Recently, I had a taxpayer call me regarding the sale of a rental property. The taxpayer sold the property for approximately $500,000 and there was approximately $100,000 of tax basis remaining after depreciation. The combined federal and state tax exposure was almost $100,000.
The taxpayer indicated he wanted to structure the sale as a like-kind (IRC 1031) exchange as he had already found a replacement property and wanted to defer the income taxes. My first question was, “Did you already close on the sale?” The taxpayer’s response was, “Yes, I received the funds, and deposited the check directly into my bank account.”
It was not fun for me to relay this to the taxpayer, but I had to let him know his receipt of the funds caused a taxable event. I further explained that to structure a 1031 exchange properly, an intermediary was needed to handle the sale and related purchase of the replacement property. Once the taxpayer received the funds, it became a taxable event.
Getting a Like-Kind Exchange Right
To avoid the same error, taxpayers should contact their advisors before completing the sale transaction. I have worked with taxpayers who did not realize a like-kind exchange was available to them, and was able to properly structure the transaction in mere days before the closing of their property.
Following the specified guidelines to completely defer the tax in a like-kind exchange are critical. If you anticipate a sale of real estate and want to defer gain recognition, consult with your tax advisor before closing the sale.
We’ve Got Your Back
Check out my previous blog, Understanding IRC Code Section 1031 and Why You Should Care for more details on properly deferring tax in a like-kind exchange transaction. If you have questions about this type of transaction, give me a call at 201.655.7411 before you close on the sale.
Making charitable contributions is a great way to reduce your taxable income. The most common type of donation is a monetary contribution. Taxpayers are allowed to make tax deductible monetary contributions to qualified organizations in amounts up to 50% of adjusted gross income.
Property gifted during a taxpayer’s lifetime receives a carryover basis, that is, the gift recipient takes the same basis as that of the donor. This means the recipient of the gift takes the same tax basis in the property as it had when owned by the decedent. Consequently, the increase in value of the property that occurred during the decedent’s lifetime is subject to federal and state taxes when the property is sold.
If you are familiar with basic accounting and maintain your own set of books, but can’t seem to make sense of the reports your accounting software is producing it may be time to sit down with your accountant. This is a great way to analyze how your business is actually doing. Your accountant is well versed in what your cash flow and finances are comprised of and could be an extremely useful resource when it comes to planning your future, setting goals, and assuring growth.
A real estate professional who is involved in buying real estate with the intention of selling for a profit in a short time frame, or flipping is usually considered a dealer. Contractors and builders who build houses and commercial structures, and subsequently sell the finished property to customers are also considered dealers.
In a business sale, the seller prefers to sell the stock representing the business ownership, but the buyer prefers to purchase the assets of the corporation. The seller wants a stock sale because it generates a capital gain, taxed at a 20% rate. The buyer prefers to purchase the assets because the full purchase price is allocated to the assets purchased, creating tax deductions for depreciation and amortization. In a stock purchase, the buyer steps into the seller’s shoes, receiving no tax benefit from the price paid until the business is sold. This issue is usually resolved by compromise, sometimes involving a price adjustment.
Let’s face it, to be called a certified public accountant (CPA) one must have a certain educational background as well as proven knowledge (i.e., by passing a rigorous exam). We believe CPAs have the business acumen that allows them to prepare basic financial reports and tax returns. You may also expect your CPA to fill the role of business consultant to help you achieve certain business and personal results.
Cash method – under the cash method, revenues and expenses are recognized based upon receipt and disbursement of funds. Contractors are generally eligible for the cash method of 
Non-U.S. persons are subject to income tax only on their U.S. source income (income earned within the United States). According to the Internal Revenue Service, most types of U.S. source income paid to a