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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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Hi, My brother and I are purchasing a condo for all cash mid

Resolved Question:

Hi, My brother and I are purchasing a condo for all cash mid Jan 2012. As part of the cash deal we are each withdrawing 115K for our IRAs. We need to purchase with all cash because the building is a condo coversion with 42% sold, and the mortgage banks will not touch it much less Wells Fargo which was the orginal lender in the 42 sold mix, but papers
have to be refiled and it would take possibly months and no one at WF wants to work on it for 1 sale. We have also found out that we cannot do a "cash out" equity loan as we would need the loan finalized by within 60 days of closing to re-deposit the IRA funds to escape
paying tremendous personal income taxes in 2012.


My queston is do you know of anything on the tax books where we can defer payment of the taxes all at once (on 230K). There is no longer the 3 or 5 year income averaging other than for fishermen or farmers as you know, so it seems we are at a big loss!

We already have taken 30K each in 2011 for the down payment, and which we will have to pay income taxes on 20K of it. I know we can withdraw up to 10K for 1st time home buyers' down payments.

Thank you in advance.

Barbara Markus
Submitted: 2 years ago.
Category: Tax
Expert:  Jax Tax replied 2 years ago.

Jax Tax : First, the $10k for first time homebuyer is for early withdrawal penalty exemptions. The full amount is still subject to personal income tax. The penalty is 10% in addition to the tax if you are under 59 1/2.
Jax Tax : As for defferring the tax, there is no way by which to do so but you may be able to reduce your taxable income or structure the purchase in a new way.
Jax Tax : I need to know for what purchase you are buying the condo. To live in or to rent? It is just one condo correct?
Jax Tax : Also, as far as your earnings go. Are the two of you self employed or w2 employees.
Customer:

The condo purchase will be our primary residence. My borther is retired on SS and Pension income and I am also retired with SS and small pension income and a real estate broker with commssion income. Together our income is over 100K annually.

Customer:

It is also one condo.

Jax Tax : Are you both over 59 1/2 years old.
Customer:

Yes

Jax Tax : So the primary residence $10k exclusion does not matter. There is no penalty anyway, but there is tax.
Customer:

OK I understand. So I have to claim 30K on each of our returns to be taxes--bad news.

Jax Tax : First, I reccomend pulling out half in 2011 then half in 2012 so that you do not bring your tax bracket up to the Max amount for 2011.
Jax Tax : It will also lower the amount of social security that is subject to tax.
Jax Tax : The other idea was a self.directed IRA but it will not work for a primary residence.
Jax Tax : The only thing you can do is spread the withdrawal over Dec and Jan. Take a loom at your tax bracket based on filing status for 2011 and 2012 add all other income to determine what amounts to withdrawal to keep your self out of the higher tax bracket. This will save you thousands.
Jax Tax : Here are the tax brackets. http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html
Jax Tax : Take only enough in 2011 to keep yourself in the lower tax bracket then take the rest after Jan 1.
Customer:

ok I will check it out.

Customer:

Guess I was looking for a magic bullet. What if we were purchasing this condo as an investment to rent? Would that be

Jax Tax : You can make up to $6000 in contributions to a new IRA in 2011 (before April 2012 ) for a $6000 deduction and the same in 2012.
Jax Tax : This will save you money but there will be tax.
Jax Tax : There are a lot of what ifs, but as an investment, there is what is called a self directed IRA that can be used. Problem is the home is owned by the IRA, all rent goes to the IRA, and you cannot live there.
Customer:

That will not work.

Jax Tax : There is no magic bullet but spacing the IRA withdrawal will save you thousands.
Jax Tax : Like you said, you only have 60 days to get the funds to replace the IRA. If your credit is good, possibly a private loan with prosper.com will help.
Customer:

After I compute the taxes for 2011 and 2012 can the taxes be paid by installment payments during the year

Customer:

I will check out prosper.com. too. I dont think personal loans will go that high but will check.

Customer:

Is there anything else you can think of

Jax Tax : The taxes should be paid out of the withdrawal. Paying the IRS will create more penalty and interest than it can possibly be worth.
Customer:

I dont follow your last comment. The withdrawal is totally to pay the balance of the purchase.

Jax Tax : But yes, you can if the debt stays under $25k. That means the tax would need to be less than $15k. Otherwise, you got a home subject to seizures by the IRS.
Customer:

You are talking about paying estimated taxes under 25K can avoid penalty.

Jax Tax : You need to withdrawal enough to purchase the home and cover the taxes. If the full amount is needed for the purchase, you are making a mistake. You are going to have a house free and clear and an IRS debt. The home will be at significant risk of IRS seizure if the debt goes over $25k
Customer:

I do understand and will readjust my calculations.

Jax Tax : You are going to be penalized if you don't pay all of the tax. I am saying that owing more than $25k (about $17k in tax as interest and penalty will bring you to $25k quick) will make seizure a likely threat.
Customer:

Well, I will follow what you tell me. I have a tax program and will do the calculations for estimated tax based on your suggestions half IRA w/d 2011 and Jan2012.

Customer:

Also to include the taxes on both.

Customer:

I will consider depositing 6K too in an IRA before April 2012 and next year for each of us.

Customer:

Do you have any other ideas?

Customer:

JAX are you there?

Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Jax Tax and other Tax Specialists are ready to help you
Expert:  Jax Tax replied 2 years ago.
Let me know if you need additional help.

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