fbpx Skip to main content Skip to search

Archives for July 2017

Real Estate Divestment Tax Strategy: Charitable Remainder Unitrusts

For many individuals and investors, real estate represents the largest portion of their net worth. Real estate has been a popular investment tool both for income and long-term appreciation. Individuals or businesses intending to divest real estate have several options.

These include outright sale or donation, bequest, bargain sale, charitable gift annuity, charitable remainder trust and retained life interest. Some of the alternatives provide an income stream and may result in charitable tax deductions and the avoidance of capital gains tax.

WHAT IS A Charitable Remainder Unitrusts?

Charitable remainder unitrusts can be an effective tool for converting real estate into higher income producing assets. Charitable remainder unitrusts may accept real estate as an asset, and then pay the net income generated by the property to the trust beneficiaries or sell the property and then pay a fixed percentage of the value of the assets.

A charitable remainder trust is an irrevocable trust that provides for and maintains two sets of beneficiaries. First is the income beneficiary. The income beneficiary receives a set percentage of income from the trust for life or a term of up to 20 years. The second is the charitable beneficiary. This could be one or more charitable organizations that receive the principal of the trust after the income beneficiaries pass away.

A CRUT can sell a property, reinvest the proceeds into a diversified portfolio of securities, and pay a percent of the trust value, all without any capital gains tax liability for the donor. This is a very useful tool to strategically minimize real estate taxes.

BENEFITS

Since the first beneficiary is the income beneficiary, the amount of income generated is of importance to the donor. The amount of income depends upon the payout percentage chosen and the amount of income generated within the trust. The remainder of the trust must be at least 10 percent of the fair market value of the assets transferred to the trust. That market value is determined at the time of transfer and based on the original amount of the appraised value.

The amount paid out to the income beneficiary can be 5 percent to 50 percent of the trust funds each year as long as the appropriate amount remains in the trust for the charitable beneficiary. A higher payout percentage will lower the charitable income tax deduction.

A charitable remainder trust is outside of the estate and additional assets can be added after it is established. The charitable deduction available depends on the type of property contributed and the type of charity named as the charitable beneficiary. Any deductions not used in the year of contribution can be carried forward five years.

Charitable Remainder Trusts aren’t something a investor can do internally, but rather require a CPA.

Here at Camuso CPA PLLC, we do have the ability to offer charitable remainder unitary trusts strategies along with other powerful tax planning tools to our clients. If you are interested into how this service might benefit your business, please don’t hesitate to give us a call today. One of our friendly and knowledgeable representatives will be happy to answers any questions you have.

Your personal and business finances are the foundation of your success. Contact Camuso CPA today to build your dedicated financial team: https://www.camusocpa.com/contact/#/

Read more

What Is Cost Segregation?

Here at Camuso CPA PLLC, cost segregation is just one of the services that we provide at our firm. For those of you who are unfamiliar with the term, cost segregation is simply the act of identifying the assets of a business, their value, and then classifying those assets in regards to the federal tax code. It can be beneficial for many businesses, but it also has potential drawbacks. Cost segregation studies used to only be available for companies that were over a certain size with huge buildings, but nowadays much smaller companies can qualify.

Benefits

Some of the benefits possible from cost segregation include:

  • An increase in your cash flow
  • Lessened current tax liability
  • A deferral of taxes to a later date
  • The option to reclaim depreciation deductions that you missed from previous years without having to amend your tax returns

Engineering Based Cost Segregation

This type of cost segregation allows commercial real estate owners to reclassify their real property as personal property. What this does is make you depreciable tax life shorter.

The items that get identified in an engineering based cost segregation study include just about every range of building components you could think of: electrical installations, mechanical components, finishes, plumbing, etc. These get reclassified into more “shortly lived” asset categories, which can mean big savings for the business.

Time Value of Money (TVM)

Time Value of Money is an important concept in cost segregation: the whole process rests on it. Basically, the principle just states that a dollar today has more worth than a dollar at a later date. While inflation might make you think the opposite, remember that this dollar isn’t sitting buried in a suit case, but is going to be invested in the business. With cost segregation, this same property of the dollar applies to tax deductions, ie: a tax deduction today has more value than a tax deduction in the future.

That is the crux of cost segregation. You’re not actually necessarily saving a ton from lowering your depreciation, however because you have more cash now to invest in your business, the Time Value of Money results in a large net gain of profit.

Cost segregation studies aren’t something a business can do internally, but rather need a CPA for. And not just any CPA at that. The IRS Cost Segregation Audit Techniques Guide states ““Preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes. In general, a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law, are other important criteria.”

Here at Camuso CPA PLLC, we do have the ability to offer cost segregation studies to our clients. If you are interested into how this service might benefit your business, please don’t hesitate to give us a call today. One of our friendly and knowledgeable representatives will be happy to answers any questions you have.

Read more

What Taxpayers Need to Know About the Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

This is a valuable tax deduction that should not go overlooked by taxpayers determined to effectively maximize profits and minimize taxes. Taxpayers cannot deduct more than the net business profit. Any unused home office deduction, is carried over to the following year.

There are two basic requirements for your home to qualify as a deduction:

Regular and Exclusive Use

You must regularly use part of your home exclusively for conducting business.

Principal Place of Your Business

You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.

Additional tests for employee use. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the tests discussed above plus:

Your business use must be for the convenience of your employer, and

You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer.

If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

There are two methods that can be used when approaching home office deductions.

 Simplified Option

For taxable years starting on, or after, January 1, 2013 the simplified option can significantly reduce record-keeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage ($5 per square foot limited to 300 square feet)  of the office in lieu of determining actual expenses.

Regular Method

Taxpayers using the regular method instead of the optional method, must determine the actual expenses of their home office. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Generally, when using the regular method, deductions for a home office are based on the percentage of your home devoted to business use.

Depreciation and Recapture

Depreciation taken as part of the regular method to deduct home office expenses provides a larger deduction but is recaptured in later years if taxpayers decide to sell the home.

If the regular method is used to calculate the home office deduction all allowed or allowable depreciation must be considered at the time of sale.  For most taxpayers who have a business office, the simplified method is generally preferable when the cost of the residence is $200,000 or less. When the cost of the residence is $300,000 or more, the actual-cost method is preferable. When the cost of the residence is between $200,000 and $300,000, the decision to use the simplified method depends on the marginal tax rate and the business use percentage.

The depreciation will produce a taxable gain if/when the residence is sold, because of the special Sec. 121 recapture rules. Normally, the gain on the sale of a personal residence is tax free provided the gain falls within the allowable exclusion limits but, gains attributable to the accumulated depreciation taken on the residence is taxed at 25% or the taxpayer’s marginal tax rate, if less.

To avoid depreciation recapture taxpayers can utilize the simplified method. Under this option, depreciation is treated as zero and won’t reduce the basis of the home.

Your personal and business finances are the foundation of your success. Contact Camuso CPA today to build your dedicated financial specialist team: https://www.camusocpa.com/contact/#/

Read more