By: Jeff Skolnick, CPA, M.S. Taxation

One question that I run in to quite often is I made a mistake on my tax return and I know I’m entitled to more deductions, but is amending my return going to raise a red flag?

My answer to this question would be if you have the proper support to your change by all means, file an amended return.  This question of whether amended returns raise red flags has long been discussed by both taxpayers and tax professionals.  I have never seen any study that proves filing an amended return opens you to audit any more than filing any other return.  For purposes of this article I will concentrate on amended returns filed with the IRS.

Under what circumstances should I file an amended return?

Amended returns should be filed if you need to correct anything on a form previously filed with a taxing authority.  Corrections may include changes to income, deductions, credits, filing status or dependents.

How do I file an amended tax return?

An amended tax return is filed with the IRS Service center that processed your original return.  The amended form is Form 1040X which shows amounts originally reported under income, deduction, tax liability and payment categories.  This form will also show any changes that you are claiming.  The key to this is to properly document your changes in narrative form and to attach any backup.  An example would be that you are taking additional mortgage interest expense.  You would attach a copy of form 1098 received from a bank showing the additional interest.

Please keep in mind when filing an amended return to claim a refund of previously paid taxes, the return is due within three years after the date you filed your original return or within two years after the date you paid the tax, whichever is later.

Does filing an amended return extend the statute of limitations?

Generally filing an amended return does not extend the statute of limitations for an income tax return. The exception to this rule occurs if your amended return is received by the IRS within 60 days of when the statute would have expired. In that case the IRS has an additional 60 days to assess tax.  If, for example,  a taxpayer filed their 2015 return timely (April 15, 2016) and then filed an amended return which was received by the IRS on April 14, 2019, then the IRS would have 60 days to assess the taxpayer because the amended return was received with only 1 day remaining on the statute.

 Are there any reasons to file an amended return other than to correct errors?

The answer to this question is yes.  A perfect example of this would be a casualty loss (i.e. Hurricane Sandy in 2012).  Normally a casualty loss is reported in the year the casualty occurs.   however if you suffer a casualty loss due to a federally declared disaster that occurs in an area requiring public or individual assistance, then you can treat the loss as having occurred in the year immediately preceding the tax year in which it happened, and you can deduct the loss on your tax return or amended tax return for the year before

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Article by: Jeff Skolnick, CPA, M.S. Taxation

Like-Kind Exchanges or 1031 transactions allow taxpayers to dispose of property and defer the gain if the property is exchanged for like kind property.

In English, what this means is that if you were to trade real estate, then you would have to exchange it for real estate, an automobile for an automobile, etc.  Keep in mind both the property given and the property received must be used for business or investment purposes.

Like-kind exchange rules may apply to many types of property.  The most common questions revolve around real estate and therefore this will be my focus.

Like-kind exchange rules generally discuss exchanging one piece of property for another simultaneously.  These rules certainly can apply to real estate; however, it is very difficult to find two individuals willing to exchange properties.  The solution to this problem can be found in a delayed exchange.

In a delayed exchange a taxpayer may sell a piece of business or investment property and purchase, at a later date, replacement property and still qualify under the like-kind exchange rules.  While this can obviously be a very attractive way to sell property that has appreciated in value, great care must be taken as the rules are complex and any mistake will disqualify the transaction and render it immediately taxable.

The major requirements of a delayed exchange are as follows:

• Replacement property must be identified within 45 days of the sale of the property relinquished. The identification must be in a written document signed by the taxpayer and delivered to the seller of the replacement property or anyone who is not a disqualified person. It is usually given to the qualified intermediary.

• The taxpayer must close on the replacement property on the earlier of the 180^th day after the sale of the property relinquished or the due date of the taxpayer’s income tax return (including extensions).

• The taxpayer cannot receive the money from the sale of the relinquished property.  In most cases the proceeds of the first sale are held by a “qualified intermediary” until they are needed to close on the replacement property.  While there is no requirement to use a qualified intermediary, the taxpayer is not allowed to use anyone who has had a financial relationship with the taxpayer in the last two years. That rules out the current attorney, accountant, investment banker, broker or real estate agent. Each of these individuals is considered to be a disqualified person. Qualified intermediaries are used to these transactions and in my opinion worth the money to make sure the transaction is completed properly. I have read articles detailing that there is a lack of regulation of Qualified Intermediaries so make sure you do your research and find one that is reputable and bonded.

• The purchase price of the replacement property must be at least as much as the sales price of the property relinquished or a portion of the gain will not be tax deferred.

Once again, if any of the above provisions are violated, then the transaction will become immediately taxable.

It is important to keep in mind that although the rules for what qualifies as like-kind real estate are liberal, neither personal residences nor vacation homes will qualify.  These types of properties may be converted to business or investment use; however, this usually requires significant time (approximately 2 years).  Again, keep in mind properties must be identified within 45 days and generally closed on within 180 days. This can be the most difficult part of the transaction.

It is also important to remember that like-kind exchanges defer taxes and do not eliminate them. In other words the gain you defer will reduce the cost basis of the property you purchase and the gain will be realized upon the sale of the replacement  property unless the taxpayer enters in to another like-kind exchange

In addition, there are a variety of other factors that may come in to play.  This article is meant to give a basic overview of the law.

The rules of like-kind exchanges are complex and stringent, however if followed correctly can be well worth the time and effort. The rules, however, if not followed 100% will destroy the transaction and the deferral will be disallowed and the transaction will become immediately taxable. It is, of course, vital that any taxpayer seek the advice of tax professionals familiar with such transactions.

You can visit me check this out on my latest podcast at: https://anchor.fm/jeffrey-skolnick/episodes/Episode-13-Defer-taxes-on-real-estate-sales-e3ufca