1. John Smith's tax issues:
Issue a) How is the $300,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
From the information that was provided, the income was derived from the business and this gross income is taxable pursuant to Code§1.61-3(a). He is subject to self-employment tax, since the total amount of income that will come through to his personal tax income of half of the self-employment tax liability.
Conclusion:
John will have to pay self-employment tax, which is the gross income that obtained in business in the amount of $300,000. He will actually have to pay "income" and "self-employment" tax on the "net" earnings from his business... not the entire $300K because presumably he has
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< this is good.
Conclusion:
In summary, the only tax advantage of selling the old house is that a larger deduction of mortgage interest on the new home. Paying off a mortgage associated with a primary residence has no impact on calculation of gain or loss, it simply reduces the otherwise deductible mortgage interest. You should have mentioned that under IRC 163 the $1M principal balance limitation to fully deducting interest and that they can deduct interest on their primary residence and one other residence.
Issue b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
Applicable Law & Analysis:
The 1301 1031 tax exchange refers to the exchange of real property that is “like-kind” (Reg.§1.1031(a)-1(b).
John and Jane are looking to but an expensive home, this would not apply. Code§1031(b) states that no gain or loss shall be allowed and a gain would be applicable in this case. By adding money in the exchange or boot as it is referred to, they would most likely have a recognize a gain and pay tax on that gain. Conclusion:
In summary, John and Jane would not be able to use 1031 tax exchange to purchase the new more expensive home. Due to the gain of buying an expensive house, it would not be considered “like-kind”. The additional money that is paid to acquire this
Married taxpayers may exclude up to $500,000 of gain upon the sale of their residence every two years (Code § 121(b)(1) and (2), (Code §121(b)(3)(B)) (Tax Almanac. 2009, June 18, Internal Revenue Code:Sec. 121. Exclusion of Gain from Sale of Principal Residence). The requirement is that they need to have owned and occupied the residence as their principal residence for two out of the last five years prior to the sale (Code §121(b)(3)(A)) (Tax Almanac, 2009, June 18). Assuming a new mortgage will most likely give them a larger deduction of mortgage interest and if they have lived in their current home for a while that is nondeductible (Code § 163(h)(3)(E)(i) (Tax Almanac. 2009, June 18, . Internal Revenue Code:Sec. 163.
Generally, a realized gain from sale of personal residence can be excluded from gross income under Exclusion 121. The amount realized is the selling price of the property less any disposition costs. The adjusted basis is then determined and the amount is subtracted from the realized sum. This will give you the amount of loss or gain from the sale of the property. Since the couple occupied the sold home for at least 2 of the last 5 years they fulfill the requirements for exclusion 121 treatment. The exclusion amount for the couple if filing jointly is $500.000 and the calculation would be as follows:
INCOME TAXES – As a sole proprietor all business income or losses must be reported as personal income tax. The business itself is not taxed separately.
If you were to sale your current residence, you could be eligible to exclude up to $500k (married filing jointly) of that gain from your income. Of course, this gain would apply to the tax year in which the property was sold and I believe you are looking for tax benefits
In 2013 Marianne sold land, building and equipment with a combined basis of $150,000 to an unrelated third party and in return received an installment note of $80,000 per year for five years. Of the $250,000 gain on sale, $150,000 was classified as Section 1245 gain and the remaining $100,000 was Section 1231 gain. In 2013, Marianne had a capital loss carryover of $60,000, $50,000 of which she used to offset her Section 1231 gain; she recognized no Section 1245 gain. The following year she recognized $40,000 of 1245 gain and $10,000 of Section 1231 gain which she promptly offset with the last $10,000 of the capital loss carryover. In 2015, she recognized $50,000 Section 1245 gain and no Section 1231 gain.
The federal tax law clearly defines the word “individual” and “married couple.” The Tax Court introduces that petitioner and Mrs. Packard are the first-time homebuyer pursuant to paragraph (1) and paragraph (6) respectively, which is from the perspective of each individual. The Court of Appeals states that the Packards is a single inseparable unit for purposes of determining first-time homebuyer eligibility. In my opinion, I think the Court of Appeals is more clear and accurate in explaining the tax system.
2(b) Jane has inquired about the 1031 tax exchange if they could use that plus some of John’s money from the case to purchase a more expensive house.
c. The Johnsons own a piece of investment real estate. They paid $500 of real property taxes on the property and they incurred $200 of expenses in travel costs to see the property and to evaluate other similar potential investment properties.
____ 25. If both §§ 357(b) and (c) apply to the same transfer (i.e., the liability is not supported by a bona fide business
John and Jane own and rent out a duplex in Atlanta. They are getting older now and are planning to retire and to move to Miami. John and Jane would like to sell the Atlanta Duplex and purchase a small commercial building next to the lovely condo they bought on the beach. The main issue is John and Jane can only afford to buy this building if they are able to capture all of the existing equity in their Atlanta duplex. To avoid (defer) a taxable event when they sell their duplex John and Jane can utilize Section 1031 of the IRC. There are, however, a few hoops that John and Jane must jump through to qualify.
During the transaction, if the transferor receives boot, section 351(b) requires them to recognize the gain (capital, long-term, or short-term) equal to the lessor of the gain that would be recognized under section 1001 if the transferor were treated as selling property transferred and the fair market value of the boot received. Under section 351(b)(2), no such loss of any realized loss to be recognized (4)(8).
As for the combination of cash and new shares, shareholders can take part of their money
The issue in this case is whether Jim proceeds from the sale of the town houses are ordinary income within Income Tax Assessment
Income taxes- All income generated through a sole proprietorship is taxed by the Internal Revenue Service. This is reported on the owner's personal tax return.
The distribution of the net proceeds from the sale of the real estate will result in U.S. tax liability of $200K, which will be offset by attributes carried over from prior years.