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The 1031 Exchange
2007-09-28 21:59:00
1031 Exchange s have been around for quite a long time. The IRS has clear guidelines on what qualifies and the rules for doing one. If you qualify, doing one correctly allows you to defer all taxes until you eventually sell your property outright. This article isn?t to go over the details. it?s to point out some of the considerations when doing an exchange.You are exchanging for another piece of real estate. Whether it is one you will own and manage alone or if you will be a tenant in common, you need to be aware of the costs and risks of the exchanged property.What will be the costs of ownership of the new property? Will insurance costs increase, property taxes go up? Are there association fees? Management fees, deferred maintenance to handle? Are there vacancy issues, long term leases, rent control issues, etc?Will the time constraints of the 1031 allow the exchange plenty of time to complete? What if a last minute disclosure is uncovered that makes the purchase unsatisfactory?What...
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Bottom Line- Protecting Yourself and Your Investments- Part I
2007-09-25 01:21:00
Above all else, when implementing a Capital Gains Tax Saving Strategy, there are three things you need to find out.How much do I get to keep when all is said and done?Is my investment protected from loss, or is it an acceptable risk for me?Is the strategy legal and IRS compliant?This may seem simple, but the answers are not always obvious. You have to be able to sift through any sales hype and know what is guaranteed and what is simply projected.The capital gains tax planning industry is dynamic. That means as tax law changes, strategies change. It is inevitable. If your criteria for choice is that a strategy has been around for many years, your choices will be quite limited and perhaps not even a good fit.Just because a company is fairly new, this reason alone is not cause to dismiss what is being offered. Instead, inquire about the experience of the providers, the structure of the plan, the adherence to law, the protection you receive, and be sure you understand the process and wh...
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Is There a Chance You Will Outlive Your Savings?
2007-09-11 23:33:00
In recent surveys one of the biggest concerns of retirees is that they will run out of savings or not have enough money to live on down the road.Between inflation, health care, long term care, the uncertainty of social security and nonexistent or dwindling retirement and/or pension income, it is a very valid concern.For many, appreciated assets such as real estate, their businesses, stock portfolios, or professional practices are intended to be the mainstay for retirement purposes.Often, 20, 30 or even 40 years have been spent in the accumulation phase. The value of the asset has probably increased many times over. It is reasonable to think that this increase is yours to keep when it comes time to sell.The reality is that depending on the asset and how it is held, 15-50% of your profits might be given in the form of taxes to the IRS, never to be seen again. Can you really afford to lose that much and still survive financially throughout your remaining retirement years?Even if you ca...
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Know Your Risk Tolerance
2007-09-11 23:30:00
Everything in life has risk. When it comes to finances, whether they are placed into a savings account, cd, the stock market, real estate, hedge funds, etc. there is an associated risk.The extremes are that the savings account risk is that your money won?t keep up with the cost of inflation. On the other end of the spectrum, the investment could potentially lose all value.When you are selling a highly appreciated asset, you need to determine exactly what risk tolerance is for the proceeds. This will help determine what course of action is right for you.Here are just some of the factors that should be considered.Do you have other assets or is this your only one?Are you still earning income, close to retirement, or already retired?Are you comfortable owning stocks, real estate, annuities or fixed rate savings?Do you need a certain amount of monthly income, do you want to leave the largest legacy or is your intent to be charitable?Do you need to remove assets from your estate for estat...
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Let Me Be Your Advocate
2007-09-11 23:26:00
Having someone on your side who knows the right questions to ask is crucial.I think the only thing worse than not knowing the right questions to ask is not knowing if the answers you get are accurate, complete or even truthful.I run into this same dilemma every time I take my car in for service. Outside of the basics, the mechanic can convince me that I won?t even make it home without an expensive repair because my knowledge of auto mechanics is minimal.A good solution for me is to bring along a friend who is more familiar with the inner workings of autos. Once the mechanic realizes that he or she is speaking with someone knowledgeable, it is less likely that they will propose a repair that is unnecessary or overcharge.One of the services I offer my clients is to be their advocate when speaking with an individual making an alternate proposal. I know exactly what questions need to be asked and the answers that should be forthcoming.All parties involved should be present on a conferen...
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Selling Stock Portfolios
2007-09-05 21:10:00
Most people typically don't sell huge amounts of stock in a single year unless they need a big loss to offset other large gains.However, sometimes one has no choice. A common situation is when someone is given or buys stock options for a very low price and hangs onto them hoping the price will really rise.When this happens, there are times when the company issuing the stock has the opportunity to repurchase these shares or options at a set price. Or, the company is sold and the new company will buy the old shares outright.Some municipal bonds can also be called if the issuing municipality can refinance the bonds at a lower interest rate. This often makes a sale the best choice, rather than receiving a lower interest rate and reduced income.So, assuming you sell these assets for more than you originally paid for them, you are faced with a capital gain and capital gains tax.If the amount is significant, it often behooves you to put a tax savings strategy in place before the sale happ...
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Business Lending- Have Funds Dried Up?
2007-08-23 19:02:00
The last post was on how the tightening credit market is affecting sellers of residential real estate. Now here is what I am seeing regarding commercial financing for business purchases.I have several clients in various stages of selling their businesses. The reasons for sale vary from retirement to having an offer come from out of the blue, to exiting one business to begin something new.I am seeing requests for due diligence become longer than in the past, and I believe in some circumstances this is in part because it is becoming more difficult to raise the necessary capital to complete the buy.In one incidence, an employee wanted to purchase the business from her employer. The business was successful, she had the right experience and skill to run it, and it had been established in the community for 26 years. She had good personal credit, but she was unable to find any lender to issue the funds. There have been two other parties interested in the three months since, but none have ...
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How the Lending Crunch Affects Sellers
2007-08-23 18:27:00
I'm sure you've been seeing all the stories about mortgage lenders cutting jobs, filing for bankruptcy, and tightening the rules on new loans. It is indeed a mess.If you are selling an asset- how does this affect you? The next couple of posts will give examples of what I am seeing on a weekly basis.First are those selling residential real estate. Properties that were previously selling typically within a month are now taking much longer. Often times, even when an offer is made and accepted, the financing which the buyer supposedly qualified for falls through before close of escrow and the process begins all over again. There is a lot of "hurry up and wait".Prices are being reduced and saving capital gains tax becomes even more important for those who need to sell. Others, who have less pressing needs are deciding to re-rent if this is possible and a few are offering seller financing.This too shall pass, as all forms of investments surge in some cycles and decline in others. It'...
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Case Study of Multiple Taxable Events in Same Tax Year
2007-07-31 23:40:00
Recently I had a case where the same gentleman- I'll call him Joe- had two separate capital gains triggering incidents happen in the same tax year.The first was a re-finance of a previous owner carry-back mortgage which triggered the remaining amount to be repaid in full prior to the end of the installment agreement. For several years he had been spreading out the capital gains tax and repaying it as he received principle through the payments made by the buyer. The amount of gain distributed and taxable at the end was about 400K.The second event was also the result of an installment agreement issue. The buyer had been having trouble keeping up with the payments and foreclosure was the next logical step. A new buyer came to the rescue and agreed to pay off the remainder due from the original installment agreement plus the penalties assessed. This still meant receiving the remaining amount due as a lump sum and this was also about 400K..It was too late to defer any capital gains tax ...
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Results of Very Non-Scientific Poll
2007-07-24 00:56:00
Several weeks ago I sent out an email regarding a case where potential clients had decided it was just easier to pay over 900K in taxes than worry about executing a tax saving strategy.I asked my readers for any responses as to whether or not there was a certain amount of money one had to have in order to not make an effort to protect close to one million dollars.I was actually hoping someone might reply in the affirmative and tell me why they felt that way. 100% of the responses I received all stated that no matter how much money they already had, it was worth it to them to hold onto as much of that 900K+ as they could.After reviewing all the email replies, I realized I was hearing only from a very select savvy group. After all, those who read my emails and educate themselves on protecting their assets are the ones motivated enough to send in a reply.I doubt anyone not worried about a mere 900K going to the tax man is even on any of my email message lists. I'm also thinking anyone...
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You Will Shoot Yourself in the Foot and Your Advisor Will Help
2007-07-11 01:15:00
This isn't my first message regarding "advisors" who harm clients by thinking they know more than they do. It is probably one of the most frustrating things in my work and it doesn't have to be that way. The solution is obvious.When dealing with Capital Gains Tax Strategies, it is safe to say that 98% of all the attorneys, tax professionals, financial planners and real estate brokers in the US are not up to speed on what is currently available or how to compare the options. This is not the problem. I wouldn't expect them to be, anymore than I would be up to debating how to file tax returns or do the legal contract language for a trust.The problem is that when a client comes to them for help on a capital gains tax issue they hand out advice without having all the facts. And they often get paid a lot for this bad practice. That is just wrong.I can say this definitively, because I see it happen almost every day. There is a simple solution to make sure this does not happen to you. H...
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No Capital Gains Tax in 2008?
2007-07-05 20:43:00
If only that were true... It is true that the capital gains tax rate for low income tax brackets (10% and 15%) in 2008 goes to 0%.But, before you run out and plan to sell your rental with a 300K gain, be sure you understand that most of that gain will not be taxed at 0%. Bummer, I know...We don't know what the qualifying incomes are for 2008, but for 2007 they are up to $31,850.00 for individuals and $63,700.00 for married couples filing jointly.So, if the levels didn't change for 2008 (they usually go up slightly each year) and you are married making 50K/yr as a couple, only the first $13,700.00 of capital gain is taxed at 0%. The remainder is taxed at 15%. So, in the above example, $286,300.00 is taxed at the 15% maximum long term rate.Don't forget to add your state and/or city taxes into the equation as well. This can easily add another 5-9.5% depending on your state of residence and state of property sale.And, don't forget the recaptured depreciation tax This doesn't get t...
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Marital Primary Residence Exclusion on Death of Spouse
2007-06-27 22:31:00
I?m often asked whether the 500K marital exclusion carries over upon the death of a spouse. The answer is not always straight forward.Typically, if both spouses owned and lived in a home for at least two of the last five years and file a joint return, there is a 500K exclusion on capital gains tax when the house is sold.If one spouse dies and the house is sold in the same tax year, a joint return can still be filed and the exclusion taken. Otherwise the exclusion drops to 205K for the remaining spouse.However, other tax rules may come into play.If the deceased spouse passed their portion of the home to the surviving spouse, in most cases the surviving spouse receives a step up in basis for the half they just inherited. So, if the house was purchased for 100K and each spouse owned 50%, each have a cost basis of 50K. If the house is valued at 400K when the first spouse passes away, their half is now stepped up to 200K, so the remaining spouse now has a new cost basis of 250K.Also, if ...
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Q and A Regarding "Intent" and the IRS
2007-06-25 21:59:00
When it comes to taxes, the IRS does often look at ?intent? to determine whether certain things qualify for certain tax rules.Such as, when you purchase a property, do you intend to hold it for investment purposes or is your intent to fix it up and sell it right away?I got a question today from a military individual stating he had purchased a property that was ?going to be? his primary residence, but he had never lived there and had rented it out since purchase. He had been renting in another state for the last few years.Now he wants to sell and wanted to know if he can qualify for the personal residence exemption.Unfortunately, he can?t. To satisfy the test for exemption you have to both own and reside in a primary residence for at least 2 of the last 5 years. Intent to live there does not come into play unless you actually do.And, no, it also doesn?t matter if he sells the ?intended? house and buys a new primary residence and lives there immediately. He still doesn?t qualify for t...
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At What Point do You Need to Have an Exit Strategy in Place?
2007-06-21 00:26:00
If you have an asset such as a business, a stock portfolio, real estate or a pricey collection it is never too soon to educate yourself about how you plan to exit or sell. Although a lot may change before the actual sale, you never know exactly when some unforeseen event may trigger the need to sell.As to how soon you should have a specific strategy in place, the answer is definitely prior to close.Below are some of the main considerations which need to be taken into account.1. Your age now and your age at time of sale2. The amount of gain you will potentially realize and the amount you?d owe in taxes if you had to pay at time of sale.3. Your need for income- now or in the future4. Whether or not you are at a point in life where you can invest the proceeds in anything with risk of loss or if you need asset protection.5. Your needs to provide for your heirs.6. Your estate planning needs and charitable intent, if any.7. Any other income and assets you have and how the sale of the one ...
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Is 960K a Lot of Money to Write a Check For?
2007-06-13 18:43:00
Occasionally I have a case that gives me pause. I have to wonder at what point loss of money is no longer important to some.I?d like to hear some opinions from my subscribers. After you?ve read this article, if you would, drop me a quick email to savegainstax@gmail.com and let me know how you decide how much is too much to pay in taxes- assuming you have a solid alternative.My recent discussions were with a son regarding the sale of his family business. His parents were the only stock holders so they made the final decision. They were in their early 70s and about to retire. Both are in good health.The business had a gain of about 3.2 million dollars and the tax bill was going to be approximately 960K. Real estate was involved, so recapture of depreciation was also an issue.The son was concerned about losing that much of their profits, so he was doing some research on how they could minimize their tax burden. Any way we looked at it, it behooved them to do something rather than nothi...
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5 Common Mistakes People Make When Selling Their Highly Appreciated Assets
2007-06-05 02:59:00
You may have spent many years of your life waiting for your real estate, business, practice, stock portfolio or collection to grow in value. Then, the time comes when you are ready to sell. You find a buyer, negotiate a fair price, and then lose 15-45% of your gains to Uncle Sam, the average being about 25%.The good news is that you have choices to avoid a good portion of this loss. You can also avoid the following mistakes I find most common amongst less savvy sellers. Below are just a few.Mistake number 1: Not having a plan in place prior to sale. Worse yet, not even knowing you have multiple options available to you.Mistake number 2: Getting your financial and tax planning advice from someone not qualified to provide it. Chances are, your hairdresser or golf buddy don't keep up to date on this type of specialized subject. Yet, I see time and time again, people relying more on the opinion of a relative or acquaintance than on the experience of a specialist. If Uncle Joe is the on...
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Case Study - Sale of LLC
2007-05-24 20:59:00
Sometimes one does not have control over when their asset is sold. This was the case of a 54 year old woman recently.As part of a divorce settlement she was awarded a percentage in her former husband?s LLC which held a shopping complex. She was a minority shareholder, so had no decision making clout.For years her only income was her share of the rent which was about 45K/year. She only worked sporadically part time so this was what paid the bills. Then one day she was told the property had sold and would close within the week.Her share would amount to about 1.2 million dollars after costs of sale, and her tax bill would be approximately 360K. That is almost 1/3 of her asset. Of course she went into panic mode and didn?t have a lot of time.We were able to put together a plan where she kept out 200K (and had a big tax deduction to minimize the taxes due at sale). This was money to keep and reinvest. The other 1M would go through the Installment Sale through a Foundation.This triggered ...
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Clients Lose Millions With Qualified Intermediary
2007-05-17 03:05:00
I got an alert on an article today from San Jose, CA. The subject was a Qualified Intermediary that somehow absconded with millions and millions of dollars in clients 1031 exchange funds.Here is a link to the entire article:http://www.mercurynews.com/ci_589 8867?source=rss&nclick_check=1#recent _commThese are people who have been in business for a long time. It seems almost impossible to believe this can happen, but it shows that you need to know what questions to ask before entrusting your funds to anyone. It comes back to- how do you know what to ask if you don?t know?Shopping for the lowest cost QI is acceptable if you are comparing apples to apples. Here are some basic questions.1. Is my money held in a separate account that you cannot access except for the exchange transaction?2. Are you insured and bonded?3. Do you pay interest on my money while you hold it?4. What assurances do you have in writing that if something happens to your company my money is still intact and not ac...
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Case Study of Company Stock Sale
2007-05-15 21:07:00
This is a case study of how a Charitable Installment Bargain Sale can be used to minimize taxes on the sale of company stock held in a company 401K plan.A 60 year old gentleman had a large amount of company stock in an old 401K plan with his former company. He had left several years ago, but kept the stock in his old plan.Now he is ready to retire, but if he rolls the stock into a traditional IRA and sells it, he will pay ordinary income tax on the entire amount. His cost basis in the stock is 70K. The stock value is now worth over 1 million dollars. He has other income, but not quite enough to maintain his lifestyle. Any distribution would be taxed at about 37% between state and federal taxes. That's almost 40 cents on the dollar that would go to Uncle Sam.So, here is a solution that makes a lot of sense.He has a one time shot, since the stock is in a 401K plan, to pay ordinary income tax on his cost basis and get the stock out of the plan. This means that for about 26K (income ta...
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How to Know What to Share and With Whom
2007-04-23 21:06:00
It goes without saying that one should not divulge personal information to strangers. With all of the identity theft going on in this crazy world, one can't be too careful.However, there are times when sharing the information necessary to help yourself, your company or your family is not only practical but crucial.If you are going to go to a CPA to do your taxes, they need to know your complete financial picture to do their job properly. If you hold back information, you are the one who gets hurt.If you go to an attorney for legal counsel, you must disclose the facts as you know them so they will be able to do their job properly.When seeking capital gains tax advice and counsel, it is important to know what legal structures are in place and how the sale of your asset will affect the rest of your financial picture. I have the same responsibility as your CPA and Attorney as far as confidentiality and protection of your personal data. Without the proper numbers, I can't provide you ...
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Things That Make Me Go "Huh?"
2007-04-17 01:29:00
Sometimes I just have to shake my head and chuckle.I get alerts for news articles and press releases that concern capital gains so I can keep up on what everyone is doing and publishing.Today there was a Press Release put out by one of the larger Structured Sales companies. The title had something to do with How Older Women and Widows were now inquiring about the Structured Sales Concept for 1031 Exchanges.That was confusing enough, as the two are mutually exclusive. Farther down in the article they did mention the Structured Sale was in lieu of further 1031 exchanges.Then they gave an example. One might think they would use an example of an older woman as the article title implied, but they used a daughter selling her Dad's second home to pay for his medical nursing care.The daughter was "brought to tears" by the concept of her dad getting 10 years of payments totaling 300K (however, no mention was even made of the amount at time of sale for comparison).Then came this sentence: "A...
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Case Study Of What Not to Do
2007-04-13 22:16:00
I recently had a call from a real estate agent who was in a panic. She had an 82 year old client who had called her in tears. Here is what had happened.The client (I'll call her Susan Seller) had engaged the real estate agent (Rita Realtor) to sell an investment property for her in the Spring of 2006. Rita did exactly this and collected her commission without asking any questions about what Susan would do with the proceeds. Susan had approximately 280K in gains.Susan took the check from escrow and placed it in a 6 month CD. She had never sold property before and was unaware of the tax consequences.When the 6 months were nearing an end, Susan called Rita back and asked her to look for another investment property for her that was in the price range of her last sale.Rita found a property for her in early 2007 and collected another commission, still not ever discussing the funds involved. Susan used the entire amount from the last sale, plus the interest from the CD and about 10K of he...
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Is Gifting Real Estate A Good Idea?
2007-04-11 21:20:00
I receive a lot of questions regarding gifting real estate as a means to pass along property prior to death and remove it from the estate.In theory it sounds good, but in many cases it does not accomplish what the giftor intended. Here are some things to consider before taking any action.When you gift real estate the person receiving the property inherits your tax basis and /or depreciation taken. So, if you paid 100K for the property and it is worth 500K, the recipient will owe taxes on 400K when they sell.If you are giving the gift to remove property from your estate, you have to realize you may have to pay gift tax. You have a maximum of 1 million dollars to give during the course of your lifetime without paying gift tax. Once that amount is exceeded, it is you who will have to pay the tax on each gift. (There is an annual amount of 12K that can be gifted to any one person without counting against your maximum lifetime gift amount)If you are trying to remove property from your es...
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Red Flags to Beware of From Your Advisors
2007-04-10 21:12:00
Tax time is drawing near. Never is the desperation more apparent than this time of year when panic sets in as April 15 (or 17th in 2007) fast approaches.I estimate 4 of every 5 phone calls and emails are from those filling out tax returns and learning of the exact amount of taxes they have due. Many panic from having had no guidance prior to the sale of their asset in the previous tax year, but just as many are irate due to having had bad counsel.In almost all cases, the amount they have to pay is much greater than they anticipated or were told. Most don't have the excess funds readily available and are desperately trying to find a way to defer their tax burden now due.So, I've compiled a list of some of the most frequent scenarios I hear and where the initial problem started, often due to bad or inaccurate advice.Consider these red flags if you find yourself selling an asset, and at least seek a second opinion before proceeding if you are told something similar.1. From financial ...
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Minimizing Sometimes Possible Even After the Sale
2007-04-03 01:36:00
Recently, I was presented with a fairly unusual scenario. A man in New York City was paid 500K as a buy out on a rent controlled lease. He'd been there 20 years and was one of only 5 tenants left in a building on prime land where the owners wanted to tear down the building and build a skyscraper.The buyout was actually considered as a long term capital gain, even though the tenant never owned the real estate. Money had already changed hands, so a taxable event had occurred. It was too late to defer capital gains tax, but not too late to minimize the tax burden due to the best extent possible and still have him meet his goals.Here was the plan I presented to him. His goal is to use the money to buy a primary residence, and the means is to do a Charitable Installment Bargain Sale using cash."If you pay your taxes, you'll owe a little over 25% of 500K or about 125K. So you either start with 375K left over and use that as a down payment on something or strategize for something better....
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Bad Advice Can Really Break You
2007-04-02 20:44:00
As I've said before, the calls I dislike the most are from those individuals that have already sold their asset and are desperately trying to figure out a way to reduce their capital gains tax.My business is not really driven by any particular event, such as tax filing time, but it is from February to April that a lot of people actually realize what their tax consequences are and panic.In most cases, it is too late to do much but pay the piper. The tragedy is, the money is not always there to cover the bill.A fellow in Florida sold a rental property last year at a nice profit. He had paid about 70K four years ago and sold for 800K. He owned it with another family member, and both had put quite a bit of money into fixing it up, and had taken out a number of high interest loans to finance it.His tax preparer had told them they would only owe 5% in capital gains tax, so they each set aside 20K for taxes. After paying off the loans (including a large balloon payment), they each had abo...
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Dismantling a Business Isn't Always Easy
2007-03-31 02:40:00
When people come to me to help them minimize their tax burden upon selling a business, they often don't have a clue what tax consequences await them.Every business is different, but here a some of the factors that determine how much tax will be owed. It can become quite complicated, depending on the business structure, the assets of the business, the parties involved in the sale, etc.What entity structure does the business have? C-Corp, Partnership, S-Corp, LLC, Sole Proprietorship, etc. Each entity is taxed differently with different rulesWho are the owners/partners/shareholders/members, etc. and how is ownership divided?What is the sale comprised of? Assets, inventory, real estate, client list, good will, etc.Will the entity be shut down on sale or remain intact?Do all of the partners agree on sales terms and goals?Will the sale be broken down by types of assets, or sold as shares of the company?If real estate, when was it purchased, how much debt is there, what is adjusted cost ...
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Special Q and A call Wednesday, March 14
2007-03-13 03:11:00
I'm doing a special Q&A call on Wednesday. It will be a lot of fun to just answer questions submitted by readers and subscribers.You will get to hear what others are concerned about and get caught up to date on all the current changes.Here's the link:Q&A Call Marc h 14, 2007Sign up, get the call in number and passcode and submit your question to be answered live.See you therePaula Straub760-917-0858Subscribe in a reader
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Beware the AMT tax trap
2007-03-08 18:46:00
I got most of my tax preparation done for my 2006 tax return yesterday. Yeah, it was a riot.I don't think anyone likes to think about tax time, but I for one do my very best each year to minimize my tax burden using all of the deductions allowed to me under current tax law. I don't want to give away more of my income/proceeds than I have to, or want to.Below is a link regarding the AMT tax trap that faces millions more each year. It has become a serious problem for middle class America. Fixing it will be extremely costly and difficult.Good article on the Alternative Minimum Tax DebacleI don't understand the mentality of "I'll just pay my taxes and be done with it". I face this a lot when potential clients decide tax planning is too much effort, or listen to their CPAs who also don't understand the value of planning and tell them it's easier to just pay the piper.But, it's not my money or my financial future. I can't worry more about it than the one who faces the dilemma. Jus...
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