Pros and Cons of Selling Your Photo Studio

By Julian Block





         Barbara is thinking about selling her photo studio where she has operated from for seven years and becoming a renter.

 
 
        Were Barbara to sell, what's left from the proceeds after she pays off the mortgages could be used to take care of debts on a car, credit cards and other obligations, on which she has fallen badly behind.

         In her area, the rent for a dwelling comparable to the one she now owns would amount to about the same as the payment on her first mortgage.

         Would it make sense to sell at a time when the real estate market is strong and move into a rental unit?

THE PROS AND CONS

         It all depends. She needs to consider a number of factors.

         Would remaining an owner make sense? Possibly, if home prices continue to rise and her property's appreciation exceeds what she could derive from investing the proceeds of the sale.

         But home prices do not move in only one direction.

Say she sells and pays off those debts. Less of her stock photography income is siphoned off by debt payments, which means she finally has funds available for investing in new digital equipment.

         Other subjective questions might be: Will the landlord be responsive when something goes wrong? How well will Barbara get along with neighboring tenants?

         Renting could be advantageous for Barbara and lots of other similarly situated individuals. When it comes to the income tax rules, which definitely favor home owners over renters my answers are more concrete.

ITEMIZE THE ADVANTAGES

         Assuming she sells, Barbara qualifies for an "exclusion," meaning escape from taxes of as much as $250,000 in profit on home sales for single filers. The exclusion doubles to a full $500,000 for married couples filing jointly. Remember, that's profit, not sales price.

         Some stipulations: (1) Barbara must own and live in the property as her principal place of business for at least two out of the five years before the sale date; and (2) at least two years have elapsed since she last used the exclusion. As she's been there for seven years, she's relieved of any taxes on her profit.

         What about renting? She no longer has itemized deductions for real estate taxes and interest on home mortgages.

         Whether as a home owner or renter, other possibilities for itemized deductions are: charitable contributions; state income taxes; uninsured medical expenses that exceed 7.5 percent of her adjusted gross income casualty and theft
losses, allowable only to the extent such uninsured losses exceed $100 (for each casualty or theft) and 10 percent of adjusted gross income; and miscellaneous expenses. Since she is operating a business she is still entitled to deductions for interest payments on her business car loan, business credit card balances and other business debts (she has lots of them).

         To get any benefit from itemizing, Barbara's total has to exceed the standard deduction that she would get anyway. For someone like her (single and under age 65), the standard deduction for 2001 is $550 for an individual with the filing status of single and $650 for a head of household. Those figures are adjusted for inflation and will increase for 2002 to $_____ and $_____ respectively.

         What do all those numbers mean? To the extent of her standard deduction, Barbara's itemized deductions are wasted. Moreover, her standard deduction might be greater in any case than her itemized deductions if they're largely limited to real estate taxes and mortgage interest.

Julian Block, a former IRS agent and tax attorney, is the author of "Julian Block's Tax Avoidance Secrets" ($29.95 p&h included, 560 pgs. Mention you are a PhotoStockNotes subscriber and receive the book for $19.95. Julian Block, 3 Washington Sq, Larchmont NY 10538-2032). For Julian's tax saving and tax planning reports, go to http://www.photosourcefolio.com/TaxReports.htm. Julian can be reached at julianblock@yahoo.com.


           


           

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