The Benefits of Outsourcing Payroll

Man buried under his payroll paperwork for his small business

Once you go into business for yourself, you discover just how much effort is involved in creating a small business. It can truly be overwhelming at times! From staffing, to equipment purchases, to taxes, there’s no shortage of headaches for a business owner to deal with. That’s why more and more business owners are choosing to outsource where they can. One of the ways you can save yourself a great deal of time, effort and money is by outsourcing payroll. Here are a few of the benefits of doing so:

You’ll save time – and time is money!

When you decided to start a business, chances are it wasn’t because you enjoyed poring over mounds of paperwork for hours on end. Nevertheless, that’s just what you may find yourself doing when trying to work out the finer details of your payroll. While it may have started off simple enough, as your business grew and expanded the payroll became more and more complicated. Every moment you spend ironing out the details of payroll is a moment you can’t devote to other business matters. Not only is this inconvenient for you, it can become downright costly. After all, your time is valuable! Any time you, or one of your valued employees, spends working on payroll is time you can’t devote to bringing more money in.

You’ll reduce errors – and save money that way, too!

Errors in your payroll can prove to be costly for your business. As you know, it’s not as simple as just paying your staff. There’s insurance, taxes (both state and federal) and a bevy of other financial considerations. If you make a mistake somewhere along the way, chances are you will shoulder a serious financial penalty as a result. For example, if you don’t calculate your taxes correctly, or if you are late on a payment, you can get hit with a fine. The easiest way to avoid all this hassle is by outsourcing payroll; put your finances in the hands of seasoned professionals and you’ll greatly reduce the chances of costly mistakes.

You’ll be a lot more adaptable

Part of what makes payroll so complex is its ever-changing nature. Tax laws are always in flux and your staffing needs are always changing too. Some weeks, your part-time employees will work many more hours than others; with every change, you’ll find yourself starting from scratch. A professional payroll service will not face this problem. They are constantly being trained in the latest changes to tax law and they’re also trained to handle a varying level of employee hours. Ensure your company can weather the ever changing business climate by outsourcing payroll.

A payroll service handles more than just paychecks

If you outsource to a reliable payroll company, they’ll do a lot more than just issue your company’s paychecks. Not only can they calculate the amount of money owed to each employee, they can also work out tax obligations for each individual. They’ll allow employees to designate a certain amount of each paycheck to a 401(k), should they wish to do so. A payroll service will also calculate how much your company owes in payroll taxes.

Outsourcing payroll

If, after reading this article, you are considering outsourcing payroll, we think that’s a great step to take for your business! Make sure you do the necessary research and contact any potential companies you are considering using. There are a few questions you should always ask. What is the cost of the service? What services will you get for that cost? How are taxes handled? Make sure to contact a few references, as well. Check to see if the service is reliable and if previous customers have been satisfied.

9 Reasons To Outsource Your Accounting Department

notepad saying your should outsource accounting vs hire

As an entrepreneur, you’re always looking for ways to cut costs and increase profits for your business. No doubt you have learned that managing a small business can be a real headache, with many challenges – some expected, some unexpected! – and you want to get a leg up whenever you can. One way you can do this is by looking for accounting services for small businesses. While you may think that outsourcing your accounting department will end up costing you more money, this doesn’t necessarily have to be the case. In fact, outsourcing can be a great way to save your small business time, money, and bring in extra profits. Here are 9 of our top reasons to outsource your accounting department:

1. You’ll Save Money on Training Costs

One of the biggest expenses incurred by any business is the cost of training; getting your employees familiar with all of their responsibilities, as well as software and other equipment, takes time and money. By hiring an accounting service for your small business, your accountants will come pre-trained and armed with expert knowledge.

2. You’ll Benefit from the Services of a Team of Experts

If you hire an in-house accountant, no matter how good they may be, they will still only be one person. A professional accounting firm will bring years of experience to bear, from a team of seasoned professionals; having extra sets of eyes studying your finances will also reduce the incidence of error, greatly improving your peace of mind.

3. You’ll Save on Software Costs

Another expense that many small business owners grit their teeth and pay for is the cost of the newest technology; after all, it’s important to always have access to the latest software, whether it be QuickBooks or other programs. Hiring an accounting service for your small business will save you from expensive yearly updates; they will always have access to the latest technology.

4. You’ll Free Up Time for Other Projects

The old saying, “time is money,” is an absolute truth – any time you spend trying to figure out your finances is time you can’t spend doing other crucial tasks. If you’re constantly poring over QuickBooks trying to keep track of every dime that comes in and out, you will have a lot less time to handle the other daily aspects of running a business. By outsourcing, you’ll have a lot more time to do those important jobs.

5. You’ll Reduce the Risk of Financial Problems

There are a lot of potential financial problems that can plague a small company. Everything from tax audits to theft can severely impact your bottom line. By having a team of professional accountants keeping track of your money, you will rest easy with the knowledge that your finances are being handled by an impartial group who won’t allow anything to get by them – or you.

6. You’ll Be Able to Make Better Financial Decisions

With a professional team of accountants handling your money, you’ll have access to whatever financial information you need at any time. You will never be unclear on exactly where your business is in terms of income and expenses, allowing you to be better informed when it comes to staffing, equipment purchases, and other major decisions for your company.

7. You Can Change with the Times

Accounting, like anything else, changes with the times and by hiring an accounting firm, you’ll be able to stay up to date. If you have an in house accountant, or handle your finances yourself, you will likely be stuck with the information you had when you were originally trained. By outsourcing, you’ll be able to always have the latest in information, technology, and fraud prevention techniques.

8. Outsourcing Even Helps the Environment

For many businesses, going green is another great benefit of outsourcing your accounting firm. Hiring a professional accounting firm will save you a lot of money on disposables such as paper, printer ink, and other sundry costs. It will also reduce your carbon footprint and benefit the environment.

9. You’ll Be Able to Grow Your Business

By outsourcing to an accounting company for your small business, you’ll be able to upgrade easily once your income increases. Many business owners find themselves defeated by their own success, as your business becoming more popular and busy can leave you and your employees overwhelmed. With an accounting firm, you’ll be able to meticulously track the growth of your business, and adapt as needed. Best of luck in your business ventures!

Deductible Expenses For Real Estate Agents

A real estate agent filling out their deductions with a calculator next to their hand and with tax season in blue font


As yet another tax season rolls around, and people everywhere are scrambling to save as much money as possible by maximizing their deductions. This can be a real headache if you’re in real estate, since it’s a complex line of work with a wide array of different expenses, some of which are deductible and some of which are not. Which items you can and cannot write off depends on many factors, including the size of your business, your office, your vehicle, and other things. Here are a few of the most popular legal deductions for real estate agents:

Your Home Office

If you work from home, you might be eligible to deduct the cost of a home office. As long as you have an area of your home specifically dedicated to work, you should be able to subtract its cost from your yearly taxes. This applies even if you also make use of your broker’s office space. There are several rules, however; to deduct the cost of a space, for example, it must be your primary workspace and it must not be used for other things. You can’t deduct your bedroom just because you have a computer there that you occasionally use for work; you would have to use the computer solely for your real estate job and you would only be able to deduct the cost of the square footage of the area you are employing.

Your Vehicle Mileage

Of course, you will be expected to travel quite a bit as a real estate agent, especially during your busiest times. The more work you are getting, the more you’ll have to drive, and the cost of gas and wear and tear on your car can really rack up. Fortunately, if you keep a detailed log of your mileage, you will be able to deduct the travel that you do for work. The IRS has a standard rate for miles traveled; it could potentially add up to quite a bit if you’re traveling a lot for work. Keeping track of your mileage is no longer the slog that it once was, either; you can simply use an app on your phone to maintain a detailed record of everywhere you went for work. It’s potentially also possible to deduct the cost of leasing a car, or even to deduct the depreciation of a new car; both of these are viable options, as a successful real estate agent shouldn’t be seen driving around in a clunker!

Other Travel Expenses

Occasionally, you will have to travel for work for meetings, seminars, and other crucial business ventures. In most cases, you can deduct the cost of travelling, including hotel fees, airline tickets, and other sundry costs. Meals such as business lunches are 50 percent deductible too, so make sure you keep a detailed record anytime you take a client to a restaurant or cater an open house.

Your Office Supplies

Most of what you use in your office can be deducted as well. This ranges from little things that add up over time – such as stationary and photocopies – to larger expenses such as furniture. If you purchase a new desk, for example, you may be able to deduct the full amount. If you made such a purchase a few years ago, you might still be able to deduct the cost, minus a few years of depreciation. If you use your cell phone for work, you can deduct a certain amount of your payments as well. Or you may have a work phone that you use only for business; in that case, you can deduct the full amount (this also applies to a landline to your office).

Your Realtor’s License

As a real estate agent, you have certain fees that you must pay annually, many of which are deductible. For example, you can deduct the cost of renewing your state license each year; you can also deduct the cost of your business insurance and your Errors and Omissions insurance. There are other potentially deductible costs as well, such as membership dues, and certain other real estate taxes. Self-employment taxes, however, are not deductible.

Retirement Plan Contributions

Of course, just as anyone in any line of work should, a real estate agent should make regular contributions to a retirement plan. Often, you can make deductions based on how much you are contributing to a retirement plan; for example, the limit for a standard IRA is 12.5%.


Top Tax Write Offs For Small Businesses

Chalk board featuring taxes, USD symbol, and piggy bank full of money indicating tax savings and write offs

Every small business owner knows that, come tax time, there are ways to save a fortune in taxes if you are clever. Looking for the right tax write offs for small business owners, however, can be a bit of a challenge and we’re here to help point you in the right direction. Here are a few of the top tax write offs for small businesses:

Travel Costs

If you have to travel for your business, you can almost always write it off as long as it’s distance travel. Local commuting, such as driving from your home to your office, generally doesn’t apply. However, other types of travel might, such as the costs of delivering items locally. But if you have to send someone from your business to a meeting across the country, the cost of your plane ride and hotel stay is almost certainly deductible. To find out whether or not your travel expenses can be deducted, read IRS Publication 463 in full. Make sure you keep a thorough documentation of all of your business expenses, such as mileage and airline receipts.


Any money you spend on utilities for your business is deductible. For small business owners, however, this can enter a bit of a grey area as you strive to answer the question of where your personal costs end and your business costs begin. For example, let’s say you work from home and have a landline to receive calls on. Is your phone bill then deductible if you take business calls? If you have only one landline, the answer is no. However, if you set up a second one solely for business purposes, you will be able to deduct the cost of that phone bill. Similarly, if you have a cellphone you use only for business purposes, you will probably be able to deduct it from your taxes.

Home Office

If you work from home, you might have a home office set up in one of the rooms. You can deduct the cost of anything in your home that is devoted solely to your business. This means that if you have a workstation in your bedroom, you cannot deduct the entire cost of your bedroom, but you can measure out the space around your desk and deduct the cost of your mortgage and insurance from that area only. You will have to divide the square footage of that space by the cost of your home to discover the exact amount.

Contract Labor

Often, small business owners don’t keep employees on staff for necessary labor, and simply hire contractors when labor needs to be done. Keep a thorough record of any contractors you employ, because the money you spend on them is usually deductible. If you pay any contractor more than $600 throughout the tax year, make sure they are given form 1099-MISC.


If you are self-employed, you are probably paying for all of your own health insurance costs. This can set you back quite a bit, but the good news is that it’s a tax write-off. If you are eligible for insurance from other sources, however, you will not be able to insure yourself and deduct it. Similarly, if your insurance costs add up to more than the net profit of your small business, you will not be able to write them off.


Business meals are 50% deductible, which means wherever you end up eating you will still pay half! Keep this in mind if you are trying to save money while also wining and dining prospective clients. Check IRS Publication 463 to see how to substantiate the expenses of meals; you will not be able to claim any deductions if you don’t.

Small Business Coaching: Getting Your Startup Started

Green monopoly house game pieces representing starting a small business

You have long dreamt about starting your own small business and, now, you’ve finally got the ball rolling! You have a great idea, and you’ve taken out a startup loan and are now working furiously to make your business a reality. But if a great idea, a little money and a willingness to work hard were all it took to start a successful small business, everyone would be doing it. The fact of the matter is, only about half of small businesses survive for five years! Many people look back on their attempts to start and run a business and wish they’d had more knowledge at the beginning. One way to help navigate the complex world of business is with the help of a small business coach. Here’s what you need to know about hiring one:

What Does A Business Coach Do?

Simply put, a business coach will help you get your business where you want it to be. If you are just starting out, this type of help can be invaluable as you will get assistance with every step of the process. Your business doesn’t necessarily have to be in its infancy to benefit from the help of a coach, either: you can simply be looking to grow an established business or expand into new territories. No matter where you are in your journey as a small business owner, small business coaching can help you reach your goals more quickly.

What Kind Of Coach Do I Need?

Depending on what needs you specifically have, there are many types of coaches out there that can assist you. Perhaps you run a brick-and-mortar shop and are looking into expanding into the online world; a social media coach can help you build your internet presence. On the other hand, perhaps you have been selling your wares online but have the goal of finally opening a physical storefront; a brick-and-mortar coach can help you achieve this goal. With the right coach, you can receive assistance in every aspect of running a business.

How Much Does A Business Coach Cost?

As any prudent business owner should be, you are most likely concerned with the costs of running a business and may worry about how much hiring a coach will set you back. This is a valid concern but beyond the scope of this article since prices vary so widely. Many coaches charge an hourly rate, which can be anywhere from $200 to over $600 depending on their experience and reputation. Others will look to sell you a package at a flat rate; this can include a number of hours of in-person or Skype sessions as well as work you can do on your own. As a general rule, small business coaching shouldn’t break the bank but should be enough of an investment that you take it seriously.

How Do I Find A Great Coach?

When you’re on the lookout for a great small business coach, there are a number of things you should keep an eye out for. As we’ve already mentioned, the costs and the specific type of coaching you need should be high up on your list; you will also want to thoroughly research any small business coach you are considering hiring. Ask for references and don’t be afraid to check them. Talk to other small business owners who have secured the services of the coach you are considering. You want a coach that will keep you accountable, holding you to any commitments you make. You will also want someone who will be honest with you! A good coach will always be positive, but not be afraid to tell you if you are potentially

making mistakes with regards to the direction of your business. Good luck with your search and with your business endeavors!

Cut Costs With A Business Accountant

Small business owner filing 1040 tax paperwork with money saved lining the side

Going into business for yourself can be a lucrative and rewarding venture. However, as anyone who has run a small business knows, it can also be costly. Running a small business comes with a wide array of expenses, not the least of which come from managing the finances. While you may believe that you can save by handling the money yourself, what this will really end up doing is taking up a large amount of your time that could be better spent handling other aspects of your business operations. The more time you spend trying to handle your company’s finances, the less time you can spend on other things; your time is valuable, and you’re trying to cut costs!

Once you are close to having your business up and running, it’s time to consider hiring a small business accountant. Many business owners balk at this idea, due to the fact that hiring an accountant seems like a costly step that they can avoid. However, if you take a step back and look at the grand scheme of things, you’ll find that securing the services of a small business accountant can actually save you quite a bit.
Here are a few ways you’ll save your business money by hiring an accountant:

When Starting The Business

A small business accountant can start saving you money right from the very beginning. One thing you’ll need to consider is your business structure. Will your business be best served by filing for sole proprietorship? Or are you looking for a partnership, or even to start a corporation? Choosing the right business structure for your particular line of work can be critical to saving money in the long run, and a qualified accountant can help you with this.

Once your business gets going, you will of course need to start a business bank account. As with choosing a business structure, you’ll have several options to choose from and your company’s financial future could be at stake. A credible, experienced accountant can give you a lot of help in this area.

Once Your Business Is Up and Running

After your small business accountant has helped you get your business up and running, it’s time to start thinking about managing the day to day finances. Choosing the right finance software can save you a lot of headaches when it comes to keeping track of your income and expenses; this is another thing your accountant can help you with. They can also help train you how to file taxes properly; for example, if your business makes use of independent contractors (as opposed to full on employees), they will need to be classified as such with the IRS. Having a qualified small business accountant can make tax season much less of a nightmare, and help you save money on unnecessary tax expenditures!

As Your Business Grows

Eventually, when all of your hard work pays off and your business begins to grow, you will still find yourself saving money with the help of a small business accountant. If your goal is to reach a certain amount of growth for the year, you will need to budget for that and your accountant will be there to help you create that budget. As your business grows, your costs will go up as you find yourself needing to hire more employees and buy or lease more equipment. Once again, a qualified accountant can be invaluable during this process, helping you to avoid spending any money that you don’t need to.

Hiring an Accountant

With all of the benefits that come along with hiring a small business accountant, now is a great time to start looking for one! Choosing the right accountant, however, can be the true challenge. You will want to vet any potential candidates carefully, making sure they have plenty of experience and all of the proper certifications for your area. Don’t forget to ask for references; you will want to speak to other small business owners who have successfully made use of your potential accountant’s services. Good luck with your future business endeavors!

Why Do I Need A CPA For My Small Business?

Business owner distracted from work with tax forms

As a small business owner, there is a lot you have to take into consideration. The day to day running of your business requires a lot of planning, from licensing and permits to leasing your location and registering all of your company trademarks. Needless to say, a huge part of running any business is the financial aspect, and many business owners find themselves asking the question, “Do I need a CPA for my small business?” Hiring an accountant might seem like something only bigger businesses do, but it’s something you should seriously consider no matter where you are in the growth of your company. Here are a few reasons why:

You Will Save Money

Of course, hiring a CPA isn’t cheap; it can be one of the bigger expenses you incur when you go into business. Even so, securing the services of a good accountant will ultimately pay for itself. First, consider how much time you will spend poring over the finances for your business. Every minute you spend trying to balance your books is a minute that you can no longer devote to other crucial aspects of running a business. If you’re spending hours each day working on tax forms, you aren’t bringing money in. Not only that, you can rest easy knowing that you have a financial expert working to save your company as much money as possible. Even if you yourself are financially savvy, you might find yourself spread too thin as a result of taking on every other job a business owner must deal with.

A CPA Can Help You Deal With The Unexpected

Running a business always come with an element of unpredictability. Especially as your business grows, you may find yourself dealing with problems you never considered. As your business grows, and you hire more employees, contract out more work, order more equipment, and generate more income, a talented accountant will help you to get it all under control. They will also help you deal with any unexpected financial curve balls that may come your way and threaten your business.

An Accountant Will Help With The Legal Aspects

Depending on a number of factors, including your location and the type of business you are running, the laws that govern your company can vary widely. For example, the tax laws you are bound to will depend on what type of business structure you have. Will you be the sole proprietor? Or an LLC? Are you working from home? Or do you operate out of a storefront? But even if you are the sole proprietor of the business, a CPA can help you navigate the tangled web that is local business law. Ultimately, you will need the assistance of someone who is experienced in dealing with businesses of all types and sizes. They can also assist you should you face the unfortunate situation of a lawsuit being filed against your company.

When To Hire A CPA

As a CPA can charge up to several hundred dollars an hour, it’s important to be responsible when securing the services of one. Make sure to thoroughly research anyone you are considering hiring, and ensure that they have all of the proper certifications that a CPA requires. While many small business owners worry that hiring an accountant will be an expense they can’t afford, or force them to relinquish control of certain aspects of their business, the truth is that having a great CPA can increase your savings and your profits while also offering you greater freedom to manage the other aspects of running a business. With all of these considerations in mind, the answer to the question, “Do I need a CPA for my small business?” is almost always YES!

A Primer on Disregarded Entities

Disregarded Entity Tax Reporting Ownership
Disregarded Entities

If you spend a substantial amount of time around tax professionals, there’s a decent chance you will encounter the phrase “disregarded entity” at one point or another. This phrase, fear-inspiring though it sounds, is a fairly straightforward concept which has relevance in a variety of contexts. In this article, we will introduce disregarded entities and explain why you and other HTW readers should be familiar with this concept.

Tax Reporting

Not all business entities are the same. As we have discussed in our webcast on the topic, businesspeople can select between a number of distinct corporate entities depending on which entity best suits their particular situation. Once an entity has been selected, one of the remaining steps is for the owner to determine whether that entity will be “disregarded” for tax reporting purposes. In simple terms, if an entity be disregarded, then it will not file its own separate tax return to the IRS; it is disregarded to whomever is the current owner, and so the current owner will include the financial data of the entity within his or her own return. Disregarded entities, therefore, can be thought of as assets which are fully traceable to the owner, rather than wholly distinct entities.

Only certain corporate entities may be disregarded. For instance, a single member LLC is typically disregarded to the single member unless the single owner specifically elects to treat the LLC as regarded. And so income generated by such an LLC would be included on the owner’s tax return rather than a tax return prepared and owned by the entity itself.

Certain corporate entities can never be disregarded. S Corps, C Corps, and multi-member LLCs in which the two members are not husband and wife in a community property state cannot ever be disregarded and must report income independently.

1031 Exchange Context

Another context in which disregarded entities may show up as an important concept is the 1031 exchange industry. The tax code requires that whichever entity owns the relinquished property in a 1031 exchange must also acquire title to the replacement property. As I’m sure our readers are aware, title to real estate can be held by corporate entities, and so if a regarded corporate entity hold title to real property then this preexisting ownership must kept consistent throughout the exchange. If the entity doesn’t remain consistent then a valid tax-deferred exchange cannot occur.

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Delaware Statutory Trusts Increasingly Popular as Real Estate Investment Opportunities

DST Trust Investment Real Estate Property
Delaware Statutory Trusts

There is a number of ways to hold title to real property. Perhaps the most common way is to hold full title – or “fee” simple title – as an individual or married couple. Title to real property can also be held jointly by multiple corporate or individual persons. One increasingly common means to jointly hold title to an investment property is to use a so-called Delaware Statutory Trust. DSTs are trusts which have been established under the state laws of Delaware and which permit multiple investors to co-own a property and still maintain the ability to freely sell their ownership interest. In a DST ownership arrangement, investors acquire an “undivided fractional interest” in the real property and they are able to dispose of this interest without obtaining the prior approval or cooperation from the other investors. In other words, DST interests are freely alienable, and for this and several other reasons DSTs have become used more and more frequently in tax deferred real estate exchanges under IRC Section 1031.

Benefits of DSTs

Delaware statutory trusts offer several significant benefits over other co-ownership arrangements. For one, DSTs are able to accommodate large numbers of investors – much larger than TIC arrangements – and so DSTs provide a reasonable avenue for investors to acquire interests in highly expensive developments. Investors can achieve a level of diversification with DSTs which would ordinarily be unattainable; with DSTs, investors can obtain reasonably priced fractional interests in properties which would normally be outside their list of prospects.

Investors who prefer passive investments may also gravitate to DSTs. Typically, DSTs are managed by a central sponsor, and so investors usually take on very few (if any) managerial responsibilities when they acquire an interest in a DST.

Potential Issues

Because of their structure, DSTs are likely to be an excellent option for veteran investors who want steady, reliable returns from investment property with relatively low risk; they will be less ideal for newer investors, or for investors who are looking to grow their wealth at a rapid pace.

Obtaining an interest in a DST is a bit tougher than doing the same with another investment vehicle; DSTs have barriers to entry, and so investors who acquire DSTs typically hold these interests longer than they hold interests in other investments. This means that investors should think carefully about whether investing in a DST be a good decision for them, because DSTs generally demand greater levels of commitment from investors.

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Combining Sections 121 & 1031 for Optimal Tax Treatment

Real Estate Residence Tax Capital Gain Investment
Sections 121 & 1031

As we’ve noted before on HTW, Section 1031 of the IRC applies specifically and exclusively to real property used for business or investment purposes. Section 121, on the other hand, applies to primary residences, and can be utilized to eliminate substantial capital gain upon the sale of one’s property (up to $250,000 for single filers and $500,000 for married filing jointly). Though no taxpayer can use 1031 to exchange his primary residence, the tax code allows taxpayers to simultaneously utilize both of these sections in cases involving mixed use or dual use properties. In the 1031 industry, combining Section 121 and Section 1031 in this manner is commonly referred to as “split treatment.” In this article, we will discuss how this process of combining 121 and 1031 can be achieved.

Combining on the Sale

If a taxpayer has been living in a portion of the property he or she wishes to sell as part of a like-kind 1031 exchange, then the taxpayer may utilize 121 and 1031 on the sale. Suppose that the taxpayer owns a four-unit rental property and lives in one of the units; in this scenario, the taxpayer could sell the property, exclude up to 25 percent of the gain through the exclusion conferred by Section 121 and then defer recognition of up to 75 percent of the remaining gain by acquiring suitable replacement property as part of a 1031 exchange. Hence, in this example, the taxpayer would only be deferring whatever portion of the property is considered used for investment purposes.

Combining after a Conversion

Suppose a taxpayer acquires like-kind replacement property as part of an exchange but then wishes to convert the replacement property into a primary residence. Then, let’s further suppose that the taxpayer wished to sell the property outright after this conversion to a primary residence. In this scenario, the taxpayer would have benefitted initially from Section 1031 on the acquisition, but they would also be able to utilize Section 121 to exclude realized gain on the sale. Current regulations on converted property state that a taxpayer must own a property for a minimum of 5 years after completing a 1031 exchange in order to be eligible to use Section 121; what’s more, taxpayers must also live in the property as their primary residence for at least 2 years during that 5 year period.

Let’s illustrate this: suppose that a taxpayer exchanges into an investment property through a 1031 exchange and then moves into the property 2 years later. Suppose that the taxpayer lives in the property for 3 years and then decide to sell the property. The taxpayer could use Section 121 to potentially exclude up to $250,000 (if filing single), but he would only be able to exclude 3/5 of whatever gain is recognized on the sale. Even though the property would be classifiable as a “primary residence” at the time of sale, Section 121 could only offset a portion of the gain equal to the percentage of time spent living in the property.

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