Property Rules

Understanding Taxes on Real Estate Gains
Understanding Taxes on Real Estate Gains 850 500 smolinlupinco

If you own real estate held for over a year and sell it for a profit, you typically face capital gains tax. This applies even to indirect ownership passed through entities like LLCs, partnerships, or S corporations. You can expect to pay the standard 15% or 20% federal income tax rate for long-term capital gains.

Some real estate gains can be taxed at even higher rates due to depreciation deductions. Here are some potential federal income tax implications of these gains.

Vacant land

Specifically for high earners, the current maximum federal long-term capital gain tax on vacant land is 20%. For 2024, the 20% rate kicks in for 

  • Single filers with taxable income exceeding $518,900
  • Married joint-filing couples with taxable income exceeding $583,750
  • Head of household with taxable income exceeding $551,350. 

If your income is below these thresholds, you’ll only owe 15% federal tax on vacant land gains. Remember that you may also owe the 3.8% net investment income tax (NIIT) on some or all of the gain.

Gains from depreciation

Depreciation-related gains from real estate, also known as unrecaptured Section 1250 gains, are generally taxed at a flat 25% federal rate. However, if the gain would be taxed at a lower rate without this special treatment, this 25% rate does not apply. However, you could owe the 3.8% NIIT on some or all of the unrecaptured Section 1250 gain.

Gains from qualified improvement property

Qualified improvement property or QIP, refers to improvements to the interior of nonresidential buildings after being placed in service. QIP excludes enlargements such as elevators, escalators, and structural changes.

You can claim tax deductions for QIP through Section 179 deductions or bonus depreciation. When you sell QIP for which you’ve claimed Section 179 deductions, part of the gain may be taxed as ordinary income at your regular tax rate rather than the lower long-term capital gains rate. This is known as Section 1245 recapture. You may also owe the 3.8% NIIT on this portion of the gain.

If you sell QIP for which first-year bonus depreciation has been claimed, part of the gain might be taxed as ordinary income at your regular tax rate via Section 1250 recapture, rather than lower long-term gain rates. This applies to the portion of the gain that exceeds the depreciation calculated using the applicable straight-line method. Again, you may still owe the 3.8% NIIT on some or all of the recapture gain.

Tax planning point: Choosing straight-line depreciation for real property, including QIP, there won’t be any Section 1245 or Section 1250 recapture. You will only have unrecaptured Section 1250 gain from the depreciation taxed at a federal rate below 25%. The 3.8% NIIT on all or part of the gain may still apply.

Handling the complexities

The federal income tax rules for real estate gains are obviously very complex. There’s a lot to consider: different tax rates applied to different categories of gain, the possibility of owing the 3.8% NIIT, and potential state income tax. 

Our team of skilled tax advisors can help you understand the intricacies and minimize the tax liability of capital gains. Contact a Smolin advisor to discuss your specific situation.

Six Tax Issues to Consider During a Divorce
Six Tax Issues to Consider During a Divorce 850 500 smolinlupinco

Divorce is a complex legal process, both financially and emotionally. Taxes are likely the farthest thing from your mind. But, you need to keep in mind the tax implications and consider seeking professional assistance to minimize your tax bill and navigate the separation process more smoothly. 

Here are six issues to keep top of mind as you move through the divorce process.

1. Planning to sell the marital home 

When a divorcing couple chooses to sell their home, they can possibly avoid paying tax on up to $500,000 of gain if they owned the home and lived there for two of the previous five years. If the living situation is such that one spouse continues living in the home while the other moves out, as long as they both remain owners, they might be able to avoid gains on future sale of the home for up to $250,000 each. In this instance, there may need to be special wording in the divorce decree or separation agreement to protect this exclusion for the spouse who moves out.

If the couple doesn’t meet strict two-year ownership and use requirements to qualify for the full $250,000 or $500,000 home sale exclusion, they might still be eligible for a reduced exclusion due to unforeseen circumstances.

2. Dividing retirement assets

Pension benefits often represent a significant portion of a couple’s marital assets. To ensure fair division of property, a “qualified domestic relations order” or QDRO is typically necessary. A QDRO is a legal document that outlines how pension benefits will be split between divorcing parties and whether one former spouse has the right to share in the benefits.

Without a QDRO, the spouse who earned the benefits remains solely responsible for associated taxes, even though they’re paid to the other spouse. A QDRO essentially transfers a portion of the pension benefits to the non-earning spouse along with the tax liability for their share. 

3. Determining your filing status

If you’re still legally married as of December 31st, you still need to file taxes as married jointly or married separately, even if you are in the process of getting divorced. However, if you’ve finalized your divorce by year-end, you could potentially qualify for “head of household” status if you meet certain requirements, such as having dependent children reside with you for more than half the year. 

4. Understanding alimony and spousal support 

The Tax Cuts and Jobs Act of 2017 made significant changes to the way alimony and spousal support are treated regarding taxes. For divorce or separation agreements executed after December 31, 2018, alimony and support payments are no longer deductible by the payer and are not taxable income for the recipient. This means alimony and spousal support are now treated similarly to child support payments for tax purposes. 

It’s important to note that divorce or separation agreements executed before 2019 generally still follow the old tax rules, where alimony is deductible for the payer and taxable for the recipient.

5. Claiming dependents

Unlike alimony, regardless of when the divorce or separation agreement was executed, child support payments are neither tax-deductible for the payer nor taxable income for the recipient. 

Determining which parent claims the child as a dependent or tax purposes often depends on standing custody agreements. Generally the custodial parent —the one the child lives with the majority of the year—can claim the child as a dependent; however, there are a few exceptions.

For instance, if the non-custodial parent provides more than half of the child’s support, they may be able to claim the child. It’s essential to coordinate with your ex-spouse to determine who will claim the child and thus access any related tax breaks.

6. Dividing business assets 

Divorcing couples who own a business together face unique tax challenges. The transfer of business interests in connection with divorce, can trigger significant tax implications.  For instance, if one spouse owns shares of an S corporation, transferring the shares could result in loss of valuable tax deductions such as forfeiting suspended losses ie. when losses are carried over into future tax years rather than being deducted for the year they’re incurred. 

Similarly, transferring a partnership interest can lead to even more complex tax issues  involving partnership debt, capital accounts, and valuation of the business. 

Seeking professional guidance

These are just some of the tax-related issues you may face when getting a divorce. You may need to adjust your tax withholding to reflect your new filing status. Be sure to also notify the IRS of any address or name changes. You likely also need to re-evaluate your estate plans to align with your new circumstances.

Proper planning is essential to ensure a fair division of assets while minimizing your tax liability. Our skilled team of Smolin advisors can help you navigate the complex financial issues involved with your divorce.

Read This Before Listing Your Property as a Vacation Rental

Read This Before Listing Your Property as a Vacation Rental
Read This Before Listing Your Property as a Vacation Rental 850 500 smolinlupinco

Whether you own a lakefront cottage, vacation beach home, or ski chalet, renting out your property for part of the year can have significant tax impacts.

Here’s what you need to know.

Your level of personal use impacts your taxes

The number of days the property is rented has a direct impact on your taxes.

However, there are certain scenarios that don’t count towards this total since your official “personal use” of the property includes more than your own vacations. It also includes vacation use by your relatives—even if you charge them market-rate rent. It also includes use by nonrelatives if you don’t charge them a market rate rent.

This is important because if you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all.

Under these circumstances, you could see significant tax benefits since even a significant amount of rental income received won’t be included in your income for tax purposes. However, you also won’t be able to deduct operating costs or depreciation﹘only property taxes and mortgage interest. 

(Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you do rent the property out for nonpersonal use for more than 14 days, the rent received must be included in your income and you will be able to deduct operating costs and depreciation (subject to several rules). To do this, you’ll need to allocate expenses between rental days and personal use days.

For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc. costs to rental. Additionally, you would allocate 75% of your depreciation allowance, interest and taxes for the property to rental. The personal use portion of taxes is separately deductible. If the personal use exceeds the greater of 14 days or 10% of the rental days, the personal use portion of interest on a second home will also be deductible. In this case, though, depreciation on the personal use portion isn’t allowed.

Income and expenses

When rental income is greater than allocable deductions, you’ll need to report both in order to determine how much rental income you should add to your other income for tax purposes. 

When you may claim a loss

If the income is lower than the expenses and you don’t use the property personally for more than 14 days or 10% total percent of rental days, you could be able to claim a rental loss.

When calculating the loss, though, you must allocate your expenses between the rental and personal portions. It’s also important to keep in mind that the loss will be considered “passive” and may be limited under the passive loss rules.

When you cannot claim a loss

If rental income is higher than expenses or if the house is used personally for 10% of rental days or more than 14 days total (whichever is greater), you won’t be able to claim a loss. However, you’ll still be able to use your deductions to balance out rental income. Any unused deductions will be carried forward. This could be usable in future years.

While there are still multiple deductions up to the amount of rental income you can claim, you must use them in this order: 

  • Interest and taxes
  • Operating costs
  • Depreciation

Questions? Ask Smolin

Tax rules for vacation rentals can be complicated. If you plan to rent out your property, it pays to plan ahead. Contact your Smolin accountant to learn how you may be able to maximize deductions in your unique situation.

Owning Assets Jointly Child Estate Planning

Is owning assets jointly with your child an effective estate planning strategy? 
Is owning assets jointly with your child an effective estate planning strategy?  850 500 smolinlupinco

Are you considering sharing ownership of an asset jointly with your child (or another heir) in an effort to save time on estate planning? Though appealing, this approach should be executed with caution. This is because it can open the door to unwelcome consequences that might ultimately undermine your efforts.

There are some advantages to owning an asset, such as a car, brokerage account, or piece of real estate, with your child as “joint tenants with right of survivorship.” The asset will automatically pass to your child without going through probate, for example. 

Still, it may also lead to costly headaches down the line, such as the following,

Preventable transfer tax liability

When your child is added to the title of property you already own, they could become liable for a gift tax on half of the property’s value. When it’s time for them to inherit the property, half of the property’s value will be included in your taxable estate.

Higher income taxes

As a joint owner of your property, your child won’t be eligible to benefit from the stepped-up basis as if the asset were transferred at death. Instead, they could face a higher capital gains tax. 

Risk of claims by creditors

Does your child have significant debt, such as student debt or credit card debt? Joint ownership means that the property could be exposed to claims from your child’s creditors.

Shared use before inheritance

By making your child an owner of certain assets, such as bank or brokerage accounts, you legally authorize them to use those assets without your knowledge or consent. You won’t be able to sell or borrow against the property without your child’s written consent, either.

Unexpected circumstances

If your child predeceases you unexpectedly, the asset will be in your name alone. You’ll need to revisit your estate plan to create a new plan for them. 

Less control 

If you believe your child is too young to manage your property immediately, making them a joint owner can be a risky move. When you pass, they’ll receive the asset immediately, whether or not they have the financial maturity—or ability—to manage it.   

Questions? Smolin can help.

Even if joint ownership isn’t the best strategy for your estate planning needs, it may still be possible to save time and money on the estate planning process with a well-designed trust. Contact the friendly team at Smolin to learn more about the estate planning measures available to you. 

Listing home vacation rental tax impacts

Listing your home as a vacation rental? Here are the tax impacts to watch for
Listing your home as a vacation rental? Here are the tax impacts to watch for 850 500 smolinlupinco

Whether in the mountains or a waterfront community, many Americans dream of owning their perfect vacation home. If you already own a second house in a desirable area, you might consider renting it out for part of the year.

Before you post that listing, though, take a moment to learn about the tax implications. Taxes for these transactions can be complicated. They are determined based on how many days the home is rented, as well as a few other factors.

Vacation use by yourself and family members (even if you charge them rent) may impact that amount of taxes you pay. Use by nonrelatives will also affect your rate if market rent isn’t charged.

Tax rates for short-term rentals

Did you know that if you rent a property out for less than 15 days during the year, it’s not treated as “rental property” at all? For tax purposes, any rent you receive for this timeframe won’t be included in your income. This can lead to revenue and significant tax benefits in the right circumstances.

There is a drawback to this, though. You can only deduct property taxes and mortgage interest—not depreciation or operating costs. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

Tax rates for longer rentals

You must include rent received for property rented out more than 14 days in your income for tax purposes. In this scenario, you may deduct part of your depreciation and operating expenses (subject to certain rules). 

However, navigating the numbers can prove challenging. You must allocate which portion of certain expenses are incurred via personal use days vs. rental days, such as: 

  • Maintenance
  • Utilities
  • Depreciation allowance 
  • Taxes
  • Interest

Both the personal use portion of taxes and the personal use part of interest on your second home may be deducted separately. To be eligible, the personal use part of interest must exceed the greater of 14 days or 10% of the rental days. Depreciation on the personal use portion of time is not deductible. 

Losses may be deductible

If allocable deductions are lower than your rental income, you must report the deductions and the rent to determine the amount of rental income you should add to your other income. If expenses exceed the income, it may be possible to claim a rental loss.

The number of days you use the house for personal purposes is important here. If you used the home for more than the greater of 14 days or 10% of the rental days, you used it “too much” to claim your loss.

In this instance, you may still be able to wipe out the rental income using your deductions. However, you can’t create a loss. Deductions you can’t claim will be carried forward, and you may even be able to use them in future years. 

If you can only deduct rental expenses up to the amount of rental income you received, you must prioritize the following deductions:

  • Interest and taxes
  • Operating costs
  • Depreciation

Even if you “pass” the personal use test, you must still allocate your expenses between the personal and rental portions. In this case, though, rental deductions that exceed rental income may be claimed as a “passive” loss (and will be limited under passive loss rules.) 

Questions? Smolin can help.

Tax rules regarding vacation rental homes can be confusing. We only discuss the basic rules above, and additional rules may apply to you if you’re considered a small landlord or real estate professional.

That’s why it’s best to consult with a tax professional before planning your vacation home use. Contact the friendly tax experts at Smolin to learn more.

Planning sell property How profits taxed

Planning to sell your property? Here’s how your profits could be taxed.
Planning to sell your property? Here’s how your profits could be taxed. 850 500 smolinlupinco

Across the United States, home values have risen dramatically over the last few years. The median price of existing home sales increased 1.9% between July 2022 and July 2023, and there were even larger increases in previous years.

While the upward trend appears universal, median home prices have varied by region:

Northeast: $467,000
Midwest: $304,600
South: $366,200
West: $610,500

If you hope to take advantage of these higher home sales pricetags by putting your house on the market, educate yourself about the tax planning implications first. You could be responsible for capital gains tax and Net Investment Income Tax (NIIT). 

A large chunk of your profits could be protected

If the house you plan to sell is your primary residence, some or all of the profit may be tax-free. Single filers can exclude $250,000 (or twice that for joint filers), but must meet certain requirements first: 

  • The seller must have owned the home for at least two of the five years leading up to the sale
  • The property must have been the seller’s principal residence for two or more years out of the last five

While these time periods don’t necessarily have to overlap to be eligible for the exclusion, they may.

Worth noting is the fact that homeowners may only use this exclusion once every two years. If you’re moving around more frequently than that, you won’t be able to claim it every time.

What happens to profits above the exclusion amount? 

What happens if the sale of your home generates more than $250,000 or $500,000 in profit? 

Providing you’ve owned the home for a year or longer, any cash exceeding these baseline amounts will be taxed at your long-term capital gains rate.

If you’ve owned the home for at least a year, the cash amount in excess of these baselines will likely be taxed at your long-term capital gains rate. If you acquired your house more recently, the profit will be deemed a short-term gain and subject to your ordinary income rate, which could double or even triple your long-term rate.

If the house you’re selling isn’t your primary residence (i.e. it’s a vacation home), the sale may not be eligible for the capital gains exclusion. However, it’s important to ask your accountant.

If you own more than one home and rent them out, they may be considered business assets. If so, this would allow you to defer tax or any gains through an installment sale or a Section 1031 like-kind exchange. You could potentially deduct a loss, as well—something you can’t do on the sale of a principal residence.

How does the 3.8% NIIT apply to home sales? 

The 3.8% Net Investment Income Tax (NIIT) generally doesn’t apply to capital gains from the sale of your main home, up to the exclusion limits of $250,000 for single filers and $500,000 for married couples filing jointly.

Still, if your modified adjusted gross income (MAGI) exceeds the amounts below, gains beyond the exclusion limit may be subject to the tax:

  • Married taxpayers filing jointly: $250,000
  • Surviving spouses: $250,000
  • Married taxpayers filing separately: $125,000
  • Unmarried taxpayers and heads of household: $200,000

The gain from the sale of a vacation home or other second residence that does not qualify for the main home exclusion is also subject to the NIIT tax. 

Two additional factors to consider

1. The actual value of your home once all factors are considered

Keep thorough records to support an accurate tax basis. Include documentation of your original cost, home improvements, casualty losses, and depreciation claimed for business use. 

2. Losses (generally) aren’t deductible

If you unfortunately fail to turn a profit on selling your principal resident, it generally isn’t deductible.

However, if you rent a portion of your home out or use it exclusively for business, any loss attributed to that portion of the home could be deductible. 

Clearly, taxes can vary between sales. Depending on your income and the profit of your home sale, some of all of the gain could be tax-free. However, higher-income homeowners with more expensive homes might be looking at a hefty, postsale tax bill. 

Have questions? Smolin can help 

If you’re considering selling your house, it pays to be prepared. To learn more about the tax impacts you may be facing, contact our knowledgeable team at Smolin for personalized advice.  

Ease the Burden of Being a Member of the Sandwich Generation with these Action Steps
Ease the Burden of Being a Member of the Sandwich Generation with these Action Steps 1275 750 smolinlupinco

Are you raising children and supporting aging parents at the same time? If so, you can count yourself among those in the “Sandwich Generation,” a cohort “squeezed” by the demands of caring for children and older adults. 

While providing for your parents later in life may be gratifying, it can also be time-consuming. Deciding how best to handle the financial affairs of your parents as they age requires much thought.

You’ll need to incorporate their needs into your own estate plan. If necessary, you’ll also have to tweak some arrangements they’ve already made. Here are some essential steps you can take to manage your situation.

Identify key contacts

Just as you would do for yourself, you’ll need to collect the names and addresses of the professionals important to your parent’s medical and financial matters. Your list could include the following:

  • Stockbrokers 
  • Financial advisors
  • Attorneys
  • CPAs
  • Insurance agents
  • Physicians

List and value assets 

If you’re managing your parents’ financial matters, you’ll need an in-depth understanding of their assets. Maintain a list of their investment holdings, IRAs, other retirement accounts, and life insurance policies. Include current balances, account numbers, and projections for social security benefits.

Execute the proper estate planning documents. 

Make a plan to gather and review several legal documents involved in estate planning. If your parents already have some of this paperwork completed, be aware that it may need updating. 

Common elements in an estate plan include the following.

Wills. Your parents’ wills control where their possessions go and tie up other loose ends. (Jointly owned property with rights of survivorship automatically passes to the survivor.) It’s important to note that wills usually name an executor, and if you’re handling your parents’ financial matters, you may be the best choice.

Living trusts. A living trust can add to a will by providing for the distribution of selected assets. Unlike some of the assets in a will, a living trust isn’t required to go through probate, so you might be able to save time and money and avoid public disclosure.

Powers of attorney for health and finances. This authorizes someone to legally act on behalf of another person. A durable power of attorney is the most common version, and with this, the authorization continues after the individual becomes disabled. This document gives you the ability to better manage your parents’ affairs.

Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. It’s essential to make sure that your parents’ doctors and other relevant medical professionals have copies of advance directives so they can act in accordance with your parents’ wishes.

Beneficiary designations. If your parents have completed beneficiary designations for their retirement plans, IRAs, and life insurance policies, these designations will take precedence over any references in a will, so it’s critical to keep them current.

Spread the wealth

If you decide that the best way to help your parents is to provide them with monetary gifts, avoiding a gift tax liability is relatively easy. Under the annual gift tax exclusion, you can give any recipient up to $17,000 (for 2023) without being required to pay gift tax. 

Also, payments made to medical providers are not considered gifts, so you may make these payments on your parents’ behalf without using any of your yearly exclusion or lifetime exemption amounts.

Have questions? Smolin can help

If you’re a member of the Sandwich Generation, you’ve probably got plenty on your plate. If you have questions about handling your parent’s estate plans or managing your own, contact the knowledgeable professionals at Smolin, and we’ll help you navigate this complex process with ease.

What are the Advantages and Disadvantages of Claiming Big First-Year Real Estate Depreciation Deductions?
What are the Advantages and Disadvantages of Claiming Big First-Year Real Estate Depreciation Deductions? 850 500 smolinlupinco

Certain businesses may be allowed to claim large first-year depreciation tax deductions for eligible real estate costs instead of depreciating them over several years. Is this the right choice for your business? You may assume so, but the answer is not as simple as it seems.

Qualified improvement property

For eligible assets placed into service during tax years beginning in 2023, the maximum allowable first-year Section 179 depreciation deduction is $1.16 million. 

It’s important to note that the Sec. 179 deduction can be claimed for real estate qualified improvement property (QIP) up to the maximum yearly allowance.

QIP includes any improvement to an interior area of a nonresidential building that you placed in service after the building was first placed in service. 

For Sec. 179 deduction purposes, QIP also includes:

  • HVAC systems
  • Nonresidential building roofs
  • Fire protection and alarm systems
  • Security systems placed in service after the building was first placed in service

With that said, expenditures that are attributable to the enlargement of the building, such as elevators or escalators or the building’s internal structural frame do not count as QIP, and you must depreciate them over multiple years.

Mind the limitations

A taxpayer’s Sec. 179 deduction isn’t able to cause an overall business tax loss, and the maximum deduction is phased out if too much qualifying property goes into service within the tax year. 

The Sec. 179 deduction limitation rules can be complicated if you own a stake in a pass-through business entity (a partnership, an LLC treated as a partnership for tax purposes, or an S-corp). 

Last but not least, trusts and estates can’t claim Sec. 179 deductions, and noncorporate lessors face added restrictions.

First-year bonus depreciation for QIP

Aside from the Sec. 179 deduction, an 80% first-year bonus depreciation is also available for QIP that’s put into service in the calendar year 2023. If your aim is to maximize first-year write-offs, you’d want to claim the Sec. 179 deduction first. If you max out with 179, then you’d claim your 80% first-year bonus depreciation.

It’s essential to note that for first-year bonus depreciation purposes, QIP doesn’t include:

  • Nonresidential building roofs
  • HVAC systems
  • Fire protection and alarm systems
  • Security systems.

Consider depreciating QIP over time

There are two reasons why you should think carefully about claiming big first-year depreciation deductions for QIP.

1. Lower-taxed gain when the property is sold

First-year Sec. 179 deductions and bonus depreciation claimed for QIP can create what’s called depreciation recapture, which means your assets will be taxed at higher ordinary income rates when the QIP is sold. 

Under the current regulations, the maximum individual rate on ordinary income is 37%, but you may also end up owing the 3.8% net investment income tax (NIIT).

Conversely, for any QIP that’s held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if eligible.

2. Write-offs may be worth more in the future

If you claim large first-year depreciation deductions for QIP, your depreciation deductions for future years will be reduced accordingly. If federal income tax rates go up in the future, you’ll have essentially traded potentially more valuable future-year depreciation write-offs for less-valuable first-year write-offs.

Have questions? Smolin can help

The decision to claim first-year depreciation deductions for QIP or not claim them can be complicated. If you have questions about this process or need help navigating and other tax issues, contact the team at Smolin, and we’ll make sure you have the answers you need to make the best choice for your business.

Handle with Care: Including a Family Vacation Home in your Estate Plan
Handle with Care: Including a Family Vacation Home in your Estate Plan 1275 750 smolinlupinco

The fate of a family home can be an emotionally charged estate planning issue for many people, and emotions often run high when dealing with assets like vacation homes that can have a special place in one’s heart.

With that in mind, it’s essential to address your estate planning carefully when deciding what to do with your vacation home.

Keeping the peace

Before determining how to treat your vacation home in your estate plan, discuss it with your loved ones. If you simply divide ownership of the house equally among your relatives, it may cause unnecessary conflict and hurt feelings. 

Some family members may have a greater interest in keeping the family home than in any financial gain it might provide, and others may prefer to sell the property and use the proceeds for other things.

One viable solution is to leave the property to loved ones who wish to keep it and leave other assets to those who don’t. 

Alternatively, you can create a buyout plan that establishes the conditions under which family members who want to keep the property can purchase the interests of those who wish to sell.

Your plan should establish a reasonable price and payment terms, which can include payments in installments over several years.

Consider creating a usage schedule for nonowners who want to be allowed to continue using the vacation home. To help ease the costs of keeping the property in the family, consider setting aside some assets that will generate income to cover the costs of maintenance, property taxes, repairs, and other expenses that might arise.

Transferring your home

Once you’ve decided who will receive your vacation home, there are a variety of traditional estate planning tools you can use to transfer it tax-efficiently. It might make sense to transfer the interests in the property to your beneficiaries now, using tax-free gifts.

However, if you’re not ready to relinquish ownership just yet, consider using a qualified personal residence trust (QPRT). With a QPRT, you can transfer a qualifying vacation home to an irrevocable trust, which allows you to retain the right to occupy the property during the trust term.

When the term of the QPRT ends, the property will be transferred to your family, though it’s possible to continue occupying the home while paying them fair market rent. The transfer of the home is a taxable gift of your beneficiaries’ remainder interest, which is only one small part of the home’s current fair market value.

You’re required to survive the trust term, and the property must qualify as a “personal residence,” which means that, among other things, you must use it for the greater of 14 days per year or more than 10% of the total number of days you rent it out.

Discussing your intentions

These are just a few issues that can come with passing a vacation home down to your loved ones. Estate planning for this process may be complicated, but it doesn’t have to be. The key is to discuss all the options with your family so that you can create a plan that meets everyone’s needs.

Have questions? Smolin can help

Are you unsure of the best way to pass down your vacation home to your children or other relatives? Consult with the knowledgeable professionals at Smolin, and we’ll help you find the solution that meets your needs.

New and Improved Accounting Rules for Common Control Leases
New and Improved Accounting Rules for Common Control Leases 1275 750 smolinlupinco

On March 27, 2023, the Financial Accounting Standards Board (FASB) published narrowly drawn amendments to the lease accounting rules. This updated guidance clarifies issues pertaining to rental agreements between businesses with the same owner.

Written vs. verbal leases

Accounting Standards Update (ASU) No. 2023-01, Leases (Topic 842) Common Control Arrangements, explains how related business entities controlled by the same owner determine whether a lease exists. 

This guidance settles questions about how to approach verbal common control leases and whether legal counsel is required to determine the terms and conditions of a lease. Specifically, it gives an optional practical expedient to private businesses and not-for-profit organizations that aren’t conduit bond obligors. (A practical expedient is an accounting workaround that enables a business to use a more straightforward route to end up with the same outcome.)

The practical expedient is only applicable for written leases. Under the updated guidance, a business electing to use the practical expedient must follow the written terms and conditions of a common control arrangement to determine whether a lease exists and how to account for it. 

With a verbal lease agreement, as is typically the case between private entities under common control, the company must document the existing unwritten terms of the agreement before applying these lease accounting rules.

The lessee isn’t required to determine whether written terms and conditions are enforceable when applying the practical expedient. Additionally, businesses can use the practical expedient on an arrangement-by-arrangement basis.

Leasehold improvements

The accounting rules for certain leasehold improvements have also changed for public and private organizations under ASU 2023-01. Examples of leasehold improvements include:

  • Installing carpet 
  • Painting
  • Building out the space for the lessee’s needs

For example, a salon might install new plumbing fixtures and sinks, a chemical manufacturer could require ventilation for its production process, and a neighborhood restaurant may create a rooftop garden to attract new customers.

Under these amendments, lessees must amortize leasehold improvements over the improvements’ useful lives to the common control group, regardless of lease terms.

When the lessee no longer controls the underlying asset, the transfer of those improvements must be accounted for with either net asset or equity. The improvements will remain subject to the impairment requirements of Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment.

Guidance for implementation

ASU No. 2023-01 is an amendment to ASC Topic 842, Leases, which was issued in 2016. It went into effect for public entities in 2019 and for private entities in 2022. This standard requires the full effect of entities’ long-term lease obligations to be reported on the balance sheet.

Starting on December 15, 2023, the updated regulations will be implemented for this and subsequent fiscal years. If a company decides to adopt these modifications during an interim period, it must be done at the beginning of the fiscal year that includes that interim period. However, early adoption is allowed for both interim and financial statements that have yet to be issued. 

If your business opts to adopt ASU 2023-01 concurrently with the adoption of Topic 842, you should use the same transition approach as this standard. If your company chooses to adopt these rules in a subsequent period, it must do this prospectively or retrospectively.

Need help understanding these rules? Get in touch. 

If your company rents from a related party, we can help you report these arrangements in alignment with this updated guidance. The accounting professionals at Smolin Lupin know how to determine whether a common control lease exists and how to report improvements and other fixes made to rented property.

Start Typing
in NJ, NY & FL | Smolin Lupin & Co.