Tax Questions Answered by Your San Francisco Tax accountant

October 2017

179 Limitation | 1031 Exchange Requirement |W-4|Home Sale

W-4 Confusion

Question: My husband and I both put down "married" and "no allowance" on W-4, but we still owe so much taxes at year end. Why?

 

Answer: W-4 is aimed at reflecting the average American household. Couples both with similar high income could end up paying higher tax rates with a joint return. Therefore, it might help to choose "married but withhold at higher rate" to withhold more during the year.
 
When you have other nonwage income(rental, interest, stock sale, etc.),   when you have two jobs, or when you have bonus and/or stock compensations, W-4 needs to be carefully reviewed to ensure you are not short on withholding. IRS does have a withholding calculator (click here) to help you fill out W-4. However, in the cases you have more complicated tax situation, you would seek professional help to do a tax projection mid-year there would not be unpleasant surprises at tax time.

Section 179 Taxable Income Limitation

Question: My wife just started a small printing business as a single-member LLC. She just bought over $100K worth of equipment.  Is she able to use section 179 to write off $100k in one year even the first year there is very little business income?  I have a regular salaried job with over $200k/year pay.

 

Answer:

Under IRS section 179 income limitation rule, the total amount you can deduct each year is limited to the taxable income from the active conduct of any trade or business during the year. Taxable income for this purpose includes net income and losses from " Section 1231 gains (or losses)" "Interest from working capital of your trade or business"  and Wages, salaries, tips, or other pay.
 
If you wife treats her single-member LLC as a sole proprietorship for tax purpose, she will report her business on 1040  Sch. C. Her wages or other employee earnings are included in net business taxable income. When you file jointly, your wages are also included in the net business taxable income calculation.  Simply speaking, she will be able to take advantage of the Section 179 deduction without the income limitation concern.

Layoff,divorce and home sale exclusion

Question: We are going through a divorce. My husband lost his job several months ago.  Due to this hardship, is there an exception to the 2-year rule to home sale gain exclusion.

 

Answer: Individuals can exclude up to $250,000 ($500,000 for a married couple filing jointly) of gain from the sale of their primary residence. To qualify for the exclusion, the home must have been owned and used as a primary residence for two of the prior five years. However, Reduced exclusions do apply in certain circumstances when the ownership and use tests not met. For example, the home was sold due to serious health issues, change of employment or certain unforeseen circumstances such as divorce and unemployment. Therefore, in your case, it seems that you might still qualify for a reduced exclusion.

1031 Exchange Requirement

Question: On 1031 exchange, I want to trade mine five single-family homes(used for rental) to 1 large duplex(will be a rental). Duplex has the bigger value. Will the exchange be tax-free?

Answer: In a 1031 exchange, property relinquished, and potential replacement properties must be held by the taxpayer for trade or business or investment purpose. The property can not be a personal use home such as a primary residence. The property cannot be bought primarily with the intent to resell. However,  there is no holding period specified in the tax law. In your case, both properties you wish to sell any property you want to replace are for rental. Therefore, they qualify.

 

In a tax-deferred IRS section 1031 exchange, the first requirement is "Like-kind."  It is considered "Like-kind" property as long as the nature or character of the property is same, not its grade or quantity. Therefore,  almost any type of rental,business-use, or investment real estate would qualify as long as the fair market value of the replacement properties does not exceed 200% of the aggregate fair market value of all the exchanged properties.  The Therefore, family home and duplex can be considered as "like-kind."

What's your question?

Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.

CPA San Jose, CPA San Francisco  

T: 888-388-1422

T: 415-704-8989

F: 415-805-8934

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