2018 Mileage Rate Reimbursements & Deductions

If you are going to use your car for business, charity, and medical appointments during 2018, please be aware that the standard mileage rates for computing the deductible costs have changed.

Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.

Effective January 1, 2018, here are the rates to use to calculate reimbursements and deductions for the year:

  •  The rate is 54.5¢ per mile for business miles driven (up from 53.5   cents in 2017)
  •  For charitable services, it remains at 14¢
  •  The rate for medical mileage is 18¢ per mile (up from 17 cents in 2017)

Keep in mind that the mileage expenses for moving expenses and job-related mileage deductions for employees were eliminated effective January 1, 2018. For tax planning purposes, talk to your employer and see if you can get a reimbursement for both of these expenses. If not possible, ask for a raise to at least cover all or at least part of your expenses.

That is all for now.

If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.

Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.

Top 6 Year-end Tax Moves Before Tax Law Changes

Are you following the most recent tax proposal development? If not, no worries – I will give you the most up-to-date development.

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

Both the House bill and the Senate measure calls for the elimination of most itemized deductions (that is Form 1040 Schedule A Itemized deductions). And in case they finalized the tax proposal this month, it won’t take effect until the 2018 tax year. However, we still need to plan since it could affect some of your 2017 year-end tax moves.

Here are six itemized deduction-related moves that you need to do now:

  1. Pay your state taxes. If you live in a state that tax salary & wage income, you need to pay your state taxes as much as you can this year while they’re still deductible. A great way to do this is to make your final state estimated tax payments before the year-end.

 

  1. Pay your real estate taxes early. The House bill is allowing up to $10,000 of real estate tax If your property tax bill is higher than that, then pay it in December instead of early next year, to avoid losing some deductions.

 

  1. Prepay your January mortgage. The increased standard deduction amounts could make your mortgage interest deductions irrelevant. So by prepaying your January mortgage in December, it will increase your deductible mortgage interest for 2017.

 

  1. Bunch medical expenses. If you had a challenging year as far as your or family members’ health, this is the year to make sure you don’t waste any expenses. So, in addition to year-end doctor and dental visits, make sure you don’t overlook other possible medical deductions. And if you are scheduled for a major surgery next year, I would recommend doing it before year-end.

 

  1. Bunch miscellaneous expenses. If you are an employee, make sure you deduct all unreimbursed expenses that you incur while performing your job. Also, don’t forget to deduct such things as job search costs, investment related costs, safety deposit box, accountant fees or tax preparation software costs.

 

  1. Donate to your favorite charities. If your other itemized deductions are gone and the standard deduction amount is increased, you might not have enough in donations to file a Schedule A form. So consider increasing or doubling up your donations this year when you can still claim the deductions.

So those are the six itemized deduction-related moves that you need to do now in order to maximize your deductions this year before the tax law changes.

Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.

Top 7 IRS Online Features That You Need To Know

Have you ever visited the IRS website? I have to tell you, I was pretty impressed with the online tax features. And as the tax filing season approaches, the IRS encourage you to visit IRS.gov first for tax tools and online resources to address any of your issues before calling.

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

Here are the top seven online reasons to visit the IRS website

So I encourage you to try it and check out my top seven reasons why you need to visit the IRS website this upcoming tax season.

Requesting Fraudulent Returns Following an Identity Theft

Have you ever been a victim of identity theft? Would you like to see and review a copy of your fraudulent return filed by these criminals in your behalf?

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

Today, I will share with you some information on how to get a copy of your fraudulent tax return filed by these criminals in your behalf.  You can request a reductive copy of your return from the IRS.  Reductive means a simplified version of the return without all the information. You can get copies of those fraudulent returns for the current tax year and previous 6 tax years.  The person making the request needs to be listed either as the primary or secondary social security no. on the return. Unfortunately, dependents may not request the copy.

Now, certain information on the return is reductive to protect additional victims that might appear on the return.  But any remaining data will let the victim see how much information the criminal had and how it’s used.  That’s very important.

To request a copy of fraudulent return you can use Form 4506-F and mail it to the IRS along with the required documentation.  Either you or your trusted tax advisor can complete the form.

That’s all I have. See you then.

How Does The 2017 Tax Plan Affect You

Last week, the U.S. House of Representatives’ Committee on Ways and Means introduced the 2017 Tax Cuts and Jobs Act. There will be a lot of discussions over the provisions in the bill in the upcoming weeks, and I expect changes along the way.

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

Here are some of the highlights of the 2017 tax plan:

  • Consolidate the seven current individual tax brackets into four at 12%, 25%, 35%, and 39.6%, using the following tax brackets:
Proposed Tax Rates
Rate MFJ MFS Single HOH
12% Under
$90k
Under
$45k
Under
$45k
Under
$67.5k
25% $90k–
$260k
$45k–
$130k
$45k–
$200k
$67.5k–
$200k
35% $260k–
$1,000k
$130k–
$500k
$200k–
$500k
$200k–
$500k
39.6% Over
$1,000k
Over
$500k
Over
$500k
Over
$500k
  • Increase the standard deduction:
  • Joint filers: from $12,700 to $24,000
  • Single filers (and surviving spouse): $6,300 to $12,000
  • Eliminate personal exemption of $4,050 for each person;
  • Eliminate itemized deductions except for mortgage interest deductions, charitable contribution deductions, and property tax deductions of up to $10,000. All medical expenses and other state and local tax deductions are eliminated;
  • For new home purchases, mortgage interest deductions would be limited to interest on $500,000. What? That will affect home buyers in large cities where houses cost more than $500,000;
  • Since state tax deductions will be eliminated, taxpayers in high-tax states will be greatly affected;
  • Increase the child tax credit to $1,600, and add a nonrefundable credit of $300 for non-child dependents and a new nonrefundable $300 personal credit;
  • Eliminate the alternative minimum tax (AMT) for individuals and corporations;
  • Lower the corporate tax rate to 20%, and create a 35% maximum rate on pass-through business income (like LLC, partnership and S-corporation); and
  • Increase the estate tax exemption to $10 million, and repeal the estate tax after six years.

How does this affect you?

  • The Tax Policy Center said that Trump’s tax plan wouldincrease the national debt by $7 trillion over the next 10 years;
  • Reduce U.S. gross domestic productafter 2024. The interest payment on the debt would consume a large portion of the federal budget. That money wouldn’t be available to build infrastructure or other job-creation uses;
  • Trump’s tax reform plan would help the wealthy more than the middle class. The top 1 percent would get an 8.5 percent break. This favoritism to the wealthyis why Trump’s tax plan increases the debt so much. The most affluent Americans contribute the lion’s share to total tax revenues;
  • No tax benefit to more than a third of taxpayers already have incomes that fall below their standard deduction and personal exemptions.

That’s all for now – I will give you the latest update as it develops.

Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.

3 Scary Tax Filing Mistakes

Have you ever filed your taxes knowing that you either omitted or did not bother to review if your numbers makes sense? I got to tell you, you only need to get audited once, to experience the stress and hassle of replying to your beloved IRS.

 

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

Today, I will share with you 3 scary tax filing mistakes that you will really regret:

 

  1. For Recently Separated or Divorced Couples

 

If you are recently separated or divorced and you are not on speaking terms with your spouse or ex-spouse, it’s very easy to make mistakes on both of your returns. Here are some tax filing errors that might come back to haunt both of you:

 

  1. Choosing the wrong filing status – either spouse might file a joint return, separate return or single-filer return. If both spouses are not on the same page, have no communication & filed different returns, rest assured that they will have time to talk about it during the audit.
  2. Reporting a different alimony paid and received – to avoid any IRS letter for both parties, make sure that the alimony reported for both spouses are identical. If not, you need to start preparing all the tax support to provide proof of the amount that you reported.

 

  1. Getting Super-Aggressive On Your Business Deductions

 

If you own your own business and you are motivated to minimize your taxes, you are more inclined to deduct a lot of various expenses.  Be very careful though since a “Schedule C Profit or Loss From Business” tax form is a red-flag for an IRS audit. IRS would require proof why the expenses are “ordinary and necessary” for the business. If you cannot provide proof, they can go back and audit the last 3 years of your return. The words very stressful is an understatement once you get an IRS letter indicating that you have been selected for an audit.

 

  1. Not reporting extra income

Make sure you report all the income that you received that don’t generate a W-2 or 1099. You might think cash received, payments from a side gig and under-the-table arrangements don’t have to be reported on your return. However, in case you get audited, the IRS will ask for copies of your bank statements and cash transactions. They can come back and audit the last 3 years of your return. It gets worse – if you omitted more than 25% of your gross income, they can go back and audit the last 6 years of your return. Good luck on that!

So those are three examples of scary tax filing mistakes.

 

Next time, please make sure to take this into account in order to avoid any IRS visits.

Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.

Pay Zero To Become The Hero Part 2 (Presented at Anaheim Hills Brokers Caravan)

Noel:                Third strategy that you need to apply – expenses. Missed expenses! There’s a lot. I’m only gonna cover two that you might be missing. The first one is called, the start-up cost. If you’re into real estate investing, any cost incurred before buying or renting a property, they’re all deductible. Examples – legal and consultant fees, CPA fees and business formation. You got to travel out-of-state to look for properties – that is tax deductible. Car expenses – the whole work is deductible. You picked it up and it’s deductible.

Noel (cont’d):  Number two, that a lot of people might be missing is the closing cost. When you’ve to sell the property or buy it. It’s on the closing disclosure. There’s a lot of numbers there. Each one of those goes – uh – you have to treat each one differently. Some of them are gonna be amortized meaning spread on the life of the loan like points. The other ones’ are going to be fully deductible. We have property taxes, partial insurance, they’re tax-deductible up front and then there’s the – what they call title charges added to the purchase price. And, lastly, if you have an impound account, those reserves- they are not tax-deductible. They’re not deductible for now because the lender is reserving it to pay for property tax and for the insurance. Keep that in mind.

Noel (cont’d):  The fourth one, the R, the first R – Rates. The rates, if you plan accordingly, and I keep telling my clients – it’s all about structuring. The rates, if you sell the property, you can potentially zero it out. The capital gains – how? Two strategies, number one, you have to hold the property for more than a year. Number two, you have to make sure your income is lower than like around $75,000 if you are married, and if you are single it’s $38,000. You might be looking at me like, ‘How are we supposed to do that?’ You have to – If you have a business, you got to postpone your income. You have to maximize your deductions and if you do that, you can zero it out. How do I know? I’ve been doing a lot of those the last five years.

Male:               But with residential lending, you’re not gonna be able to get a loan on those properties, without showing any income.

Noel:                Well, that’s a different – ah. His question is that, How can we zero it out, we need that?

When a client have that issue, the question that I always ask is that, ‘What is the priority? Is it tax or is it the lending?’ Because a lot of my clients, when they want to buy more properties, guess what?

Noel:                You gotta show more income. So, you gotta pick kinda like which one is more important. Is it going to be wealth building cause the potential over here or paying the taxes? If the tax is gonna be a bucket – a nickel – go for the wealth building. Good question. Okay?

Noel:                So, if you do that, the bracket is a 10 or 15 percent tax bracket. If you do that you can potentially zero out your taxes. I have a client, got one property in Corona del Mar. We did some structuring – a lot though cause the property there is pricey. We did- we combined this – this, uh, – we combined this strategy. Some life-kind, some zero out – he got business deductions, he’s got a real estate. We combined. He – he sheltered almost like half a million dollars capital gains tax. But, it’s all about planning.

Noel (cont’d):  The last strategy – the last R is R E Pro, real estate professional. You guys heard about this? Raise your hand. No? Ok. Real estate professional, the reason why it’s so powerful is because it potentially zero out your taxes. If you have a lot of real estate holdings, it will allow you – it will allow you to deduct your rental losses against your earned income, W2, business income and could potentially zero out your taxes.

Noel (cont’d):  What are the requirements? There are two major requirements. It’s all about time. The first one is called, the 50 percent test. So, the amount of time you spend in real estate business needs to be more than your working hours. So, if I’m a CPA – that’s my full-time- job – and I’m working 2,000 hours. Well, I gotta spend 2,001 hours in real estate – might not be possible, so I gotta do some structuring. The other time requirement is the 750 hours. You have to have 750 hours in a real estate business. And, you might be thinking, ‘What’s that 750 about?’ Well, it’s for non-working spouse. They want to make sure you meet some rules. So, if you apply those again, you can zero out your taxes.

Noel (cont’d): Got a client…makes 200,000 – 250,000 dollars. Got business and all that – once everything is done, his income is around fifty while his rental losses is fifty grand. He pays zero taxes.

Noel (cont’d):  One reminder, though. The real estate professional designation was abused way back during the real estate boom that the IRS came up with the – they call it, the audit procedure, in 2008. So, If you’re planning to do that, re – I want to remind you there’s an audit risk that you’re gonna get audited. So, what’s the audit-proofing? You have to make sure you know the rules of the game.

Noel (cont’d):  So, in closing, those five strategies would help you potentially zero out your taxes. The like-kind exchange, depreciation, missed expenses, key tax rates and real estate professional. Apply that to zero out your taxes but the most important thing though is it’s not about the tax savings but what can you do with it. So, the financial freedom is more important. So, just imagine these are your choices of questions – ‘Do I buy a new car? Do I buy a new home? Do I buy a second home? Do I fund my retirement? Do I travel?’

Noel (cont’d):  So you see…when you pay zero, you become the hero.

Noel:                Thank you so much.

Pay Zero To Become The Hero Part 1 (Presented at Anaheim Hills Brokers Caravan)

Noel:                What do the Irvine Company, McDonalds and our lovely President have in common?

Audience:        They don’t pay taxes.

Noel:                (laughing) Great. (Laughing) They’re a billion dollar real estate investors. And you might be wondering, how in the world were they able to do that?

Noel (cont’d):  Simple.

Noel (cont’d):  They took advantage of the most powerful real estate tax strategies.

Noel (cont’d):  They use the powerful tax code to zero their taxes.

Noel (cont’d):  As you can see, IRS is their friend. Is IRS your friend?

Audience:        No!

Noel:                No? Well, then in the next few minutes you’ll discover 5 ultimate tax secrets to zero down your taxes.

Noel (cont’d):  It’s called (picks up piece of paper from table) – the LDDER Approach. That if you apply (puts paper down on table) you will zero your taxes.

Noel (cont’d):  So you can pay zero and become

Noel (cont’d):  the hero.

Noel:                Are you guys ready –

Audience:        Yes.

Noel:                To become the hero?

Audience:        Yes.

Female voice: Always.

Noel:                Let’s do it. The first L (picks up paper from table) stands for like-kind exchange. Raise your hand if you’re familiar with like-kind exchange.

Noel:                Great! (puts paper on table). A like-kind exchange allows you to postpone your taxes by exchanging up to a higher price property. It’s a way to consolidate your real estate portfolio…

Noel (cont’d):  Or to – to minimize your taxes by building up your portfolio. It’s a two-step process.

Noel (cont’d):  One – you got to sell the property. Number two, you have to re-invest the cash proceeds.

Noel (cont’d):  I have a client. His name is Rich. He started with one triplex twenty years ago.

Noel (cont’d):  Guess what he ended up with right now?

Noel (cont’d):  Apartment buildings.

Noel (cont’d):  He started with a triplex. Now it’s worth I think ten million dollars.

Audience:        Wow!

Noel:                Here’s a strategy that you may not be familiar with. Once he passed away,

Noel (cont’d):  and that property transferred to his survivors – which might be the kids – his starting number which he bought way back, I think like half a million dollars. The starting numbers of the beneficiaries – or the kids – is not half a million dollars.

Noel:                Its ten million dollars. So, if the kids decided to sell the property the next day for ten million dollars, guess – what’s the tax for the kids?

Audience:        Zero?

Noel:                Zero (makes symbol of 0 with his hand). What is the strategy called? It’s called the 3D. It’s defer – defer – and die. Remember that.

Noel:                (laughing) Very powerful concept! The next one, the D (picks up paper) – stands for depreciation. (puts paper down) Depreciation allows – it’s a deductible expense for the wear and tear of the property. What is the plus? It’s a paper loss. There’s no money coming out of your pocket. I have – I have a client, Rich, I met 15 years ago. He went to my office and he said, “Noel, can you review my taxes?” And I said, “What do you have?” He said, “I only got like 2 rental properties.” And I was thinking, ‘Aah, that’s gonna be easy.’ I sat down and look at the schedule E form line one, gross rents – one million dollars. I said, “Whoa, what do you have?” “Well, I’ve got two apartment buildings.” It just gets better. One million dollars gross rent. Rental expenses, eight hundred thousand dollars.

What’s the rental income?

Noel (cont’d):  Two hundred thousand dollars – on his pocket – doesn’t fit over here (demonstrates his pants pockets). But, he’s got two hundred thousand dollars cash in his pocket. Now, here’s the kicker. I told you about depreciation, right? His depreciation was two hundred fifty thousand dollars. What’s his loss showing on the return? Fifty thousand dollar loss! I was looking at him and said, “You’re putting two hundred thousand dollars in your pocket? And you’re showing 50K of losses.” And, I was thinking, ‘Man, this is too good to be true.’ But, it was there.

Noel (cont’d):  So, take advantage of that depreciation to maximize if you have rental properties. (End of Part 1)

How to Beat Uncle Sam

Noel:                Raise your hand if you know Uncle Sam.

Audience:        (Silent)

Female:           Personally, my uncle?

Noel:                (Laughs)

Audience:        (Laughs)

Noel:                Great!  Now, raise your hand if you know Uncle Sam is not really your uncle?

Audience:        (Laughs)

Noel:                Great!  You see, a real uncle usually gives you money, this particular uncle takes away your money.

Audience:        (Laughs)

Noel:                So, today I will discuss with you, three tricky tax expenses. It’s called the 3 M’s.

I will show you how Uncle Sam takes away your money and I will also show you how to   get it back. Are you guys ready?

Audience:        Yep. Yes.

Noel:                Let’s do it.

Mortgage Interest

The first M stands for, mortgage interest.

I had a client. His name is Johnny. I gotta tell you he’s very extreme when it comes to minimizing his taxes. I was reviewing his return and guess what I saw on the mortgage interest? $50,000 of mortgage interest.

I ask him, “Why is this too high?” He said, “Well, I put zero down so I can get a huge mortgage interest deduction. Noel, it’s called, tax strategy.” I said, “Johnny, let me tell you something.”

This is what I told him.

See, this fifty thousand? That’s your mortgage interest. If I multiply that by 30 percent, which is your tax rate, your tax savings is $15,000. That’s the good part.

Here’s the bad part. The difference between the 50,000 that came out less the tax savings of 15,000 is how much? 35,000.

I ask him, “Do you know where that goes?” He said, “No.” It goes down the drain. That’s where it goes.

Audience:        (Laughing.)

Noel:                And, I told him that imagine you had it for ten years. So, you multiply $35,000 times 10, that’s $350,000 that you paid for nothing. It’s non-deductible expenses. So he said, “Really? Oh, I’m looking at it differently.” I said, “Yeah.” So, he said, “What can I do? That’s a lot of money.”

I said three things. Number one, do a by weekly payment instead of paying once-a-month – do every two weeks.  He said, “Why?” Cause you want to shave off 4-6 years off the mortgage payoff.

Number two is, why don’t you try to convert it to 15-year fixed. Why? You will save a tons of mortgage interest. You’ll probably shave – it’s gonna be close – 15 years – half.

And, then number three, If you have the chance, convert a fixed loan to a line of credit.  Why? If you convert a fixed loan to a line of credit – a line of credit is like a credit card expense. If you pay it down, they will base the interest off the balance. The sooner you can pay that off, the sooner you can be debt free.

Medical Expenses

Noel:                Number two – the second M– medical expenses.

Alright, medical expenses – have a 10 percent income limitation. That means you can only deduct 10 percent – in excess of 10 percent of your income.

So, let me give you an example. Johnny, for example, makes $100,000  and I multiply by 10 percent. So, his limit is $10,000. If his medical expenses is $11,000, how much can he deduct on his return?

Audience:        $1,000?

Noel:                One thousand dollars – it’s in excess. So, as you can see the first 10 percent is like a non-deductible expense.

So, guess – guess what happened to Johnny? Johnny had a kidney surgery but he cannot deduct his expenses so he asks, “Noel, what can we do? I want to deduct these medical expenses.” I said, “I don’t know. Have another surgery?”

Audience:        (Laughing)

Noel:                He looked at me and said, “Okay.”

Audience:        (Laughing.)

Noel:                Here are three things that you can do to have – have medical expense deduction.

Number one, you have to bunch the expenses together in one tax year. So, if you have a major surgery, plan accordingly and do it in one year.

Number two and number three is about reducing your income. One way to do that is to maximize your 401K or retirement plan and, number two, if you have a sideline business maximize the expense.

 Miscellaneous Expenses

Noel:                Third M – miscellaneous expenses.

This, miscellaneous expenses, can be broken down into three parts. The first part is what they call, unreimbursed employee expenses. So, if you’re a salesperson, commission people, you can deduct a lot of unreimbursed employee expenses.

The other one is, other expenses, and the other one that I want to talk about later is toastmaster’s expenses, okay? There’s a limit though. There’s a 2 percent income limit. It means that you can only deduct in excess of 2 percent of your income.

So, let me go back again to Johnny. A hundred thousand dollars times 2 percent is two grand. The first two grand you cannot deduct. The only thing you can deduct is above it.

So, if it’s a reimbursed medical expenses – I mean, a reimbursed employee expenses, is $2,001. How much can he deduct? One dollar. I told him the rules.

He got pissed off…

Audience:        (Muffled laughter)

Noel:                He said, “What can we do?” I said, “Well, the way we can probably do this is, to work on this.

Have you guys seen this before?  Who’s doing their taxes?  Raise your hand.

There you go. Are you guys familiar with this? This, my friend got 50 deductions.

If you’re not familiar with this, I can e-mail this to you.

Audience:        (Inaudible, muffled. Some light laughter.)

Noel:                Is that something of interest?

Audience:        (Inaudible, in agreeance)

Noel:                Okay. So, here’s how we break it down. I already told you about the reimbursement employee expenses.  Anything that’s necessary for your job performance or to do your job is deductible if it’s on unreimbursed.

The other one is other expenses. There’s a lot a bunch here. What I want to talk about is toastmaster’s expenses. Very important if you’re not deducting.

If this is something – here’s the rule – that’s the minimum rule. If this is something to improve your skills for your job, it’s deductible. So, from work to here and back, you should be deducting it.

Female:           Mileage.

Noel:                Yes, mileage. It’s huge. Here’s another thing. If you’re attending conference, conventions, if you go to Vancouver…

Audience:        (Light laughter.)

Noel:                You can deduct it.

Female:           Really?

 Noel:                As long as you can document it. How? Travel expenses got to be more than 50 percent of your time. So, if you went to Vancouver for more than 50 percent, meaning you did a lot of – you know – starting Wednesday  – to that  – it’s all business, it’s all deductible. You just have to document it. Got it?

 Alright. (Still holding paper.) This – so, I’ll e-mail you everything.  That’s all I have.

So, in closing, the 3 Ms is a perfect example of how Uncle Sam takes away your money. Mortgage interest, medical expenses and miscellaneous expenses. Try to apply what I told you today so you can take more money back.

So, here’s the last thing I have to say – behind every successful man stands a woman and Uncle Sam.

Audience:        (Laughing.)

Noel:                One takes the credit, the other takes the cash.

Audience:        (Laughing/ clapping.)

Noel:                If you like to learn more, click the link lowermytaxnow.com, and subscribe to my weekly blog. Until then, this is Noel Dalmacio, your ultimate CPA of Lower My Tax Now.

How To Avoid Paying Tax For Sale Of A Home You Owned Less Than Two Years

Did you own an existing home that you bought less than two years ago? And because of some unforeseen situations, you are force to sell it. Worse, now you are worried about the potential tax that you will be paying on the sale.

Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.

In order to claim the $500,000 capital gain exemption on the sale of your home, you need to use and own it for two out of the last 5 years. Now, if you did not meet the 2-year rule when you sold your home, you can use the “reduced exemption” rules in order to avoid paying taxes.

A reduced exemption is available if the reason why you sold your home was due to:

1. Change of employment
2. Health
3. Death
4. Loss of job
5. Divorce
6. Multiple births
7. Others

The reduced exemption is calculated by dividing the total number of months you owned and used it over twenty four months. Here’s an example: Donald owned and used a property in Washington, DC for 12 months. Due to job relocation (he will go back to New York) he sold his property. Because the move was job-related, he qualifies for the reduced exemption.

Ratio

12 months (Number of months owned/used) = 50%
———————————————————–
24 months

Exclusion

$500K (capital gain exemption) x 50% = $250,000

Donald can exclude up to $250,000 of gain on the house he bought in Washington DC.

So make sure that you apply the “reduced exemption” rule in case you sell your home for less than two years.

Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.