Author: Leon Clinton

We absolutely, positively don’t like commuting mileage. You should dislike it, too. It’s personal. It’s not deductible.

But with knowledge, it’s avoidable.

Let’s eliminate commuting and make those trips from your home to your office deductible.

The law gives you two ways to eliminate commuting from your home to your outside-the-home office:

Make a temporary business stop on the way to the office.
Establish a home office that qualifies as a principal office.

Temporary Business Stop

The temporary business stop strategy is designed for the home that contains no home office. In this case, the stop turns a commute from your home to the office into a deductible business trip.

Example 1. Sam, a property and casualty insurance agent, does not claim a home-office deduction. He has to photograph a property before the insurance company will issue the policy. Sam’s trip from his home to the property and from the property to his downtown office produces business miles.

Example 2. Sam, the guy from Example 1, drives from his home to his downtown office. That’s a non-deductible commute.

Caution. If your only office is in your home and that office does not qualify as a principal office, then the IRS labels your trip from your home to a business stop the “first stop,” and that trip is a non-deductible commute.

Example 3. You have an office inside your home that does not qualify as a principal office, and you have no office outside the home. You drive 17 miles to a business stop and then return home. Because your only office is inside the home and it does not qualify as a principal office, your 34-mile round trip is a personal non-deductible commute under the IRS’s first and last stop rule.

Home-Office Solution

If you have both a downtown office and a principal office inside your home, you have no commuting mileage from your home to your downtown office. You don’t need to work in your home before you leave for the office. You simply need an office in the home that qualifies under the law as a principal office.

Example 4. You have an administrative office in your home that qualifies as a principal office. You drive 11 miles from your home to your downtown office, work all day in your downtown office, and then drive the 11 miles from your downtown office back home. This 22-mile round trip to and from your downtown office is deductible as business mileage.

If you would like to discuss business mileage, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 20, 2022

The tax-code-defined vacation home rules come into play when you have both rental and personal use of a home. Thus, you can have tax-code-defined vacation homes in the city, in the suburbs, and in recreation areas.

If you have no combined rental and personal use of the home, the rules are easy. The property is one of the following:

• Principal residence
• Second home
• Rental property

But when you have both rental and personal use of the home, your tax life gets more complicated because you have entered the tax code’s vacation home section. In this situation, the property in a more complicated way is one of the following:

• Principal residence
• Second home
• Rental property

If it’s a principal residence, then the $250,000/$500,000 home sale exclusion is available when you sell.

If it’s simply a second home, you can’t use the exclusion and you pay taxes at capital gains rates—and you may suffer the NIIT as well.

If it’s a rental, you face the capital gains rules, NIIT, unrecaptured Section 1250 gain taxes, and release of some (if grouped) or all (if not grouped) passive activity suspended losses.

When you have rental use after 2008 and then convert the rental to your principal residence, you must use a rental/residence fraction to determine how you will be taxed.

As you can see, the rules in this area can get complicated. If you would like to discuss the rules, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 16, 2022

With today’s home prices and the crazy real estate market, it’s likely difficult for your children to buy a home. And it’s conceivable that you are ready to move on from your existing home.

If this is true, consider the three options below.

Option 1: Make an Outright Gift

Say you’re feeling so generous that you might just simply give your home to your adult child. What a deal for the kid!

Tax-wise, if you make the gift this year, it will reduce your $12.06 million unified federal gift and estate tax exemption. To calculate the impact, reduce the fair market value of the home you would be giving away by the annual federal gift tax exclusion, which is $16,000 for 2022. The remainder is the amount that would reduce your unified federal exemption.

If you’re married, your spouse has a separate $12.06 million unified federal exemption. If you and your spouse make a joint gift of the home, each of your unified federal exemptions will be reduced. To calculate the impact, take half of the fair market value of the home minus the $16,000 annual exclusion. The remainder is the amount by which you would reduce your unified federal exemption. Ditto for your spouse’s separate exemption.

If your child is married and you give the home to your child and his or her spouse, you can claim a separate $16,000 annual exclusion for your child’s spouse.

If you expect the home to continue to appreciate (seemingly a pretty good bet), getting it out of your estate by giving it away is a good estate-tax-avoidance strategy.

Option 2: Arrange a Bargain Sale

Say you’re feeling generous, but not so generous that you want to simply give away your home. Fair enough.

Consider selling the home to your child for less than fair market value. For federal gift tax purposes, this is treated as a gift of the difference between the home’s fair market value and the bargain sale price. Tax-wise, this can work out okay.

Warning. Do not make a bargain sale or an outright gift of the home if you intend to continue living there until you depart this planet. In these scenarios, expect the IRS to argue that the home’s full date-of-death fair market value must be included in your estate for federal estate tax purposes, even if you were paying fair market rent to your child.

Option 3: Arrange Full-Price Sale with Seller Financing from You

The idea of giving your home-starved child a big free lunch might be unappealing. Very well.

Consider selling the home to your child for its current fair market value with you taking back a note for a big part of the purchase price.

Assume you’re feeling charitable. If so, you can charge the lowest interest rate the IRS allows without any weird tax consequences. That’s called the “applicable federal rate” (AFR).

AFRs change monthly in response to bond market conditions and are generally well below commercial rates. In April 2022, the long-term AFR, for loans of more than nine years, is only 2.25 percent (assuming annual compounding). The mid-term AFR, for loans of more than three years but not more than nine years, is only 1.87 percent (assuming annual compounding).

As this was written, the going rate nationally for a 30-year fixed-rate commercial mortgage was around 6.1 percent, while the rate for a 15-year loan was around 5.6 percent.

So, for a loan made in April 2022, you could take back a 30-year note that charges the long-term AFR of only 2.25 percent. Alternatively, you could take back a nine-year note that charges the mid-term AFR of only 1.87 percent. Either arrangement would be a money-saving deal for your child.

If you would like to discuss transferring your home to your adult child, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 9, 2022