment will be considered temporary until the date the taxpayer’s expectation changes.
Example: John is an attorney with an office in Farmington Hills. His house is in Royal Oak. Mileage from his home is Royal Oak to Farmington Hills is not deductible because it is considered personal commuting (assuming John’s home does not qualify under the home office rules as his principal place of business).
If John drives from his home to Ferndale to meet with a client, then he is driving to a temporary work location and his mileage from his home to Ferndale is deductible. Further, mileage from his temporary work location in Ferndale to his office in Farmington Hills is also deductible. At the end of the day, mileage from his office in Farmington Hills to his home is not deductible. If John has another business appointment with a client in Warren on the way home, then mileage from his office to his appointment in Warren and from Warren to his home is deductible.
3. Driving to Temporary Work Location When Taxpayer Does NOT Have a Regular Work Location Away From Personal Residence
If a taxpayer does not have a regular work location away from her personal home, the taxpayer may only deduct auto expenses in going between her home and a temporary work location outside the metropolitan area where the taxpayer normally works and lives.
Generally, a metropolitan area includes the area within the city limits and the suburbs that are considered part of that area. Since the taxpayer has no regular work location away from her personal home, mileage to her first business destination within a metropolitan area will be considered nondeductible personal commuting. However, if the business destination is outside the metropolitan area, then the IRS will allow a business deduction.
Example: Joan is a self-employed CPA in Detroit. She works out of her home. Unfortunately, her home office is not used exclusively for business because her kids use her home office to do homework so she does not qualify for the home office deduction. She does not have an office outside the home. Any mileage to her first destination in the metro Detroit area will not be deductible. However, if Joan meets with a client in Traverse City, the mileage will be deductible because Traverse City will most likely be considered outside the metro Detroit area.
It would be best for Joan to make sure her office qualifies as her principal place of business under the home office rules. Then any mileage she incurs for her CPA business will be deductible.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
More Businesses Now Qualify for Faster Write-Offs on Building Improvements
The Protecting Americans from Tax Hikes (PATH) Act passed last year and provided taxpayers with goodies in time for the holidays. This post will focus on a new tax provision that helps taxpayers who make improvements to commercial buildings by making expenditures for these improvements eligible for bonus depreciation.
A prior post explaining the benefits to individual taxpayers can be found here.
A prior post explaining the favorable new rules for depreciation in general can be found here.
Background
Under prior law, qualified leasehold improvement property qualified for bonus depreciation. Generally, long lived assets have to be depreciated over a number of years. Leasehold improvement property is generally deducted over 39 years. Qualified leasehold improvement property can be deducted over 15 years. Additionally, since it qualified for bonus depreciation, 50% of the cost of the qualified leasehold improvements could be deducted in the year the improvements were placed in service.
Example: ABC Corp spends $200,000 to remodel its leased space. Before the favorable qualified leasehold improvement property rules took effect, the $200,000 would have to be deducted over 39 years ($5,128 each year for 39 years).
Under the favorable qualified leasehold improvement property rules, 50% of the $200,000 can be deducted in the year of service and the remaining $100,000 cost can be deducted over 15 years (or $6,666 per year). The total first year depreciation expense is $106,666 (substantially more than the $5,128 that would apply without these rules)
Qualified leasehold improvement property included any improvement to the interior of a commercial building if:
• The improvement was made pursuant to a lease
• The interior building portion was to be occupied by the lessee or sublessee
• The improvement was placed in service more than 3 years after the building itself was first placed in service by any person
• The improvement was a structural component of the building
Qualified leasehold improvement property did not include expenses for:
• An enlargement of a building
• Any elevator or escalator
• Any structural component of a common area
• The internal structural framework of the building
Unfortunately, the qualified leasehold improvement property rules did not apply if the building owner was related to the tenant.
The New Law
Beginning in 2016, qualified improvement property is eligible for bonus deprecation. Now, bonus depreciation applies to qualified improvements to commercial buildings regardless of whether the building is leased or owned.
The definition of qualified improvement property has also been expanded.
Qualified improvement property is any improvement to an interior portion of a commercial building if the improvement is placed in service after the date the building is first placed in service. The improvement no longer needs to be placed in service more than 3 years after the building was first placed in service.
The definition of qualified improvement property now also applies to structural components of a building that benefit a common area.
Unfortunately, qualified improvement property still does not include any improvement for which the expense is attributable to: the enlargement of the building; any elevator or escalator; or the internal structural framework of the building.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Good News for Taxpayers in Latest Tax Law Change
On December 18, 2015 our beloved government let us know what the tax laws were for 2015 by passing the Protecting Americans from Tax Hikes Act. The Act provides good news for a change. It makes permanent the enhanced child tax credit, the American Opportunity Credit for college students, the deduction for certain expenses of school teachers, the deduction for sales taxes, and the tax-free distributions from IRAs for charitable purposes.
A prior blog post explained the beneficial new rules for depreciation. This post will focus on other personal tax breaks that have been extended. Future blog posts will describe these provisions in greater detail.path act
Enhanced Child Tax Credit Made Permanent
The child tax credit allows taxpayers to claim a $1,000 tax credit for each qualifying child under age 17 that the taxpayer can claim as a dependent. To the extent the child tax credit exceeds the taxpayer’s tax liability, the taxpayer is eligible for a refundable credit equal to 15% of earned income in excess of a threshold amount.
Under prior law, the threshold amount was $3,000 and was scheduled to increase to $10,000 in 2018. This increased threshold amount would have severely limited the refundable credit for many taxpayers. The Act removed the $10,000 threshold amount that would take effect in 2018 and made permanent the $3,000 threshold amount.
Enhanced American Opportunity Credit Made Permanent
Under prior law, through 2017, the American Opportunity Credit increased the old Hope Credit from $1,800 to $2,500 and increased the number of years students could claim the credit from two years to four years.
The credit is 100% of the first $2,000 of qualifying education expenses plus 25% of the next $2,000 of qualifying education expenses. Up to 40% of the credit is may be a refundable credit (i.e., $1,000 of the $2,500). To qualify for the refundable portion, the student must not be subject to the kiddie tax rules (regardless of whether the student has investment income).
The new Act made these provisions permanent.
Above the Line Deduction for Teachers Made Permanent
The Act permanently extends the $250 above the line deduction for teacher expenses. Beginning in 2016, the Act modifies the deduction by indexing it for inflation and treating professional development expenses as eligible for the deduction. Without this special rule, out-of-pocket expenses that teachers incur for school supplies would have to be taken as an itemized deduction subject to the 2% floor.
State & Local Sales Tax Deduction Made Permanent
While this rule generally benefits taxpayers who live in states that do not have an income tax, it may help taxpayers who incur large sales tax bills (such as the sales tax paid on a vehicle). Taxpayers who live in states with an income tax can deduct either state and local income taxes or state and local sales tax.
Nontaxable IRA Transfers to Charities Made Permanent
Taxpayers age 70½ and older can make tax-free distributions to a charity from an IRA up to $100,000 per year. These distributions aren’t subject to the charitable contribution percentage limits. Additionally, these distributions will satisfy the minimum distribution rules.
Exclusion for Discharged Home Mortgage Debt Retroactively Extended Through 2016
When a taxpayer is relieved of debt, the reduction in debt is taxable income. There are existing exceptions for debt discharged through bankruptcy and for insolvent taxpayers. An additional exception was created during the recession that allowed tax-free treatment of debt discharge income on debt incurred to acquire or substantially improve a principal residence. The exclusion provides relief up to $2 million of debt discharge income on a principal residence.
Mortgage Insurance Premiums Deduction Retroactively Extended Through 2016
Mortgage insurance premiums paid during 2015 and 2016 qualify as qualified residence interest and can be deducted. The deduction is phased out for taxpayers with AGI between $100,000 and $110,000.
Above-the-Line Deduction for Higher Education Expenses Retroactively Extended Through 2016
Effective for tax years beginning after Dec. 31, 2014, the Act retroactively extends through 2016 the $4,000 above-the-line deduction for qualified tuition and related expenses for higher education.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
