In this Radio Show, Sanjiv Gupta CPA talks about the following topics:
Your Tax Question:
Then my question is regarding this stimulus payment for which has been passed by the Congress and we started getting the payments. In terms of you know, the payment which is being received, I know the standard letter or electronic transfer the main method you choose, but what if, based on the conditions, you know, or the rules passed for the government, we are eligible for let's say x number, but we get a different y number in our bank. And I know there is a recovery act in the tax return they mentioned that you can go and claim the differential how does that actually works meaning if you think you are being provided with the lesser money than eligible, like the maximum is 50 $600 which is suitable for how to tackle that in your tax return. Can you please elaborate on your thoughts on that?
Yes, this is very, very good question. So we are talking about the stimulus payment the economic impact payment under the American rescue plan is a third in line stimulus payment.
First two were $1200 and $2400. And this 3rd one is $1400 payment for husband and wife and for each kid. Meaning family of four will get $5400 (AGI is $160,000).
If you have not received the funds than go to irs.gov and click on that button get my payment.
If you are entitled to receive $5600 but you didn't get full amount than you can claim it on your 2021 tax return. Basically, $5600 is advance tax rebate against your 2021 tax return.
Your Tax Question:
I want to ask about, you know, I have a rental property for almost like now 10 years, it's on appreciated a lot, we'd like to do a 1031 exchange to the property. So what are the tax implication I should be worried about?
So just wanted to tell few things about entity, one exchange to all the listeners for the benefit of listeners. So basically, what we're talking about is a rental property, which is a property that is rented out for a number of years. And you claim depreciation on the property because you can claim depreciation, if it's residential, the depreciation method you can use for 27.5 years. And for if it's a commercial resident commercial property and 39 years, so, it every year depreciate based on the value of the building, not the land, you can appreciate that this is there on the form deposition schedule on your tax return, it is attached to the Schedule D.
So, whatever value you have and that is book value of the tax return value, we call it and what you sell, what you sell for it differential, you have to pay the tax long term capital gains on that and his deposition he captured that happens at a rate of 25%. Now, the last that is there, because of depreciation, if the rent is not is not enough to cover the depreciation, the expenses, you have a loss that is also carried forward, on to form 8582. Now, if you're again, in the inner game, if your net again, after taking into account all those things, and now the net gain is higher, let's say you have a gain of 200k or 200k. And your tax rate, long term capital gains rate federal let's say you're afraid to high income bracket of more than half a million dollars, AGI so your federal tax rate is 20%. And state will be around roughly 7% , roughly 3.8% Medicare tax. So you're talking about 30% taxes on that 300k income capital gain. That is like $90,000.
1031 exchange is a way to avoid paying the tax on that on the gain $90,000 what you can do, you can invest that money, the sale proceeds not again sale proceeds, the totals will proceed into another property, but you have to identify you have to give the address of the property within 45 days from the end of the sale of the old property. 45 days is a day mark the day 45 it cannot be 46. If 45 days fall on Saturday or Sunday, you can take on Monday. But that's the only consideration allowed. So that date is 45 days from the end of the sale of the whole property. And I didn't find a new property. And the escrow needs to be closed within six months from the end of the escrows from the annual sale of the property for buying a new property that six month period is what is called 180 days rule. So 45 days and 180 days, the amount of the new property, the costs of the new property should be higher than the cost of the old property, the loan amount on the new property should also be higher than the loan amount of the old property. And you should use the form 8428 is a perfect way of avoiding taxes. And the taxes may go away to later on in case of death of the person winning it. Or if you go and start living in that property for two years or three years. There are certain rules to complex rules around it. It's not so easy, but there are certain rules to be followed. But yes, there are ways you can avoid taxes altogether. But that's a great way to do 1031 exchange.