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Barbara Lamar
Barbara Lamar, Tax Lawyer, CPA
Category: Tax
Satisfied Customers: 188
Experience:  JD, MBA University of Texas at Austin, over 18 years representing small businesses
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Reducing taxes

Customer Question

Hello! I live in California. Just sold my rental property (5 years owned, did not live in last 2)in Oregon. Don’t want to do a 1031 exchange so will pay capital gains tax. Haven’t done my 2004 taxes yet. What can I do this year to reduce my 2005 taxes? Thank you!
Submitted: 11 years ago.
Category: Tax
Expert:  Barbara Lamar replied 11 years ago.
If the property was your home for 2 out of the last 5 years it will be a qualified residence for purposes of the exclusion of gains. You can only use the exclusion once every two years, so if you think you may sell your present house within the next two years, you'd want to decide which house will have the larger gain.

You can exclude up to $250,000 of gain if you're single; up to $500,000 if you're married and file a joint return.

Please feel free to ask for clarification if this doesn't answer your question completely. With respect to other ways to cut taxes, it's hard to answer this without knowing more about your circumstances.
Customer: replied 11 years ago.
Reply to Barbara Lamar's Post: Thank you Barbara. I understand your point. But as I mentioned, I did not live in the property in the last 2 years. I do not own a house in California and I don't want to buy now because it is too expensive in the Bay Area. I am not interested in a 1031 exchange. I know i will pay a capital gain as part of my income tax for 2005. I just want to know what I can do (in terms of adjustments in 401K, IRA, charity, 2004 income tax return, other options) so I can reduce the amount I will owe.   
Expert:  Barbara Lamar replied 11 years ago.
It doesn't matter that you didn't live in the property over the last two years, long as you lived in it two years before that. Just has to be 2 out of 5, doesn't matter which two. (and you don't have to buy another house as you did with prior law)

With respect to other tax breaks, there are very few tax breaks that are completely general, one-size-fits-all. Whether a particular tax provision applies to you or would be advantgeous to you if it did apply, depends on your overall situation. Even retirement plans are not 100% good all the time, as you can end up paying taxes at ordinary rates for capital gains that accrued inside a retirement plan; and with 401(k)'s you're at the mercy of whoever's administering the plan.

One general rule is not to ever spend money on *anything* just to get a tax break. Since the tax rates are well below 100% you always come out on the short end when you spend money on something you didn't want or need, just for the tax break.

On the other hand, if there are things you want or need, you can sometimes structure their acquisition in such a way as to achieve a reduction in taxes.

For example, say one of your hobbies is collecting antique hand tools. You could turn your hobby into a business. If you do it right (that is, really run it as a business rather than a hobby) you can write off expenses such as books about antique tools, shelves for the tools, the part of your house from which you operate your antique tool business, and so forth.

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