How to lock down the home sale exclusion

Good news if you’re selling your home: The home sale exclusion wasn’t touched by the massive tax law changes. Arguably one of the biggest tax breaks to be left intact, it allows you to exclude capital gains tax on the first $250,000 in profit from a sale of a home. The maximum home sale exclusion is doubled to $500,000 if you’re married and file jointly.

How the exclusion works

The basic requirements are relatively simple. To qualify, you must have owned and used the home as your principal residence at least two of the previous five years. For example, if you live in a home for two years and then move full-time to a vacation home for three years, you can still qualify for the exclusion on the sale of the first home.

Consider these factors if you’re determining whether or not you can take advantage of the home sale exclusion:

  • The years you own and use your principal home don’t have to be consecutive. For instance, you might live in a principal residence for one year, switch to another home in the second year and then move back to the first home in the third year.
  • Joint filers can claim the maximum exclusion if either spouse owned the home for at least two out of the last five years leading up to the sale date, both spouses have lived in the home for two out of the five years and neither spouse has elected the exclusion within the last two years. This could be crucial for recently divorced or remarried taxpayers.
  • Generally, a short temporary absence won’t count against you. A college professor on sabbatical or snowbirds spending winters in Florida should be OK.
  • If you split time between two homes during the year, the place where you stay most often is generally treated as the principal residence. Therefore, to claim the exclusion for a home, make sure you reside there more than half the year for at least two years.

You may qualify for a partial exclusion if you sell a home before you meet the two year requirement due to an employment change, health issue or some other unforeseen event. In this case, then exclusion is prorated based on your use.

Contact Dye & Whitcomb, LLC if you have questions about how the home sale exclusion could help you save on your 2018 tax bill.

Your roadmap to business travel deductions

If you have a business trip lined up to a charming city or summer resort, you may end up tacking on a few days of vacation while you’re there. And guess what? Most expenses will remain tax-deductible if you stay within the tax law boundaries.

Deducting your business-vacation travel expenses

To claim deductions for domestic business travel, the primary purposes of the trip must be related to business. Simply put, you must clearly spend more time on business than pleasure. Clearly separate your travel days on your calendar between “business days” and “personal days.”

When it comes to writing off expenses, start with airfare or other round-trip transportation, lodging and 50 percent of the cost of your meals. Add on incidentals like cab fare to a business meeting. Just remember that costs related to the vacation part of the trip, such as extra hotel nights and sightseeing excursions, are nondeductible.

Here are a few hints for maximizing deductions on the trip:

  • Keep a close watch on business versus pleasure days. If the IRS ends up deeming the trip a disguised vacation, no deduction is allowed.
  • The 50 percent deduction for business entertainment has been eliminated. The IRS is expected to issue guidance on how this change affects deductions for meals with clients.
  • Don’t go overboard. You can’t deduct expenses that are lavish or extravagant. That means you probably shouldn’t splurge on the penthouse suite.
  • Keep business travel expense records. Without receipts and other proper records, your deductions are in jeopardy.
  • Know the rules around traveling with your spouse. Generally, travel expenses related to a spouse accompanying you on the trip are nondeductible unless there’s a valid business reason, such as when your spouse also works for your company.

Contact Dye & Whitcomb, Fort Collins CPAs if you’re thinking about adding a vacation to a business trip. We can help you understand what will and won’t be deductible.

Looking to hire new employees or take on extra help for the summer?

Is your company looking to hire new employees or take on extra help for the summer? If you hire workers from groups of people the government identifies as having major barriers to employment, you may be eligible for tax credits.

The Work Opportunity Tax Credit (WOTC) is one such credit recently extended through 2019. In addition, long-term unemployment benefit recipients who have been unemployed at least 27 weeks were added to the list of target groups with unemployment barriers.

Currently, the nine eligible groups that are part of the WOTC include:

  • Temporary Assistance for Needy Families (TANF) recipients
    Unemployed veterans, including disabled veterans
    Designated community residents living in empowerment zones or rural renewal counties
    Food stamp recipients
    Vocational rehabilitation referrals
    Supplemental Security Income (SSI) recipients
    Ex-felons
    Long-term unemployment recipients
    In most cases, the credit for someone working at least 120 hours during the year equals 25 percent of their first-year wages up to $6,000, for a maximum credit of $1,500. If the employee works at least 400 hours, the credit jumps to 40 percent of first-year wages up to $6,000, for a $2,400 maximum.

The credit amount can be even higher for hiring military veterans. The maximum may reach as high as $9,600 for hiring a veteran with a disability.

Keep in mind the special rules for hiring young people to work during the summer. The WOTC can be claimed for hiring individuals aged 16 or 17 who reside in an empowerment zone or enterprise community. For work performed between May 1 and Sept. 15, the credit generally equals 25 percent of first-year wages up to $3,000, for a maximum of $750. But if the individual works 400 hours or more, the credit increases to 40 percent of first-year wages up to $3,000, for a $1,200 maximum.

To qualify for the WOTC, workers must be certified by the appropriate state authority.

Are like-kind exchanges still viable when selling property?

Are you selling real estate or other investment or business property like collectibles or cars? Generally, you’ll owe capital gains tax on a gain, but you might arrange a Section 1031 exchange of “like-kind property” instead. If certain requirements are met, tax is deferred until you sell the replacement property … if ever.

But the Tax Cuts and Jobs Act (TCJA) throws a curveball into the mix. Beginning in 2018, the tax benefits of Section 1031 exchanges are eliminated, except for swaps of real estate (transitional rules may apply).

Here’s what you should know when swapping

No current tax is due on a Section 1031 exchange of like-kind properties, except for any “boot” received. Boot is the term used to describe the cash used or mortgage debt assumed to even out a real estate swap.

For example, say you exchange a building worth $1 million for one worth $950,000. If the other party kicks in $50,000 in cash, that is the boot you would owe capital gains tax on in the year you received it. Assuming it’s a long-term gain, the maximum tax would be $10,000 (20 percent of $50,000).

It’s good to keep in mind that the definition of “like-kind” real estate properties is expansive. For instance, you can exchange an apartment building for a warehouse or even vacant land. However, to qualify for tax deferral, you must meet two strict deadlines:

You must identify or actually receive the replacement property within 45 days of transferring ownership of the relinquished property.
You must receive the title to the replacement property within 180 days or your tax return due date plus extensions for the tax year of the transfer.
Because it’s unusual for two investors to each own property the other wants, like-kind exchanges often involve multiple parties. A qualified intermediary may help facilitate an exchange.

Although the TCJA eliminates tax deferral on non-real estate exchanges after 2017, if replacement property was identified before 2018 you can still qualify for a tax-deferred exchange if the title is transferred by this year’s deadline.