Category: KRS Blog

The Tax Cuts and Jobs Act (TCJA) and Code Section 1031

Posted by Simon Filip on

The Tax Cuts and Jobs Act (TCJA) and Code Section 1031The Tax Cut and Jobs Act (TCJA) was signed into law on December 22, 2017, and took effect on January 1, 2018. Included in the political promise of tax simplicity and historically large tax cuts to middle-income households were amendments to existing tax code, including Code Section 1031. Investment property owners will continue to be able to defer capital gains taxes using 1031 tax-deferred exchanges, which have been in the tax code since 1921.

What changes under the new tax law?

The tax law repealed 1031 exchanges for all other types of property that are not real property. This means 1031 exchanges of personal property, assets that can no longer be exchanged including collectibles, franchise licenses, and patents, aircraft, machinery, boats, livestock, and artwork.

What didn’t change for 1031 exchanges?

Real estate exchanges are subject to the same rules and requirements as prior law. Taxpayers must still identify their replacement within 45 days and exchange within 180 days. All real estate in the United States, improved and unimproved, also remains like-kind to all other domestic real estate.  Foreign real estate continues to be treated as not like-kind to real estate.

Are there timing considerations?

Pursuant to the transition rules, a personal property exchange to be completed in 2018 would be afforded tax deferral under the prior law if the relinquished property was sold or the replacement property was acquired by the taxpayer prior to December 31, 2017.

What about cost segregation?

A cost segregation study identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income taxes. Taxpayers entering into a 1031 exchange who are contemplating a cost segregation study, need to consider the disallowance of personal property as like-kind to real property. Reclassifying asses to shorter recovery periods will increase annual depreciation deductions, but can potentially cause gain recognition from the exchange.

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different, especially when real estate is involved – so don’t go it alone! Check out the New Tax Law Explained! for Individuals and then contact me at sfilip@krscpas.com or 201.655.7411 to discuss tax planning and your real estate investments under the TCJA.

 

Repeal of Miscellaneous Itemized Deductions – What Does This Mean for Employee Business Expenses?

Posted by Maria T. Rollins on

Repeal of Miscellaneous Itemized Deductions – What Does This Mean for Employee Business Expenses?Before the Tax Cuts and Jobs Act, individuals who itemized their deductions could deduct certain miscellaneous itemized deductions to the extent that those deductions exceed 2% of their adjusted gross income (AGI). These deductions included unreimbursed employee business expenses, such as  unreimbursed transportation, travel, business meals and entertainment, subscriptions to professional journals, union and professional dues, and professional uniforms.

Under the new law, miscellaneous itemized deductions are disallowed after December 31, 2017.

So what does this mean for those employees who incur these costs in performing services for their employer?

They may be out of luck.  Let’s say an employee earns $60,000 in wages and incurs $2,500 in business related expenses such as travel, insurance, and subscriptions. The employee is taxed on the full $60,000 and the $2,500 out of pocket expense is not deductible.

Reimbursement under an accountable plan

Employers who don’t reimburse employees for legitimate business expenses under an accountable plan should consider the effects of this practice. Employers can generally provide employees with the same real compensation and a lower taxable income if they provide some of the compensation in the form of reimbursement of business expenses under an accountable plan. So, if the employee in the example above was paid $2,500 less (making his earnings $57,500), but was separately reimbursed for his $2,500 of business expenses under an accountable plan, he would have a lower taxable income with the same actual compensation because his $2,500 of reimbursement wouldn’t be included in income.

If you incur significant employee business expenses, talk to your employer about establishing an accountable plan. Doing so can save the employee taxes with little impact to the employer.

We’ve got your back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation now that the Tax Cut and Jobs Act is finally signed into law. Don’t lose sleep wondering what impact the new laws will have on you, your family, or your business. Check out the New Tax Law Explained! For Individuals page and then contact me at 201.655.7411 or mrollins@krscpas.com.

 

The Tax Act and the Real Estate Industry

Posted by Simon Filip on

The Tax Act and the Real Estate IndustryTax Cuts and Jobs Act (“TCJA”)

On December 20, 2017 Congress passed the most extensive tax reform since 1986, which was subsequently signed into law by President Trump. Included in the TCJA are changes to the Internal Revenue Code (“Code”) that impact taxpayers engaged in the real estate business, and those who otherwise own real estate.

Individual tax rates

The TCJA lowers the marginal (top tax bracket) tax rate applicable to individuals from 39.6% to 37%. The net investment income tax (NIIT) and Medicare surtax of 3.8% and 0.9%, respectively, remain. The reduction in tax rates is not permanent like the corporate tax rate reduction, and is scheduled to expire after 2025. The tax rates applicable to long-term capital gains of individuals remains at 15% or 20%, depending on adjusted gross income (AGI).

Deduction for qualified business income of pass-through entities

The TCJA creates a new 20% tax deduction for certain pass-through businesses. For taxpayers with incomes above certain thresholds, the 20% deduction is limited to the greater of (i) 50% of the W-2 wages paid by the business, or (ii) 25% of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable property (which includes structures, but not land).

Pass-through businesses include partnerships, limited liabilities taxed as partnerships, S Corporations, sole proprietorships, disregarded entities, and trusts.

The deduction is subject to several limitations that are likely to materially limit the deduction for many taxpayers. These limitations include the following:

  • Qualified business income does not include IRC Section 707(c) guaranteed payments for services, amounts paid by S corporations that are treated as reasonable compensation of the taxpayer, or, to the extent provided in regulations, amounts paid or incurred for services by a partnership to a partner who is acting other than in his or her capacity as a partner.
  • Qualified business income does not include income involving the performance of services (i) in the fields of, among others: health, law, accounting consulting, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or (ii) consisting of investing or investment management, trading, or dealing in securities, partnership interests or commodities.
  • Qualified business income includes (and, thus, the deduction is applicable to) only income that is effectively connected with the conduct of a trade or business within the United States.
  • The deduction is limited to 100% of the taxpayer’s combined qualified business income (e.g., if the taxpayer has losses from certain qualified businesses that, in the aggregate, exceed the income generated from other qualified businesses, the taxpayer’s deduction would be $0).

Interest expense deduction limitation

For most taxpayers, TCJA disallows the deductibility of business interest to the extent that net interest expense exceeds 30% of Earnings before Income Taxes Depreciation and Amortization (EBITDA) for 2018 through 2022, or Earnings before Income Taxes (EBIT) beginning in 2022. An exemption from these rules applies to certain taxpayers with average annual gross receipts under $25 million.

A real property trade or business can elect out of the new business interest disallowance by electing to utilize the Alternative Depreciation System (ADS). The ADS lives for nonresidential, residential and qualified improvements are 40, 30, and 20 years, respectively.  All of which are longer lives, resulting in lower annual depreciation allowances.

Immediate expensing of qualified depreciable personal property

The TCJA includes generous expensing provisions for acquired assets. The additional first year depreciation deduction for qualified depreciable personal property (commonly known as Bonus Depreciation) was extended and modified. For property placed in service after September 27, 2017 and before 2023, the allowance is increased from 50% to 100%. After 2022, the bonus depreciation percentage is phased-down to in each subsequent year by 20% per year.

Expansion of Section 179 expensing

Taxpayers may elect under Code Section 179 to deduct the cost of qualifying property, rather than to recover the costs through annual depreciation deductions. The TCJA increased the maximum amount a taxpayer may expense under Section 179 to $1 million, and increased the phase-out threshold amount to $2.5 million.

The Act also expanded the definition of qualified real property eligible for the 179 expensing to include certain improvements to nonresidential real property, including:

  • Roofs
  • Heating, Ventilation, and Air Conditioning Property
  • Fire Protection and Alarm Systems
  • Security Systems

We’ve got your back

The new tax code is complex and every taxpayer’s situation is different, especially when real estate is involved – so don’t go it alone! Contact me at sfilip@krscpas.com or 201.655.7411 to discuss tax planning and your real estate investments under the TCJA.

An Update: Real Estate Professionals and Passive Losses

Posted by Simon Filip on

Dreaded Passive Losses

An Update: Real Estate Professionals and Passive LossesA passive loss from a real estate activity occurs when your rental property’s expenses exceeds its income. The undesirable consequence of passive losses is that a taxpayer is only allowed to claim a certain amount of losses on their tax return each year.

When income is below $100,000, a taxpayer can deduct up to $25,000 of passive losses. As income increases above $100,000, the $25,000 passive loss limitation decreases or “phases out.” The phase out is $0.50 for every $1 increase in income. Once income increases above $150,000, taxpayers are completely phased out of deducting passive losses.

Rentals are passive, unless they aren’t

The general rule is that all rental activities are, by definition, passive. However, the Internal Revenue Code created an exception for certain professionals in the real estate business.

Who is a real estate professional?

As discussed in a previous post, for income tax purposes, the real estate professional designation means you spend a certain amount of time in real estate activities.

According to the IRS, real estate professionals are individuals who meet both of these conditions:

1) More than 50% of their personal services during the tax year are performed in real property trades or businesses in which they materially participate and

2) they spend more than 750 hours of service during the year in real property trades or businesses in which they materially participate.

Any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operations, management, leasing, or brokerage trade or business qualifies as real property trade or business.

Can I qualify as a real estate professional?

I get these questions quite often from taxpayers:  Do I qualify as a real estate professional?  If not, how can I qualify?

There have been many cases that appear in front of the Tax Court where a taxpayer argues they qualify as a real estate professional and the IRS has disallowed treatment and subjects the taxpayer to the passive activity loss rules of Code Sec. 469.

A recent case held that a mortgage broker was not a real estate professional (Hickam, T.C. Summ. 2017-66). The taxpayer was a broker of real estate mortgages and loans secured by a real estate. Although the taxpayer held a real estate license, he did not develop, redevelop, construct, reconstruct, operate, or rent real estate in his mortgage brokerage operation.

The taxpayer argued that his mortgage brokerage services and loan origination services should be included for purposes of satisfying the real estate professional test. The Court held that the taxpayer’s mortgage brokerage services and loan origination services did not constitute real property trades or businesses under Code Sec. 469(c)(7)(c).

We’ve got your back

If you invest in real estate, it can be difficult to keep track of tax laws and how they impact you. At KRS CPAs, we stay on top of all the laws – especially the changes under the new tax reform – and can help you avoid tax problems. Contact me at sfilip@krscpas.com or 201.655.7411 for a complimentary initial consultation.

2017 Tax Legislation: What Individual Taxpayers Need to Know

Posted by Maria T. Rollins on

2017 Tax Legislation: What Individual Taxpayers Need to KnowThe new Tax Cuts and Jobs Act amends the Internal Revenue Code (IRC) to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. It is the most sweeping update to the U.S. tax code in more than 30 years, and from what we’re seeing, it impacts everyone’s tax situation a bit differently.

What works for one individual or family may not work for another, although their circumstances may appear to be similar on the surface.

Here are some of the key features of the tax reform legislation that you need to know about as an individual tax payer. (I’ll cover the impact on businesses in a separate post.)

Individual Tax Rates

There are still seven tax brackets, however the rates have dropped in all except the lowest bracket. The new maximum tax rate was reduced from 39.6% to 37%, which applies for those earning over $500,000 annually, if single, or $600,000 if married.

Here is a comparison of the old and new tax rates:

Comparison of new and old tax rates

While these changes are likely good for everyone, I do have some clients who are married, filing jointly and when I recalculated their taxes under the new law, the results were not what we expected. The husband and wife both work, and it turns out they’re only going to save $200 in taxes! So that’s why it’s important to work with your accountant and look at your situation individually.

Alternative Minimum Tax

The alternative minimum tax (AMT) is a supplemental income tax imposed by the United States federal government. AMT is a separate tax calculation that is run after the regular tax calculations are done. The taxpayer pays the higher of the two taxes. Although this was supposed to be a tax to ensure that everyone, including the wealthy, pay some tax, in the past it did hit many middle income wage earners.

Under the new law:

  • The amount exempt from AMT increases from $86,200 to $109,400, if married, and from $55,400 to $70,300 if single.
  • The phase-out of the exemption amount begins at $1,000,000 – instead of $164,100 – if married, and $500,000 – instead of $123,100 – if single.

So we expect we will be seeing fewer middle income wage earners subject to AMT.

Deductions, exemptions, and capital gains

The standard deductions have nearly doubled to $24,000 (married) and $12,000 (single), however there is no longer any personal exemptions allowed at any income level.

Individual deductions for state and local taxes (SALT) for income, sales, and property are limited in aggregate to $10,000 for married and single filers and $5,000 for married, filing separately. What this means in a high real estate tax state like New Jersey, where you’re probably paying more than $10,000 a year in real estate taxes, you’re going to be taking a hit starting in 2018.

Most miscellaneous itemized deductions – for example, tax preparation and investment expenses – that had been subject to the 2% of adjusted gross income (AGI) floor will no longer be allowed.

As far as capital gains, there were no changes to the tax rate. The maximum rate on long-term gains and qualified dividend income (before 3.8% net investment income tax) remains at 20%.

As the reform bill was being negotiated, there had been talk of doing away with the medical expense deduction completely, which would have hurt the elderly. Instead, they reduced the floor to 7.5% of AGI for tax years 2017 and 2018.

Fortunately, there were no changes to how securities are treated. You can continue to specify which stocks you’re selling, which means if have a lot of the same stock, you can pick your highest basis so that you have the lowest amount of capital gain.

The child tax credit increases from $1,000 per qualified child to $2,000, with $1,400 being refundable. Phase-out of the credit begins at $110,000 (single) and $400,000 (married).

You will no longer be penalized if you don’t have health insurance. Starting in 2019, the new legislation eliminates the Affordable Care Act’s individual mandate.

Mortgage interest and real estate

Before the tax law changed, you could deduct mortgage interest on mortgages up to $1 million, if you’re married, and $500,000 if you’re single. Interest on a Home Equity Line of Credit (HELOC) could be deducted up to $100,000. Under the new law, individuals are allowed an itemized deduction for interest on a principal residence and second residence up to a combined $750,000. Mortgages obtained before 12/16/17 are grandfathered and new purchase money mortgages may be grandfathered if the purchase contract is dated before 12/16/17.

Refinancing of grandfathered mortgages is grandfathered, but not beyond the original mortgage’s term and amount, with some exceptions for balloon mortgages. Interest on HELOCs is no longer deductible.

The rules for capital gain exclusion for a primary residence remain unchanged, which is good for the real estate market. When you sell your primary residence, you get to exclude $500,000 of gain. As the taxpayer, you must own and use the home as your primary residence for two out of the previous five years. This exemption can only be used once every two years.

You will still be able to do a like-kind exchange on real estate, but no longer on personal property. This type of exchange allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the gain on the sale of the first asset.

College savings plans, estates and gifts

If you have a Section 529 plan, you can now pay up to $10,000 a year per student for high school education. This had always been limited to college, but now if you are paying public, private or religious high school tuition, you can use some of your 529 here.

Under the new tax law, the estate, gift and generation skipping transfer (GST) tax exemptions are doubled to $11.2 million per US domiciliary.  These exemptions sunset after 2025 and revert back to the law in effect for 2017 with inflation adjustments. There’s a possibility for “clawback” at death if the law is not changed.

Pass-through and charitable deductions

If you own a business that is set up as a partnership, S-corporation, or sole proprietorship, income was passed through to your individual tax returns, where it was taxed as ordinary income. There is now a new 20% deduction for qualified business income from a partnership, S-corp, or sole proprietorship. There are some income limitations to this deduction, so be sure you consult your tax advisor on this one.

We still have deductions for charitable contributions. Under the new law, a contribution made to public charities is deductible, as long as it doesn’t exceed 60% of the taxpayer’s AGI – this is up from 50% of AGI.

We’ve got your back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation now that it is finally signed into law. Don’t lose sleep wondering what impact the new law will have on you and your family. Contact me at 201.655.7411 or mrollins@krscpas.com.

 

Excluding Gain on the Sale of a Principal Residence

Posted by Simon Filip on

Excluding Gain on the Sale of a Principal ResidenceOne of the most valuable assets a taxpayer will ever sell is their personal residence. Under IRC Section 121 of current tax law, a taxpayer can exclude up to $250,000 ($500,000 if married, filing jointly) of gain realized on the sale or exchange of a principal residence.

Any loss on a principal residence is deemed a personal loss and non-deductible.

What is a principal residence?

The determination whether a property is used as a taxpayer’s principal residence depends on a variety of factors. Some of these factors include:

  • Principal place of abode for the taxpayer’s family members
  • Address on the taxpayer’s driver’s license, automobile registration, and voter registration
  • Mailing address for bills and correspondence
  • Location of taxpayer’s banks
  • Location of religious organizations and recreational clubs with which the taxpayer is affiliated
  • Location of the taxpayer’s doctors
  • Taxpayer’s place of employment

If a taxpayer uses more than one property as a residence, the property that checks the most boxes will likely be assessed as the primary residence. If a taxpayer alternates between two properties, the property used the majority of time during that year will be considered the principal residence for purposes of the IRC Section 121 exclusion. A houseboat, trailer, or apartment a taxpayer is entitled to occupy in a cooperative housing corporation (co-op) may also qualify as a principal residence.

How is gain or loss computed?

Gain (or loss) is computed based upon the selling price less expenses of the sale and the taxpayer’s adjusted basis in the residence. Adjusted basis is original cost plus the cost of improvements (not repairs) made to the residence and reduced by any depreciation claimed on the property.

Gain exclusion requirements

Taxpayer’s must meet three tests for the full gain exclusion to apply:

  1. Ownership – the taxpayer must have owned the residence for at least two years during the five years ending on the date of the sale or exchange. Tip – The measuring period is the actual time between sales, not taxable years.
  2. Use – the taxpayer must have occupied the residence as a principal residence for periods adding up to at least two years within the five-year period ending on the date of sale or exchange.
  3. One Sale in Two Years – the exclusion under Section 121 does not apply to any sale of a principal residence if, during the two-year period ending on the date of sale, the taxpayer sold their principal residence in which gain was excluded under section 121.

Example: A taxpayer sold a principal residence on March 1, 2016 and excluded the gain under Section 121. The taxpayer would not be eligible to claim the exclusion under Section 121 until April 2, 2018.

It is important to note The Tax Cuts and Jobs Act proposed increasing the length of ownership and use from two out of five years to five out of eight years. This was removed from the final version of the bill.

Property used partially as business and partially as principal residence

The IRS takes the position that the Section 121 exclusion is not available for any portion of the residence used for business purposes during the qualifying use period. Thus, if a portion of the property was used as a principal residence and a portion separate from the dwelling unit was used for non-residential purposes, only the gain allocable to the residential portion is excludable. However, no allocation is required if both the residential and nonresidential portions are within the same dwelling unit (commonly seen in home offices). It is important to note gain attributable to depreciation claimed after May 6, 1997 is not eligible for exclusion.

Example – Home office impact on gain exclusion

Jeff, an accountant, purchases a house in 2014. The house is a single unit, but Jeff has one room that is used exclusively for the accountant practice until the property is sold in 2017. Jeff claims depreciation of $3,000 attributable to the portion used as a home office. Upon the sale in 2017, Jeff realized a gain of $75,000.

Since Jeff’s home office is part of the dwelling, no allocation is required. However, Jeff must recognize $3,000 of the gain as unrecaptured Section 1250 gain (currently taxed at 25%), the depreciation claimed for the business portion of his home. The remaining $72,000 is excludable under the Section 121 exclusion.

Selling your principal residence? Get the advice you need for smart tax decisions

For more about how the sale of your principal residence can affect your tax situation, please contact me at sfilip@krscpas.com or (201) 655-7411.

How Tax Reform Impacts Real Estate

Posted by Simon Filip on

How Tax Reform Impacts Real Estate

The Senate and House have passed similar tax reform plans, but the bill is not yet finalized. Legislators are still working to create a unified bill, and the real estate industry can expect significant changes under the “Tax Cuts and Jobs Act.” Key changes include:

Temporary 100% Bonus Depreciation

House Bill:

Modifies existing bonus depreciation rules under the “PATH Act” by increasing the rate to 100% through the end of 2022. It also makes bonus depreciation applicable to both new and used property, where it currently applies only to new property. The 100% bonus depreciation will not apply to real property trade or business (i.e., commercial and residential real estate).

Senate Bill:

Similar to the House bill, except the 100% bonus depreciation will apply only to new property and to real property trade or business.

Section 179 Expensing

House Bill:

The Section 179 expense limitations for 2018 will increase from $500,000 to $5 million while the phase-out limitations for assets placed in service will be increased from $2 million to $20 million.

Senate Bill:

The Section 179 expense limitations for 2018 will increase from $500,000 to $1 million while the phase-out limitations will increase from $2 million to $2.5 million. Qualified real property eligible for 179 expensing will be expanded to include improvements to certain buildings systems including roofs, HVAC, fire and alarm systems, and security systems.

Real Estate Recovery Periods

House Bill:

No changes to current depreciation recovery periods of 27.5 years for residential and 39 years for non-residential real property.

Senate Bill:

Nonresidential real and residential rental property depreciable lives would be shortened to 25 years.

Like-Kind (1031 Exchanges)

House bill:

1031 exchanges will continue for real property, but not for tangible personal property. CAUTION: The proposed rules will trigger 1245 recapture for tangible personal property.

Senate Bill:

Same as House bill.

An updated version of the Tax Cuts and Jobs Act must be approved by both the Senate and House before going to the president to be signed into law.

We’ve Got Your Back

At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation when it is finally signed into law. Don’t lose sleep wondering what impact the tax changes will have on your real estate holdings. Contact me at 201.655.7411 or SFilip@krscpas.com.

Update: Tax reform has now been passed into law. Stay up-to-date on how it impacts real estate investors by checking out the New Tax Law Explained! For Real Estate Investors.

Investing in Foreign Real Estate? Here’s What You Need to Know

Posted by Simon Filip on

Investing in Foreign Real Estate? Here’s What You Need to Know

Much is written about tax compliance and withholding imposed upon a foreign entity or person owning real estate in the United States. The fact that many U.S. taxpayers own real estate outside of the country is often disregarded.

The intent of this post is to touch upon some of the differences of which an investor or potential investor in foreign real estate should be aware.

Depreciation and foreign property holdings

One of the main differences in holding a U.S. rental property compared to a foreign rental property is depreciation. The Internal Revenue Code requires any tangible property used predominantly outside the U.S. during the year to use the Alternative Depreciation System (“ADS”). Residential rental property located in a foreign country must use ADS, resulting in depreciation over a 40 year recovery period compared to the 27.5 year recovery of U.S. residential property.

1031 exchanges aren’t allowed

I have discussed the tax deferral afforded by entering into a 1031 like-kind exchange in previous posts. However, the Internal Revenue Code does not allow taxpayers to exchange U.S. investment property for foreign investment property.  U.S. property is limited to the 50 states and the District of Columbia only. Property located in U.S. territories, such as Puerto Rico, is not like-kind to property located within the United States. There are limited exceptions, under certain circumstances for property located within the U.S Virgin Islands, Guam and the Northern Mariana Islands.

Taxpayers can obtain deferral afforded by a 1031 exchange when trading U.S. property for U.S. property, but not U.S. property for foreign property. However, foreign property is deemed liked-kind when exchanged for other foreign property, thus qualifying for 1031 exchange treatment.

Preventing double taxation

If a taxpayer operates a property abroad as a rental property, taxes will be owed in the country where the property is located. To prevent double taxation, a U.S. taxpayer can claim a credit on the U.S. tax return for taxes paid to the foreign country relating to the net rental income. It is important to note that a taxpayer cannot claim a credit for more than the amount of U.S. tax on the rental income.

The foreign tax credit is also available if the property is sold and there is any capital gains tax in the foreign county.

Additional reporting obligations

A U.S. taxpayer may have additional filing obligations with their tax return as a result of the foreign rental activity.

For example, if a U.S. taxpayer establishes a foreign bank account to collect rent and the aggregate value of the account is $10,000 or more on any given day, an FBAR (Report of Foreign Bank and Financial Accounts) is required to be filed.

If the property is held in a foreign corporation, Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) is required to be filed. If the property is held in a Foreign LLC, then Form 8858 (Information Return of U.S Persons with Respect to Foreign Disregarded Entities) may be required.

We’ve got your back

Don’t go it alone if you’re an investor in foreign real estate. Contact me at sfilip@krscpas.com or 201.655.7411 for assistance with tax planning for your international holdings.

Special Tax Allowance for Rental Real Estate Activities

Posted by Simon Filip on

Special Tax Allowance for Rental Real Estate ActivitiesIf a taxpayer fails to qualify as a real estate professional, losses from rental activities may still be deductible. While real estate professionals are afforded beneficial tax treatment enabling them to deduct losses from their real estate activities, real estate nonprofessionals taxpayers may still benefit.

Exception for rental real estate activities with active participation

If a taxpayer or spouse actively participated in a passive rental real estate activity, they may be able to deduct up to $25,000 of loss from the activity from nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities.

What determines active participation?

A taxpayer actively participated in a rental real estate activity if the taxpayer (and spouse) owned at least 10% of the rental property and made management decisions or arranged for others to provide services. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, and approving expenditures.

Having a property manager will not prevent a taxpayer from meeting the active participation test. A taxpayer’s lack of participation in operations does not preclude qualification as an active participant, as long as the taxpayer is still involved in a significant sense. For example, the service vendors and approving tenants must be approved by the taxpayer before the property manager can commit to a service or lease contract. In other words, the taxpayer is still treated as actively participating if they are involved in meaningful management decisions regarding the rental property.

Maximum special allowance

The maximum special allowance is:

  • $25,000 for single taxpayers and married taxpayers filing jointly
  • $12,500 for married taxpayers who file separate returns
  • $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified

If the taxpayer’s modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), they can deduct losses up to the amount specified above. If MAGI is more than $100,000 (more than $50,000 if married filing separately), the special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately and your MAGI). If MAGI is $150,000 or more ($75,000 if married filing separately), there is no special allowance.

Modified Adjust Gross Income (MAGI)

For purposes of calculating the special allowance for rental real estate activities, modified adjusted gross income is computed by deducting the following items from Adjusted Gross Income (AGI):

  • Any passive loss or passive income
  • Any rental losses (whether or not allowed by IRC § 469(c)(7))
  • IRA, taxable social security
  • One-half of self-employment tax
  • Exclusion under 137 for adoption expenses
  • Student loan interest
  • Exclusion for income from US savings bonds (to pay higher education tuition and fees)
  • Qualified tuition expenses (tax years 2002 and later)
  • Tuition and fees deduction
  • Any overall loss from a PTP (publicly traded partnership)

We’ve got your back

Learn about all the tax benefits you may qualify for if you invest in real estate. Contact me at sfilip@krscpas.com or 201.655.7411.

Food for Thought from NJBIZ FoodBizNJ Conference

Posted by Maria T. Rollins on

Having recently attended the FoodBizNJ conference, “Setting the Table for Growth”, I would like to share some “food for thought” I took away from the conference.

Food for Thought from NJBIZ FoodBizNJ ConferenceNew Jersey is home to many food manufacturers, distributors, retailers, restaurants, farms, and the service providers to those companies. However, the industry does face challenges that are not specific to New Jersey.

Some key concerns are:

Managing the workforce

As many food manufacturing jobs do not require a college degree, it is possible to have a career in the food industry without a college education. If necessary, advanced education can come later, however, “soft-skills” training is necessary and most likely will need to be provided by the employer.

As stated by Donna Schaffner, Associate Director: Food Safety, Quality Assurance & Training, Rutgers Food Innovation, it is expected that individuals entering the workforce today will have 22 different jobs in their lifetime. Having a strategy for training and retaining these individuals is critical. Training time and dollars must be well spent in an effort to retain those trained employees.

Understand your margins

It is critical to have a handle on your production costs and gross margin. The first step to setting prices is to understand your cost structure. This is not an exercise that is performed only once; costs change and require constant monitoring. Costs can change materially over time. Costs that are too high and prices set too low can result in disaster. If changes are not monitored and quickly acted upon, the business may experience significant losses.

Specific challenges for family food businesses

A very low percentage of family food businesses make it to the 4th generation. Many of those that do have a “family first” mantra that extends the definition of “family” to long-time employees. Many successful multi-generational family businesses get each succeeding generation involved as early as possible and strive to teach them the business from the ground up. It is perfectly acceptable if some family members choose a different career path but retain ownership interests in the business.  The most successful multi-generational businesses employ family members in active roles, and each generation enthusiastically attempts to contribute to the business’s successful continuation.

What is one challenge that KRS has seen in multi-generational food businesses?

In our practice, we frequently encounter family businesses struggling with under-performing family members involved  in the business. It is often a difficult subject to approach when “family first” is your mantra.  A good executive training program as well as holding family members to the same standards as other employees is a good first step in avoiding the problem early on. Utilizing a performance-based evaluation and compensation program may also help alleviate any discontent within the generations.

This is one of the many challenges we have seen in multi-generational family businesses. If you are in a family food business and you have a unique challenge contact KRS CPAs as we can offer a fresh, independent evaluation of your business.