Q: My son and I bought a house to remodel and resell. We had it for two years, during which time no one lived in it. We sold it at a loss. Is the loss deductible?

—K.B., Ridgecrest, Calif.

A: The general rule is that you can’t deduct a loss on the sale of your personal residence. But the answer is different in cases such as the one you mentioned.

If the house is “an asset that was purchased for investment purposes only, with the intention of incurring a profit and not used for personal purposes, then the loss would be deductible as a capital loss,” says Brittney Saks, who heads the U.S. Personal Financial Services Practice at PricewaterhouseCoopers.

Based on what our California reader has told us “it would seem that the house was bought purely for investment purposes,” Ms. Saks says.

Mark Luscombe, principal federal tax analyst at CCH, a Wolters Kluwer business, agrees. “Yes, it appears that the home was investment property and not a residence, so it would qualify for capital-loss treatment on sale,” he says.

Here is how those capital-loss rules typically work:

You can use your capital losses to offset your capital gains on a dollar-for-dollar basis.

If your losses exceed your gains, or if you don’t have any gains at all, then you can use your net loss to soak up as much as $3,000 a year ($1,500 if you’re married and filing separately from your spouse) of your wages and other ordinary income. Additional losses are carried over into future years.

For more details, see the Internal Revenue Service website, and type “capital gains and losses” in the search box.

However, Ms. Saks points out that the taxpayer has the burden of proof to show the intention and correct classification of the property.

Q: Has Congress extended the tax break for IRA distributions that are donated directly to a charity?

—E.D., Providence, R.I.

A: Not yet. That law expired at the end of last year.

Most tax advisers I have spoken with predict lawmakers will approve another extension this year of the provision, which lets many people who are 70½ or older transfer as much as $100,000 a year directly from an individual retirement account to one or more qualified charities without having to report any of that money as taxable income.

—Send your questions to us at askdowjones.sunday03@wsj.com and include your name, address and telephone number. Questions may be edited; we regret that we cannot answer every letter.

Article source: Wall Street Journal

 

About 52% of all businesses are run from home. The number of teleworkers is growing annually.

It’s good to know that some tax savings can result from this work arrangement.

A portion of personal expenses for your home can be turned into a business deduction — if you meet certain rules.

To claim a home-office deduction, you must use the space in your residence as a principal place of business, as a place to meet or deal with customers on a regular basis, or as a separate structure used for the business.

You also must do the above regularly and exclusively for business.

If you’re an employee, you must use the space for your employer’s convenience and not for your own preference. Working after hours at home rather than staying late at the office is probably your own choice and not for your employer’s convenience.

Usually, “employer’s convenience” means that the employer does not have space for you on the company’s premises.

But while the home-office deduction rules are written in black and white, there are some uncertainties that could affect your home office deduction. Think of them as gray areas.

One is the meaning of exclusive use. Clearly, the space must be available 24/7 for business and cannot be used by you or your family for personal reasons at any time during the day or night. Thus, if you use a TV room as an office during the day and your family watches TV there in the evening, you fail the exclusive-use test.

But what about walking through a room? The Tax Court has said that even occasional use of space, such as using a bathroom by family or guests, means your business use is not exclusive. However, the court has also said that incidental use of space, such as family members walking through the office to get to another part of the home, is minimal and won’t cause you to fail the exclusive use test.

What’s the difference between occasional and incidental use?

This is a gray area, but it seems that passing through is not equivalent to using the space.

Storage of some personal items in a space claimed as a home office won’t violate the exclusive-use test. The court has allowed a home office deduction for a garage in which some personal items were kept. So, people, no. Things, yes.

A common belief is that claiming a home office deduction is a red flag to the IRS, practically inviting an audit. There is no IRS data to support this belief and, unfortunately, the belief may be responsible for some taxpayers forgoing the deduction needlessly even though they are otherwise eligible for it.

The best course of action is to talk over your personal situation with a tax advisor to make sure you meet the home office deduction rules.

Keep good records of all expenses related to the home office, and take a photo of the space used as a home office. The photo can help in case the IRS questions your return after you’ve stopped using the space for business.

To learn more about the home-office deduction rules, see IRS Publication 587, Business Use of Your Home.

Article source: Wall Street Journal

 

In the midst of the current sluggish economy that has engulfed the government and business sectors in an avalanche of difficulty and uncertainty, there is a great temptation to ‘curse the darkness’ by casting blame.  It is certainly true that the current financial situation has plenty of blame to go around.  Typically, entities such as “Wall Street Greed” and “Irresponsible Government” are dogs that frequently get kicked.  However, there is a very large elephant that frequently seems to be overlooked.  That elephant is personal responsibility.

The reason why personal responsibility plays such an important role in the current economic situation is because it is impossible for a financial crisis to develop unless there are a LOT of people using credit to live beyond their means.  The crisis develops when the people who have been living on borrowed money can no longer make the payments.  Once the borrowers stop paying the creditors, there is suddenly a crisis.  (Note that the crisis is the proverbial ‘hangover after the party’ since it is necessarily preceded by people living high on borrowed money.)

This phenomenon highlights a curious and unflattering corner of the human condition.  Namely that people are more eager to “curse the darkness” and blame somebody else for their problems than seek a path of action that they can personally take to influence their personal situation.  This is not to say that all things are all our fault.  Quite to the contrary, there are many parties who have earned a considerable measure of blame.  However, the collective malfeasance of various players on the economic stage is not within our direct control.  Taking personal responsibility for our personal decisions is of paramount importance because our actions are the primary points of influence that we have control over in regard to our personal, professional, and financial well being.  The only way that our life will improve is if we take action. Past precedent has most clearly shown that the so-called guardians of our financial well being will look after their own interests before ours.

An unfortunate and disappointing part of the current economic situation is that the ‘solution’ being sought isn’t one of returning to responsible spending and lending practices . . . no, it is the exact antithesis of responsibility referred to affectionately as a ‘bailout.’  The extreme danger posed with the ‘bailout’ solution is that it simply subsidizes the irresponsibility that caused the problem in the first place.  My greatest fear with this ‘bailout’ mindset is that constantly rewarding irresponsibility can only lead to an increase in irresponsibility by more and more people until the problems eventually get so big that it is beyond of the ability of the government to bail out.

Simple arithmetic clearly demonstrates that the extent of government financial obligations will soon exceed its financial resources by an impossibly large margin.  This will lead to a situation where many people receive far less than they have been promised for their benefits, pensions, salaries, and many other varieties of services.  This will compel many of them to “curse the darkness” as well, saying that the problem comes from taxes not being high enough on the “rich” or from unfair foreign competition, and from a variety of other sources.  In order to endure this ensuing storm of financial darkness, it is completely necessary that we take action now so that the financial well being of our families are safeguarded.

Ultimately, there is only one way to permanently restore stability.  That is to retreat from blaming other people for the financial problems that we the people have created.  Put another way . . . instead of cursing the darkness, try lighting a candle.

 

One of the curious aspects of the human condition is that we grow to achieve comfort, but when we achieve that comfort it prevents us from growing.  It has long been said that luxury is the lull to apathy.  In practice, this means that it is difficult to reach new heights if we do not leave our present place.  For most people, this means that personal, professional, or financial growth will require that we “Dial up the Discomfort” of the conversations and decisions that we must make.

The reason why this principal takes on such importance is because we all have a natural tendency to perpetuate the standard quo.  Keeping things going the way that they have been going in the past is the path of least resistance.  The problem is that following the path of least resistance cannot be expected to produce results that are different than what has been achieved in the past.  Fundamentally, this means that each time we wish to expand and grow our personal abilities, we must push beyond the realm of our comfort zone.

Why is Discomfort Necessary?

Whether we are talking about the context of personal, professional, or financial life, dialing up our level of discomfort is necessary to grow and progress.  If our relationships never experience any friction, they will not progress … they will simply stay where they are, and may possibly slip into decline.  If a business never challenges itself to accomplish new goals, it will pass through the stage of maturity and into decline.  If our financial decisions are rooted only in the desire for comfort, it will result in many lost opportunities throughout our career.

Fundamentally speaking, the way that we grow is to break out of our current ‘normal’ and seek out a new equilibrium that generates higher and greater levels of achievement.  Once this has been achieved, a new ‘normal’ is established, and the process begins over again.  The world’s high achievers must learn that constantly challenging the limits of their comfort zone is part and parcel to the growth and development that a high achiever should expect from themselves.

How Far Should We Dial It Up?

Once a person has accepted the necessity of discomfort as a piece of personal, professional, and financial growth, it becomes necessary to determine how far we must push the envelope.  If we push too hard, it can create destructive results from failed ventures, nervous breakdowns, and the like.  Conversely, if we do not push hard enough, we cannot expect to grow and progress.  In order to achieve this “Sweet Spot” of personal and professional development, it becomes necessary that we learn to recognize how much discomfort is necessary without pushing the boundaries so hard that they collapse.

The True Hallmark of Success

The true characteristic that differentiates those who achieve success and everybody else is the number of uncomfortable conversations that they are willing to have.  This does not mean that successful people need to become a “Bull in a China Shop” who constantly disrupt the environment around them.  Rather, it is a testament to the fact that constantly growing means that we will constantly be pushing the boundaries of our comfort zone.

In this way, we should go into each day asking ourselves what we are going to do that pushes our zone of comfort?  What conversations are we willing to have that we would rather put off?  What difficult work are we stalling on by keeping ourselves busy with something else?  What do we avoid by telling ourselves that we will get to it later?  The sooner we develop the ability to take these tasks head-on, the faster our trajectory of personal, professional, and financial growth will accelerate.

In the end, each of us who seek to follow a trajectory of continued growth must find a way to consistently push our personal boundaries of comfort.  The exact way that each person dials up their own level of discomfort will be unique.  However, there is one common characteristic that is shared between the journey of all aspiring achievers.  This common thread is that we must all find a way to push our comfort zone, and find the right way to undertake this task in such a way that it propels us onward and upward, but does not wreak a destructive force upon our lives. Ultimately, this serves as one of the many challenges that all achievers must undertake.  And like all other challenges, ignoring it will not make it disappear.  It will only be accomplished if it is addressed.

 

One of the great disservices that has been created by contemporary business literature is an enduring impression that ‘simple’ and ‘easy’ are the same thing.  Many gurus and seminar spokesman will repeatedly claim that success is simple, with the unsaid assumption being that it’s so simple you can achieve it with minimal effort.  The thing that we need to keep in mind when we are thinking about the laws of success and our personal achievement is that simple things are frequently quite difficult.

The formula for weight loss is exceedingly simple . . . just eat less and exercise more.  The fact that this system happens to be simple doesn’t mean that it will be easy to accomplish.  The preponderance of fad diets serves as a testament to this fact, since each attempts to take some new angle on convincing people that they can accomplish their health and fitness goals without developing the discipline that is necessary to turn away tasty food and regularly exercise.

The purpose of this illustration is to drive home the point that success is derived from personal discipline more than any formula or system that is available for purchase from a seminar spokesperson.  This is not to say that one should not pay attention to the laws of success, or that the formulas for success are necessarily fraudulent.  What it means is that each of these will be completely useless without the addition of personal discipline.

In this case, what is simple frequently proves to be very hard and what appears to be complex can frequently be the path of least resistance.  The reason for this is because simple frequently dictates action while complicated situations provide a ready alibi for inaction.  In order for each of us to achieve our goals and ambitions, we must develop the discipline to consistently do simple things and avoid getting lost in the complexity of situations that can derail us from achieving our ambitions.  In the end, each of us are responsible and accountable for our own success.  In many cases, this path is simple . . . however, it is almost never easy.

 

One of the things that have been debated for a very long time is whether people act out of personal conviction (for love) or because of incentives and opportunity for gain (for money).  The answer to this question has a tremendous impact on our personal, professional, and financial lives.  Most of us tend to think that our personal lives are exclusively based on personal motivations (love) and that our professional and financial lives are based on rational decisions (money).  The truth is that these two forces mix and meld in everything that we do.  Understanding the way that they work can help each of us to live more complete and fulfilled lives.

The first circle of understanding when it comes to the relationship between love and money is the realization that the two are linked.  Most people will not work for free in a job, even if they love it very much.  Conversely, there is also a point where additional money fails to produce additional motivation.  The key to understanding this trade-off is the notion of a non-linear relationship.  In other words, money motivates up to a point and then begins to lose its power.  Similarly, doing something that you love only becomes motivating after your monetary needs have been met.

It is frequently noted that “money can’t buy happiness” and we wholeheartedly agree.  However, the lack of money will generate a large amount of unhappiness.  Thus, money is not something that makes you happy in and of itself, but something that allows you the freedom to do the things that make you truly happy.  Similarly, pursuing a personal passion such as music, writing, or athletics may not produce much if any income.  Because of this, it is necessary to satisfy your monetary needs so that your passion can be pursued in your leisure time.  Furthermore, our ability to help others is frequently constrained by our financial resources.  Each person has a limited amount of time in the day and good intentions won’t even buy a cup of stale coffee.  To the extent that our non-monetary desires to help make the world a better place come to the forefront of our mind, it must necessarily trigger a monetary desire to generate resources that can be dedicated to said charitable cause.

The way that this relates to our personal lives involves many layers.  Nobody will argue that lots of money is necessary to have a happy and fulfilled life.  However, if every evening meal becomes an argument over how the months bills will be paid, it will be extremely difficult to achieve happiness or fulfillment.  When there is only one cookie left, my goal is not to ensure that it goes to whomever is the highest bidder between my spouse and children.  My goal is to do my best so that everybody in my family is satisfied.  Incidentally, this is one of the reasons why family business dealings frequently encounter so much difficulty.  When the non-monetary world of family that is driven by love and affection is forced into the monetary world of business where costs and profits must be monitored meticulously, there is tremendous room for strife and misunderstanding.

Another iteration of this phenomenon plays out in the workplace.  Many people say that they value autonomy and interesting work as the reasons why they stay at their current job.  However, students graduating from college frequently cite compensation as their primary goal when looking for employment.  So how do these two notions intersect?  Compensation is what attracts people to join a company, and is also the primary incentive for them to stay.  However, compensation alone will only inspire people to work hard enough to avoid being fired.  (Promotions also matter, but they tend to come less frequently as an employee rises in the ranks)  The thing that inspires people to do more than the minimum is a feeling of autonomy, interest in their work, and meaningful things to work on.

When dealing in the arena of investments and financial decisions, most of our decisions are rational and calculated.  However, the whole reason why we make these calculated investment decisions is so that we will have sufficient financial resources in the future to care for ourselves and our family.  In this way, the monetary means of investments ultimately serve a non-monetary end of providing for our family, enjoying the things that make us happy, and achieving financial security.

Ultimately, there will always be a cross-over between monetary and non-monetary motivations.  Love and Money are both necessary for a complete and fulfilling life.  The secret to happiness is not the pursuit of one to the exclusion of the other, but creating a healthy balance between the two.  In this way, we can achieve ever greater success in our personal, professional, and financial lives.