Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 31, 1994 TAG: 9401310019
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
\ Q: My mother entered a nursing home in November 1993 and had to sell her house and land in December. This was her first sale of this property, in order to pay nursing home expenses. The amount of the sale was $114,000.
Will she be required to pay capital gain on this sale of property? Should a tax return be filed in any case?
A: If your mother meets certain requirements, she can elect not to pay tax on the gain from the sale of her property. The requirements are:
She must be over 55 years of age at the time of the sale.
She must have owned and used the property as her principal residence for at least three of the last five years.
She has not used this election in the past or filed a joint return with a former spouse who used the election.
Up to $125,000 of gain can be excluded. Because the selling price is less than this, she should be able to exclude the entire gain.
Your mother should file an income tax return and report the gain on Form 2119. She must show on this form that she meets these requirements and choose to exclude the gain from tax. You can get a free IRS publication that will explain this in greater detail. Call (800) TAX-FORM and ask for Publication 523.
If she does not meet the above requirements, she will have to report the sale and pay tax on the gain. Remember that the reportable gain is the sales price less her "basis" of the property. Her basis includes the original cost plus improvements that she made to the property while she owned it, and the expenses of selling the property.
Answered by Melinda Chitwood of Brown, Edwards & Co.
\ Interest applies to alternative minimum tax
Q: I have a municipal bond that is exempt from federal and state taxes. The percentage of interest earned by the fund to be treated as a preference item for the federal alternative minimum tax is 13.24 percent. Does this mean that 13.24 percent of the interest earned is to be considered for federal alternative minimum tax?
Long- and short-term capital gains as well as interest are reinvested. Are taxes on capital gains for 1993 to be paid now or when the bond is sold?
A: The 13.24 percent of the interest earned on your tax-exempt bond must be considered for the alternative minimum tax. You should enter the amount on line 13 of Form 6251 and complete Form 6251 to determine the amount, if any, of alternative minimum tax you may owe.
Capital gains are taxable in the year earned even though they are reinvested. Remember to increase your cost basis by the amount of income you have reinvested.
Answered by Robert K. Flynn of Foti Flynn Lowen & Co.
\ Reporting sale of out-of-state home
Q: I am a senior citizen. I sold my home in New Jersey and moved to Virginia in 1993. I would like to know how the exemption to persons over 55 will apply to my situation.
I lived in my former home for 31 years. I have purchased a home in Virginia and the cost of purchase plus renovations have equaled the amount I received for the sale of my former home.
How is this addressed in my 1040A tax form? I would also like to know if my tax accountant in New Jersey is eligible to file my return.
A: You should report the sale of your residence on IRS Form 2119, which also means you must file Form 1040 instead of Form 1040A.
You can postpone any gain from the sale of your former residence. This is because you have bought and lived in a new home within two years before or two years after the sale, and the purchase price of the new home is at least equal to the adjusted sales price of the old home. The basis for your new residence is its cost less the unrecognized (deferred) gain.
The exclusion (as opposed to postponement) for a seller 55 or over is a once-in-a-lifetime election to exclude up to $125,000 of gain from the sale of property owned and used as the principal residence for at least three of the five years preceding the sale.
You should use the deferral provision described above to postpone your gain and save the exclusion election for a later time. For example, a 55-year-old taxpayer who elects to exclude a $25,000 profit cannot make the election again when another residence is sold at a profit of $100,000. You should also be aware that the exclusion election can generally be made or revoked by filing an amended return at any time within three years after the return is due for the year of sale.
Any tax preparer, including your tax accountant in New Jersey, can prepare your return, but you must file your own returns. Incidentally, New Jersey law follows federal law regarding the sale of personal residences for income tax purposes.
Answered by Terrence M. Clem of Miller, Morgan & Co.
\ Accounting method key to collecting unpaid rent
Q: I am a landlord here in the Roanoke Valley with a couple of apartment houses. Here lately I have run into some collection problems with tenants owing rent money and even moving out in the middle of the night.
I would like to know what recourse I have as to claiming some of this noncollectible rent money as a bad debt on my tax forms and how to go about claiming it.
A: The tax treatment of uncollected tenant rent varies depending on the method of accounting used by the taxpayer.
Taxpayers who account for their income and deductions using the "cash basis" method of accounting are not allowed a tax deduction for rental income never collected. Neither are they required to report as income, until it is actually received, rent that is owed to them.
Taxpayers using the "accrual basis" method of accounting report rental income as it becomes due, not when it is received. For this reason, an accrual basis taxpayer is allowed a bad debt deduction for uncollectible rent, but only if such rent previously was reported as income when it first became due. If applicable, the deduction for lost rent is claimed on Form 1040, Schedule E as a rental expense.
Answered by David Lucas of Lucas & Boatwright.
by CNB