The Tattooed Investor

Partial Exclusion on a residence you've used as a rental....

I’m sure most of you know about the exclusion from tax the IRS allows on the gain from the sale of a personal home. But did you know you can still take advantage of a partial home sale exclusion on a home you once lived in but also used as a rental?

Huh?..yeah, that’s what I thought when I typed it...anyway, here's a scenario:

Suppose a single taxpayer sells a home for $600,000. She originally purchased the house in 2000 for $250,000. She lived in the home through March 31st, 2006 at which point she began renting the place out. It continued to be used as a rental up to the date of sale on February 28, 2010. The reason she sold the home was due to a job-related transfer in February 2010. The sales costs were $32,000 and the depreciation taken during the rental period was $27,800. What would the taxpayer’s taxable gain be from this sale?

The odd thing here is that she sold the house during the time it was a rental and the root question is whether or not she would still qualify for a partial exclusion...and what about the requirement that she live in the home 24 out of the last 60 months (look back period)?...In this case, the homeowner used the house as a residence 13 out of the 60 months used in the look back period:

Rental - April 1, 2006 through February 28, 2010 = 47 months
Used as a Residence = 13 months prior to that

Section 121 Exclusion (this is what us nerds refer to instead of the Home Sale Exclusion since is this section where the IRS allows it) = (13/24) * $250,000 (total possible exclusion amount for a single taxpayer) = $135,425 of gain exclusion.

Something to consider, Section 121(c)(2) says:

"The reduced exclusion applies to ANY sale or exchange of a principal residence if:

The exclusionwould not (but for these rules relating to the reduced exclusion) apply to the sale or exchange by reason of:

1) A failure to meet the ownership and use requirements, or

2) The limit of only one sale every two years, and

The sale or exchange is by reson of a change in place of employment, helath or (to the extent provided in regulations), unforeseen circumstances.

As a result, the partial exclusion applies to any sale or exchange of a principal residence, and in this case, by virtue of the job-related move.

Now, to complete the journey to geekville, I will show you how the numbers work:

Sales Price:                            $600,000
Cost:                $250,000
Depreciation: ($27,800)
Basis:                                    ($222,200)
Sales cost:                              ($32,000)

Gain before exclusion:                           $345,800
Section 121 Exclusion:                         ($135,425)

Taxable Gain:                                         $210,375

...yeah, i know there are some rounding differences....don’t get your abacus all up in a knot...I just want you to see the concept of what we’re doing... ;-)

Hope this helps you...if you have any questions, give me a buzz...
Mike Henninger, EA - (484) 245-4155

Summit Accounting Services, LLC

Don't tell me what I CAN'T do...

Don’t tell me what I can’t do….EVER….

Have you ever been sick and called your plumber to have him diagnose you? Or rewire your house and ask your postal carrier if you should use 14/2 wire for the job?

OF COURSE NOT!! And why?

Because, in these types of instances we seek the advice of experts, people who have real world experience doing exactly what it is we’re trying to figure out. Seems pretty obvious, eh?….

Then why is it, when we attempt to change our lives for the better (via things like real estate or starting a business..or just live life on our own terms) we listen to people who have never, EVER done it or even attempted to do it?? If we’re honest, we take the advice of people with absolutely ZERO experience, but somehow they’ve become total experts on what can’t be done.

See, the problem is, these people are usually the ones closest to us. And most of the time, they don’t intend to be dream crushers. They’ve just never really allowed themselves to believe life can be something other than the status quo. They’re just projecting that same disbelief onto you. For the most part, they’ve focused on “not being able to do anything except average” and really believe that’s all life is. Their negativity is generally coming from two sources; 1) They’re afraid that if you succeed, their relationship with you will change or end and 2) subconsciously, they know misery loves company and if you’re willing to work your arse off and succeed, it’ll be an indication that they could probably do more in their own life to make it better…and that means they’re currently “under-performing”…not a comfortable thing to have to admit.

So, what to do? Obviously, if these people are family, you can’t kick them all out of your life. But I will say, that I have really cut off friends from my past who had no experience accomplishing goals but knew all too well how things didn’t work, how the rich got richer, how so and so got lucky, how no one is making money now, how everyone they knew who tried real estate investing “got screwed”…This last makes sense because they seemed to only want to hang out with losers…anyway…I cut ALL those people out of my life…and replaced them with people who were not only succeeding in what I wanted to achieve, but were CRUSHING IT!!!

This did two things. First, it eliminated all the negative crap I used to hear on a daily basis and replaced it with positive, goal achieving, work with relentless aggression towards freedom, b*lls to the wall, passion that only the truly successful have. Folks, I’M A MANIAC WITH REGARDS TO THE PASSION I HAVE FOR WHAT I’M WORKING TOWARDS…A MANIAC!!!

My dreams are awesome so my effort to achieve them has to be equally awesome.

In closing, make it your objective to surround yourself with people who are succeeding at what you want to do, fill your mind/ears/eyes with the things YOU determine to be success and happiness and most importantly, be true to your vision of what you want life to be.
I know some of this sounds harsh, but this is serious business…this is YOUR life…In the words of my buddy David Alexander, “It’s your life. You get to design it the way YOU want”…And don’t worry, those who truly love you will “get it”…eventually…

- The Tattooed Investor

A Video on Consistency... (sorry for the lighting)...

Tax day is almost here!!!!

It's April already. Are your taxes done? If not, here are some stress-relieving ideas:

Don't Procrastinate Anymore - Resist the temptation to put off your taxes until the very last minute. Our office needs time to prepare your return, and we may need to request certain documents from you, which will take additional time.
Don't Panic If You Can't Pay - If you can't immediately pay the taxes you owe, consider some alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late-payment penalty rate. You also have various options for charging your balance on a credit card. There is no IRS fee for credit card payments, but the processing companies charge a convenience fee. Electronic filers with a balance due can file early and authorize the government's financial agent to take the money directly from their checking or savings account on the April due date, with no fee.
Request an Extension of Time to File - But Pay on Time - If the clock runs out, you can get an automatic six-month extension, bringing the filing date to October 17, 2011. The extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late-payment penalty if you have not paid at least 90 percent of your total tax by that date. Call us for a variety of easy ways to apply for an extension.

I hope this helps take some of the "worry" out of the last week of the tax season...If you have questions or you need to file a return or an extension, please don't hesitate to call. We have clients nationwide and can accomodate your situation. Talk to you soon...

Michael Henninger, EA

Summit Accounting Services, LLC - (610) 440-2560

Tax time...do you need to file????

Yeah, I'm a real estate investor...but what some may not know is this...prior to investing, I was an accountant and also have my own tax and accounting firm....so, to help my fellow REI's, I'm going to periodically write some blog articles to help during tax season...hope they help..

A common question people ask me is "Do I need to file a return?" and unless you're a member of Congress or a White House appointee, you must file if you meet certain IRS criteria. The following should help you figure it out for 2010. Keep in mind, this crap is unbelievably boring for most, so if you need more info, hit me up: 484.245.4155 or email: mike@thetattooedaccountant dot com....

Single Taxpayers
If you expect to file a single return, the IRS requires you to file a return for 2010 if your gross income for the year is at least $9,350 if you are under age 65 and $10,750 if you are 65 or older.

Married Filing Jointly
For married persons filing jointly, you are required to file a return if gross income for 2010 is at least $18,700 if both of you are under age 65. If one of you was at least age 65 in 2010, the limit is $19,850 - and if both of you were 65 or over, you must file if you made at least $20,900.

If you are not living with your spouse at the end of the year or you weren't living with them on the day they passed away, the IRS requires you to file a return if your gross income is at least $3,650. Each personal exemption in 2010 is worth $3,650.

For married persons filing a separate return, no matter what age, you must file a return if gross income is at least $3,650.

Head of Household
For persons filing as head of household, you must file a return for 2010 if gross income is at least $12,000 if under age 65 and $13,400 if at least age 65.

Qualifying Widow or Widower
For persons filing as a qualifying widow or widower with a dependent child, you must file a return for 2010 if gross income is at least $15,050 if under age 65 and $16,150 if at least age 65.

Other Situations That Require Filing
Even if you don't earn this much income, other situations necessitate filing a tax return. For example, a dependent has to file a return for 2010 if they received more than $950 in unearned income or more than $5,700 in earned income.

Even more incessant info from the heart of Nerdville:

You Owe Certain Taxes. If you owe FICA or Medicare taxes (also called payroll taxes) on unreported tips or other reported income that were not collected, you must file a return. You must also file a tax return if you are liable for any alternative minimum tax. Finally, you must file a return if you owe taxes on individual retirement accounts, Archer MSA accounts, or an employer-sponsored retirement plan.

Advance Earned Income Tax Credit Payments. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, which may be returned in the form of a refund. If you receive advance payments for the earned income credit from your employer, you must file a return.

Self-Employment Earnings. If your net earnings from self-employment are $400 or more, you must file a return.

Church Income. If you earn employee income of at least $108.28 from either a church or a qualified church-controlled organization that is exempt from employer-paid FICA and Medicare taxes, you must file a return.

Questions?

Feel free to call my office, 610.440.2560 or call me directly 484.245.4155 or email me: mike@thetattooedaccountant dot com... Let's rock tax season!!!

"just because your friends jump off a bridge doesnâ€™t make it rightâ€

As a kid, I remember hearing this all the time. Our moms and dads wanted us to make decisions on our own and to not “do things” just because everyone else was…they were trying to teach us to “stand out from the crowd”….it taught us, or should have, to go against the flow and this is powerful advice since as adults, the flow usually leads to Suckville.

So, why was this advice good then, but not good now?…. The majority of people are taught to “go to school, get good grades, go to college, get a good job, work 35 years, retire and THEN relax” because everyone else is doing it. When anything out of the ordinary is mentioned, like “hey, i’d like to start my own business” or ”college might not be for me” we’re told, “You don’t want to do that, you should do what everyone else is doing”..i.e., go to school, get good grades, get a job, etc…..ARE YOU KIDDING ME???? LISTEN, IF YOU ARE SERIOUS ABOUT CREATING YOUR DREAM LIFE, YOU’RE GOING TO HAVE TO FIND THE KID WHO HAD THE COURAGE STAND OUT FROM THE CROWD. I struggled with this for years…I thought having a job was “safe” and the right thing to do because everyone else was doing it….I went to school because everyone else did…I lived a life a certain way because everyone else did….and I was miserable. I’m not saying getting good grades and going to college is a bad thing (although I am on a crusade to prove my tuition was the biggest waste of money ever spent) and for some, even most, living in the “traditional” template is fine….but it wasn’t for me. It’s ironic how we were not supposed to follow the crowd off the bridge when we were kids, but that’s exactly what many people are expected to do as adults by living a life by default. Like I said, the traditional route is good for many people and there’s nothing wrong with that unless it prevents you from living your dream life. For example, my wife LOVES her job as a nurse…but for me, being an accountant was like a slow death.

The point I want to make here is this; this post is not about not going to college or quitting your job…it’s about listening to the still small voice, it’s about making sure you’re where you’re supposed to be and living the life YOU want….not the one created by someone else’s interpretation of what happiness is. If you’re in a job you love and you feel complete, you’re already living the dream. If you’re in a job and you hate the very thought of even being there, then stop ignoring it, find out what is is you want and start taking massive action to change it. The route I took isn’t for everyone, but it was the route God created for me based on the passions He placed in my heart. Believe me, when you’re “on point”, you’ll know it. It’s kind of like when you’re tuning to a radio station….when you’re tuned in, the white noise vanishes and things are crystal clear. So, make the decision to “get tuned in”.

To answer the question of whether I’d jump off a bridge because everyone else was doing it…as a kid, maybe, as an adult, no way….I’m more happy than I’ve ever been and it’s because I took stock of what I truly wanted my life to be in every aspect and created a plan to make it real….whatever “risks” were involved, I was prepared to take them…and I’m stronger than ever as a result….

BTW, the inspiration for this post came from a video I watched of my son……he was jumping off a bridge into the Lehigh…..

Mike – The Tattooed Investor