Friday, October 30, 2009

Recoup your real estate investment losses!!!!!!!!!!!!

This one has got to be the QUESTION OF THE YEAR… All year long we hear the same story. A client purchases a pre-construction property in Florida (or anywhere for that matter) with the enthusiastic intention to resell quickly and make a few bucks. This business proved to be very fruitful when the real estate market was booming. Not so much any longer. By the time many investors had to close on the property (since they couldn’t sell the contract), the market value of the properly was significantly less than the “original sales price”. Let’s put this in perspective. You purchase a preconstruction condo for $200,000 in 2007 with the intention of reselling for profit. You put 20% down, with the remaining $160,000 due at closing. In 2009, when the property is ready for closing, you realize that market value of the property is $100,000. Now what??? Basically, you are about to sign a mortgage on the property that exceeds the current value after you had already spent the 20% on the deposit. After some careful consideration, you decide to walk away from the unit and NOT go thru with the closing. You have sound reasons for doing so as you have determined that walking away from the deposit and losing $40,000 is more reasonable than entering into a transaction that seems to lack financial sense. We are not here to give guidance on real estate transactions or advice about purchasing and selling investment property. What happens with the $40,000 that you lost?

This question has been widely debated by accountants, attorneys, etc. Some feel that this transaction is deductible at the rate of $3,000/year pursuant to capital loss thresholds. It will take you 13 years to deduct the losses. Not a very comforting proposition…

You have already lost the $40,000. The best thing you can now do now is recoup a portion of it via the tax return. Our position on this is that you deduct the entire loss of $40,000 in the year you lost the deposit and offset the $40,000 loss against ordinary income. Now THAT doesn’t sound as bad. Under a 35% tax rate, you will be able to recoup $14,000.

Here’s the thought process…

If you take the position that this contact to buy real estate is to be treated as “real property”, then a loss that is generated from a sale of real property is an “ordinary loss”, (while the gain is capital in nature). An ordinary loss means you get to deduct the whole thing against your ordinary earned income, while a capital loss means that you are capped at deducting $3,000 per year. We will all take an ordinary loss instead of a capital loss any day. So, ordinary it is under this perspective…

If you take the position that this contract to buy real estate is not yet “real property” because no closing has taken place and no deed has been assigned… There is another IRS regulation that might work. Refer to That regulation refers to abandonment of business property (and in this case, property doesn’t only mean real, tangible property). And guess what? Under that regulation, abandonment loss on business property is treated as “ordinary”, which means FULLY DEDUCTIBLE against ordinary income.

So we will take the chance advocating that abandoning a deposit on a property intended for resale is fully deductible against ordinary income. Now THAT is GREAT NEWS!!!

As always, contact us with any questions. Stay tuned!

Wednesday, October 28, 2009

Convert or Not Convert? THAT is the question...

So what about that Roth conversion that everyone is talking about? We LOVE the Roth IRA! Why? Because since you are contributing to the plan with the “after tax” money, you don’t have to pay taxes on accumulated gains when the funds are withdrawn at retirement (and over the years, it certainly adds up). We will leave the growth chart analysis to our colleagues, financial planners. Take our word for it, the numbers work. Historically, income limitations prevented many individuals from opening such an account. In addition, income limitations have been imposed on anyone wanting to convert a regular IRA into a Roth.

Here come the great news… Starting in 2010, income limitation on conversions to a Roth will be lifted. That doesn’t mean that the income limitation on new contributions are lifted, but it does seem like there is a way around that one as well. We are thinking that if your income is too high to qualify to make a new Roth IRA contribution, just make a regular IRA contribution and convert (seems like a loophole, but nevertheless will work…)

So, if you make the election to convert your regular IRA into a Roth IRA, you will have to pay all taxes due on conversion. Well, you can’t have it all. Remember, that converting in 2010, doesn’t mean paying tax in 2010. You will be presented with an option to pay the taxes owed on the conversion over 2 years 2011-2012. The current legislation is going toward increasing the tax rates in 2011, and probably even more so in 2012; it might make sense to satisfy the debt in 2011.

Why is this so important now? Think about the conversion value. You have contributed $50,000 to an IRA, the value of which has declined to $25,000. Sounds familiar? It certainly does in this market. Well, if you convert that IRA into a Roth, you will only pay tax on the $25,000 at conversion, and all future earnings growth will be tax free. Of course it would be a bit painful to convert at $25,000, pay tax at the conversion and have the value drop to $12,000. Regardless, assuming a somewhat steady growth of even 3% per year, it makes all the sense to convert. In addition, if you leave the Roth IRA to your kids, and the money continues to grow, they will enjoy tax free distributions; and the accumulated savings from taxes on the accumulated growth over the years will be of a significant magnitude. Sounds worthy of taking a chance…

So while we always advocate tax deferrals (a dollar of tax paid tomorrow is certainly better than today), this seems to be a valid exception. There are of course many unforeseen circumstances which can possible make this conversion a mistake… Who knows, the taxes might be abolished on capital gains ten years from now, the values might decline even further, etc…

There is no doubt that this conversion should be on everyone’s radar. As always, we are here to help!

Monday, October 26, 2009

Self-employed New Yorkers beware - MCTD is here!

Many of you earning a living in New York on a freelance basis have become aware of the new tax when you received a simple blue card notifying you of "tax due". The metropolitan commuter transportation mobility tax (MCTMT) is a new tax imposed on certain employers and self-employed individuals engaging in business within the metropolitan commuter transportation district (MCTD). This department administers the tax for the Metropolitan Transportation Authority. (The MCTD includes the counties of New York (Manhattan), Bronx, Kings (Brooklyn), Queens, Richmond (Staten Island), Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester).

It is understood that the state of NY, just like many of the other states is experiencing a deficit and needs the additional tax revenue. We get that. We are not disputing the origin of the tax, the need for a new tax, etc.. What we don't understand at all is how the methodology of calculation and payment has been designed. The first piece of the puzzle which is based on net self-employment income is due by November 2nd. The second piece of the puzzle is due on February 1st and accounts for net self-employment income for fourth quarter of 2009, and an additional annual return for MCTD is due by April 1st. Now this just seems to be bizarre. We don't know many self-employed individuals clients that can easily extract their "annual self-employment income" by the end of January.

Why burden the taxpayer with interim calculations? Why not just apply a straight %age for this MCTD tax and make it due together with the NYS tax return? The interesting thing is that while the tax information is readily available on the NYS website (, the applicable forms and penalties are not yet finalized.

So for all of you scratching your heads on how to properly estimate the tax, more is better and base your formula on the maximum net compensation. The amount of tax is not that significant (.0034 of net earnings ). We are concerned about the penalties for underpayment and late filing. So, until further clarification is available, and until NY figures out how to do this more efficiently, pay the tax due by the deadline based on the maximum net self-employment income anticipated and carry the overpayment (if any) forward.

As always, we're here to help! Stay tuned!