Author: Leon Clinton

I hope this letter finds you well. Today, I would like to introduce a new business strategy that can help you build net worth by using depreciable antiques in your business.

The strategy is simple: buy low, depreciate to zero, and sell high. You can achieve this by incorporating antiques into your business. For example, let’s say you’re deciding between purchasing an antique desk or a regular one for your business. Both desks sell for $5,000.

The antique desk not only adds a touch of elegance to your office but also offers a better financial outcome. After 10 years of use, you can sell the antique desk for $15,000, whereas your friend who purchased the regular desk only sells it for $500.

When considering the after-tax numbers, you come out 36 times ahead of your friend. Your federal taxes on the $15,000 proceeds from the sale of the antique desk are $1,500 on the $10,000 capital gain and $1,750 on the $5,000 of depreciation recapture. After taxes, you’re left with $11,750, whereas your friend only pockets $325 after taxes.

Antiques provide a unique opportunity to increase your net worth by acquiring beautiful assets that you can use in your business and expense under Section 179. Currently, you can expense up to $1,160,000 of qualifying costs using Section 179 expensing.

The concept of using depreciable antiques in business has become possible thanks to two musicians who fought hard for this change. Brian Liddle, a professional violinist, and Richard Simon, who played violin for the New York Philharmonic Orchestra, both used antiques in their careers and were able to depreciate their antique instruments to zero and trade them for even more valuable antiques.

I encourage you to give serious consideration to the use of antiques for your business. Not only do they create aesthetic appeal, but they also offer financial benefits that can increase your net worth.

If you have any questions or would like to discuss this opportunity further, please do not hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 16, 2023

I have to share the highlights of this tax case with you.

Steven Hoakison took his case to court, where the IRS asserted that

• Hoakison was a collector of antique tractors, and
• the 40 farm tractors in dispute due to the IRS audit were purchased by Hoakison primarily for personal reasons and served no business purpose.

To push its no-business-purpose position, the IRS noted that 37 of the 40 tractors in dispute were more than 40 years old at the time Hoakison purchased them and that there “is obviously an element of nostalgia” involved because the tractors were similar to those he used while growing up. (Some of the tractors were over 75 years old.)

The IRS further asserted that Hoakison could not actually have needed the number of tractors reported for the years at issue because the work performed by each of the newly acquired 29 tractors could also have been performed by the existing 17 tractors.

(Yes, this totals 46 tractors. We are focusing on the 40 that the IRS wants to disallow.)

How the Court Ruled

The court noted that

• although Hoakison could have performed the same work with the 17 original tractors, that fact is not relevant to the deductibility of the newly acquired tractors; and
• the only requirement for the newly-acquired-older tractors (the 40 tractors in dispute with the IRS) is that they be used in Hoakison’s farm business—which they were.

Thus, the court ruled for Hoakison.

The IRS brought up the antique issue. The court allowed the tractor deductions based on use in the business and in its ruling cited both the Simon and Liddle antique music instrument cases.

Key point. The Hoakison case involved an Iowa farmer outside the Second and Third Circuit Courts of Appeal, where precedent from the Simon and Liddle cases did not have to be followed. But the court did follow both the Simon and Liddle cases and cited them as authority.

Most everyone operates their business differently. The key to business assets and their deductions is how you use the assets.

If you are considering antiques for use in your business as business assets and would like to discuss them, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 11, 2023

The real estate boom appears to be over for now.

Morgan Stanley predicts that house prices could fall by 10 percent by the end of 2024, perhaps twice as much in a worst-case scenario. Homeowners who purchased their homes at the top of the market could be in trouble, especially if the U.S. falls into a recession.

No homeowner wants to go through foreclosure and its credit rating destruction. Fortunately, there is an alternative: a short sale.

In a short sale, homeowners sell their home in a regular sale through a real estate agent for less than the amount of their mortgage. The lender accepts the sale proceeds, releases the mortgage lien on the property, and typically writes off the remainder of the loan as an uncollectible debt.

Lenders agree to short sales only where it’s clear that

• the home is worth less than what the homeowner owes, and
• the homeowner is financially unable to keep up the mortgage payments due to job loss, health issues, death, or other hardship circumstances.

Typically, a short sale involves forgiveness of part of the mortgage debt owed by the homeowner. Debt forgiveness can constitute taxable income to the borrower. Whether the debt forgiven in a short sale is taxable income depends on several factors, including whether

• the mortgage is a recourse or a non-recourse loan,
• the forgiven debt qualifies for the qualified principal residence indebtedness exclusion, or
• the homeowner was insolvent at the time of the debt cancellation.

Forgiveness of a non-recourse loan (a loan for which the borrower is not personally liable) does not result in taxable income to the borrower. Twelve states allow only non-recourse home loans.

But recourse loans are standard practice in the other 38 states.

Fortunately, for underwater homeowners who have recourse loans, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. Thanks to this law, up to $750,000 of “qualified principal residence indebtedness” forgiven by a lender is excluded from tax. This exclusion remains in effect through 2025 and applies only to debt to acquire or build the taxpayer’s principal residence.

Homeowners who don’t qualify for the qualified principal residence indebtedness exclusion can still avoid paying tax on their canceled indebtedness if they were insolvent when the debt was canceled. Taxpayers are insolvent if their total liabilities exceed the fair market value of all their assets immediately before the debt cancellation. It’s likely that most homeowners who can get their lenders to agree to a short sale qualify as insolvent.

If you have questions about short sales, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 3, 2023