John Bullis: Get a tax deduction without paying for it
June 5, 2012
It is possible to get an income tax deduction – without paying for it.
An example would be a charitable contribution of appreciated (increased in value) property.
Suppose you owned land that you purchased a few years ago for $10,000. If the value had increased to $30,000 now and you gave it to a church or IRS qualified charity, you get a deduction for $30,000.
You will need to document the value; probably with an appraisal, and the church or charity is to give you a letter of “thanks” that indicates the details of the gift. You get $30,000 of deduction, but only paid $10,000 of cost.
Or, suppose you bought a stock like Microsoft (traded on an exchange) for $2,000 a few years ago. If the value today is $5,000, you could contribute the stock to a church or charity. You get a $5,000 deduction, but only paid $2,000 of cost.
Suppose you inherited some mineral interests, oil and gas wells and you receive royalties of $10,000. That is income for your return. But Congress has decided you can claim a “depletion” deduction of $1,500. You don’t pay anything for the “depletion” deduction, but it does reduce the taxable amount of the $10,000 of royalties you received.
What if a married couple in Nevada (or other community property states) had a rental property? If they paid $300,000 for it and allocated $100,000 to the value of land when they bought it, they can claim “depreciation” expense on the $200,000 allocated to building and improvements.
If it is commercial rental real estate, the depreciation expense each year would be about $5,128. Then suppose 10 years later, one of the joint owners dies, leaving the rental property to the survivor and the value still is $300,000. The couple claimed about $51,280 of depreciation expense over the 10 years and that reduced their taxable income and tax.
Then the survivor gets the property and can start a depreciation schedule all over again. The same building yields a depreciation deduction for the survivor without a reduction for the previous depreciation expense.
Or, suppose a couple operates a cattle ranch. They raise cattle, expensing the feed, etc., so the tax cost of the cattle is zero. Then if one of them dies and the survivor sells the cattle, the sale proceeds are reduced by the fair market value of the cattle on hand at the first death. That could mean low or no income from the sale for income tax reporting. The fair market value of the cattle at the first death becomes a significant deduction, without any payment.
IRS statistics show high income taxpayers often use appreciated property to do charitable gifts. Maybe you already get some deductions without paying for them?
Did you hear: “Difficulties are not difficult to bear if they make you better, not bitter.”
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.