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Individual Income Tax

Selling your home? Don’t share the profit with Uncle Sam

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Itching for a change of scenery? Whether you plan to sell your home because of retirement, a job change,

or a desire to downsize or move to a larger home, you may be eligible for a very attractive tax break.

If your home has appreciated in value, you may be able to exclude all or part of your profit from the sale of your home on your federal income tax return. Eligible individuals may exclude up to $250,000 of gain from their income, while married couples who file jointly may be able to exclude up to $500,000 of gain. Just be sure you familiarize yourself with the rules before you sell your home.

Who and What Qualifies?

Your home can be a house, a cooperative apartment, a condominium, or another type of residence. To qualify for the exclusion, you must have owned and used the home as your principal residence for at least two years (a total of 24 full months or 730 days) during the five-year period ending on the date of the sale. The tax law allows you to utilize the exclusion multiple times over your lifetime as long as you meet the applicable requirements. However, you may not use it more than once every two years.

You can have only one principal residence at a time. That means that if you own two homes, the home you use for the majority of the year would generally be considered your principal residence for that year.

In the case of the $500,000 exclusion for a married couple filing jointly, only one spouse must meet the ownership requirement, although neither spouse may have excluded gain from a previous home sale during the two-year period ending on the sale date. Both spouses must meet the residence (use) requirement in order to qualify for the $500,000 exclusion.

Ownership and Use Do Not Have to Be Continuous

Your ownership and use of the home do not necessarily have to coincide. As long as you have at least two years of ownership and two years of use during the five years before you sell your home, the ownership and use can occur at different times. For example, you can move out of the house for up to three years and still qualify for the exclusion.

A Reduced Exclusion Is Possible

If you are unable to meet the qualifications for the full $250,000/$500,000 exclusion, you may be eligible for a reduced exclusion under certain circumstances. These are:

  • You have to sell your home because of a change in place of employment;
  • You must move for health reasons; or
  • You must move because of other qualifying “unforeseen circumstances.”

The amount of the reduced exclusion is generally based on the portion of the two-year use and ownership periods you satisfy.

As you can see from this general summary, the rules for the gain exclusion can be complex.

How do I measure the gain before any possible exclusion? The calculation of the basis of a home varies depending on how the home was acquired. Did you purchase your home? Substantially improve your home? Receive all of the home or an interest in the home by inheritance or gift? All these factors effect how to calculate the basis of your home to measure the capital gain. We can provide more details regarding how to qualify for this valuable tax exclusion and how to calculate the gain on the sale of your home. Please contact us when contemplating selling your  home.

Home Office Tax Tips

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Working from home can potentially deliver some attractive tax advantages.

Your New Home Office!

If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

Owe NY Taxes? It Could Cost You Your Driving Privileges

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Ignoring a tax debt could cost you more than you might think. Approximately 16,000 delinquent New York taxpayers were recently informed that their driving licenses will be suspended if they don’t pay up.  Businesses or individuals who owe less than $10,000 will not be affected. New York is following the lead of California, which passed a similar law in October 2011.

Are you in Business or is it Just a Hobby?

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Whether an activity is classified as a business or a hobby can make a significant difference when it comes to taxes. Hobby losses are subject to “hobby loss rules”, under which the deductible expenses are limited to the amount of income generated by the activity. Even the expenses that can be deducted are subject to a 2% of adjusted gross income (AGI) floor. Deductions from business activity income, however, may exceed income and are fully deductible.

 To illustrate, let’s suppose John, a photographer, decided to start a side business, taking pictures at weekend weddings. He earned $4,000 and incurred travel expenses of $3,000 and supply expenses of $2,000. If John’s side job is classified as a business activity he may deduct both expenses to arrive at a $1,000 loss. If it’s classified as a hobby, however, he may only deduct expenses to the extent of his earnings $4,000(assuming those expenses exceed the 2% of AGI floor), and no loss would be allowed. 

While the difference is clear in terms of the tax ramifications, whether or not to classify an activity as a hobby is a rather complex matter.

For an activity to be considered a business, it must be engaged in for profit. How will the IRS determine the intent of the business owner? Here are several factors they consider:

  • How the activity is handled – To be considered a business an activity must be conducted in a businesslike manner. The taxpayer can establish this by maintaining separate personal and business bank accounts, and keeping records and books, maintaining a website

 

  • Historic performance- A long streak of losses indicates a hobby, whereas sustained earnings indicate a for-profit activity

 

  • Nature of the activity- If the activity can provide some sort of recreation or other personal motive, it points to hobby status. If, however, there is no conceivable personal motive it points to business activity

 

These are only a few of many factors the IRS may consider. We recommend that you consult with a tax professional to determine the proper classification of your business activity.

IRS Offers New Simplified Option for ‘Office in the Home’ Deduction

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Beginning 2013, the Internal Revenue Service is offering a simplified method that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

The new optional deduction is capped at $1,500 per year based upon $5 a square foot for up to 300 square feet. This will serve to reduce the paperwork and recordkeeping burden on small businesses.

While the new safe-harbor may be more convenient, in many cases the traditional ‘office in the home’ deduction would yield a greater tax savings. Between mortgage interest, real estate tax and utilities, many taxpayers exceed the $1,500 cap of the new deduction. The new deduction also has the disadvantage that if it would result in a loss it cannot be taken. This is in contrast to a regular office in the home deduction, which can result in a loss carry-forward. The new deduction also cannot be combined with a loss that is carried forward from the previous year.