Q: I am selling water rights for an estimated amount of over $ 200,000. One thing I am considering is avoiding any gain by using a trade of the same nature. I have to do some shopping to improve my mom’s house, make it more disabled-friendly, and switch to central heating and air conditioning. What others are telling me is that I cannot use the improvements to this property to defer taxes on the sale of water rights.
A: Water rights are considered a capital asset. If you held the water rights for more than a year, you would have a long-term capital gain, currently taxed at no more than 20% federal tax and 2.45% New Mexico tax. .
You may be able to reduce the taxable gain by allocating a portion of the cost of the land that relates to the water rights as the tax base for the rights. It’s clear if the land and the rights were acquired at the same time – the IRS thinks the answer is different if the water rights were granted after the land was acquired.
It is generally possible to use a trade of the same nature to defer the gain. Water rights can be similar to real estate if they are not limited in duration (i.e. perpetual).
However, the people who have told you that improving an existing property cannot be treated as a replacement property of the same nature are correct. If you already own the property, you are actually negotiating for construction services, which is not the same genre when it comes to real estate.
So, if you want to defer a gain, you must purchase a replacement property of the same nature (immovable) and hire a qualified intermediary to facilitate an exchange.
In the absence of an exchange, you can still declare a capital gain and it may be worth making an effort to determine how much of the tax cost of the land can be allocated to water rights.
In general, this is based on the relative fair market value of the water rights to the total value of the land, measured at the time the land was first acquired.
Q: Ndamukong Suh of the Detroit Lions was recently fined $ 100,000 by the NFL for a low block on a change of possession. One blogger said it really isn’t a big deal because he can just deduct it from his taxes. Is it really true?
A: I think so, although the tax law has its own odd way of declaring such deductions, and the end result is unlikely to be a tax benefit for Suh.
This penalty was imposed in his capacity as an employee of the Lions. As an employee of a professional football team, Suh is considered to be in the business or business of professional football.
This means that Suh has the option of deducting certain unreimbursed expenses related to the active conduct of her trade or business.
As an employee, Suh’s authorized deductions are only allowed as itemized deductions and as a type of deduction which, along with other such deductions, must exceed 2% of her Adjusted Gross Income (AGI) .
Some business expenses are not deductible because it would be against public policy to allow a deduction. Deductions create a subsidy for the taxpayer because the government ends up paying part of the deduction.
The violation of public order occurs when the deduction of a âbadâ expenditure makes the government a partner in the bad payment.
Fines and penalties paid to the government are not deductible due to this policy. So, for example, if a truck driver pays a fine for breaking traffic laws, the payment is not deductible.
Suh’s payment is made to the NFL, not to a government. There is therefore no explicit authority which would prohibit its deduction.
A quick internet search showed that Suh’s pay in 2013 includes a signing bonus of $ 11.5 million and a salary of $ 630,000.
If Suh’s AGI is at least $ 12,130,000 in 2013, his outstanding business deductions, including the fine, would have to exceed $ 242,600 for him to get a tax benefit from the fine.
So at the end of the day, I doubt he’ll get any tax benefit by paying this fine.
James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]