Another episode of the Dr. Friday show is here! In this show, Dr. Friday talks about the new tax updates and deadlines, including the following topic:
- Will I Still Get My Stimulus Check?
- All About The Cares Act
- The Tennessee Business Relief Program
- Is The Stimulus Money Taxable?
- PPP Money & Forgiveness
- Why You Need Help With Tax Representation
- EIDL Information
and other caller’s questions!
No, no, no, she’s not a medical doctor, but she can sure cure your problems or your financial woes. She’s the how-to girl. It’s the Dr. Friday show. If you have a question for Dr. Friday, call her now at 615-737-9986. So here’s your host financial counselor and tax consultant, Dr. Friday.
Dr. Friday 0:31
All righty, we are live here. It’s a wonderful Saturday, whether it’s fairly nice, I guess you’d say fall is coming in, and tax season is upon us. October 15 is a major deadline for all of us that like to procrastinate or just the reason we like to extend it. So we can actually put more money into our SEPs or our 401 Ks, which can be extended to make payments if you’re self-employed. So there’s a couple of strategies we need to think about. We all know, it seems like I’m always talking a year behind, obviously, October 15 is for everyone that hasn’t filed an extension, but basically, we’re talking 2019. Meanwhile, 2020 is going to be probably one of the most unusual tax seasons I’ve seen in 25 years, which is how long I’ve been doing taxes. With the Cares Act, and all those different things happening, there’s been some changes, something I haven’t talked a lot about is during the Cares Act, they authorized an above the line deduction of $300 to donations. So you do not have to itemize to take $300 of donation. So you’ll take your standard deduction plus 300. So if you haven’t given to charity this year, because you’re always like, “Well, it doesn’t change, I can’t give enough to make a difference as far as itemizing.” It’s part of the conversation. If it’s not a tax deduction, maybe I don’t do anything with it. Well, it comes down to it, it’s going to be this simple, it’s going to be that you can give up to $300. Do not itemize, furthermore, increase your charitable contributions or monetary gifts up in 2020. So you might want to think about giving, but the $300 is going to be above the line. So that is a kind of an important thing that happened during the Cares Act.
Dr. Friday 2:24
Again, it’s a 2020 situation, 90% of my clients give more than $300 in a year no matter what, but if it’s a year in which you haven’t, and I realized, for many people, this has been a very difficult year. Keep in mind that sometimes doing this as far as giving charity, this is going to be an additional $300. So if you’re at the 10% tax bracket, it will save you $30 right 10% of 300 if you read the 15 or 2020 will save you $60. So, depending on your tax bracket, it’s going to put a few more dollars in your pocket. Small businesses are facing extremely unusual days, right? And we need to probably do more tax strategizing than we ever have. PPP money is coming in. I do want to make sure we talk about the Tennessee business Relief Program. There are quite a few people that I keep getting information on that there isn’t anything going that direction. I mean, they did not know it existed. They’re getting some letters, and they’re not really sure. So keep in mind, you have to have had a 25% drop in income and you have to be within certain types of industries.
Dr. Friday 3:39
Most of them are tourism or restaurants, florists, and those kinds of the ones that had direct, most importantly, some pretty direct losses because income had dropped drastically during the lockdown and everything else. So many of them had some additional hardships compared to my business. I was fortunate, give or take a couple of weeks, we were able to continue doing everything that we’ve always done. So we wouldn’t be eligible for something like that. But I do have people in the restaurant industry, especially that were eligible, and it’s somewhere between 25 and $10,000. Most of my clients are million dollars or under as far as their gross revenue. If you have more than a million dollars, I believe it goes up to 25 or 30,000 if you’re in the higher dollar amount. So it’s something you definitely want. You do have to have a business license or sales tax number. So they have to have a way of justifying that you actually did file this. So if you’re a small business owner that hasn’t maybe filed a business license or filed with sales tax, keep in mind that this isn’t going to apply for you. But strategizing or buying equipment, I have always been a firm believer if the equipment is needed if it is something that is going to generate us more money than definitely use the money. Consider a Section 179, you can currently deduct up to like $1 million in eligible costs, as long as your threshold is 2.5 million your income. Again, most of those numbers are way outside of what everyday working person has your business can claim 100% first-year bonus depreciation, there are some other depreciations out there. There’s also qualified income for small businesses. So what you want to consider through this year, again, we have PPP money, we also have a lot of EIDL money that’s come into the small businesses. There are certain things that you need to make sure that you’re doing. PPP can be forgiven, and you need to work on that process. Because I believe most people now mid to late October will be the 24-week window. In most cases, you have to do it before the end of the year or after your 24 weeks, whichever comes first.
Dr. Friday 6:01
So you’re going to get that forgiven if you’ve done everything correctly. Small business owners, independent individuals that got PPP, and unemployment. Keep in mind, you’ve double-dipped, if you’re trying to claim forgiveness on your PPP, but you collected Unemployment for a period of those weeks, you’re not going to qualify and be very careful you answer those questions correctly. Not trying to scare you too much, but there is a lot of things going on. We’ve all heard the stories of the I call them idiots, but the people that you know just took advantage of the system went out and either lied to the government. I have a really hard time. I know there are people that went out there and said they brought Lamborghinis and Ferraris with all this money and all that. But I mean, we’ve been working with small businesses since early March as far as working with these different programs, and we had to provide all kinds of documentation, you know? 941, schedule C’s, we had to have proof that this income existed or this payroll existed, whatever it might have been. So I’m not too sure exactly how these individuals unless they just fraudulently created documents and put them in the system. I can’t imagine how that would have worked. Then again, you know, we’re not working on a fantasy world where we’re trying to get and keep my clients in business, and that’s what’s really, really important.
Dr. Friday 7:23
For small businesses, we also want to talk about retaining good workers, the Cares Act provided federal income tax credit equal to 50% of qualified wages paid to employees between March 13 2020 to December 31, for the purpose qualify wages include the first $10,000 wages per each one. To be eligible for this credit, your business must have either fully or positionally suspended operations during 2020. That is an important part, many of my restaurants, almost all my restaurants, and almost all my businesses, give or take one or two of them, never suspended operations. So you would not be qualified in this particular situation. Now, if you were my bars that are downtown Nashville, those completely got shut down, completely locked down furloughed, some of the people but some tried to keep their employees on. So they did not have to go on to the unemployment, those would be the ones that would be good candidates for this credit that would be available for them. So it’s like $5,000 per employee, that they could get extra credit. Of course, all of us could postpone payroll taxes, at least 6.2 Social Security, on the payroll that we had up until December. So from March 27, through December 31, 2020, I’m going to suggest being really careful with some of these kinds of things only because of the last person you want as a loan officer? I mean, it keeps me in business guys, but to be quite honest, you don’t want the IRS as a loan officer, you really do not. What you do want is to make sure that they are being paid and what you know, there are rules. So if you defer Social Security in 2020, you have to pay the other half of whatever you do for let’s say you deferred $30,000, you’d have to pay 15 by December 31, 2021, and 15 by December 31, 2022. That is making a great assumption that those two years are better and that you don’t end up in a situation, right. So if you’ve got questions, we’re having a little technical difficulty here, but you can join the show here. Right now when we take a quick break, see if we can get this squared away. When we get back we’ll take some emails, texts, and hopefully some phone calls. You can reach us here in the studio at 615-737-9986. Hopefully, they’ll be able to hear you guys when we get back. We’ll be right back with the Dr. Friday show.
Dr. Friday 10:05
Alrighty, we are live here in the studio. Well, I guess it’s my studio nowadays you never know how that works. The whole world is virtual, and any technical difficulties we had were all on Friday. Apparently, I did not have my speaker set to be able to hear the show. So we are back here and let’s get Chris from White House on the phone.
Dr. Friday 10:48
Hey, Chris. You there?
Dr. Friday 10:52
Ah, there you are. See, you have a little technical too because I first I thought I lost the speaker again. Hey, Chris, how’s life?
I have not got my stimulus check yet.
Dr. Friday 11:05
So life isn’t very good, because it’d be really nice to get that 1200 dollars wouldn’t it? Okay, so let’s go through the basic checkoff. You were not a dependent on someone else in 2019. Correct?
Dr. Friday 11:20
Did you file your own taxes?
Dr. Friday 11:24
How about an 18? Did you file taxes?
Dr. Friday 11:29
So you got sir, all these questions? How many times? I guess the last one, have you called that 800 number that’s supposed to tell you where your stimulus is?
Yeah, the one that’s on the website. They said there’s not enough information.
Dr. Friday 11:47
That’s what they said. There’s not enough information?
Not enough information, right.
Dr. Friday 11:51
Not enough information? Well, at this point, as I’ve told a few other people, I’ll share that with you, because it’s absolutely worthless information. You’re going to be claiming it on your 2020 tax return. And you’ll be able to get it. The downside to this is I’m not absolutely sure that if you owe back taxes or anything else, that they’re not going to try to apply it to any outstanding balances. Right now the only thing they can apply it to is back child support. I’m guessing you don’t have back child support, correct?
Yeah, I don’t have anything like that. I will tell you, I did make a slight miscalculation on my taxes. I was off, there was a $200 mistake. So I only got my taxes back about three weeks ago, and I filed on March 13.
Dr. Friday 12:46
So somehow in the system because of income information not matching. Nowadays, they’re getting better at it, they put a hold on your return, they finally got it fixed, they charged you assuming you made the mistake they didn’t. So you’ve now gotten your refund, but you’ve only just gotten. If you filed on 18 You know, this is this kind of information I don’t understand. If someone files 2018, my understanding was they were using 2018 as the original distribution. And then they changed it to people that hadn’t filed 18 and 19 would be filed and they were using 19. But I don’t quite understand how that works if you filed in 2018. I’ve got several callers so I’m not understanding their system to be honest with you, Chris, as far as how that’s not helping you. But it doesn’t make any sense to me.
I’m Bruce by the way, not Chris.
Dr. Friday 13:42
Oh, I’m sorry.
Dr. Friday 13:46
It’s one of those Saturdays, let me tell you a call the person the wrong name. No worries, you know, it’s all good. Thank you for calling, though. It’s a great question. I know there are thousands of people that are still listening and that haven’t received it. And at this point, if you’ve called and you’ve looked online, there’s really nothing more anyone can do for whatever reason. There’s a group of people that are not getting those checks. I don’t know, you know, it’s crazy.
Are they still mailing out checks to anybody?
Dr. Friday 14:24
My understanding that they were mailing them out till the end of September. So this would be the last couple days of any checks going out. I haven’t heard of any extension of the check be mailed out or anything else. With the elections coming up, you know, there’s a lot of talk of a second stimulus and all this but I don’t think anything’s going to move until after November 2, personally. Maybe a little after that if they use the mailings.
Okay. Yeah, mine is on mail.
Dr. Friday 14:51
Yeah. Sorry, buddy.
That’s alright, thank you!
Dr. Friday 14:55
Thanks for listening. Appreciate it. Okay, you are listening to the Dr. Friday show. We are live as you can tell because if I was recorded, I probably would have had to re-record this. Let’s talk a little bit more about taxes. If you want to join the show, it’s awesome. That’d be great. 615-737-9986. We’re taking your calls, talking about all kinds of interesting things. As many of you guys know, I’m an enrolled agent licensed with the Internal Revenue Service to do taxes and representation. That’s kind of all I do. So if you haven’t filed taxes for a number of years, if you have issues, or you’re getting the love letters, liens, levies, and you’re wanting to try to get some resolution to that situation, then you need to give me a call, or you can go right to my website: Drfriday.com. Set up a tax appointment, everything’s labeled a tax appointment, set up an appointment, and then in the memo, say back work, or you’re needing to do resolution. Every first meeting is free unless I’m doing preparation or something. The initial meetings are always free so that we all can be on the exact same page and know what we’re doing and how we’re going to do it. So I don’t come up and soon as you call me to say, “Oh, yeah, let’s cost the $3,000, and let’s start building that now” before I pulled your transcripts and have any idea if I’m going to be able to do any kind of resolution for you. Because believe it or not, even though I have done 20 years, we’ve had some really great settlements, we’ve been able to have a resolution on many people, not every case is going to get a resolution. It takes time. If you really are serious about wanting to do it, you might as well figure, it’s gonna take us about a year to get a resolution through the system. It’s not something that’s going to happen fast. It’s not something that I’ve had people come in.
Dr. Friday 16:45
I’ve had people wait to get married because they want to make sure the person they’re marrying, doesn’t have any tax issues. They wanted to bring that into the marriage and they’ve had to delay it. In some cases, it’s intelligent to make sure you understand and know what you’re doing and how you’re doing it versus just winging it. I had one come in, and they’re getting married in like 30 days, and they wanted resolution, and that’s impossible. The only thing I could have gotten you as a payment plan, which wasn’t going to work in her particular situation. So even though the person you’re marrying doesn’t take on, theoretically, your tax debt, what they do take on, and in many cases that person works. The IRS has a cost of living per household, per family. If you are now merging with someone that makes as much if not more money than you, guess what? Your entire paycheck now in many cases could go to the IRS as a 100% check. Versus if you’re supporting yourself, you’re living on your own and having to take care of yourself. Now that money is going to be reduced because there’s a cost of living involved. So getting married or having someone else take care of those issues.
Dr. Friday 17:53
Also, divorce. Here’s an interesting conversation, to me, it’s interesting, who knows. But if you’re thinking about getting divorced, and you have tax issues, my suggestion is if it’s at all possible, to get a resolution before. Because what can happen and we have helped happen is one of the people will come to us after and if they don’t have enough money, they can get a resolution as a single person against that debt. Guess what the other person who may have even had a court order by the divorce, saying that they have to pay the taxes may not have to pay those taxes. Because the IRS does not look at court papers as a legal document as far as who is responsible for paying the tax if you were married at the time and you both filed those tax returns, you’re both equally responsible for 100% of that debt. Not 50% of it 100% each person. So if there is something else, my suggestion is if you’re going to go and get divorced, and you have a tax issue, you would mandate that that person maintain a payment plan. Just as some people suggest life insurance or something else, the payment plan and they have to prove either every month or give you online access to you can always pull up the transcripts, but something that shows that those payments are being made. Because if not, the surprise to you will be is when your employer gets a love letter from the government saying you’re now having to start making payments out of your paycheck which can be two-thirds of your paycheck so you go home basically with nothing. And then they require you to set up a payment plan because of it. You can go to the courts all you want the IRS is not going to care you are now the breadwinner especially if the other person is a self-employed individual much harder for the IRS to collect on them because they don’t have a simple W2 or standard employer. Sometimes they have multiple employers, so making sure that you have the ability To do something along those lines.
Dr. Friday 20:02
2020 for many people might be actually a great year for you. One of the years that you might want to consider putting money into a retirement account. Now, I’m a caveat that with I am not a financial planner, I don’t sell financials, I don’t have anything else that I need to deal with on that. I’m talking solely for the purpose of taxes. With taxes, what we’re looking to do is reduce your tax bill and make it work. To do that, one way to do it is to put money into either a simple setup a single member 401k. Now, if you have employees, you’re going to be limited to certain things that you can do. But even putting money away in an IRA or 401k, an IRA may be a good plan. Now, I’m always going to suggest talking to a financial planner, someone that’s got a little bit bigger spectrum than your tax person. Because all we’re looking for right now is to be quite honest, instant gratification, right? We’re looking for things to just go pretty much straight out and make it work for us. So we should be able to move things and do things. All right. So we’re going to take our second break. When we come back, we’ll get to your phone calls, you can join us at 615-737-9986. If you need questions on taxes, or if you haven’t filed taxes for a number of years where to get started, I can help you with that. We’ll be right back.
Dr. Friday 21:41
All righty, we are back live here in my home studio. For all of you wonderful listeners, if you want to join the show, now’s the time to pick up the phone. We’re halfway through 615-737-9986. So let’s talk about a few kinds of unique topics. I got an email this week, and it was an interesting question. I find again, taxes are always fun and exciting for me. The question asked, “Can I avoid state income tax?” and this particular person lives in New York City just to let you know, and they’re wanting to know if they can avoid income tax. They don’t live in New York, they live in New Jersey, but they work in New York. My basic answer to this is New York and California because right now there is a great argument that this is because the employer has mandated you to work from home. If that’s the case, then sometimes you don’t have to pay certain things. But New York has basically come out and they have said that just because you’re working from home, we’re still considering you New York employees because you work for a New York employer and that you’re still obligated to all the state county in New York, it’s almost street tax. So you know, my advice to them was to go ahead and remit it. If something changes by the time we get ready to file 2020 we can always make that argument when we get ready to file but to always make those estimated payments. Really want to make sure that you guys are making your quarterly and estimated payments totally important to do because the penalty still exists. Even though the first two quarters didn’t hit till 7/15/20 we still had the 9/15/20 which just passed us and now we have the 1/15/21. All right, Danny, you are on the line? This is Dr. Friday
How are you?
Dr. Friday 23:39
Hello Danny, I am awesome.
Good. I own an entertainment company here in Nashville. We do DJ karaoke and we’ve been basically shut down since March. I have tried to, I got a little bit of a PPP money but I mean money-making month between March and October is basically non-existent this year. I have tried to apply for an additional grant, I’ve got two different business licenses one on the promotion side, one on the entertainment side. I’ve tried to put in my tax ID number I’ve tried to put in my business license. And it asks for the last sales tax.
Dr. Friday 24:28
What are the last three payments that you made?
I put those in and it says in there it doesn’t match their record. Even though I can go back to me where I did it.
Dr. Friday 24:41
You can physically look at it and say okay, yeah. Sometimes you need to put in if there were any late fees or anything you need to put the exact dollar amount that was paid, not saying that they applied but I had that in one of my cases. The only reason I was using what we originally paid but they had paid it a little late and there are some additional fees on one of them. So that would be the first thing. The second thing in my personal opinion, double-check. You can call because I have on these and said the same thing. I’ve had some that that’s exactly what happened. We have the right account number, we have the name, we know we operate them, it all shows under our regular 10 tap account, right? I mean, it’s not like we’re making it up, we’ve got the information, and it doesn’t match. A lot of times they’ll tell you what’s not matching, they’re able to see it for some reason, they can say no, you put in the wrong zip code. That’s not what we’re showing, even though it is what you’re showing. So my suggestion is to call the Tennessee Department of Revenue on Monday morning and see if you can’t get them to have the possibility of calling them and I’m gonna give you are you driving right now?
I am but I am actually pulled over.
Dr. Friday 25:57
Okay, so the phone number you’re gonna want to call is the 615-253-0600. Just call and just tell him you’re trying to get through the Tennessee relief in the certificate won’t verify for you.
Dr. Friday 26:19
They’ll connect you to the right department, but I have had them and they are very helpful. Once you get someone on the phone, they usually so far have been able to get verified. At least to get to the next page, which has you fill out the information about Have you had 25%. You are a perfect candidate and you should be able to get in if you have two business licenses, you should be able to get them under each.
Okay. What was that number again? My pen ran out.
Dr. Friday 26:43
That’s okay. 615-253-0600.
Dr. Friday 26:52
All right. Good luck. After that, give me a call in the office and we’ve got some friends over there might be able to help, okay?
Okay. Thank you so much.
Dr. Friday 27:02
Bye, bye. All righty. Let’s go right along and talk to I think it is, Tim. Hey Tim! What’s happening.
Hey, Dr. Friday! First of all, I want to give you an applaud. I’m a customer of yours, and this lady is an incredible person, use her! My daughter still has not gotten her stimulus or for her two children. I heard you mentioned earlier to a gentleman that if we can’t get it, which I’ve tried everything, then she’ll get it back on her 2020 return. How does that work?
Dr. Friday 27:41
So they’re showing some demos of what the new tax return there’s a line on there, it’s going to ask if you received how much you received. Then in her case, she would say zero and then they would give her the credit of $1000 and she’s got to $500 for each child and $1200 for her, so 2200 or something like that. If the children are under the age of 17. If they’re older than that, then they may not qualify. Either way, she’ll put all that information in there’s going to be a line and they will add back into her refund.
Okay, thank you, Dr. Friday, you’re the best!
Dr. Friday 28:17
No problem. Thank you for calling Tim. Appreciate you. Alrighty and we’re moving right along here again if you got questions guys and you’re not sure I’m you know, again on the stimulus. I kind of feel a little bit like I’m not able to do a whole bunch on the stimulus. On the EIDL the PPP and the Tennessee business relief, I’m a little stronger on because we’re filing and living those every day. The stimulus even though it’s dealt with by the Internal Revenue Service, really all they are issuing the checks, so they’ve got this whole separate division doing it. Like I said, 2020 they have already put on there. Now the question is going to really be fun. Now, let me clarify right now that the stimulus money is not taxable. Okay? The question is going to be is in some cases, people got too much money, their children either were already turned 17 and they shouldn’t have qualified or somehow they got money for a person, someone else. Either way, you look at it, it’s not going to be taxable. So my understanding is there’s no taking it back. So if you got too much money, you’ll be okay. If you didn’t get enough, which is the ones I’m more concerned with, then those are the ones that we need to get a hold of and you know, just making sure but there is going to be a line right on the tax return. Many of you guys file taxes back in was it eight or nine we had something similar to this where they also had it was a lot smaller. I think it was $600 a family or something but there was a stimulus back then and we had the same process.
Dr. Friday 29:54
Alright, let’s hit Jackie before the break. That way she doesn’t have to hold through it. Hey, Jackie.
Good afternoon, how you doing?
Dr. Friday 30:02
I am doing awesome. What can I do for you?
My brothers, sisters, and I purchased our mom’s house in 1998. But she kept a lifetime whatever on it, and she passed in 2012. We just sold the house, just closed on it Thursday. What do I need? Because what I understand is I’ll have to establish the cost basis for the house as of 2012 when she passed?
Dr. Friday 30:34
Right, so we need to have ideally, and a lot of times real estate agents are awesome. They will pull comps based on the month surrounding mom’s death. So they need to be roughly around the same time mom passed away. Okay, so whatever that was in 2012, ideally get two to three comps. Then that would be our basis and then based on your percentage, and I would share that with all the family. I mean, like everyone used the same numbers, makes life a lot cleaner, as far as I’m concerned. So hopefully it was worth more than what you guys paid for it. But that’s going to be your basis is 2012. And then whatever you sold it for now, and it could be that it was worth more than that is now who knows. Now, did you guys rent it out or something between 12 and 2020?
No, what happened was that our younger sister, she lived in the house until she passed in August of this year. We didn’t use a real estate person. We sold it ourselves.
Dr. Friday 31:33
Okay, so even though mom had a lifetime estate there, you guys allowed the sister to continue until I’m sorry about the loss of your sister and Mom. But when she passed away is when the house really became available for you guys to sell it sounds like.
Dr. Friday 31:49
Okay. So if you don’t, Zillow, property taxes, never as good as what I prefer or call. Sometimes there are some really cool real estate people that would actually work around those kinds of things. If you call my office, I have a couple that would be able to give it to you. If you want just to use property tax, I mean, that will always have a value. It’s not always the right value. Sometimes it’s too low for me, but it would give you a trail, something that you could use for justification.
Yes, we’re gonna probably be hit pretty hard. My mom, we’ve basically paid off her mortgage on her home. So we sold it for a lot more than what we paid for it.
Dr. Friday 32:34
But what you paid for doesn’t make a difference as what was it worth in 2012.
Dr. Friday 32:39
So whatever it was worth in 2012, because you had that lifetime estate, even though you paid for it in 98, you basically get a step up in basis because you were unable to actually process with the lifetime estate.
Okay, that was my understanding, I just want to make sure so I could go ahead and get busy and get the paperwork in place. Thank you.
Dr. Friday 32:56
No problem. Thank you.
Dr. Friday 33:00
Alrighty, so we’re gonna take another break here in just a few minutes. Remember, if you’re dealing with anything like Jackie, life happens, guys. You need to make sure, don’t know how many family members are involved or anything, but make sure the ideal situation is a lot of times we’ll have a Schedule E prepared. If there are multiple people that file on that same rental, or in this case, this would be a capital gains situation long term capital gains. I’m sure there’s going to be decent gains still on it. At least making sure you’re all using the same basis is very important. At least that way you guys can all justify it and use the information that came to you through either research of property taxes, or getting a real estate person that might be able to pull some comps, whichever works. So if you want to join the show, we’re going to have a few minutes about 10-15 minutes left after this break. Call 615-737-9986. We’re gonna take your calls and then we’re going to tell you a little bit about some of the tax changes that are in the making. So we’re going to be right back with the Dr. Friday show.
Dr. Friday 34:09
All righty. We are back live here in my home studio live for you guys on the station, and we’re having an awesome show. I won’t appreciate all you guys calling in and we have two callers. We’ve got Don who is first then we’ll get to David. Hey Don, what’s happening?
Well, Dr. Friday, I thank you for taking my call. I am 77 years old, and I bought a two-bedroom condominium in Madison, Tennessee 20 years ago. I paid $75,000 for it. It was a premium Construction price, and I have had it rented every month, all of those years, but with the exception of three months, so it’s been a great investment. The question is, is that I just spent $10,000, the renter moved out on a two-year lease, and I have decided, I’m not going to. I’m 77. It’s time to give up the rental business. So I’m going to get them listed for $150,000. I’ve just put $10,000 in it in the last two months, for the new carpet, paint, toilets, and appliances, and to get into top shape. What are my tax consequences? If I sell it for $150,000, less than 10,000 repairs?
Dr. Friday 36:01
Well, the question is, since you’ve had it, you never lived in it’s pretty much always been a rental property and investment property, maybe is a good term that you’ve had, correct?
Dr. Friday 36:16
So what year did you purchase it in?
21 years ago.
Dr. Friday 36:24
21 years ago, okay, so it’s probably almost fully depreciated. We’re basically looking at closing cost fees and the $10,000, you put into it less. So let’s just say that you, between the two, you’ve got about 20,000. So you’re still going to pocket about $130,000. I’m gonna be nosy, give me some ballpark of what your income is just doesn’t have to be itemized. But what ballpark are you in, as far as before this? What income do you make every month? Like Social Security, pensions, all that if you add all that up? What do you have roughly?
$10,000 a month income.
Dr. Friday 37:07
10,000 a month? So you make around $120,000 a year?
Dr. Friday 37:12
Okay, are you married or single sir?
Dr. Friday 37:17
Okay, is that for both of you combined? The 10,000 a month?
Dr. Friday 37:22
Okay, so you’re basically already exceeded the free thing. So here’s the deal, if you guys exceed $250,000, with the profit of the sale, you’re going to get hit with an additional 3.8% tax on everything that’s above that 250. You’re going to be really, really close. Some of that money, I’m thinking at 77 some of that money is your Social Security, which we’re only taxed on 85% of. So you might be able to squeeze underneath that. If you keep squeezing underneath it, you’re gonna be at the 15% tax bracket. So you’re gonna pay 15% on whatever the profit of roughly 130,000.
Okay, so it is considered 130,000 is the total that id has to pay taxes on?
Dr. Friday 38:21
Yeah, the 75 without looking at the depreciation schedule. Back in those days, it was like 27. So there may be a little bit of the original purchase in there, but the worse scenario is, you basically have the $10,000 plus closing costs fees. That’s a worse scenario. When you go back and look at your tax return or if someone does it, they’ll have a recapture depreciation situation on that. I’m making the assumption that most of that, if not all of it is almost gone at this point.
Okay, and thank you. My last question is, why are you called Dr. Friday?
Dr. Friday 39:00
Well, I have a Ph.D. in economics and my first name is Friday. So it’s a little more catchy than my last name, which is Burke. So Dr. Friday.
Okay, have a good day. Thank you so much.
Dr. Friday 39:11
No problem, thanks. Okay, let’s see if we can hit David real quick. If he’s still on the line.
Dr. Friday 39:20
Ah, thank you so much for holding. What can I do for you, boss?
Well, I got a little situation and a question I want to ask you about. My wife’s father in Mississippi built the house and probably in 1983 or 1984. He was a comp the contract so I have no idea what he had in it. He put it in the last name. She’s an only child in 2001. He passed away in 2017 in March, and it’s sitting there and we haven’t been able to do anything for a lot of Reasons health-wise, and we live in Tennessee and it’s in Mississippi. What kind of situation am I gonna be in? I have a man that wants to buy it. He’s thinking in the area of somewhere around $150,000 for the place. It actually has about 12 acres.
Dr. Friday 40:23
Okay, he’s actually looking at the benefit of the land as well as the house may still be a very nice place. I’m just saying the land doesn’t hurt. So it’s got some value because it’s got dirt. Okay, so did the dad have a life estate? Was he still living in that home?
He was, he lived in that home until he passed away. But it was in the last name. She’s an only child, in 2001 I believe.
Dr. Friday 40:53
This is always a bad idea. I know why people do it do not get me wrong. But the problem is that at the time that he did it, he eliminated the step-up in basis by doing that. Again, I know why people do it. They want to make sure their children have their assets.
Yeah, but she was an only child.
Dr. Friday 41:13
Yeah, but he did what he did. You have no idea what the value of the home? The nice thing about property taxes is is that you could go back to the beginning. So go back to 83/84 when they started assessing him, and that’s what you’re going to have to use as his original investment.
Really, and then how is that going to affect us as far as taxes?
Dr. Friday 41:43
Unfortunately, it’s gonna be a lot like the prior caller, I think you’re gonna find back in the 80s. Maybe he paid for it himself. He’s got 30 or 40 grand into a home that’s now worth 150.
Dr. Friday 42:02
Yeah. So the difference between those numbers is going to be your capital gains.
Capital gains from whatever it’s worth when he built it? [Inaudible] assessed in 2001 when it was put in her name.
Dr. Friday 42:17
He eliminated the step-up in basis. So the value of the home is what he paid for it, not what would have happened when he passed away. So it goes, it reverts back to what he paid for it. Now, don’t get me wrong, he’s probably done some improvements and things, but we have no records of any of that.
Right. Nothing at all. We just know that he was a contract, and he built it himself.
Dr. Friday 42:39
Right. So, I would just go back and see what the county assessed them on the value. It may be a little bit on the high side. All in all, it’s going to be the best that we can do. In the tax law, in this case, the tax law allows us to do the best of our ability. So I think they would accept and then I think you’re still going to find that you’re going to have a very large capital gain because I don’t think that was worse that much in Mississippi back in the 80s.
That will hit us right off of the taxes here in Tennessee.
Dr. Friday 43:08
Right, then you’ll write them off on your federal taxes. Thank goodness, we don’t have a state income tax.
We’ll just have to file something from Mississippi to do that. Or will it be just you? Well, since
Dr. Friday 43:21
She will. You will file an out of state return and have to pay tax on the gains of that home in Mississippi.
That will be a pretty large percentage you think?
Dr. Friday 43:32
Yeah, I’ll try to look I think it says here the income tax ranges between three to five if that helps. So it’s not bad, but it’s still another 3% or so on it, which is painful.
I understand. Okay, thank you, Dr. Friday.
Dr. Friday 43:48
No worries. Thank you, sir. Okay, guys, we’re almost at the end of the show here. I believe I have to go to 5850. If you want to reach me, you can always call me at my office on Monday, 615-367-0819. You can email your questions because sometimes that’s the easiest way to do things. The email is on firstname.lastname@example.org. If you need to set up a tax appointment or consulting appointment, go to the website drfriday.com, click on appointments, set up your tax appointment that way you can always get an again my initial meetings are always free. Make sure we’re all on the same page. I can also set up tax payments if you need help preparing your taxes business personal or estate tax returns. Again if you want to reach me 615-367-0819. I hope you guys have an awesome Saturday.