Author: Leon Clinton

I have great news! You can have in your real estate portfolio both investor and dealer properties. This distinction is significant for tax purposes.

Here’s a snapshot of the potential tax differences:

Suppose you profit $90,000 from a property sale:

• As a dealer, your tax could be up to $46,017.
• As an investor, it might be only $21,420.

That’s a potential savings of $24,597 in taxes for investors!

You look at every property individually to determine its classification and make sure you identify each property in your records as either an investment or dealer property. Not doing so can lead to complications with the IRS, and believe me, you don’t want to rely on the IRS for “mercy.”

How the courts determine your classification:

• The primary factor is your intention when purchasing and holding a property. Your records play a pivotal role in illustrating this intent.
• Properties meant for sale to customers are dealer properties. If you frequently buy and sell properties within a year, they’re likely considered dealer properties.
• Properties purchased to renovate and sell usually fall under dealer properties.
• Subdividing properties also leans them toward dealer classification unless they meet the specific criteria of IRC Section 1237.

On the other hand, if your goal with a property is appreciation or rental income, it’s considered an investment property.

Remember, each property’s classification is determined independently. So, whether it’s you or your corporation, owning both dealer and investor properties is possible.

Need assistance classifying your properties? Please call me directly at 408-778-9651.

• By Leon Clinton
• October 3, 2023

For 2024, you can elect the de minimis safe harbor to expense assets costing $2,500 or less ($5,000 with audited financial statements or similar).

The term “safe harbor” means that the IRS will accept your expensing of the qualified assets if you properly abided by the safe harbor rules.

Here are three benefits of this safe harbor:

1. Safe harbor expensing is superior to Section 179 expensing and depreciation because you don’t have the recapture period that can complicate your taxes.
2. Safe harbor expensing simplifies your tax and business records because you don’t have the assets cluttering your books.
3. The safe harbor does not reduce your overall ceiling on Section 179 expensing.

Here’s how the safe harbor works. Say you are a small business that elects the $2,500 ceiling for safe harbor expensing, and you buy two desks costing $2,100 each. On the invoice, you see the quantity “two” and the total cost of $4,200, plus sales tax of $378 and a $200 delivery and setup charge, for a total of $4,778.

Before this safe harbor, you would have capitalized each desk at $2,389 ($4,778 ÷ 2) and then either Section 179 expensed or depreciated it. You would have kept the desks in your depreciation schedules until you disposed of them.

With the safe harbor, you expense the desks as office supplies—your tax records life is easier.

You and I do a two-step process to benefit from the safe harbor. It works like this:

Step 1—You. For safe harbor protection, you must have in place an accounting policy—at the beginning of the tax year—that requires expensing an amount of your choosing, up to the $2,500 or $5,000 limit. I can help you with this.

Step 2—Me. When I prepare your tax return, I make the election on your tax return for you to use safe harbor expensing. I do this with an election statement on your federal tax return and file that tax return by the due date (including extensions).

If you want to use this safe harbor in 2024, we need to set this up so that it is in place on January 1.

• By Leon Clinton
• September 29, 2023

Many of our clients have taken opportunities to live and work in various parts of the world, such as Switzerland, and have concerns about their U.S. tax obligations.

We want to alert you to the tax implications you might encounter as a U.S. citizen living or working abroad. We’re going to use Switzerland in our examples.

As a U.S. citizen, you remain subject to U.S. tax obligations, even living abroad. But your government has granted you certain tax breaks and mechanisms to mitigate the risk of being doubly taxed by the U.S. and Switzerland on your income. Here are the key points:

• Foreign Earned Income Exclusion allows you to exclude a portion of the wages you earned in Switzerland from your U.S. taxable income, up to $120,000 for 2023.
• Housing Exclusion/Deduction allows you to exclude or deduct a certain amount of foreign housing costs, including rent, utilities (excluding telephone), and insurance.
• Foreign Tax Credit helps you avoid double taxation by reducing your U.S. tax liability by the taxes you’ve paid in Switzerland.

The income and housing exclusions require that you pass a residency test. You have two choices: the physical presence test or the bona fide residence test. The physical presence test requires you to reside in Switzerland for at least 330 days within 12 months. The bona fide residence test requires you to live abroad for the entire tax year.

Another essential point to remember is reporting your foreign financial accounts. Suppose the combined value of all your foreign financial accounts exceeds $10,000 at any time during the year. In that case, you must file the Report of Foreign Bank and Financial Accounts (FBAR) and potentially Form 8938 for additional disclosures.

Moreover, the U.S. has income tax treaties with many countries, including Switzerland, that can influence your tax obligations. These treaties help prevent double taxation and could allow you to be eligible for certain credits, deductions, exemptions, and reductions in the rate of taxes on certain items of income you receive outside the U.S.

Finally, it’s crucial to note that international agreements known as “totalization agreements” eliminate double Social Security taxation. The U.S. has such agreements with 25 foreign countries, which provide exemptions from the Federal Insurance Contributions Act (FICA) taxes if your earnings are subject to similar taxes under the social security system of a foreign country.

If you have questions or need further clarification, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 26, 2023