Q:  My sister and I own a 4-unit residential building. We have lived in 2 units as our primary residence for 10 years. We just converted all 4 units into 4 condos and intend to sell the entire property. May we apply our $500,000 tax exemption to half of the capital gain?

A:  The general rule is that you and your sister each can sell your principal residence and exclude up to $250,000 each, as long as you have owned and lived in the residence for at least 24 of the 50 month period prior to sale. Thus, the value of the two units you and your sister lived in would be subject to the residency exclusion. You also may combine the residency exclusion with the tax-free exchange provisions of Section 1031 to postpone gain on the sale of the rental units.

Q:  I live and work in California during the week. I commute to Illinois on weekends to see my family. If I claim Illinois as my tax home may I claim all expenses related to my California residence as unreimbursed business expenses?

A:  California would probably be considered your place of residence since you spend the majority of your time there. As such, you are not entitled to deduct costs of maintaining the California residence as a business expense. However, if the property qualifies as a second residence, you are entitled to deduct qualified mortgage interest and property taxes.

Generally, your "home" refers to the principal place of business or post of employment, and you may not keep this residence at a location where you are not engaged in business and then take a deduction for traveling expenses to and from your actual place of employment.

Q:  My wife and I own rental property and file separate returns. How should the income be reported - by the person who has legal title to the property, or equally, regardless of how legal title is held?

A:  The answer depends on whether the property is considered: (i) one spouse's separate property; (ii) community property of both spouses or; (iii)separate property of one spouse in which the other spouse as a marital property interest under the laws of the state where your reside. If both spouses own the property equally or have equal interest in the property under the laws of your state, then you must split the income and expenses equally. If one owns the property as separate property, that person claims the income and expenses. Of course, if you file a joint return, this issue becomes moot.

Q:  I am a non-citizen, non-resident. I hold a US bank account and deposit U.S. source income and dividends to this account. The company does not withhold taxes on these amounts and I wish to know what U.S. tax obligation I have.

A:  You owe tax on your income at the flat rate of 30%. If you choose to pay it, file a Form 1040 NR and declare the income and pay the tax. However, provided you've truthfully reported your filing status to the company, it is the responsibility of the company to withhold and pay the 30% tax to the U.S. since the U.S. generally has no legal jurisdiction over a non- U.S. resident/citizen, absent treaty provisions allowing for collection of taxes cross-border. The upshot: you can pay the tax if you want to (use form 1040 NR) but the responsibility for the tax generally rests with the payor.

The browsable version of this page: July, 2003 FAQ

All contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.