What are the Advantages of Being a Real Estate Professional?

A real estate professional going over paperwork
The IRS treats rental property losses like passive losses meaning they are not from a trade or business. Rental activities are presumed to be passive by the IRS allowing passive losses to be deducted only against other passive income. Therefore if there is no other passive income such as rental income, the losses for that activity are suspended until the rental property relating to that activity is sold. Note that the IRS keeps track of the suspended passive losses for each activity when you file form 8582 with your federal income tax return.

However, there is an exception to that passive loss rule which is when a taxpayer is treated as a real estate professional. A real estate professional is someone who:

1. Devotes more than half of his or her personal services during the tax year in real estate businesses, and
2. who spends more than 750 hours materially involved during the tax year as a developer, broker, landlord or other real estate professional (also known as the Material Participation Test).

If both tests are met for each real estate activity then the loss is treated as an ordinary loss for that activity and can be deducted against other ordinary income.

Keep in mind the best type of loss to have is an ordinary loss because it can be deducted against other ordinary income like wages, bonuses, self- employment income, interest, dividends, rents and royalties.

To meet the 750 hour requirement the IRS requires you keep a log of the work you do as a landlord, contractor or broker. Examples include:

1. Working on or improving the property,
2. Researching and Bidding on properties,
3. Finding and Screening tenants,
4. Collecting rent,
5. Performing maintenance.

Since Material Participation must be established on an activity by activity basis, I always recommend an election be made under Treasury Regulation 1.469-9(g) to aggregate all real estate activities as one activity. This makes meeting the 750 hour rule much easier for taxpayers with more than one rental property or brokers who have other businesses besides real estate.

Once an election it is made is good for that tax year and all future tax years until either the Taxpayer or the IRS revoke it. Feel free to contact Gregory Spadea at 610-521-0604 to learn how to make the election.

Do I Have to Pay Tax if I Receive a 1099-C – Discharge of Indebtedness Form?

Miscellaneous income form on desk
It depends on when the Creditor issues you that 1099-C.  Generally if you fail to pay your credit card or an unsecured debt the financial institution writes off the debt, and they have 10 years to issue you a 1099-C for the debt that was forgiven.  If the creditor fails to issue you a 1099-C within the 10 year state collection statutory period, then you do not have to include the discharged debt on your tax return.

There was a recent Tax Court Summary Opinion 2012-46 that addressed this issue. A credit card company forgave a debt and never issued a 1099-C.  It then sold the debt to a third party collection agency ten years later which then issued a 1099-C to the debtor. The Tax Court held that the debtor did not have to pay income tax on the forgiven debt because the state collection statute had expired.

In addition, no income tax is due if you are insolvent at the time of the discharge such as if you file for bankruptcy.  You can exclude the cancellation of debt income on IRS Form 982.

If you have any questions please call Gregory Spadea at Spadea & Associates, LLC in Ridley Park at 610-521-0604.


What Business Expenses Are Deductible?

If you are self-employed or have an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories broken down as follows:

  • Advertising;
  • Car expense (need business miles plus parking, tolls or actual fuel invoices, insurance, repairs and total miles driven and business miles plus parking and tolls);
  • Fixed Asset – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;
  • W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;
  • Employer share of employment taxes like FICA and FUTA;
  • Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;
  • If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.
  • Insurance but list health insurance separately;
  • Supplies;
  • Materials or Purchase of inventory for resale;
  • Travel, Hotel, Airfare and Car Rental;
  • Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;
  • Telephone including local, long distance, fax and mobile;
  • DSL, cable and internet charges;
  • Postage;
  • Continuing education and business seminars and conferences;
  • Interest expense paid on business loans and provide year end balances;
  • Rent;
  • Utilities like electricity, oil or gas;
  • Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;
  • Prior Year Local Income Tax paid;
  • Total state sales tax paid if you included it in gross sales receipts.

Contact Gregory Spadea at 610-521-0604, if you have any questions or need your tax returns prepared.

How Long Do I Have to Keep My Tax Records For?

A folder of records and a tax form on the table.
The length of time you should keep a document depends on the expense or event that the
document records. Generally, you must keep your records until the period of limitations for that return runs out.

General Rule – The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The Statute begins to run from the later of that date the returns are filed or the due date which is typically April 15.

If you owe no additional tax and the following four situations do not apply to you; keep the tax records for 3 years.

However, if
1. You do not report income that you should report, and it is more than 25% of the gross
income shown on your return; keep your records for 6 years.

2. You do not file a return; keep your records indefinitely.

3. You file an amended return for credit or refund or a claim after you file your return; keep your records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

4. You file a claim for a loss from worthless securities or bad debt deduction; keep your records for 7 years.

Federal Income Tax Returns – Keep copies of your filed federal income tax returns forever. I recommend scanning them into your hard drive or cloud so they don’t take any space. Copies of previous federal tax returns help in preparing future tax returns, filing an amended return or applying for a mortgage or loan. In addition you should check to ensure all your wages and income have been reported correctly and match your Social Security earnings history. You can file Form SSA-7004 to get a copy of your earnings history from Social Security.

Employment Tax Returns and Records – Keep all employment tax returns and records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Rental or Business Property – Keep records relating to the purchase and improvements on a rental or business property until the period of limitations expires for the year in which you sell the property. You must keep these records to verify any depreciation or amortization deduction taken in the years you owned the property, as well as to figure the gain or loss when you sell the property.

If you never sell the rental property and fully depreciate it over 29 1/2 years you need to keep a record of all your cost basis and improvements until 3 years after the 29 ½ year period ends to verify the depreciation in the event you are audited.

Section 1031 Property – Generally, if you received property in a nontaxable 1031 exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inherited Property – If you inherit property from an estate, you get a stepped up basis in the property which is the fair market value at the decedent’s date of death. Therefore you should keep a copy of the appraisal taken at the date of death, or the inheritance or estate tax return for as long as you own the property to verify your basis so when you sell the property you can calculate your gain. Keep in mind if you only inherit half of a jointly owned property you only get a stepped up basis in the half that you inherited and did not already own.

Primary Residence – Cost records for your primary residence and any improvements should be kept until the home is sold. Note that a net gain (selling price less the basis and expenses of sale) are less than $250,000 if you are single or $500,000 on a joint return isn’t subject to income tax. However, the home had to be your primary residence for 2 out of the last 5 years prior to the sale. If the net gain profit is more than $250,000 ($500,000 on a joint return), or if you don’t qualify for the full gain exclusion, then you’re going to need those records for another three years after that return is filed.

Brokerage Statements and Cancelled Checks – When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does. Common examples are brokerage statements which should be kept for 7 years and bank statements and cancelled checks which should be kept for 7 years.

If you are not sure how long you should keep a specific document feel free to call Spadea & Associates, LLC at 610-521-0604 or email Gregory J. Spadea at Gregory@SpadeaLawFirm.com

Tax Preparation Needed for 2011

Please click on the link below in order to download and print tax preparation information needed for 2011.  This income tax checklist is divided into relevant categories to help you organize your tax information.

Tax Preparation Information Needed for 2011

How Do I Withdraw an IRS Tax Lien?

tax lien
When you owe federal income tax and fail to pay it after receiving notices from the IRS, the IRS will file a lien against you which attaches to any real property you own. You can request that the IRS withdraw the tax lien by filing form 12277 which is more beneficial than a release of a tax lien because a withdrawal expunges the lien immediately from the debtor’s records so it’s as if the lien was never filed. You can request a lien withdrawal either after the lien has been released or after entering into a direct debit installment agreement.

Requesting a lien withdrawal after the lien has been released

If you have paid the tax and have the Certificate of Release of Federal Tax Lien you can apply to have the lien withdrawn. Please refer to IRS Publication 1450 for instructions on how to get a Certificate of Release of Federal Tax Lien.

You will qualify as long as:

1) you are in compliance for the last three years and have filed all your individual and business tax returns; and
2) you are current on your estimated tax payments and federal tax deposits, if applicable.

Lien withdrawal after entering into a Direct Debit Installment Agreement

In order to qualify you must:

1) enter into a direct debit installment agreement, but if you are currently on a regular installment agreement, you may convert to a Direct Debit Installment Agreement; and
2) owe less than $25,000, however if you owe more than $25,000 you may pay down the balance to $25,000 before requesting that the IRS withdraw the lien; and
3) you are in compliance for the last three years and have filed all your individual and business tax returns; and
4) you are current on your estimated tax payments and federal tax deposits which means you cannot have defaulted on your current, or any previous, direct debit installment agreement.
5) your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier.

Contact the Tax Lawyers in Ridley Park, PA at the Law Offices of Spadea & Associates, LLC

If you have any questions please contact the Law Offices of Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

Why I Must Claim my Child as my Dependent Even if He or She is Over 18

Young man studying in library
Besides the personal and spousal exemptions, you should also claim an exemption for each of your dependents. The reason is that unless your dependent had taxable income of at least $20,000 in 2010 they will not be able to use the entire $2,500 of education tax credits because their income tax will be less than $2,500. However, your child must realize they may not claim themselves when you claim them as a dependent. If they do take a personal exemption for themselves, then they would have to file an amended return if you wanted to claim them as a dependent on your return. Spadea & Associates, LLC would gladly assist them in amending their return.

Briefly, if the individual meets all of the following tests, he or she is your dependent and is not permitted to claim an individual exemption on his or her own tax return:

the member-of-household or the relationship test
the citizenship test
the joint return test
the gross income test
the support test

Member of Household or Relationship Test

If your child or other dependent died during the year but would otherwise have met all five tests, you can still claim the exemption for the dependent. Conversely, if your child was born on the last day of the year and met all five tests above you can claim him or her them as a dependent. If the individual is not a close relative under the IRS’s definition, he or she can still meet the first test for dependent status by living with you for the entire year as a member of your household.

Foster children (or adults) can be treated as dependents if they live with you for the entire year, unless you receive payments as a foster parent from a state government, a political subdivision, or a tax-exempt child-placement agency. If you receive any such payments, you can’t claim a dependency exemption for the child. If you receive some payments as a foster parent, you can claim a charitable deduction for the excess expenses, if your actual expenses for the child are higher than the amount of payments you receive.

Citizenship Test

This test for dependent status is met if the person is a U.S. citizen or resident alien, or is a resident of Canada or Mexico for at least part of the calendar year in which your tax year begins.

Joint Return Test

This test for dependent status refers to the tax return filed by the dependent, not your own tax return. In most cases, you can not claim a dependency exemption for any married person who files a joint return with his or her spouse. The exception to this rule is if neither the dependent nor his or her spouse is required to file a tax return, but they file one merely to get a refund, and neither the dependent nor his or her spouse would owe any tax if they filed separately rather than jointly.

Gross Income test

The dependent must either (a) be your child who is age 18 or younger, or under the age of 24 and a student, or (b) have gross income that is less than the amount of the dependency exemption for the year, which means less than $3,650 for 2010.

Therefore even if your child was over 18 and in college and earned more than $3,650 in 2010, you should still claim that child on your return if you provided more than half of their support and you are in a higher tax bracket. The reason is that you can take advantage of the $1,500 Hope Education credit and $1,000 American Opportunity Credit which your child may not be able to use because they may not have enough taxable income to get the full education credit as stated earlier.

Remember the education credits are not refundable tax credits like the Earned Income Credit so if your child does not owe tax of less than $2,500, they will not be using the entire education credit that you would be eligible for assuming you are in a higher tax bracket.

Support Test

The final part of the test for dependent status requires that you provide more than half of the person’s total support during the calendar year.

Planning Point for Self Employed Parents

If your child is 15 or older you can hire him or her and pay them up to $3,650 in 2010 and they will pay no income tax and you can still claim them as a dependent.

However, household employees or foreign exchange students that live with you will not qualify as dependents.

© 2024 The Law Offices of Spadea & Associates. All Rights Reserved. Sitemap | Disclaimer | Privacy Policy by VPS Marketing Agency, LLC