In this tax tip article, we look at the sale or transfer of a house due to a court ordered decree of divorce or separation instrument.
The costs of selling real estate are considerable. Real estate commissions, closing costs, and fees can be many thousands of dollars. The selling process can also be extremely time consuming. The advantage is that real property, meaning land and houses, qualify for special rules of property transfers.
If the house is transferred to a former spouse as the result of a divorce, then the nonrecognition property transfer rules can apply. This means that the former spouse will own the house and no taxes are liable to either party.
Selling the house
There are times when selling the house is the best option for both parties. It provides cash and allows both spouses to live in new communities. Section 121 of the tax code allows a person to exclude from income up to $250,000 of gain on the sale of their primary house. If both parties have lived in the house for two of the past five years, both parties may be able to exclude $500,000 of gain, or $250,000 for each spouse in their income tax. Because of that, the sale of a house may be largely tax free. It is important to note, however, that vacation homes don’t qualify for this divorce law exception. The IRS only applies this for the primary home.
For example:
A married couple in Duarte jointly owns a house worth $700,000 with a mortgage of $100,000. As a result of a divorce, one spouse is required to transfer their interest in the house to the former spouse. This means that one spouse surrenders their $300,000 share, or his/her half of the $600,000 of equity in the house to their former spouse, and will have no tax due on this transfer. The former spouse thus receives $600,000 of equity and no taxes are due until the house is sold.
However, if the house in Duarte is sold for $700,000—(we’ll ignore the commissions and closing costs to keep it simple)—each spouse will receive $300,000 after paying off the $100,000 mortgage. Up to $250,000 of that gain per spouse can be excluded from income. Therefore, $50,000 is taxed at the appropriate capital gains rate of 15%, yielding a tax of $7,500 for each spouse. Each spouse will net $292,500 and the total cash payment made to former spouse will be $585,000. Notice that the sale of the house provides $15,000 less to the former spouse due to taxes, and presents a tax bill of $7,500 to the spouse surrendering their interest in the house. The real amount provided to the former spouse will be even less once commission and selling costs are included.
MiklosCPA can help you determine the best way to divide assets while minimizing your tax liability while going through a divorce. Divorce law is no simple matter. If you find our free tax resources useful, please share it and connect with us on our social media pages.
Now, just to be clear, this isn’t about the commute going from home to work and back. However, if you have to stop by to drop off some documents for a client, or if you went to a conference, then some of that mileage may apply as a deduction part of unreimbursed travel expense! To able to write off travel expenses, you are required to meet certain conditions:
Your travel should be temporary or your assignment should be temporary, OR
You have to be away from your tax home (for example, Azusa) which may be different from your family home (for example, Temecula). Should the tax home not be the same as your family home, you may be face with a different set of rules when it comes to deducting travel expenses on your tax return.
If you meet one of the conditions, the unreimbursed travel expenses could be deductible. You would have to determine the category and deduction limitations. Some of the expenses you can deduct as travel expenses are: transportation costs, taxi fares, commuter bus charges, car, lodging and meals, tips and other similar ordinary and necessary expenses which are related to your business travel.
Example 1: You live and work in Los Angeles, and you had to travel to San Francisco to meet your client in her place of business. You took a shuttle to and from the Los Angeles airport, flew from LAX to SFO, rented a car and stayed one night at a hotel. If you were not reimbursed for any of these costs, you may able to deduct these travel expenses on your individual tax return.
Example 2: You live and work in the city of Monrovia and your corporate office in San Diego is requesting you to work out of the San Diego office for the next 20 months while completing your project. During these months, you periodically visited your home in Monrovia. Since you were realistically expected to work in San Diego for more than one year, you cannot deduct any of your travel expenses since San Diego became your tax home.
Still a bit confused? That’s okay. MiklosCPA knows that the IRS has some rules which are difficult to figure out. Our firm can help you determine if your expenses meet the requirement, and you may end up saving a bit of money on your taxes. Give us a call to help review your situation and we can help guide you to the right decision!
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Individuals can take advantage of moving expense tax deductions, however here are some of the things you may need to show:
You move within one year of accepting your new job.
Your new job is at least 50 miles away from your previous home than your last job was from your previous home.
Your new job is a full time position
If you are self-employed, you may have to show some additional reasons why you had to move.
If you qualify, then you are able to deduct the money you spent for household goods, moving, traveling to your new home, and hotel costs while setting up your new home.
Just remember that not all costs can be deducted as part of your moving expenses. Some of these are:
losses from sale of your home
real estate taxes
return trips to your former residence
driver’s license
expenses of entering or breaking a lease, just to name a few.
For example, during the year you lived and worked in Glendale, CA. The distance from your home to your office was 5 miles. You have accepted a new full time position in Bakersfield and decided to relocate instead of driving 120 miles one way each and every day. Your start date is next month and you plan to buy a place in Bakersfield to following month. Within the first month of your employment you packed up all your household goods and personal items and paid a moving company to transport your belongings.
Since your new job will be 115 miles (120-5), you meet the distance requirement
Any reasonable expenses to the moving company may be deduced.
As the position is a full time position, you may be able to deduct your moving expenses.
To make your preparation for your tax return as stress free as possible, make sure you keep good records of your moving expenses and readily available for tax preparer. If in doubt, keep the receipt anyway, as it may be helpful later on.
At MiklosCPA, we understand that some of these rules and applicable limitation may be hard to follow and understanding the maze of the tax code may seem overwhelming. Let us help you make things easy and clear! Give us a call to help review your situation and guide you in making the right tax decision for you.
As a business owner, your focus will always be to grow your business. But while you are finding these new opportunities, you are faced with a variety of challenges that can include managing your accounting and business taxes. We can relate with how frustrating this can be.
The following is a quick guide to help you better navigate the maze of business taxes. Need more help than that? Not a problem, MiklosCPA can guide you through!
We’ll provide you with a customized set of services to help you ease your stress and worry about your books so you can sleep at night. Here is a quick reference guide for some of the tax forms you may need:
Your Business
Responsible for
Reporting
Partnership
Annual return of income Employment taxes Excise taxes
IRS Form 1065 IRS Form 940 / 941 / 944 / 943 Excise Tax Forms
Partner in a partnership (individual)
Income tax Estimated tax Self-employment tax
IRS Form 1040 Schedule E IRS Form 1040-ES IRS Form 1040 Schedule SE
Sole proprietorship
Income tax Estimated tax Employment taxes Excise taxes Self-employment tax
IRS Form 1040 Schedule C-EZ / C / F IRS Form 1040-ES IRS Form 940 / 941 /944 / 943 Excise Tax Forms IRS Form 1040 Schedule SE
S Corporation
Income tax Estimated tax Employment taxes Excise taxes
IRS Form 1120-S IRS Form 1120-W IRS Form 940 / 941 / 944 / 943 Excise Tax Forms
S Corporation (shareholder)
Income tax Estimated tax
IRS Form 1040 Schedule E IRS Form 1040-ES
C Corporation
Income tax Estimated tax Employment taxes Excise taxes
IRS Form 1120 IRS Form 1120-W IRS Form 940 / 941 / 944 / 943 Excise Tax Forms
Remembering IRS filing deadlines for your business taxes and forms is a business by itself. However having a reliable tax firm, like MiklosCPA, a California based CPA practice can show you how to reduce your potential tax penalties by filing the right business tax forms correctly. Give us a call to set up a free consultation for your tax and accounting needs.
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As months and years pass by, your business records will help you to make vital business decisions along the way. These decisions will range from buying equipment, hiring employees, to thinking whether or not it’s time to get a bigger space. You will also want to know how much your original investment returned to you. To make these decisions, you have to make sure you have your records in order.
“Why keep records?”
Simply put, your business records are the history and accomplishments of what you have done so far. A good CPA will be able to give you the perspective you need on how things are going, and more importantly, what to do next. Wise tax planning is the key to running a successful business.
Some additional reasons are:
To help prepare your tax returns
To support items on your business tax returns
Help defend your deductions during with IRS audits
Prepare your financial statements, and
To provide easier access to a line of credit at the bank.
How Long Do I Keep Records?
You must keep all your records until the period of limitation ends for the return on which you have listed the item, whether it is income or deduction related. The period starts from the date the tax return was filed. If you filed the return earlier, the date is still on the due date of the return.
Should You…
Applicable Period
File a claim for a loss from worthless securities or a bad debt deduction
7 years
File a claim for credit or refund after you filed your return
Later of 3 or 2 years after the tax was paid
Owe additional tax
3 years
Do not report income that you should report and it is more than 25% of the gross income shown on the return
6 years
File a fraudulent return
No time limit
Do not file a return
No time limit
As a business owner, the last thing you may want to do at the end of the day is to sit down in front of a computer and type in numbers. Not to worry. MiklosCPA is here to help.
We can provide affordable and customized bookkeeping services at our California-based accounting firm. Whether you just need a few templates to get you started, or you would like us to take a more active approach in getting your information into QuickBooks or another accounting system, we work hard to help simplify the process for our clients so you can spend more time focused on the most important thing: YOUR BUSINESS.
Running a successful business requires professionals. Contact our accounting practice for a free consultation on how we can help your business grow with your own customized solution.
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MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
