Considering a Foreclosure or Short Sale?

As we all know so well, there are many people who are going through the foreclosure or short sale process this year. With those transactions taking place, many taxpayers are very unsure of what the tax implications are. Before I dive into the potential tax consequences, let me stress one thing: If you are going through this process, consult an attorney, a CPA and a credit specialist.

If you are being foreclosed or short selling your primary residence, chances are you will be ok and most likely will not have any taxable income. From there, the main question that needs to be asked from a tax perspective is this: Is my loan recourse or nonrecourse? What????

Well…your loan is recourse if you have personally guarateed the loan. That is to say the bank not only has right to the property if the home is foreclosed/short sold, but also has the right to come after your personal assets. Your loan is nonrecourse if the bank only has the right to the property. So, generally speaking, it will most likely be preferable not only from a legal perspective, but also from a tax perspective, that you have a nonrecourse loan. Thankfully, most mortgages (until recently) in Arizona fall under the nonrecourse title.

Once you’ve determined what kind of loan you have, then the real work begins. I will be expanding on this in a future post. In the meantime, check out IRS Publication 4681 for some education and ask me any questions you have!

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Endurance Can Be A Game-Changer

If you were awake during Wimbledon over the past few weeks, you undoubtedly heard about the epic match between John Isner and Nicholas Mahut, which lasted over 11 hours and spanned three days. If you don’t already know all of the riveting details of the match, you can read about it HERE.

Now I would never claim to be a huge tennis fan, although I completed as a youngster and know a lot about the game, but any person who saw or heard about this match took something from it. If you didn’t, you need to start paying attention and learning along the way.

Endurance can be a game-changer. It’s often times the determining factor between a win and a loss in sports and often times the determining factor in winning or losing a client. How many times has that one extra call or meeting been the final push to seal the deal? How many times do you feel like, “This isn’t worth my time”, but you do it anyway and reap huge rewards because you fought off that feeling?

Next time you are questioning whether or not to follow up or follow through, remember Wimbledon 2010 and the tennis match that you learned from. Endure to the end. It will pay off.

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I Just Set Up An LLC For My Biz….

You’ve historically just reported all of your income on your Schedule C and someone told you that setting up an LLC would be a good idea. Well, that was a good choice. It is a great idea from a legal perspective because it puts some of the potential liability on the Company (new LLC) versus you personally. Now, I would never claim to be an attorney, but LLC does stand for “Limited Liability Company”…so I guess I can get that right…

The question becomes: How does this change my taxes? The answer is: It doesn’t. Maybe…

If you simply set up the LLC, you will continue to report everything on your Schedule C if you (and your spouse) are the sole member(s). If you set up the LLC with you and another member that is not your spouse, your taxes will default to partnership taxation on Form 1065, which has very similar tax ramifications as a Schedule C, there are just more people involved.

There is one other option, one that should be utilized in one specific situation: Your company makes a lot of money and your work full time in the business. You can elect to be taxed as an S-corporation by filing Form 2553. This allows you to utilize one significant tax advantage (although this may be going away thanks to Congress, described by my friend Joe) which is the ability to pay yourself “reasonable compensation” by ways of a true salary, via a true payroll.

As an Schedule C or Partnership, 100% of your income is subject to self employment taxes (payroll taxes) AND income taxes. If you pay yourself a salary (above) that salary will be subject to self-employment taxes and income taxes, but everything you make above that will ONLY be subject to income taxes. That means a potential 15.3% tax savings on income above your salary.

Are you confused? Let me know!

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What Drives You?

In all of my years playing and coaching baseball, I received and gave a lot of advice. Oddly enough, there are only a few important words of advice, that applied to both baseball and life, that are forever imprinted in my mind’s eye. I’ll share one. 

Former ASU standout and New York Yankees player Ken Phelps once provided me with an amazing acronym. For those of you who are knowledgable about baseball, this will hit home. Ken used the acronym “ACE”. He said that there are three main things that you can control every single day as a baseball player. You can control your ATTITUDE, your can control your CONSISTENCY and you can control your EFFORT. Yes, there are an abundance of things you cannot control, but if you focus on controlling those three things, results will inevitably follow.

As I powered through the 2010 tax season, I knew that I would be fatigued and that I wouldn’t feel like doing much of the work that I had to do, but I focused, knowing that the reward of hard work and extra effort would be much more pleasing than knowing I could’ve done a little bit more and could’ve worked a little bit harder.

I had a lot of success as a baseball player and I worked harder than 95% of all the other players I came across, but I look back now and KNOW that I could’ve done a little bit more. What a lesson!

I recently recommended Daniel Pink’s book, “Drive” to many of my friends. I read many books, but this one really stuck with me. It discusses the fact that we are taught to be driven by money and “things”, but in reality, most of us, at least the ones who are a cut above, are not driven by material things, we are driven by more. We are driven by an inner desire to be better and to do things the right way and in the end, HELP people. All ancillary factors are irrelevant! Age, gender, race etc. are never a determinant in what makes us tick. What drives you?

What I am looking for from my commenters are two simple answers:

—- What drives you?

—- What is the best piece of advice you’ve received from a mentor?

Feel free to be as creative as you’d like in response. I will be following this post later in the week to discuss my business as a CPA and answer any questions that you may have.

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Repeat Home Buyer Tax Credit - Why didn’t I hear about this??

We’ve all heard about the First-Time Home Buyer tax credit, but have you heard about the Repeat (Move-Up) Home Buyer Credit. Well, if you haven’t…

Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit. The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. That is, both spouses must qualify as long-time residents, with at least five years of principal residency for each. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.

You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). Please note that although the Form is titled “First-Time Homebuyer Credit,” this is the correct form for claiming both the $8,000 first-time homebuyer tax credit and $6,500 repeat buyer tax credit. No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase. In cases where a HUD-1 form is not used, such as for construction of some new homes, you should attach a copy of the certificate of occupancy in lieu of the HUD-1.

(Thanks to http://www.federalhousingtaxcredit.com/faq2.php#1 - See website for more details)

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