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I have 2 salaried jobs, 1 independent contractor position…

I have 2 salaried jobs...
I have 2 salaried jobs, 1 independent contractor position and real estate income. My husband has a salaried job. We underpay taxes every year. Last year we owed 30K and a penalty. I haven't paid any estimated taxes yet this year. Trying to figure out what to do before year end to decrease taxes. We are doing a 1031 exchange hopefully before the end of the year. If we exchange for an expensive property, 1/27th of the price will offset income, right?
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11/22/2017
Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,408
Experience: Certified Public Accountant
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Hi, my name is Mark. I will be happy to help you with your questions. Please give me a moment to prepare your response.

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For your independent contractor position do you have a LLC?

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Customer reply replied 6 months ago
no, no LLC

Ideally you would want to reduce your self employment income as much as possible. With a 1031 exchange you are deferring the gain from the sale of the property. The basis on the sale of the property would carry to the new property. If you take any cash in the deal you would pay tax on this amount.

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Customer reply replied 6 months ago
we won't be taking any cash in the 1031 deal. the question is how much cash to put INTO the deal. We are getting 370K for selling the property. The question is whether to buy a new property for as close to 370K as possible, or whether to buy a much bigger property for like 1M that will make more rental income and also help offset this year's tax bill from the self employment income I haven't yet paid taxes on.

You are probably aware of this but I will explain anyway. As a self-employed individual your net income is subject to both income tax and self employment taxes. The self employment taxes are 15.3% of the first $118,000 of income. You also pay income tax on this amount. Let's assume that you are in the 25% bracket. This would mean that you would pay 40% on the net income of your contracting income. I

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With a 1031 exchange to completely defer the gain you need to purchase a property that is more than the property that you are selling. Let's assume that your basis in the property that you are selling is $200,000. The gain on this sale would be $170,000. If you purchase a property for $400,000 your new basis would be $$230,000 ($200,000 your original basis plus $30,000 the difference between the purchase and the sales price). The $170,000 gain would be deferred. If you purchase a $1 million property The basis would be $630,000. With a higher priced property you would have some additional interest and depreciation prior to year 1. Do you know if you or your husband are considered real estate professionals?

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Customer reply replied 6 months ago
we are not real estate professionals

With a rental loss you are limited to $25,000. This loss is further limited by your Adjusted Gross income. If your combined income is greater than $150,000 then your loss would be completely eliminated. You do not lose the loss, it is just suspended. You would be able to claim the loss if your income changes or you sell the property.

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Customer reply replied 6 months ago
our income is greater than 150k. So a huge real estate loss does not cancel out any of our non-real-estate related income for this year?

Correct, a large rental loss would not help you. The loss would be suspended. The additional purchase price would add to the basis in the property and would not create a significant loss in the last month of the year.

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Customer reply replied 6 months ago
any suggestions for reducing the taxes I will owe? I will buy things I need for my non-real-estate business e.g. a laptop, but anything beyond that?Also, can you define "suspended" for me? Does this mean any real estate losses will be considered in future years even though they aren't too helpful in the current year? Do you know if turbotax does this automatically?

Yes, suspended means that you do not lose the loss. The loss is just carryforward until you are able to use the loss or until you sell the property.

Purchasing equipment is a useful way to reduce your net income. Do you use your car for business? A car purchase could be used to reduce your income. If you finance the car you may be able receive a deduction with little out of pocket expense. The amount of deduction that you receive will depend on the type of vehicle that is purchase.

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Customer reply replied 6 months ago
thank you! I do not have a CPA and was frightened off by how much one wanted to charge me for doing my taxes ($2.5k.) I like doing my taxes in turbotax myself, and I think I can continue to do this if I'm able to ask questions like this. Does this seem like a reasonable strategy? Any other suggestions?

One additional item is that you could make a retirement contribution based on your Self employment income. You could make a SEP IRA contribution of up to 25% of your net income. You would be able to fund the contribution up to the time that you file your taxes - even extensions. So you could have up to October 15th.

$2,500 sounds a bit high for what you are describing. Based on your description it sounds like you have W-2's, renal property, Schedule C, and likely Schedule A.

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Customer reply replied 6 months ago
can you be our cpa?

Sure I would be happy to. I am located in Tempe, AZ but have clients around the country.

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Customer reply replied 6 months ago
how would that work? not through justanswers? could I still do my taxes in turbotax but have you look things over and answer questions? or does that not make sense?

Yes, you could still do your taxes on Turbotax and I could review them and answer other questions. If you wanted I could prepare your taxes. Whatever you preferred.

Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2,408
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I look forward to hearing from you. Please let me know if you have any other questions.

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