by Charles Blair, DDS and John McGill, MBA, CPA, JD
In 1990, I purchased a two-family home for $62,500 and used it as my personal residence until 1994. Following this, I held the home as investment property, although I did not rent it out. Over the years, I have made approximately $10,000 worth of improvements.
In 2000, I sold the home for $70,000 and was given a Form 1099 for that amount. In connection with the sale, I had $4,000 in closing costs and another $1,500 in repairs. Will I be required to pay capital-gains taxes on this transaction, or can I report a loss?
Under federal tax law, the determination of gain or loss is based upon the difference between the adjusted sales price (sales price less expenses related to the sale) and the tax basis of the property. In your situation, the adjusted sales price for the property was the $70,000 received, less the $4,000 in closing costs and $1,500 in repairs, for a net sales price of $64,500.
In comparison, your total tax basis for the property sold was $72,500 (the $62,500 sales price plus the $10,000 in improvements). Accordingly, you would report a long-term capital loss of $8,000 for 2000 federal and state income tax purposes.
This loss could be used to offset other gains you have incurred during 2000. Once the gains were fully offset, you could deduct up to $3,000 of the remaining loss against your other income. Any remaining loss would be carried forward for use in future tax years.
I am in the process of purchasing a practice. In connection with that, a friend of mine advised me to make a substantial allocation of the purchase price to the practice-management software that I am buying, saying that this would be immediately deductible, while I would be forced to have longer write-off periods for payments made for other types of assets. Is this a good idea?
No, your friend is incorrect.
Under Section 197 of the tax law, if software is purchased as part of a practice acquisition, the software cost must be amortized (written off) over a 15-year period. Alternatively, computer software purchased in the ordinary course of business (not relating to the purchase of a practice) has a three-year write-off period. However, if the computer software cost is bundled as part of the total computer cost, it must be written off over the normal period relating to the purchase of computer hardware (five years).
Over the past few years, I have funded a nondeductible IRA contribution, but did not file Form 8606 with my tax return. My CPA said not to worry about this, but will this cause me to have to pay taxes on the nondeductible amounts contributed to the IRA?
Your failure to file Form 8606, which establishes the total nondeductible IRA contributions you have made, will not result in your owing additional federal and state income taxes. Rather, this form gives the IRS the information necessary to calculate the tax you will owe when you actually begin taking distributions after retirement.
Since you failed to file Form 8606 in the past, catch up on this year's return by not only listing the amounts contributed for the current year, but also including the amount contributed for all previous years on the separate line that requests that information. Then attach a note stating that you failed to file Form 8606 during prior years and that you are electing to include all of the prior year contributions on this year's return.
The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.
Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.