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Does the Sale of Your Home Qualify for a Federal Income Tax Exclusion?

You’ve sold your home and made a nice profit on the sale. So you may be wondering if Uncle Sam is entitled to a cut. Although gain on a home sale is potentially taxable, you may qualify for a federal income-tax exclusion.

The Rules in General

If you’re a single taxpayer, you may qualify to exclude gain of up to $250,000 if you owned the home and used it as your principal residence for at least two of the five years before the sale. Married couples who file jointly may exclude up to $500,000 of gain as long as one spouse owned the home — and both spouses used the home as a principal residence — for two of the last five years.

The Frequency Factor

The exclusion is generally available to sellers only once during a two-year period. A married couple is entitled to the $500,000 exclusion only if neither partner used the exclusion within the two-year period that ended on the sale date.

Reduced But Available

Even if you don’t meet the criteria described above, you may still qualify for a reduced exclusion (of less than $250,000 or $500,000) if the primary reason for the home sale was a change in the location of your employment, a health condition, or certain other “unforeseen” circumstances. The affected individual can be you, your spouse, a co-owner of the residence, or a person sharing your household. You may also qualify for the reduced exclusion if you sell your home to care for a sick family member.

Additional restrictions on gain exclusion may apply if you’ve rented out your home, maintained a home office, or turned a second home into a principal residence.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

New Tax Law Provisions

Last summer’s highway trust fund extension law* includes a few important federal tax provisions that affect business and individual taxpayers.

Return due dates

Tax AvoidThe new law accelerates the filing deadline for partnership returns by one month, effective with returns for tax years that begin after December 31, 2015. As a result, the due date for partnership returns will be the fifteenth day of the third month after the end of the partnership’s tax year — March 15 for a partnership with a calendar year.

C corporations will have an additional month to file their returns, generally effective with returns for tax years beginning after December 31, 2015. As a result, C corporation returns will be due by the fifteenth day of the fourth month after the end of the tax year (by April 15 for a C corporation with a calendar year). The extended deadline doesn’t take effect until tax years beginning after December 31, 2025, for C corporations with fiscal years ending on June 30.

Basis reporting

For federal estate-tax purposes, property included in the gross estate is generally valued at its fair market value on the decedent’s date of death. That same fair market value then becomes the property’s income-tax basis in the hands of the person who acquires the property from the decedent.

The new law doesn’t change this rule. However, it requires the executor of any estate required to file a federal estate-tax return to furnish an information statement to the IRS and to each person receiving property from the estate. The statement must show the value of the property as reported on the return (and any other information the IRS may require). There are penalties for failure to file and for tax understatements resulting from inconsistencies in basis reporting.

Mortgage information returns

Under the new law, mortgage lenders must include additional items, such as the amount of principal outstanding at the beginning of the year, on information returns required to be furnished after December 31, 2016.

If you are tired of overpaying taxes and would like to be more aggressive lowering your taxes but stay within the legal limits, call 510-222-5800 and ask for Navjeet.  Our initial consultation for small business owners is free.

 

Chahal & Associates is a California Tax and Accounting firm that focuses on lowering your taxes legally.  We have three convenient locations to service the broader Bay area and are the fastest growing firm locally.  Our offices are located in Marin County – San Rafael, Emeryville – Alameda County, and Pinole – Contra Costa County.

While we work with all types of businesses, Chahal & Associates also has specialty services like International Taxation, Expatriate Tax, Restaurant Accounting, Retail Accounting, QuickBooks Accounting and Auto Repair Accounting.

* Surface Transportation and Veterans Health Improvement Act of 2015

Tax Breaks for Bay Area Businesses

Tax BreaksIf you run a small business, you already have a full plate. The last thing you need is for the IRS to question any of your business expense deductions. But it could happen. And that’s why having records that prove your expenses is so important. Even deductions for routine business expenses could be disallowed if you don’t have appropriate records.

What Records Are Required?

Except in a few instances, the tax law does not require any special kind of records. You’re free to have a recordkeeping system that is suited to your business, as long as it clearly shows your expenses. In addition to books that allow you to track and summarize your business transactions, you should keep supporting documents, such as:

  • Canceled checks
  • Cash register receipts
  • Credit card sales slips
  • Invoices
  • Account statements

The rules are stricter for travel, entertainment, and transportation expenses. You should retain hotel bills or other documentary evidence (e.g., receipts, canceled checks) for each lodging expense and for any other expense of $75 or more. In addition, you should maintain a diary, log, or account book with the information described below.

Travel. Your records should show the cost of each separate expense for travel, lodging, and meals. For each trip, record your destination, the dates you left and returned, and the number of days spent on business. Also record the business purpose for the expense or the business benefit you gained or expected to gain. Incidental expenses, such as taxi fares, may be totaled in reasonable categories.

Entertainment. Record the date the entertainment took place and the amount of each separate expense, along with the name and address or location of the place of entertainment. Note the business purpose for the expense or the business benefit you gained or expected to gain and the nature of any business discussion or activity that took place. Also list the identities and occupations of the individuals you were entertaining or other information that indicates their business relationship to you.

If the entertainment was directly before or after a business discussion, be sure to indicate the date, place, nature, and duration of the discussion and the individuals who took part in both the discussion and the entertainment activity. For a business meal, you must prove that either you or your employee was present.

Transportation. As with travel and entertainment, you should record the amount and date of each separate expense. Note your business destination and the business purpose for the expense. If you are deducting actual car expenses, you’ll need to record the cost of the car and the date you started using it for business (for depreciation purposes). If you drive the car for both business and personal purposes or claim the standard mileage rate, keep records of the mileage for each business use and the total miles driven during the year.

Don’t Mix Business and Personal Expenses

Things can get tangled if you intermingle business and personal expenses. You can avoid headaches by having a separate business bank account and credit card.

If you are tired of overpaying taxes and would like to be more aggressive lowering your taxes but stay within the legal limits, call 510-222-5800 and ask for Navjeet.  Our initial consultation for small business owners is free.

 

Chahal & Associates is a California Tax and Accounting firm that focuses on lowering your taxes legally.  We have three convenient locations to service the broader Bay area and are the fastest growing firm locally.  Our offices are located in Marin County – San Rafael, Emeryville – Alameda County, and Pinole – Contra Costa County.

While we work with all types of businesses, Chahal & Associates also has specialty services like International Taxation, Expatriate Tax, Restaurant Accounting, Retail Accounting, QuickBooks Accounting and Auto Repair Accounting.