The Tax Questions Blog

The 1031 exchange is a great instrument for property owners who wish to defer their capital gains tax. However, not all states treat 1031 exchanges equally. California regulations stipulate that any appreciation in property value accrued in California is subject to their state taxes, regardless of whether or not that property was exchanged for one in another state before its sale. This means that CA property owners cannot escape CA state taxes, even if they exchange their property for one in another state.

Most states conform to federal income tax treatment of like kind (1031) exchanges, where all capital gains taxes are deferred until the properties eventual sale. This is generally interpreted to mean that one is only subject to taxes of the state where the property is sold, discounting the state taxes of any state where the property was exchanged from. Meaning that if I owned a property in NV, exchanged it for one in ID and subsequently sold it, I would only be responsible for federal and ID taxes, not those from NV.

California is a notable exception to this. It employs a "claw-back" provision, entitling the state to tax any gain on property that occurs in California, regardless of where the property is eventually sold.

For example:

Say Mr. Newcombe bought a property in CA for $100. After appreciating to $200, he exchanges it for one in ID. While in ID the property further appreciates to $400. Feeling he has had enough of owning property, he sells it for $400, showing a total capital gain of $300. Mr. Newcombe would not only be liable for $300 of capital gains taxes in ID, but $100 of capital gains taxes in CA as well.

Note: The reciprocal of this situation does not come into effect. If Mr. Newcombe owned property in ID and exchanged for property in CA, he would only be subject to CA state taxes, not those of ID.

From the above example it is clear that owning property in California and exchanging it for property in another state leaves one open to double taxation. There is no way to avoid this situation unless one stays out of CA entirely or performs the final sale there. Being taxed in CA would of course be undesirable because it has some of the highest income tax rates, 9.55% and 10.55% for earnings over $47,055 and $1,000,000 respectively.

The claw-back provision really hurts people when they try to exchange out of California's stringent tax system into a friendlier one such as Texas, which has no income tax. In situations such as this, the "claw-back" provision acts like a hand reaching out of the grave to grab and tax people one last time. Needless to say, before making an investment in CA, ensure it will be worth the high amount of taxes you will eventually pay for it.

Plano CPA joins Place 3 campaign

Cathy Fang, a long-time resident and Certified Public Accountant (CPA) based in Plano, announced Wednesday her candidacy for the Place 3 seat on the Plano City Council.

TaxPlus Tax Tip - For Profit or Hobby?

Are you wondering how much home insurance you need? Do you need to decide which type of policy would provide the best cover? Looking for the best rates on the market? If so, then a home insurance calculator can help.

The costs associated with owning a home can be mind-boggling. Homeowners are often familiar with the assistance that home loan calculators can bring, in getting a firm grasp on what to expect to spend on mortgage payments, refinancing, and other related expenses. But did you know that you can also use calculators to help you figure out what you will pay for your home insurance?

What's there to figure out?
As a homeowner, it's critical that you are properly covered in the event that your home or its contents area damaged or destroyed. Your home and its contents are valuable and often irreplaceable, which is why you should make sure that you have adequate coverage in the event that you are faced with unforeseen circumstances regarding your home.

The best time to add up the costs of insuring your home is before you even purchase a policy, and in order to be able to do this you'll need to know:
* The value of your home
* The value of the contents in your home
* The size of your home

Having all of these answers will help you to easily input your information into a home insurance calculator and get the right results.

How home insurance calculators work?

Home insurance calculators can help you to:
* Determine the estimated cost to rebuild your home and to replace its contents
* Determine how much money you should save in order to cover the costs of your deductible
* Purchase adequate cover
* Figure out whether or not you need additional protection

Most insurance calculators are found online and are operated by insurance companies or web comparison sites, and after entering all of your information you'll be presented with a quote that will provide you with an estimated quote on the amount you can expect to pay for home insurance. It's important to note that calculators are used just a guideline and may not reflect the actual amount you will be offered. They also do not include other factors that are often used to calculate your policy rate including the location of your home, any claims you've previously made, or your credit rating.

Make a calculated decision on your home insurance.

Ian Murray MP - April Newsletter

Welcome to my Parliamentary update for April 2011. This is my first e-newsletter to constituents in Edinburgh South. I thought I would concentrate on the budget and the effects of the budget as we enter the new financial year 2011/2012.

Question: Are corporate compensatory damage settlements taxable?

My company recently negotiated a settlement with a subcontractor for damages resulting from his failures to properly and timely complete a project. The settlement amount was less than the actual direct damages. Moreover, we had claims for intangibles for which we will not be compensated in this settlement. We are an "S" corporation and account on an accrual basis (products completed).

1) Must we pay taxes on these compensatory dollars?

2) Are there any pitfalls to avoid in the wording of our final settlement agreement in order to avoid taxes?

Answer: Yes, this settlement is taxable income. If you had business expenses, claim on your tax return.

Settlement for injury is not taxable. If it is for lost wages or interest, it is taxable. Read about settlement taxes http://taxipay.blogspot.com/2008/08/us-income-tax-topics-1.html

Fired comptroller sues Greenburgh

GREENBURGH — Former town Comptroller Michael Kolesar, who publicly criticized town departments for lacking internal controls, has filed a federal lawsuit against Greenburgh almost a year after he was forced from his job.

Question: Which federal form do I use to pay the additional taxes on my 401K?

I quit my job last year and as a result my 401k was canceled and I received a payout of the balance. I understand I have to pay taxes on this amount as income, and I also have to pay an additional 10% tax for the early withdrawal. I don't see any place on the tax form for this additional tax however. What form do I need to file for the extra 10%?

Answer: 1040 is the only form that shows the 10% penalty line.

2nd UPDATE: IRS Unveils Plan to Regulate Tax Return Preparers

(Updates with comment from H&R Block, enrolled agent.) WASHINGTON -(Dow Jones)- The Internal Revenue Service said Monday it will require registration and competency exams for legions of tax return preparers that now largely escape regulation.

How to Avoid an IRS Tax Audit : How to Report Business Losses on Schedule C Tax Form

Question: What are my chances of IRS audit with 1098-T?

Let's say my wife gets a 1099-T from her university with only 2 numbers: $17,000 billed (box 2) and $10,000 scholarship (box 5). There is a difference of $7000 that could have potentially been paid to the University and is deductible.

How would the IRS know if this was actually paid by me and was not the result of some other scenario? Do they get any additional information from the school and are my chances of being audited if I claim the full $7000 deduction?

Answer: The amount of any scholarships that is used for tuition and fees cannot be used for the education credits or deduction. HOWEVER there are some things that CAN be paid for with scholarship proceeds that are not qualifying tuition and fees for the credits or deduction. Books, equipment, living costs such as room and board in the dorms or apartment costs are all eligible costs for scholarships but don't qualify for the credits or deduction.

At audit, your records will determine what is legit and what is not. Use your scholarships first for items that don't apply for the education credits if at all possible. Then use the remainder for tuition and fees. Whatever tuition and fees are then paid out of your own pocket or with loan proceeds are eligible for the credits or deduction.

Keep IRS Auditors Away: Earn less than $200,000

December 22, 2009 (Associated Press) WASHINGTON - Want to keep IRS auditors away? Keep your earnings under $200,000 and they won't bother you 99 percent of the time.

IRS Tax Audit? Got an IRS audit? Heres what to do first