You Make the Call

You Make the Call

​Please note that the question and answer provided does not take into account all options or circumstances possible.

January 11, 2018

Question: The taxpayer owned farmland that he leased to others. The city condemned the land through eminent domain for a new highway. The taxpayer’s basis in the land is $5,000. The city gave him $100,000 resulting in a gain of $95,000.

Under §1033 Involuntary Conversions, taxpayers can defer the gain providing the replacement property is similar or related in service or use.

In this case, the taxpayer found a commercial rental property to purchase with the proceeds. Does the exchange of unimproved real estate for improved real estate qualify for the gain deferral under §1033?

Answer: Yes. Section 1033(g) contains a special rule for condemned real estate, which allows real property used in a trade or business, or for investment purposes, to be deemed converted into similar-use property under §1031 like-kind exchanges rules. Under the §1031 like-kind exchange rules, unimproved land can be exchanged for improved land.

Normally under §1033 the unimproved land would need to be replaced with similar-use property such as other unimproved land.

January 4, 2018

Question: Phil, a new client, has decided to fulfill his dream of becoming his own boss. As of the first of the year, he decided to take his stock trading activities to a new level and become a “Day Trader.” He will be paying medical insurance out of his own pocket. Can he take a deduction for self-employed health insurance assuming his only earnings are from his day trading activities?

Answer: No, he would not be eligible to take a deduction for self-employed health insurance. The deduction for self-employed health insurance is limited to net-earnings from self-employment, which is defined under §1402(a). Capital gains and losses are specifically excluded from the definition of net earnings from self-employment [§1402(a)(3)(A)].

December 28, 2017

Question: Under §267(a)(1), related party rules, losses on sales to family members are not allowed. Does that include in-laws?

Answer: No, it does not include in-laws. Section 267(c)(4) defines family members as, “the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants.” In Stern v. CIR, 215 F2d 701, the sale to a taxpayer's daughter and son-in-law as tenants by entirety was treated as sale to the son-in-law, who furnished the consideration; therefore, loss was not disallowed by §267(a)(1). In Saul v. CIR, 6 TCM (CCH) 734 (1947), the sale to the brother's sons-in-law allowed the loss even though there was a gift of funds by the brother to the daughters who then deposited the funds into joint accounts with their spouses to finance purchase; it was not treated as a sale to the brother followed by gifts from him to his sons-in-law.

December 21, 2017

Question: U.S. citizens are purchasing a house located in the U.S. that they plan to use as their primary residence. The purchase price is $250,000 but is being paid to a foreign individual. Is there a withholding requirement on the payment to the foreign individual?

Answer: No. There is an exception to the usual withholding requirements on payments to foreign individuals for the purchase of a residence. Withholding is not required on the disposition of a USRPI (U.S. Real Property Interest) if it is acquired by the transferee (buyer) for use as his residence, (not necessarily the primary residence) and the amount realized does not exceed $300,000 [§ 1445(b)(5)].

NOTE: Withholding amounts are imposed on sales proceeds in excess of $300,000. Withholding is required on the full amount, not just the excess of $300,000. For sales in excess of $300,000 but not over $1,000,000, the withholding rate is reduced to 10 percent instead of 15 percent [§1445(c)(4); Reg § 1.1445-1(b)(2)].

PRIOR LAW: For dispositions before February 17, 2016, the decreased FIRPTA withholding rate for the disposition of a residence for $1,000,000 or less did not apply. Sec. 324(c)DivQ, PL 114-113, 12/18/2015; Reg §1.1445-1(h); Code Sec. 1445(c) before AMEND by Sec. 324(b)DivQ, PL 114-113, 12/18/2015; Former Reg. §1.1445-1(b) before amend by TD 9751, 2/19/16.

December 14, 2017

Question: John, age 67, inherited an IRA from his mother who was age 95 when she died. He receives annual required minimum distributions from his mother's IRA, which he reports on his tax return. Is John eligible to treat the distributions as qualified charitable distributions (QCD)?

Answer: No, the beneficiary must attain age 70½ to make a QCD. The exclusion for qualified charitable distributions is available for distributions from an IRA maintained for a beneficiary if the beneficiary has attained age 70½ before the distribution is made [Notice 2007-7, Q-37].

December 7, 2017

Question: Bruce, a single taxpayer, decided that he would like to help children whose parents are not able to care for them, so he applied to become a foster parent. In July 2017, he received notice from the courts that they are placing Richard in his home for the remainder of the year. Richard is 12 years old. In order to assist Bruce with Richard’s care, Social Services paid Bruce each month. He received a Form W-2 for the amount received from July–December. Bruce read somewhere that the amount received from Social Services may be nontaxable to him. Is this correct?

Answer: Bruce is correct. The amount received may be nontaxable under §131, as qualified foster care payments, which are tax free to the recipient as long as the foster child meets certain requirements. In order for the payments to be nontaxable, an individual provider of foster care must receive the payments during the tax year. The payments must be made by a state or political subdivision of a state Code Sec. 131(b)(1)(A)(i), or a qualified foster care placement agency Code Sec. 131(b)(1)(ii), and the payment must be either a difficulty of care payment or paid to the foster care provider for caring for a qualifying individual who is under the age of 19 and in the foster care provider’s home. However, the foster care provider must include in income payments received for more than five qualified foster individuals who are 19 or older and difficulty-of-care payments received for more than ten qualified foster individuals under age 19 or more than five age 19 or older.

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