Accepted Answer

Hi again XXXXXXXXXX

I'm going to give you some basic answers to your questions.....if I tell you what you already know, forgive me....and if I don't tell you all you think you need to know, ask, ok?

For your proposed property division:

Capital gains tax is 15% on the profit. Profit is determined by:

Sales price-minus cost of land-any improvements to land (rare, but can happen, new well, etc) -cost of selling. * If your client did not write off the property taxes on his personal income tax return, then he may add those amounts to his basis.

Property 250 (for ex)

Sales price $139270-Basis $19200=Net Profit $120070

Capital Gains Tax 15% on profit $120070 x .15= $18010

Whether the properties were purchased together or apart makes no difference from a tax point of view. They are handled the same way, and each sale stands alone.

Since severence pay is taxed in the same way that wages are, I can not give you an estimate of what the net number for this income would be without knowing every figure on his 2006 tax return. Again, capital gains tax remains constant for these years @ 15%. I have linked you to the 2006 tax table just in case:

2006 Tax Tables + Tax Computation Worksheet for Line 44

Now I have a question for you. This may or may not be a viable alternative, but one way to cut down your client's tax liability would be to sell this land on an installment sale. The amount of gain on the sale maintains its character (capital gains, 15%) and the interest is taxed at his regular graduated tax rate, the same as his W2 income. This will however, spread the tax over more than one year. By using this method, the following forms may have a more positive outcome:

Federal 1040 bottom line tax liability will be less

Schedule A Items that have AGI floor limits (medical @ 7.5% and employee business expenses @2%) will see a larger deduction overall.

Additionally, Schedule A deductions have AGI limitations, as does most credits, deductions for IRA's, etc. Please see below:

Adjusted Gross Income Phaseout Ranges

Your client will add $139,270 to his AGI just by virtue of this sale. Once you add his additional income (wages, interest, etc) he will definitely be affected by these phase outs.

There are of course, 2 schools of thought on this. One is to take the hit all in one year and have it over with. The other is to "spread the wealth", keeping it manageable, especially if your client will be in a position where his income may drop for the next few years.

I hope this helps.

Expert:	Anne
Pos. Feedback:	100.0 %
Accepts:
Answered:	6/29/2009

Master Tax Preparer

Enrolled Agent with 20 Years Experience specializing Individual and Small Businesses