June 2012 – Page 2 – Financial Dream Team

Sell Your Home But Keep the Profits

If you’re looking to sell your home this year, then it may be time to take a closer look at the exclusion rules and cost basis of your home in order to reduce your taxable gain on the sale of a home.

The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, as long as you meet the following Ownership and Use tests. However, it cannot be used more frequently than every 24 months.

During the 5-year period ending on the date of the sale, you must have:

Owned the house for at least two years – Ownership Test
Lived in the house as your main home for at least two years – Use Test
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.

If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members’ main home, mailing address on bills, correspondence, tax returns, driver’s license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.

Tip: As we mentioned earlier, the exclusion can be used repeatedly, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.

Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.

Improvements Increase the Cost Basis

Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby reduce the capital gain.

Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.

Examples of Improvements
Examples of improvements include: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.

Example: The Kellys purchased their primary residence in 2002 for $200,000. They paved the unpaved driveway, added a swimming pool, and made several other home improvements adding up to a total of $75,000. The adjusted cost basis of the house is now $275,000. The house is then sold in 2012 for $550,000. It costs the Kellys $40,000 in commissions, advertising, and legal fees to sell the house.

These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on the Kelly’s 2012 personal tax return.

Tip: Residential Energy Efficient Property Credit. This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit expires on December 31, 2016 and is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property.

Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; fuel cell property qualifies only when installed on or in connection with your main home located in the United States.

Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

Please contact us for more information about residential energy tax credits.

Partial Use of the Exclusion Rules

Even if you do not meet the ownership and use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If one of these situations applies to you, please call us for additional details.

Recordkeeping

Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, you should keep records proving your home’s cost basis for as long as you own your house.

The records you should keep include:

Proof of the home’s purchase price and purchase expenses
Receipts and other records for all improvements, additions, and other items that affect the home’s adjusted cost basis
Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997

Questions?

Tax considerations surrounding the sale of a home can be confusing. If you have any questions on taxes related to the sale of your home, give us a call.

By Leon Clinton
June 18, 2012

Tax Due Dates for June 2012

June 11

Employees – who work for tips. If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.

June 15

Individuals– If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. (U.S. citizens living in the U.S. should have paid their taxes on April 17.) If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.Individuals – Make a payment of your 2012 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2012.

Corporations – Deposit the second installment of estimated income tax for 2012. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.

By Leon Clinton
June 12, 2012

The Best Financial Tool for Business Owners

What if there were a tool that helped you create crystal-clear plans, provided you with continual feedback about how well your plan was working, and that told you exactly what’s working and what isn’t?

Well, there is such a tool. It’s called the Budget vs. Actual Report and it’s exactly what you need to be able to consistently make smart business decisions to keep your business on track for success.

Clarifying Your Plan

The more clear you are about your business goals, the more likely you are to achieve them. Creating a budget forces you to examine the details of your goals, as well as how even a single business decision affects all other aspects of your company’s operations.

Example: Let’s say that you want to grow your sales by 15% this year.

Does that mean you need to hire another salesperson? When will the business start to see new sales from this person? Do you need to set up an office for them? New phone line? Buy them a computer? Do you need to do more advertising? How much more will you spend? When will you see the return on your advertising expenditure?

Navigating the Ship

Once you clarify your goals, then you start making business decisions to help you reach your desired outcome. Some of those decisions will be great and give you better than expected results, but others might not.

This is when the Budget vs Actual Report becomes an effective management tool. When you compare your budgeted sales and expenses to your actual results, you see exactly how far off you might be with regard to your budget, goals, and plans.

Sometimes you need to adjust your plan (budget) and sometimes you need to focus more attention to the areas of your business that are not performing as well as you planned. Either way, you are gleaning valuable insights into your business.

It’s like sailing a boat. You may be off-course most of the time, but having a clear goal and making many adjustments helps you reach your destination.

Just Do It

We often know what we need to do but don’t take the necessary action. It may seem like a huge hassle to create a budget and then create a Budget vs. Actual Report every month, but as with any new skill, it does get easier.

Turn your dreams into reality. Give us a call and we’ll guide you through the budgeting process.

By Leon Clinton
June 9, 2012

Month: June 2012