Wednesday, December 20, 2006

How do you Treat the New Kid on the Block?

First, if anyone has sent a qualification questionnaire in the last 3 weeks and did not get a response- it was eaten up by the email goblins who sent it to a black hole somewhere. After receiving a call from someone who thought I just wasn't getting back to them as promised, I discovered the email program had decided to just completely break down. It is fixed as of today, and all is back on track. I really hate it when that happens, and it does seem to happen at least twice a year without warning for some reason no one can figure out.

The last few months have certainly brought major changes in the Capital Gains Tax Savings arena. It has become an ongoing evolution and is definitely to the benefit of the seller, as the problem has not diminished as far as the taxes owed if an appreciated asset is sold outright. Not everyone welcomes change, however, and as is all too common - change breeds controversy.

I have come up with an analogy that I believe will describe how different people tend to approach new concepts. It's just a fact of human nature I guess.

Here goes...

Let's say there is a neighborhood full of kids from different families. Some kids have lived there all their lives, some for quite a few years and some are fairly new. They may have some basic disagreements amongst themselves, but they pretty much are able to co-exist with the occasional argument or conflict.

Then a new kid moves into the neighborhood. He's a good looking fellow on the outside, but no one knows much about what he has to offer on the inside because he just showed up in town.

Some of the kids will be eager to shake is hand and look forward to getting to know him better. They'll invite him over, ask him questions and see if he fits into their crowd. They welcome new blood and hope the new guy can bring something positive into their lives. They make the effort right from the start.

Another bunch of kids will keep their distance for a while. They won't introduce themselves right away - they'll watch and see how he seems to fit in with the first group. If all goes well, they'll invite the new guy over when they feel more comfortable opening up. If they see that the first group really doesn't care all that much for the new kid after getting to know him better, they probably won't bother to make an effort later on themselves. They're the wait and see types.

Then there's a third group that is suspicious of anyone new right from the start. They don't want to get to know the new guy- they'd rather just assume he won't fit in and maybe will even make fun of him or try and trip him as he walks by. They're happy with their life as it stands and the group they already know. Plus, someone that good looking probably doesn't have much else going for them anyway, right? Who needs a new friend when they're just fine as they are. They are the nay sayers. It's easy to criticize right from the start.

Back to capital gains tax saving land. The new kid on the block is the Installment Sale Through a Foundation.

There are those who can't wait to find out all about it and how it can benefit them or their clients.

There are those who don't have much of an opinion yet either way. They'll wait and see how it's accepted over time.

And there are those who have taken a stand that they don't think it could possibly have any merit whatsoever- so rather than getting to know how it really works- they prefer to start calling it names and warning others to steer clear. There's got to be something wrong with it right? Even if they don't know exactly what that might be yet. Surely there's got to be something!

I happen to be a member of the first group. Whatever new strategy becomes available I want to be the first to find out all about it. I'll ask questions until I run out. If there is something that could be better, I'd rather ask what can be done to make it right? It's only then that I'll really know if the new kid is worth hanging out with and introducing to my other friends.

As a matter of a fact, so far I like him a lot. He's a work in progress but he has a whole lot more to offer than the kids throwing the stones, and, he's a lot more pleasant to be around.

I'll be launching my new educational product "The Definitive Beginner's Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax" just in time for the holidays. Stay tuned.

Paula Straub

Qualification Questionnaire (now working again)

Tuesday, December 12, 2006

My Pain is Your Gain

It's been a bit longer than usual since I've posted. This is mainly due to more great changes in the capital gains tax saving arena.

Ever since the Private Annuity Trust was discontinued, a lot of professionals have been working overtime to come up with better and better options.

The most recent (effective 12/15/06)is the best yet. Although each time a client can benefit more I'm jumping up and down, I've done a bit of personal grumbling as I have to constantly update my sites, posts and even postpone the launch of my new product- which was due out today.

The new strategy is an installment sale through a foundation, and the thing that has recently changed is the foundation itself. The reason is that the new foundation does all the things the other one did but returns more to the client because it contains costs at a more effective rate.

I'll be holding a special telecall next week to explain in greater detail,and I will be posting more as time allows. Just know that it gives you the maximum savings and return allowed under current tax law and beats the pants off of the other choices out there (except the 1031 exchange for investment real estate).

I also hope to launch my "Definitive Beginners Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains" before the end of December. It's undergoing last minute revisions so the information is brand new and relevant.

I'll keep you posted!
Paula Straub

Qualification Questionnaire is available to find out what strategies you qualify for.
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Tuesday, November 28, 2006

The Best News to Date for Capital Gains Tax Savings!

This is so awesome!

You may have heard the saying "when one door closes another
one opens". I believe this has truly been the case regarding
recent developments in the capital gains tax savings arena.

Initially, when the Private Annuity Trust was discontinued by the
IRS I hoped they would come to their senses and bring it back

Now, with the option that has just become available as I write
this, even if they brought it back tomorrow, I don't think it even
compares in benefits.

If you could sell your asset, get an immediate charitable
deduction, have a decent portion of your capital gains tax
obligation forgiven forever, possibly have your closing costs paid
for, receive a guaranteed series of payments with principle and
interest over a number of chosen years, have the asset removed from
your estate and the remainder still pass to your heirs on death,
and your favorite charity receive money to boot- would that appeal
to you?

If not, quit reading now and pay your taxes. It's that simple.

Combining tax law from IRS codes 453, 1011 and 503C- the structured
sale through a foundation has been born.

Do yourself a huge favor, and don't even think of selling your
asset before you see how this will maximize every legal tax benefit
in existence.

I am devoting a Special Teleclass this Thursday to go over the
concept in more detail and answer questions.

Believe me, you don't want to miss this. You may
not only be the first one on your block to know about this, but the
first one in your entire city or state!

If you're not on one of my mailing lists, send me an email for the link to sign up.

Can you tell I'm excited? I'm over the moon!

Talk to you soon,

Paula Straub

Wednesday, November 22, 2006

Thanksgiving Wishes and Thanks

I believe it's a good idea to just take a day and be truly grateful for whatever blessings that we do have in life.

Thank you for giving me the opportunity to educate you and to keep you up to date and informed on the latest capital gains tax strategies. I so appreciate whenever you take the time to send an email or chat in person.

There have been a great deal of changes on the tax front this year, and most have been for the good once the dust has cleared. 2007 promises to be an even better year for helping clients hang onto more of their profits.

I am personally thankful for surviving a "No Change" IRS tax audit this week. All I can say is that it pays to follow all the IRS rules and to keep good records and documentation!

Even though I did things correctly, I spent many hours preparing all of the documentation requested and dreading the unknown. I don't wish this experience on anyone, but you honestly don't know when your number will come up during the "random" audit selection process.

If you don't know what you need to do when filing taxes, be sure and hire someone competent who does. You too will be thankful when everything is picked apart with a fine tooth comb and they go away satisfied.

Have a great Thanksgiving Holiday.

Paula Straub

Wednesday, November 15, 2006

Part 3 of 3 - Origin of the Insured Structured Sale

Part 1 covered the basics of an Installment Sale. Part 2 explained the concept of a Structured Sale. Part 3 will now go over how the combination of the first two concepts has become the Insured Structured Sale as it exists today.

Using the example of a 500K sale of real property, here’s how the Insured Structured Sale might work.

Assume this property is owned free and clear. A buyer is found and an agreeable sales price is determined (500k).

Prior to close of escrow, an Assignment Company meets with the buyer, and the buyer assigns the obligation for making payments totaling the sales price to the seller. The buyer pays his 500K to the Assignment Company and his sale is complete.

The Assignment Company now enters into a contract with the seller to make payments to the seller over a certain amount of years at an agreed upon interest rate.

Capital Gains Tax and recaptured depreciation is deferred, and paid back in small chunks as payments are received.

It is at this point the Insured Structured Sale is differentiated from the Structured Sale described in Part 2.

The Assignment Company now is obligated to make the agreed upon payments. They will in turn back their obligation with quality commercial annuities, but they are not obligated to purchase any particular product, nor does it have to be a Single Premium Immediate Annuity.

This is important, because with the range of annuities on the market today with principle guarantees and living benefits, as well as better liquidity, it gives the Assignment Company the ability to be much more flexible with the Sales Contract, making the terms much better for the seller.

Each case can be viewed individually and the best product for each unique situation can be utilized. Age, length of term, income needs, liquidity needs and growth factors can all be taken into consideration.

Since the annuity will not actually be annuitized, any remaining assets will pass to the heirs upon death.

The seller is not locked into a low interest, non-flexible product for the duration of the contract term. He is assured that all monies will be returned to him and/or his heirs with interest over time. There can even be provisions made within the contract to revisit the terms at benchmark dates and possibly revise the contract for purposes like inflation rates, etc. depending on the asset performance.

The fees involved are on a flat fee basis, no matter what the amount of the original sales price.

These are just the basics of this new strategy, and more examples will follow as cases unfold.

It is also important to note, that to the best of my knowledge only one Assignment Company offering this option exists at this time. Over time, you may see others follow.

The Insured Structured Sale really is a good alternative to the Private Annuity Trust, and in some cases, if the PAT is made available again in the future, I believe the Insured Structured Sale may still be the choice of many with Capital Gains Tax concerns.

I’ll keep you posted.

Paula Straub

ps. Find out if an Insured Structured Sale can benefit you. Fill out the Qualification Questionnaire and get a confidential and timely personal response.

Tuesday, November 07, 2006

Part 2 of 3 - Origin of Insured Structured Sale

Part 1 covered the basics of an Installment Sale. Part 2 will explain the concept of a Structured Sale. Part 3 will then explain how both the Installment Sale and Structured Sale have led the way for the Insured Structured Sale.

Let's say we are selling a piece of real estate for this example. A buyer is located and a sales price negotiated. Instead of the buyer making payments to the seller over time, the buyer can assign his obligation to make those payments to an Assignment Company.
The buyer effectively gives the sale proceeds in a lump sum to the Assignment Company, who in turn agrees to make payments back to the seller over a certain period of time and at a specific interest rate. Thus, the risk is transferred to the Assignment Company and away from the seller.

The seller only has to pay capital gains tax on the amounts he receives as principle as he receives it in the payments from the Assignment Company. He has no access to the bulk of the money, so no constructive receipt has happened.

Until very recently, the only Assignment Companies offering structured sales were owned by large insurance companies. The Assignment Company re-insured itself by investing the funds into a Single Premium Immediate Annuity with the associated insurance carrier. The annuity was then annuitized over the length of the contract and payments were made from the insurance carrier directly to the seller via another agreement.

The interest rates of an immediate annuity are fairly low, but the payments are insured by the carrier. If you chose the lifetime payout option (which would have the highest monthly payment), whenever you passed away whatever money had not been paid out to you was kept by the insurance carrier.

Again, this option is still available and can be used to spread out the payment of capital gains tax.

Part 3 will discuss a newer and more flexible version of the Structured Sale. It takes the good parts of the Installment Sale/Structured Sale and improves on some of the downsides as well.

Paula Straub

p.s. If you need to determine how much you can save in capital gains tax, fill out the Qualification Questionnaire and get a quick and confidential personal response.

Wednesday, November 01, 2006

Part 1 of 3 - Origin of Insured Structured Sale

I thought it best to break down how the Insured Structured Sale has come into being into a 3 part article. I think it will give you a bit of insight on just how powerful a concept it actually is, and that it is a great alternative to the Private Annuity Trust, which is currently unavailable for use, as of 10/18/2006 until further notice.

In this article, I'll give the basics of an Installment sale which follows IRS guidelines, section 453. It is not my intent to go into IRS code specifics here or technical jargon, only to relay the concepts to make them understandable.

Part 2 will feature the basics of the Structured Sale, and Part 3 will show how both Parts 1 and 2 have emerged into the Insured Structured Sale.

In its basic structure, and I'll use real estate as an example, the Installment Sale is basically an agreement between the buyer and the seller for the buyer to make payments back to the seller over a stated period of time, with a specific interest rate until the agreed upon sales price has been fulfilled.

For example, the seller sells a property for 500K to a buyer. Instead of the buyer getting a mortgage or paying cash for the 500K, he/she agrees to make monthly payments over say 30 years to the seller at 6% interest rate. The seller is effectively the bank.

The seller only has to pay capital gains tax as he/she receives portions of the principle in payments, thus spreading out the tax obligation over a number of years. That is the upside.

The downside might be if the buyer quits making payments, or refinances the obligation. In this case the seller either has to take legal measures and possibly get the property back after time and expense, or receives a lump sum which causes all remaining capital gains tax to be due.

There are all sort of variations on this example, but hopefully you get the gist. This option is still available, but for a person setting up their retirement, it may be too risky.

Next, in Part 2, I will explain how the risk can be successfully transferred via a Structured Sale, but the reward my be less than ideal.

Paula Straub

ps. I welcome your questions and comments. If you can't wait for Parts 2 and 3 give me a call and I will give you the details. 760-917-0858

Tuesday, October 24, 2006

Insured Structured Sale as PAT Alternative

I want to invite you to a special teleconference this Thursday, October 26th to learn about an exciting new alternative to the Private Annuity Trust.

As I stated in my last post, the PAT was discontinued until further notice by the IRS on October 18, 2006.

The Insured Structured Sale is a very effective capital gains tax saving strategy. I will be discussing the features and comparing it to the Private Annuity Trust.

It is cutting edge information that you must learn about if you or anyone you know has a capital gains tax issue.

Please go to this link and register now. Sign me up for the call.

I look forward to cluing you in to your new alternative.

Paula Straub

Thursday, October 19, 2006

Breaking News Regarding the Private Annuity Trust

On October 18, 2006 the US Treasury Department issued a new proposed regulation regarding private annuity trusts.

It is reg 141901-05. It has not been published yet, but will be very soon.

For the time being, Private Annuity Trusts have been discontinued for use. We believe it is due to the number of PATs which were improperly structured, funded, and administered.
In many cases, close relatives were made trustees and this brought into question the "hands off" intention of a non-grantor trust.

The investments and borrowing practices in some of these trusts were also improperly and imprudently handled.

In many cases the trusts were not properly set up, filed, and the tax returns required were either not filed as necessary or were filed in error. This was mostly due to non-professionals handling the details and not knowing what was required.

For years, the trust company I represent has requested the IRS establish clear guidelines to prevent this type of abuse. It now seems this may be in the process of happening, but unfortunately, instead of publishing guidelines first, the IRS decided to discontinue the PAT until further notice. There will be a hearing on the proposed regulation on February 16, 2007.
As you can imagine, there are many attorneys working on alternate solutions to this sudden ruling.

The Capital Gains Tax Problem still exists for thousands of people and businesses. This need will only continue to increase and there are still solutions and strategies available to implement.
The current momentum is that we are working on variations of the Charitable Remainder Trust. It has always been one of the options and now it is more important than ever for capital gains tax savings.

The 1031 Exchange and 1031/TIC Exchange are also powerful concepts that continue to grow exponentially in monies invested.

It is my personal opinion that the PAT will be back. I can't say when, or what guidelines it will have once it is re-instated, but there are over 70 years of tax laws supporting its use and value.
It seems, once again, that some people and professionals pushed the envelope too far and took advantage of the intent of the Private Annuity Trust. Let's hope if and when it does come back, it will have the same great advantages, but will also prevent blatant abuse by less than "trust worthy" parties.

I will be updating you as information becomes available.


Paula Straub

ps. If you have questions you would like to see addressed, please email them to me at

Wednesday, October 18, 2006

There is a reason for IRS time lines in 1031 Exchanges

For a 1031 Exchange, be it a straight 1031 or a 1031 Tenant in Common Exchange, IRS dates need to be observed.

Not only for strict tax purposes, but for practical reasons as well.

Once paperwork is filed with a Qualified Intermediary prior to close of escrow that a 1031 exchange will be made, one has 45 days from the date of close to identify property(s) that one intends to purchase.

If there was some way to "fudge" this deadline (please don't ask me how because it is definitely nothing I advocate and would definitely advise strongly against) here is what could happen.

Besides having your exchange disqualified (if the IRS found out somehow you didn't follow their rules) you run the additional risk of having your 180 day close of exchange sale deadline missed.

If you do not complete your exchange within 180 calendar days from date of property close, you will pay capital gains tax - no questions asked.

This seems like plenty of time, right? It usually is. Fluke twists of fate do happen. Financing falls through, mistakes are made through no fault of yours, and the consequences are ugly.

Moral: Stick to the rules. They are there for a reason. Bad things might happen if you think you can "beat the system"

Paula Straub

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Thursday, October 12, 2006

An Unexpected Surprise and Potential Capital Gains Tax Nightmare

You might think of bonds as a pretty safe long term investment. If you're not familiar with the different type of bonds out there, you may think of ordinary government saving bonds or Treasury bonds.

I spoke to a gentleman this week who had exchanged a real property for a type of tax free industrial bond several years ago. It was done as a structured sale with a non-profit organization, and the return rate was actually very good and supposed to last for 13 years. He was paying a bit of principle back each year, but most of his income was from the bonds and non-taxable.

Then came the nasty surprise. After only a few years, the bonds were being "called" by the non-profit organization. They had gotten a new bond issue for more than 3% less interest, and it was in the original agreement that they could replace or pay out at a date sooner than the original bond termination date.

Well, now this gentleman was no longer in such a great position. If he sold outright, he would pay 30.5% in taxes. If he allowed his bonds to be replaced, he would lose a good portion of his tax free income, and the new bond issue was backed with "shaky" projects. He could actually lose much more if not all of his substantial investment in the future.

In this case a Private Annuity Trust will suit him well. It will give he and his wife a substantial lifetime income. It will spread out his tax burden over the next approximately 26 years. He will be able to borrow back a portion of his investment through a loan agreement within the trust, and it will remove this property from his estate, so that his heirs will not be faced with a large estate tax burden when he and his wife pass away.

His attorney and CPA were not familiar with the PAT. This situation is all too common, and can place a party in a bad situation if the advisors they count on are not aware of effective capital gains tax saving strategies. In this case, I hope to educate all involved and turn this "unfortunate surprise" into a much more tenable situation for everyone.

Paula Straub
Educate Yourself on Tax Saving Strategies

ps. Fill out my Quick Questionnaire to Find out if you are a good candidate to save Capital Gains Tax

Tuesday, October 03, 2006

New Site for Real Estate Investors

I have just launched a new site for Real Estate Investors wishing to learn about Capital Gains Tax Saving Strategies. It is located at the link below


You can sign up for a free report and be kept up to date with case studies and current news on how to structure your sales so that you will not owe huge amounts of capital gains tax when your highly appreciated property is sold.

Whether you are new to the Real Estate Investing game, or an old hat- don't lose your hard earned money.

Give me a call if you have any topics you'd like to see me cover or subjects for future articles and posts.

Paula Straub
Real Estate Investors Resource Guide

Monday, October 02, 2006

Capital Gains Tax Strategies Require Action

I spoke to a couple of people this past week that wish not to pay their capital gains tax, but they don't want to put any effort into the strategy on their end.

For example, a woman in her 70's is selling investment property. It is in escrow. She doesn't want to own another investment property but also doesn't want to consider doing a 1031 TIC exchange, a Private Annuity Trust or a Charitable Remainder Trust. The reason being she's just tired of the whole thing and doesn't want to do anything she hasn't heard of before.

Ok, that's great, but if she'd heard of any of these things and was familiar with them, she probably would already have put one of those strategies in place.

I wish I had a magic pill that would allow you to save all of your capital gains tax without any effort on your part. If your mind is closed to learning new concepts, I guess paying your taxes is the best option for you.

This particular lady will owe 100K if she just sells. She is retired and will never be able to recoup that money during her lifetime.

If this was my mother, I would encourage her to learn all she can about what her options are, and bring me, her tax person, attorney, or any other party she trusts in to help her understand and make her choice.

It really comes down to this. How important is 100K or whatever your amount of tax owed is to your future income stream and legacy.

If you won't miss it, then by all means give it to the IRS. They are happy to take all they can get. Just don't complain later because you didn't make the effort to educate yourself.

Paula Straub

ps. Call me for your free consultation and know what your options are. (760)917-0858

Wednesday, September 20, 2006

Are Private Annuity Trusts Being Challenged by the IRS?

Does the IRS challenge Private Annuity Trusts? Of course they do.

Does that mean you shouldn't have one if it is in your best interest? Of course not.

The key here, like with anything, is to have it set up, funded and administered properly according to IRS tax rules. If it's done right, it won't be challenged.

What are some of the red flags that trigger IRS challenges? Here's a few. These are all things done by parties trying to "bend" the IRS rules to suit their individual or joint purposes.

1. If setting up the trust can be viewed as "Constructive Receipt". This basically means, the trust was thrown together at the last minute for no other purpose than to avoid paying capital gains tax. If done while in escrow, there needs to be evidence of contingencies of sale not yet met when the trust is created.

2. The funds are invested in volatile investments which show losses in annual tax audits. The funds are supposed to be invested in prudent vehicles so that the trust has enough funds to satisfy the payment schedule to the annuitant set up when the trust is established. Advisors and some family member trustees may see this as a place to gamble with the investments- not keeping in mind their fiduciary responsibility to the annuitant.

3. There is evidence that the annuitant is controlling the investments within the trust. The PAT is a non-grantor trust. The annuitant can have no say in how the monies are invested once the trustee is overseeing the funds. This isn't to say that the annuitant can't fire the trustee for mismanaging his funds, but he or she can't be calling up the trustee and telling him/her when to buy or sell assets within the trust.

4. The trust documents were not prepared and filed properly. This can happen when an attorney not familiar with the PAT draws up documents without the proper language, or doesn't follow proper federal filing procedures.

5. The trust's annual tax returns are not filed properly or on time. The trust is now its own entity and must file an annual return.

These are just a few reasons the IRS might challenge a PAT. In most cases, they should be challenged if someone did not do their job properly.

The future annuitant should work with experienced professionals who are fully aware of all aspects of the trust, the tax laws, and the financial and administrative details as well.

There are always a few bad apples that spoil the image of a perfectly good tax strategy and the sooner they are removed from the field the better.

Paula Straub
Free Report - 7 Secrets to Help You Hang Onto Your Capital Gains
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Monday, September 11, 2006

Forgiveness of Debt is a Taxable Event- Whether you like it or Not :(

A fact that not many people realize, even tax professionals and attorneys, is that paying off a mortgage at time of sale is a taxable event. The IRS considers it "forgiveness of debt".

Many people think that because they owe 200K on a 500K sale, their gain is only 300K. But, if they bought the home for 100K, their gain is 400K and this is the amount that capital gains tax is due on.

They usually say, "but I don't own the mortgage, the bank does". True, but you have had use of this money and the gain it acquired along the way.

If you have borrowed against the property with a second mortgage, or line of credit, you may have what's called a mortgage over basis problem. This is when you owe more on the home than what you paid for it.

What this means is that a TIC or a PAT might not work for you, as you have too much debt and not enough equity.

This is another reason to carefully plan an exit strategy when investing in real estate.

Paula Straub

p.s. My Qualification Questionnaire is functioning again. I didn't realize it was broken (and no one can seem to figure out how it got that way), but a new version is up and running at

Wednesday, August 30, 2006

FAQ- Can I control investments within a PAT?

The short answer is "no". This PAT is a non-grantor trust. The trustee (who cannot be you or your spouse) is responsible for investing the funds. The responsibility of the trust is to make the agreed upon payments back to you for the entire amount of time it was set up for.

This concept seems scary for some, as they are used to complete control over how their assets are invested. This is understandable, but should become comfortable if the proper steps are taken to protect your investments. You do have some input before the trust is created.

Although some advisors tout volatile investments such as stocks and mutual funds, caution should be taken with this approach. Just as these vehicles offer a large upside, they also have the possibility of major loss. Your trust could run out of funds and be unable to complete the payments due you.

Once you begin receiving payments from the trust they are fixed. The rate used to calculate your payments is the Federal MidTerm Rate. Even if the trust funds make more than this rate of interest, your payments don't vary. The extra money in your trust can continue payments to you if you outlive the IRS guidelines or pass to your heirs.

The PAT is not the place to speculate with volatile investments.

No two situations are identical, so there is no hard and fast rule for a specific investing strategy.

Common sense and a fair degree of conservatism are good ways to approach the trust investment strategy. Ideally, you should be able to sleep well at night knowing the trust will be able to meet the commitments it was designed for.

Paula Straub
Capital Gains Educational Resource
Free Report - 7 Secrets to help you hang onto your Capital Gains

Tuesday, August 22, 2006

$1 Gain can Trigger 20K+ Tax Bill - Really

Something very similar to the example in this article below by Robert Sommers happened to a woman I talked to last week. She bought her first investment property to fix up and sell at a profit. When she put it up for sale the market softened. She was carrying a $5500./mo loan and could only rent it for $2500./mo. By the time she lowered the price and paid realtor fees and was hit by the 3.3% Franchise tax, she owed over 16K at time of sale. She didn't have the money. I was unable to help. All this could have been avoided had she had the proper education before entering into the transaction.

Get the Capital Gains Tax Resource Now if you are in a situation that could come back to haunt you.

Be sure and read the highlighted parts.

THE TAX PROPHET: Hot Topics: April, 2004
New California Franchise Tax Board (FTB) Withholding Rules
Part 1 of a 2-part series

Faced with unprecedented fiscal woes, the State of California is taking strong measures to ensure that those who receive income from property located within the state pay their taxes. California has instituted a wide-ranging withholding regime on income emanating from California sources and paid to non-California residents - regardless of whether the owner is an entity or individual. These new rules ensnare out-of-state landlords and property owners receiving non-residential rents and royalties on the use of their California property, and the compliance burden falls squarely on the backs of property managers.

New rules also apply to the sale of California real estate by resident individuals. A person living in California and owning a vacation or second home, commercial or investment property, should be prepared to pay 3 1/3% of the transaction value as a withholding tax when they close escrow on a sale. It is estimated that as many as 300,000 transactions will be affected by this new law.
Rents Paid to a Non-California Recipient
The New Income Withholding Rules
The California Franchise Tax Board (FTB) now requires that when making payments to non-California resident owners for rents paid in the course of lessee's business on California property, agents must withhold when distributions exceed $1,500 for a calendar year. This new procedure is required when distributions of California source income are made to nonresident beneficiaries. To avoid this rule, the withholding agent must receive authorization for a waiver or a reduced withholding rate from the Franchise Tax Board.

The withholding rate is 7% of gross rent or royalty payments made to California nonresidents. Although withholding agents are not required to notify nonresident payees about the withholding, agents should warn them anyway to avoid anger and surprise when funds are withheld from expected payments.

Types of income subject to withholding include payments of leases, rents and royalties for property (real or personal) located in California, and include not only payments to non-resident individuals, but also to corporations, limited liability companies, and partnerships that do not maintain a permanent location in the State. Withholding is required when all of the following conditions are met:

Payments on rents or leases must be made in the course of the lessee's business; (Tenants of residential property are not required to withhold on payments made to nonresident owners);
The rented or leased property must be located in California; and
The total payments in a calendar year must exceed $1,500.

Remember: Withholding only applies when the rent-payers are renting or leasing property from a non-California owner in the course of their business. Thus, payments by residential tenants are excluded. An agent who manages a purely residential building will have no withholding requirements with respect to rents received from that building, but an agent who manages properties containing one or more non-residential tenants must withhold on rents paid by those tenants. Therefore, the withholding obligation is determined on a building-by-building, unit-by-unit basis.

New Rules Regarding Withholding on Sales of Real Property

Effective January 1, 2003, individual taxpayers, regardless of residence, who sell California real property, including vacation homes (or any residence not considered their principal residence), business and investment real estate, may be subject to withholding. Buyers are now required to withhold 3 1/3% of the total sales price on any purchase of California real property over $100,000, regardless of the amount of actual profit, unless the property is -
A principal residence as defined in the Internal Revenue Code (IRC);
Involved in a tax-free exchange (although cash received in the exchange will be subject to withholding),

Subject to an IRC Section 1033 involuntary conversion, or
Involved in a foreclosure (but not a sale by the debtor in lieu of foreclosure).

To illustrate the reach of these withholding requirements, consider the sale of a vacation or rental property located in California for a total sales price of $650,000. The buyer must withhold $21,645.00 and pay that amount to the FTB immediately - even if the taxable gain is merely $1.00. To actually owe the $21,645.00 in state taxes, the seller would need a $232,742 profit (assuming a 9.3% tax bracket).

This disparity is akin to over-withholding on salary - a person is entitled to claim it as a refund, but they must wait until the following year to file their tax return. Unfortunately, if someone owes child support or taxes to IRS, California or another state, their refund may be used to offset those liabilities and they could receive nothing. Note: Oversized refunds could trigger federal Alternative Minimum Tax because state income and property taxes are not deductible under the AMT.

Because FTB retains the amount withheld until the taxpayer files for a refund in the subsequent year, those selling property at the beginning of the year will lose the time-value of the monies withheld for the entire year. In effect, the taxpayer is forced to make an interest-free loan to FTB for this period.
Also, transactions in which the seller receives little or no proceeds may fall through when the withholding tax is factored into the deal.
Example, assume that a taxpayer sells property for a total sale price of $300,000, with an adjusted basis of $100,000. The taxpayer will have a taxable gain of $200,000 upon sale (assuming no costs of sale). If the debt on the property is $300,000, then the taxpayer will walk away from the deal without payment. Under the new withholding rules, there needs to be an additional $10,000 paid to FTB ($300,000 gross proceeds x 3.33% = $10,000). This is true even if the taxpayer has sufficient losses from other transactions to offset the taxable gain on the transaction.
Note: Taxable gain is measured by the adjusted basis in property, not by the amount of debt owed - thus, sellers may receive no money from a transaction and still owe taxes.
As illustrated above, equity-thin sellers, when they discover that 3 1/3% of the sales price may be withheld, may attempt to back out of sales - possibly triggering lawsuits in the process. Other sellers may manipulate the sales process by re-titling property in the name of a single-member LLC, S Corporation or other entity that would be exempt from withholding.

Caution: Transferring the property to an entity to avoid withholding tax could trigger severe adverse federal and state income taxes, depending on the entity chosen and the property involved. For instance, transferring property to a C corporation could subject the gains to regular federal corporate tax rates, rather than favorable long-term capital gains rates. Also, efforts to deliberately defeat the withholding requirements through a sham transaction could subject the taxpayer to additional penalties, or worse.

All contents copyright © 1995-2004
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.

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Paula Straub
Paula's Main Informational Site

Wednesday, August 16, 2006

If it sounds too good to be true, Change tax professionals

Let me pose a scenario and see if it sounds a bit too good to be true.

Sal makes 15K per year at his job. He owns a rental property he purchased for 100K five years ago and is selling today for 600K. Let's just say his capital gain including all improvements, depreciation, and after all costs of sale is 450K. (I'm keeping it simple for this example)

Sal goes to his local tax person, and this guy tells Sal that since he is in a low tax bracket (his income spans the 10-15% federal brackets) he will only owe 5% to the federal government in capital gains tax on his 450K gain. After all, capital gains are not considered ordinary earned income, and the 15% rate kicks in at the 25% and above Federal bracket.

[For illustration purposes, I am not even bringing state, city and certain withholding taxes or depreciation recapture into this example.]

The tax guy proceeds to tell Sal that he'd be crazy not to just sell and pay his taxes because the rates are currently so low that to defer them into the future- he will most likely be stuck in a higher tax bracket and pay much more in later years.

"Wow" says Sal, "That does sound like the best option. 5% is nothing really when all is said and done. Thanks, Mr. Tax Man, I think I will just sell and pay my taxes now."

That scenario does sound pretty good, right? You never thought Uncle Sam would be so generous. It is also a scenario I hear all the time as having been told to clients.

So, with that logic let's take it a step further. Let's just say I owned a million dollar building free and clear. I wanted to sell, but didn't want to pay 15% Federal Capital Gains Tax (150K). As a self-employed person I make 100K per year. If I stopped making income for a year, I'd be in the 0% tax bracket, so I'd only pay 5% Federal Taxes on that million dollar sale (50K). Effectively, I could take a year off, and still enjoy the 100K tax savings by doing so, and I wouldn't even have to pay income tax on that 100K! Yipee, I'm off to Tahiti!

OK, I'm trying to make a point here. Uncle Sam is not that generous or that gullible. This is not the way the capital gains tax calculation works, unfortunately. Sigh…

Let me show you how the federal calculation would go, reverting back to Sal's situation.

The first $7550.00 of Sal's income is taxed at 10%, the next $7450.00 is taxed at 15%. This makes up the 15K/year Sal earns as ordinary income.

Now his gain was 450K. The first $23,200.00 of that 450K gain is taxed at 5% capital gains rate. You see, although the gain is not ordinary income, it is considered towards Sal's gross income and sets his tax brackets. At $30,651.00 and above, Sal now enters into the 25% and above Federal Tax Bracket. So, the rest of the 450K gain ($426,800) is now taxed at the maximum long term capital gains rate of 15%.

So, instead of owing $22,500.00 (450K x 5%) to the feds, Sal will owe $65,180.00 to the feds ($23,200 x 5% plus $426,800 x 15%).

That's a difference of $42,680.00 and a heck of a shock if you weren't expecting it after you sell your property!

Don't get me wrong. There are a lot of good, qualified, capable professionals out there who do understand how capital gains tax is calculated. But I'm willing to bet for each one, there are another 3 who do not understand or simply misunderstand. They don't come across enough of the above type situations and give bad advice and counsel.

It comes back to the analogy that when you need brain surgery you don't go to a general practitioner to perform it. Find an experienced professional who handles this type of calculation on a regular basis. Get all of the facts before you make any decisions.

And, don't despair. The Capital Gains Tax strategies you do have available are still very powerful and are sanctioned by the IRS. They won't give away the farm, but they will help you plant crops for your future!

Remember, if it sounds too good to be true…that's right - it probably is.

Paula Straub

Monday, August 07, 2006

Successful Woman, Successful Business Sale

One of my girlfriends is selling her auto mechanic shops. Yeah, a woman who owns more than one car repair shop. She has about three, locally, and is getting rid of them all. On the one hand, it's kind of sad to see a woman-owned business drop out of a male-dominated field - especially one that's so successful. On the other hand, I'm happy for her because she'll make a bundle. I've given her a few planning tips to avoid having to pay all of the capital gains tax on the sale, and I'm sure other business owners could benefit.

First, consider her situation. My friend is young, in her mid-forties. Also, she is divorced with two kids - one in her second year of college, one who will graduate from high school next year. She probably won't retire and do nothing, but I think the chances of her ever punching a clock again are slim to none. So, long story short, she'll need a good, steady stream of income for a long time.

The answer to this question lies in how the sale is structured. One option a person could have in this type of situation is to carry back the financing of the sale. This means that the buyer of my friend's business would make payments directly to her. I don't think this is a good idea, and fortunately, neither does she. Basically, it means she gets out of the auto repair business and into the debt servicing business. Like I said, I don't think she's going to retire, but I don't think she wants to spend her days chasing checks. Besides, the point of having and then selling the business is to secure her future, not to sit around wondering if she's ever going to recover the value of her business.

To minimize headaches and maximize her income stream, she needs a large sum of money that she can put to work for her. My friend will get this large sum of money, as most people do, through third party financing. Some bank will pay her the purchase price, and the buyer will pay the bank principal and interest over time. If she gets a corporate buyer, they may be able to skip the financing altogether.

Of course, just getting a bank to hand you a lump of cash isn't structuring. Besides, she would immediately owe a ton of money in taxes - money that would be gone forever. There's more to be done, mostly, I think, setting up a private annuity trust and selling the business through it. It's a really good option for her, and most successful business owners, for three reasons: 1) it allows her to defer all of the capital gains tax until she begins taking payments from the trust, and, even then, the tax burden is spread out over the course of those payments; 2) she can get the proceeds out of her estate, so that it passes to her kids estate, gift, and generation skipping tax free (they will pay income tax), and it passes to them in trust, if she wants it that way; and 3) she gets a stream of income to support her and her kids for the rest of her life or over however many years she chooses to receive it.

It works like this. She sets up the trust and then places the business in it. The trust sells the business, and then invests the proceeds in whatever other investments are appropriate. The trust then makes periodic payments to my friend out of the principle and income of the investments. There is no tax on the sale to the trust because the trust has technically purchased the business at fair market value (that's why it's making payments). The transfer of the business to the trust isn't taxable, but part of the payments she receives from the trust will be taxable as capital gains, income, and recapture of depreciation. Of course, part of the payment will be non-taxable return of capital.

She can only get these benefits if the trust has certain provisions in it. The trustee of the trust must be independent of her, meaning she can choose whoever serves, but that person is not beholden to her. She cannot have any control over the assets in the trust or how they are invested (though she can give a little informal advice from time to time), and the annuity itself cannot be secured in any way.

I'm sure the sale of my friend's business has more capital gains lessons to reveal. I'll follow the sale and let you know if there's anything interesting you should know.

Paula Straub See my Brand New Site

Monday, July 31, 2006

Beware of some CPA and Attorney Recommendations

I am a great believer in working closely with competent CPA's and Attorneys. As a matter of fact, many times it is an absolute necessity. To complete a good Capital Gains Tax Saving Strategy, the Financial Advisor, CPA and Attorney should all be in harmony so that you hang onto as much of your money as possible.

That said, an incompetent or unknowledgeable professional can really cause you great financial harm. Just because someone passed their CPA exam or Bar exam at one point does not make them capable of knowing everything about capital gains. A good professional will either admit to their lack of knowledge, or take the initiative to do the proper research to bone up on the subject. You may have to pay for their research time, however, as most do nothing for free.

Case in point. I have a client in the mid-west. She has been having great difficulty finding a good tax professional in her area (fairly rural). She needs a good professional, as we are considering doing partial 1031 exchanges with her property. The first person she called told her she had no options but to pay taxes on sale.

I set out to find her someone that knew what they are doing. I contacted a "find a good CPA" type of site and told them what I was looking for. They gave me a name and I called them. The fellow seemed to be on the same page, so I had him contact my client.

I then got an email from my client. Someone from his office had contacted her. She told my client she was knowledgeable and preceded to give my client blatant incorrect tax advice without knowing what she was doing or taking a complete financial workup.

I called the CPA I talked to and relayed what the "assistant" said. He promised to contact my client and straighten out the misunderstanding. Then, much to my dismay, he contacted the client and gave more wrong information!

I am not a CPA or licensed tax professional. I can go to the IRS website to verify information I am forwarding, however. I preceded to find the correct information and email it in writing to both my client and the "tax professional".

Needless to say, my client will not be using this particular CPA. What a complete waste of precious time and energy, however. This is exactly what I was trying to avoid in the first place.

I have had very similar experiences with attorneys. They may be great at some things they do on a regular basis. However, many will not do their research on something they are not familiar with before dismissing it out of hand. This is a disservice and can cost you a huge sum of your proceeds.

The moral of this story is: make sure you are consulting with experienced and knowledgeable professionals for this special capital gains niche market. I have found that if all parties are on a conference call, the correct information can be discussed, and if there are conflicting opinions, everyone involved can produce the correct information from a qualified source and disburse it to all parties.

A professional team is crucial when implementing a capital gains tax strategy. Don't take the advice of someone who dismisses something out of hand without giving specific reasons to both you and the party recommending the strategy.

If you need brain surgery, you wouldn't go to a general practitioner would you?

ps. My brand new website I've been talking about went live today. Please check it out and let me know what you think.

Paula's new site

Paula Straub

Tuesday, July 25, 2006

Planning for Our Futures

Whether it's Capital Gains Tax planning, or just plain financial planning, the bottom line is just to start. Below is a good article from the news. The moral of the story is Just Do It!

Got a plan for your retirement?: NML speaker says it's more crucial now

Milwaukee Journal Sentinel, The (KRT) via NewsEdge Corporation :

Jul. 24--About 76 million baby boomers are headed toward retirement over the next three decades, and many of them are simply drifting there without a plan, says Lee Eisenberg.

"It's human nature that people don't like to think about getting old," said Eisenberg, a former Lands' End executive who wrote a bestselling book about retirement, "The Number." "When you're in your 30s or 40s, or even your 50s, you do everything in your power very frequently to deny the inevitable, which is that you are going to get old, and that there may not be too many institutions or people out there to take care of you."

But people need to take a look -- the sooner the better -- not only at how big of a nest egg they'd like to have, but also at what kind of retirement they envision, said Eisenberg, who will speak Wednesday to thousands of Northwestern Mutual Life Insurance Co. agents in Milwaukee for their annual meeting.

There has been a transition during baby boomers' lives that Eisenberg calls "the new rest of your life" instead of the old way of viewing retirement.

"Basically, it has to do with going from a former system in which there were very stable, really predictable support systems in place -- namely corporate pensions and an unquestionably secure Social Security system -- to the new rest of your life where each of us basically is responsible for ourselves," he said during an interview from his Chicago home.

Eisenberg said that when 401(k) retirement plans came into existence in the early 1980s, "a lot of people didn't see the handwriting on the wall" that their employers and the government weren't going to take care of them when their careers ended.

"When it was introduced, there was no big press release that said, 'Guess what? All the retirement funding rules are now dramatically going to change and you better somehow get on the boat and make sure that you are doing what you can individually to take care of your future,' " Eisenberg said.

At the same time, boomers have been coasting through an unprecedented period of low inflation, and easy credit has made them splendid consumers but not-so-good savers, he said.
"As a result, a great many people now are finding themselves unprepared," said Eisenberg, an editor at Esquire and Time magazines before joining Lands' End in Dodgeville as an executive for creative efforts from 1999 to 2004.

His book "The Number" examines the process of planning for retirement -- not just financially but emotionally. The title, in its narrowest definition, refers to how much money a person needs to feel financially secure in the later stages of life.

It's impossible to come up with a figure without envisioning what kind of a retirement a person plans to have, he said.

For example, people may choose to keep working past age 65 because they want to. They might do a new kind of work -- something they've always wanted to do.

They might scale back their lifestyle, which, of course, will require less income. On the other hand, some may want to maintain the same standard of living they had in their peak earning years, which will require that more be put away.

" 'The number' is not just how much, but 'the number' also really has to address what for," Eisenberg said.

He said people need to ask themselves what will really matter to them in retirement once their basic needs are met.

"That examined life may well be a lot less costly than a life in which you just assume, 'Well, you know, I know I'll still need two SUVs and it would be nice to have a condo in a warm place,' " Eisenberg said.

Beyond human nature, several problems hinder adequate retirement planning for many Americans, he said.

One is that students often aren't taught from an early age the fundamentals about money, including the "magic of time and compounding interest" and the danger of putting too much money in one investment. As a result, the workings of money and investing remain a mystery.
Another problem is that professionals with great know-how about money usually aren't very interested in helping average-income people because they can't make enough money off them. Planning professionals normally cater to those who already have a bundle, he said.

"There is no question that a great many people who need financial planning the most are people who either can't afford it or can't figure out a way to get it, and we're going to have to figure out a way to do that as a society," he said.

Eisenberg said financial services companies tell him a lot of people don't start asking questions about retirement planning until they're in their 50s. While that's far from ideal, it's better to get serious about saving later than never, he said.

Many people in their 20s aren't counting on Social Security when they retire, which may inspire them to get a better jump on retirement planning than their mothers and fathers did, Eisenberg said.

"I think they will begin to take much more seriously the need to sign up for the 401(k) and begin to realize that over the long term, that can make an enormous difference," Eisenberg said.

Paula Straub
Paula's Site

Monday, July 24, 2006

The Alternative Minimum Tax - Gotcha!

Few people and many professionals really know much about the dreaded Alternative Minimum Tax, how it's calculated, and when it might really bite you.

I read an article today that had some good examples. It's amazing that something with such good intentions in 1969 is catching so many undeserving individuals today and no one is willing to permanently get rid of it or to bring it up to date for whom it is meant to catch. Worldwide

For anyone selling highly appreciated assets, you should visit your CPA and have them do a calculation to see if this will affect you if you chose to sell and "just pay taxes".

Proper planning is always the key!

ps. Really hoping to debut my two new websites by Aug 1st. Stay tuned.

Paula Straub

Capital Gains Tax Resource - Interview with the Pros

Thursday, July 20, 2006

Contract Exchanges, What are they?

Tax strategies are always evolving. I enjoy keeping up with all the latest methods to help clients save money and taxes. This week I thought I'd pass along a great article by a colleague I respect. Enjoy!

Contract Exchanges: A Money-Saving Shortcut for a Turbulent Market

By Stephen A. Wayner, Esq., CES

Contract exchanges have recently become a hot topic among tax professionals, because many investors desire to cash in on the built in gains from the real estate market. Now, sensing possible dwindling future returns over the paper appreciation already earned, real estate investors want to lock in the gains from their hot investments such as condominium development contracts, and move into less high-flying, high-risk real estate holdings.

A “Contract Exchange” is the tax-deferred exchange of:-The Buyer’s ownership in a Sales Contract on real property, for different real property, or for a contract or option on different real property; or -The Option Holder’s exchange of an Option to purchase real property, for different real property, or for an option or contract on different real property. Essentially, a contract exchange is an exchange of an open option to purchase, or an open Sales Contract, rather than an exchange of the underlying real estate itself.

For the rest of the article, click the link below.

1031 Exchange News

ps. My new and improved sites are almost complete. I hope to be launching them with my next post.

Paula Straub

Wednesday, July 12, 2006

Financial Suicide

Something very sad occurred today. I wish I could say I had never seen something similar happen before, but I have. Seemingly smart people make financially devastating and irreversible choices.

The cause, I believe, is partly fear of something new to them, and partly the unwillingness to trust or listen to those professionals they have chosen to guide them.

I realize that once one is burned in a previous situation, it is harder to put yourself in someone's hands again at a later time. However, if you are faced with a potentially critical event, the worst thing you can do is take the path of least resistance when it is you who will suffer the consequences.

First, before I describe the essence of what I am witnessing, let me give an analogy.

Let's say you were diagnosed with a brain tumor that a specialist said was operable and your chances of pulling through and living a productive life were 95% in your favor. Surgery is a scary thought for anyone, and your brain is an important organ.

So, you get several professional opinions and they all agree this is your best chance of living a happy and healthy life. You, however, had a surgery many years ago that didn't turn out exactly as promised. Maybe a knee replacement that never really let you walk without a limp.

Now you distrust surgeons in general because you had an experience that didn't give you the exact results you were hoping for. You are in less pain than before the knee surgery, but not as good as before the original injury. It's left a sour taste in your mouth, so you prefer not to have another surgery ever again.

Your brain tumor will not go away however. Your choices are have the surgery with a very good chance of living a long life, or do nothing and let the tumor run its course. You might have 1 year, 10 years or 1 week left to live. Chances are the longer you live, the more eventual pain you will be in.

So, what do you do? Get over your fear of having another surgery, and most likely give yourself the gift of a longer life (taking into account that 5% chance there may be side effects or even death), or do nothing so you avoid surgery, and hope that some miracle occurs and you are healed and don't have to think about it anymore.

If this were your mom or dad and you loved them, which course of action would you encourage them to take? You can say, "it's your life" and stay out of it, or you can help them understand that it is in their best interests to have the operation so they are healthy and with you for years to come. Remember, this isn't a 50/50 chance here. It's 95/5 in favor of success.

Obviously, most would be in favor of the surgery. However, there are some that will not under any circumstances venture out of the "known" and will opt to let the tumor grow and take their life, rather than take the 95% chance of living comfortably.

Ok, this was a long road to make my original point. It is my business to put together a strategy for anyone facing a large capital gains tax consequence, so that they minimize their tax obligation and enjoy the maximum fruits of their labor when they sell an asset.

Without going into exact specifics, a potential client had a large real estate holding that was actually entrusted to two children years ago. The client no longer owned the asset. The kids did. The client wished the asset sold, so it was. The tax consequences were very large, as the kids had received it at the basis of the parents, which was very low.

The elderly remaining parent wanted control and liquidity of the proceeds. For some reason, they could not understand that they had lost control years ago. The children have control.

A Private Annuity Trust for each of the children is the best solution. It would give them each about 2800.00/mo after taxes for the rest of their lives. A loan could be taken to pay the parent's current mortgage, so the parent would have no payments to make. The kids are willing to give the parent the payments from the trust (gifting them) for the rest of the parent's life. So the parent would receive about $5600.00/mo with no taxes due as long as they lived. After the parent's death, the kids would continue to receive their $2800.00/mo after taxes for the rest of their lives. When the parent dies, the condo they live in can be sold to pay back the loan to the trust. There is a further complication of the property being held in an LLC if no trust is done.

This is an extremely cost effective way to take care the parent as long as they live. The taxes are spread out over about 30 years, so the majority of the funds are continuing to work in the kid's favor.

So here's the tragedy. The parent isn't familiar with the concepts of the PAT. Despite 2 CPA's, 2 Attorneys, and a Financial Advisor being in agreement this is the best method, the parent can only think liquidity and control are being lost. The kids, although highly educated, are inclined to do what the parent feels comfortable with rather than making their own informed decision as to how the parent is best taken care of financially.

If the asset is sold, taxes paid, and the remainder of the funds deposited in the LLC this is what will happen. For the parent to get any money from the proceeds, the kids will have to take the money first as income and pay income taxes on it before they can gift it to the parent. Since each makes a good salary, this means they will pay taxes again at about 40% when the money comes out of the LLC. So to give the parent $1000. they may have to draw out $1650.

When all is said and done, the parent will receive about 30 cents on the dollar for each payment they get. I really don't even know if they totally grasp this, although they have been informed.

Personally, I don't know why anyone would think this is the "simplest" choice. But then again, I'll take the 95% odds any day of the week. How many lottery tickets would I buy if I had a 95% of winning with each one? Let's just say I would not have to worry about money ever again...

Please don't let someone you care about commit financial suicide. Save them from themselves!

Paula Straub

Thursday, July 06, 2006

Another niche use for a Private Annuity Trust

Last week I wrote about a Private Annuity Trust being used for the sale of oil rights on an individuals property. What are some other uses one might not immediately think of?
How about the sale of a race horse owner's business, including the ponies?
Some might just keep the business in the family, but what if the owner died and his wife just didn't want to maintain that particular lifestyle?
Assuming they built the business up and could make a hefty profit, they would experience a large capital gain and owe tons of taxes if they sold outright.
The Private Annuity Trust to the rescue.
Instead of paying a huge dollar amount immediately, the taxes would be spread over the remainder of the annuitant's lifetime. The headaches of the upkeep of the stables, horses and equipment would be gone, and a sizeable income stream would replace these.
There's a lot more details to the story, but you get the gist.
I had to wonder whether life at the track may have turned into an estate on Maui or something equally inviting.
Paula Straub

Tuesday, June 27, 2006

Capital Gains Tax on Unusual Sales

I love my job. Basically, because I get bored easily and I need to keep my mind busy solving problems and with new challenges.

In my quest to help clients save capital gains tax I work with several different professionals and learn about some unusual cases. No names or specific details are exchanged - but I get to hear about cases that I may never personally come across.

For instance, a person owned land, and in fact lived on it, where oil was found. Some tests were done, and he had in fact a very promising oil well. A company who drills for oil offered him a lot of money in return for the rights to drill on his property. He was ecstatic of course, but faced a huge capital gain that year on his taxes. Through a private annuity trust, he was able to spread out that obligation, and in return now enjoys a significant lifetime income. Talk about a great situation to find yourself in!

I'll post another interesting story next time. Who would have imagined this scenario?

Paula Straub
Interview with the Pros -Educational Resource

Wednesday, June 21, 2006

1031/TIC Exchanges - What are the Advantages?

Read a good article on 1031/TIC exchanges in the Baltimore Chronicle today.

Sometimes it's good to read about them from an independent source. Here's the link to the Boston Chronicle webpage.

I am currently in the process of revamping my SaveGainsTax website and adding another site with more information and articles. The exact time frame for launch is still up in the air, as the "creative" web guy works at his own pace. I'll keep you posted.

I'm going to be hosting a special call in a few weeks with a guest speaker. I'll post more later, but the subject will be on how to evaluate commercial property and where some of the better buys are today. It'll be very informational for all of you looking into being TIC owners who are used to individual rental properties.

That's all for now. Check back for updates!

Paula Straub

Free Report "7 Secrets to Help You Hang Onto Your Capital Gains"

Monday, June 12, 2006

Vacation and Second Homes- Do they qualify for a 1031 Exchange?

Here is a great article by Stephen Wayner of Bayview Financial Exchange Services. Stephen is the QI expert on my "Interview with the Pros" resource and knows his stuff!

I often get asked if vacation and second homes qualify for a 1031 exchange. Here's what Stephen has to say:

How Can I Qualify my Vacation or Second Home for a 1031 Exchange?
By Stephen A. Wayner, Esq., CES, SVP Bayview Financial Exchange Services

With the recent gains in the real estate market, the approaching retirement
age and increased mobility of the "baby boomer" generation, and the record
wealth transfer now in full flower, professionals are seeing a growth in
pent-up demand for Code Section 1031 Tax Deferred Exchanges. Taxpayers are
frequently asking their professional advisors whether they can qualify
their vacation homes, or primary and secondary residences for a Code
Section 1031 exchange.

Exchange Mechanics. There are two properties that are considered in the
typical exchange: the property being sold (the "relinquished property"),
and the property being purchased (the "replacement property").

Vacation Homes. Vacation homes, primary and secondary residences
(hereinafter referred to collectively as "Personal Use Realty") generally
have not qualified for Section 1031 tax deferral, if either the
relinquished property or the replacement property is Personal Use Realty,
since they are not considered to be "held" for investment or business
purposes. If either: (1) the relinquished property was previously used as
Personal Use Realty; or (2) the replacement property is intended to
ultimately be used as Personal Use Realty; in order to conduct a valid
§1031 exchange it is often necessary to have such property rented to
unrelated parties for a period of time both before and after the exchange.

How Can I Make Sure my Property Qualifies? Section 1031 contains no fixed
amount of time needed to qualify a transaction for tax-deferred status.
Instead, Section 1031 requires that the taxpayer have the intent to hold
the property for either an investment purpose or a business purpose, at the
time of the exchange to avoid a taxable exchange. The case law on Section
1031 follows a line of precedence where courts will attempt to determine
the taxpayer's intent. The court applies a "facts and circumstances" test
to objectively measure whether the taxpayer had a bona fide intention to
hold each property as investment or business property at the time of the
exchange. The taxpayer's actions, written and oral communications, and tax
filings, constitute evidence for examination if the Internal Revenue
Service challenges the tax-deferred status of the exchange. The following
chart illustrates some of the factors that the Internal Revenue Service
will likely examine:


The taxpayer puts up a "for sale" sign, lists the property for sale, or
signs a listing agreement soon after its purchase.
The taxpayer applies for "owner occupied" financing on the property.
The taxpayer inadvertently checks a box in the Purchase and Sale Contract
that he intends to live in the property.
The taxpayer moves into the replacement property soon after its purchase.
The property is not rented during the term that the property has been held,
or the leases have been in effect for a brief period.
The taxpayer claims the "mortgage interest" deduction for the property on
his tax return.
The taxpayer "swaps" rental time in the replacement property for rental
time in another party's property.


The taxpayer sells the property on his own, receives an unsolicited offer,
or lists the property for sale after holding as investment for a
substantial length of time.
The taxpayer obtains financing listing himself as a non-occupant investor.
The taxpayer is careful to read the entire Purchase and Sale Contract to
avoid any reference to his occupying the property.
The taxpayer waits for at least two (2) tax filing periods before moving
into the property.
The property has been rented by its tenants for a significant time.
The taxpayer treats the property on his books and income tax returns as
investment or business use property
The taxpayer does not exchange rental time or act in a manner similar to a
"time-share" arrangement.

Changes in Purpose. The purpose for holding the property must be for
investment or business use in order to qualify for Section 1031 treatment;
nevertheless, the purpose may change during the holding period. In Internal
Revenue Service Revenue Ruling 57-244, property that the taxpayer
originally owned as his primary residence and was later converted into
rental property, qualified as investment property. The determination of the
taxpayer's intent is made at the time of the exchange, not at the time of
the property's acquisition.

How Much Personal Use is Permitted? Mere incidental personal use of
property that is otherwise considered investment property may not
disqualify the property from 1031 Exchange treatment, according to Internal
Revenue Service Private Letter Ruling 8103117 (remember that these rulings
are only binding with respect to the taxpayer who requested the ruling,
though they are some evidence of the IRS's position) . "Incidental personal
use" is not defined by the Code, Regulations, or by other guidance issued
by the IRS. If the property is not rented out by the taxpayer, then use of
the vacation home for anything other than "incidental personal use" will
disqualify the property from receiving tax-deferred exchange treatment.

For exchange purposes, subsection (d) of Section 280A contains the primary
test likely to be applied. Personal use of the property does not exceed the
greater of:

1. fourteen (14) days; or
2. ten percent (10%) of the number of days that the property is rented at
fair market value to others.

Is there a Minimum Holding Period? Some commentators have believed that the
taxpayer should hold each exchange property for at least two (2) years. In
Rev. Rul. 84-121, the Internal Revenue Service asserted its position that
relinquished property acquired and exchanged soon after its acquisition
will not qualify for a Section 1031 exchange, because the taxpayer is
deemed to have acquired the property with the intent to dispose of it,
rather than to hold it for investment or business purposes. Some of the
courts, especially those in the Western States have construed Section 1031
much more liberally. In Bolker v. Commissioner, 760 F.2d 1039 (9TH Cir.
1985), the court permitted a holding period of only three (3) months to
qualify for a 1031 exchange. The court opined that the taxpayer satisfied
the holding and intention requirements by owning the property without the
intent to liquidate the investment or to use it for personal pursuits.
However, this case is the exception rather than the majority rule.


As always, each situation must be reviewed in its entirety to determine what options are available.

Paula Straub

Wednesday, June 07, 2006

Private Annuity Trusts in the News

Came across a great article today on Private Annuity Trusts I wanted to share.

Saving Money with Private Annuity Trusts

I have been seeing more and more articles in the news as of late, and some are better written and more factual than others. There is the occasional slam, but usually from someone who isn't as knowledgeable or just enjoys bashing.

They don't work for everyone, but when they do, they save a great deal of money for the person(s) involved.

Paula Straub

Wednesday, May 31, 2006

How you own your investment can make a big difference when you sell

Often, when we set up a business, take out a mortgage, buy a stock, etc. we rarely think about what happens when we sell.

Like everything in life, a little proper planning can make all the difference down the road.

A C-Corp may make the most sense tax-wise for a business, but it may complicate or even negate using a capital gains saving strategy when the business is sold. Tax laws are different for different corporate structures.

LLCs haven't been around all that long in the general scheme of things, but this structure is often more flexible and friendly when sale time comes.

Owning a piece of investment property jointly with your spouse makes perfect sense when the marriage is going well, but if divorce becomes imminent, there can be one less than friendly spouse when it comes time to sell the property, and this could put a wrench in the plans of the other.

Business Partnerships go bad occasionally, and if the proper agreement wasn't made at the time of formation, it may be almost impossible to come to friendly terms if each partners interests and goals are different when the business is sold.

There is no one right way to own or structure things. It would be prudent, however, to set up an agreement ahead of time, that in case the worst were to happen, all parties agree on how things will be handled. It's much easier to do when cool heads prevail and there is no party feeling wronged or disillusioned.

Whenever entering into an investment, consider what its purpose is, and if it were ever to be sold in the future, what outcome would best suit all parties?

Paula Straub
KeepYourCapitalGains - Free Report

Monday, May 22, 2006

Retirement expenses that can blow your nestegg

It's been a "challenging" couple of weeks. My parents were finishing a tour of California and ending in San Diego where I live. They were to spend 3 days near me and then head home to Florida.

The day they arrived in San Diego my Mom missed a step and fell wrong on her hip. It was broken and she required immediate total hip replacement. Not only did the logistical nightmare begin, but now the expenses are multiplying quicker than the US debt.

My parents are the type of people that believe they would never need long term care insurance. They are typical of many aging baby boomers who think things only happen to other people. Now they know.

I am diverging today from my usual capital gains post in hope that even one person may benefit from my parent's story.

Since they live in Florida, my Dad had to cancel his trip back and pay the penalty to change his flight. He was able to stay with me and have me as a temporary chauffer, but not all are that lucky.

My mom went from the hospital to acute rehab (at $1500./day) and then will have to go to assisted living until the doctor feels she is ready to fly home. She will probably need to upgrade to business or first class to be able to stand the long flight. Who knows how much post therapy she will need in the coming months.

They have good health insurance. It doesn't cover custodial care or assisted living. My parents have a pension and a paid for house, but really can't easily afford 20-30K out of savings. Their budget is tight.

The moral of the story is, stuff happens. More than you might want to admit. This is probably the first of several medical crisis with a lasting consequence.

For all my clients that have chosen to just "pay their capital gains taxes", think of how having that extra money working for them would have helped in a similar unexpected event.

Statistics say that 60% of people over 65 will need long term care. PLEASE be sure you can afford to cover your expenses if you choose not to have coverage. One mis-step can cost you your retirement savings.

Paula Straub
Free report at KeepYourCapitalGains

Thursday, May 11, 2006

Good news on Capital Gains

Just back from a business trip where lots got done and set into motion. It's going to be an exciting second half of the year.

Our government just extended the lower capital gains tax rates for another 2 years. See link:

They added a bit to the limits to avoid the dreaded Alternative Minimum Tax, but a lot of people will be still be caught in that trap. Let's hope they eliminate it all together one of these years!

I'll be back on track starting next week. Have a new website with free report available here.

Happy Mother's Day to all you moms. My mom will be visiting from Florida this year.

Paula Straub

Thursday, April 27, 2006

Another scenario for 1031/TIC Exchanges

The trick is always in the planning. Sometimes you can have your cake and eat it too.

In helping a client determine what the best strategy was for them, a couple of things came into play. They had land that had really appreciated that they had owned for about 10 years and they wanted to sell. The sale price was about 800K (gains 700K).

They would like to exchange for two land parcels that were 150K each and eventually build on them. They didn't particularly want any other properties at this point. They were still left with 500K from their exchange that they would have owed taxes on.

When introduced to the concept of exchanging that 500K with a tenant in common property that would not only provide them income and appreciation potential without management hassles, this fit their needs perfectly.

They will be able to do a complete exchange, not pay any capital gains tax at this time, have their two lots for future use and have income from a good portion that is 100% more than they were getting from vacant land over the last 10 years.

They are well on their way to really building their wealth and retirement nest egg.

Paula Straub
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Monday, April 24, 2006

Selling your Business and Keeping your Gains

Real estate is known to be an asset that appreciates greatly over time. Most know there is a capital gains tax consequence when an investment property is sold.

But what about your business? Maybe you are a physician selling a practice, a dry cleaner, a hair stylist, a construction company... Whatever your business, if you get ready to sell, you should visit a competent tax professional and find out what tax consequences you will face. They could be a lot greater than you think!

If you'd like to spread out those taxes over the rest of your lifetime rather than paying in one lump sum, take the time and investigate whether a private annuity trust might suit your needs.

If possible, it could save you a great deal of money and keep your gains working for you well into your retirement years.

Be on my next teleconference and learn more about how they work.

Also, stay tuned for details on a special upcoming teleconference featuring a guest speaker!

Paula Straub
Teleconference Link
Resource Link

Monday, April 17, 2006

Tip for choosing a Tenant in Common Property

How do you know if the tenant in common property that you would like to exchange into is a good investment?

First, start by looking at it as if you were buying the entire building, not just a fractional interest. If you are not a sophisticated real estate investor, employ the aid of a commercial realtor or financial advisor who can go over the propectus/ sales data with you. Look at the assumptions made and see if they will justify the proposed return over the long haul.

Make sure you deal with a TIC Sponsor company who has been in business for a while and has a successful track record. Make sure the management company is experienced, well funded and can produce a long record of profitable properties they have handled.

If you are not comfortable with a varying return, or don't want the possible risk of putting in more money should things not go well, look into getting a triple net lease, where the burden is transferred to the management company.

Call a local realtor in the area where the property is, and ask their opinion on the location and building condition. If you have the time and inclination, fly there yourself and see it in person.

Do your due dillegence just as you would if you were financing the entire purchase yourself. The right exchange will bring you years of steady income, good appreciation potential and hassle free real estate ownership. It's worth your time and effort to make the right choice.

Paula Straub
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Thursday, April 13, 2006

Tax Time - Again...

I dislike doing my taxes as much as anyone else. Mostly because each year I promise myself I will keep better records and not have to sort through piles of paper in order to prepare my return. It always is such a relief to have the process behind me.

I've been getting a ton of questions on my SaveGainsTax website regarding returns. I love to hear from everyone, but must remind you that I am not a licensed tax professional, and I am the last person you want to ask about which IRS form to use and for specific tax return questions. So what is a person to do?

I often refer people to my friend Eva's site She has an "ask" tab there and will try to answer as many questions as possible. Realize however, that during the last days of tax season, she doesn't have time to do anything but her client's returns. Most tax professionals are buried this time of year.

So, it's a good time to think about finding a good professional to give advice on next year's taxes. The time to visit one, or to contact me if you are selling your asset is BEFORE you sell. I'm afraid if the deal is done, you will pay taxes.

Another question I can't answer is exactly how much you will owe in capital gains tax. There are many factors involved and are tied directly to your unique situation and how the asset has been listed on previous returns. I can't stress enough that now is not the time to pinch pennies and attempt to do your return yourself. Contact a qualified tax professional with particular expertise in the type of sale/ asset transfer you had and let them earn their money by perhaps saving you a bunch that you might miss by just not knowing any better. I doubt you want to be audited on a return where you made a critical error.

Have a happy holiday and hopefully a good tax filing. In my book that is any time I can minimize my tax obligation legitimately!

Paula Straub
Interview With the Pros

Monday, April 10, 2006

Q&A Can more than one property be placed in a PAT?

I get asked a lot if more than one type of investment can be placed in a Private Annuity Trust.

The answer is yes, if it is constructed properly. When the trust is built, a conversation should be had with the Trust Company and the Trust Advisor and the Legal Counsel, and financial counsel. A thorough analysis should be done as far as other assets, income needs, estate planning needs, timelines, etc.

At that time, the question should be raised as to whether to structure the trust to accept other properties in the future. These could be in the form of real estate, investments, collections, a business sale, etc.

This way, when other assets are sold in the future, another annuity contract can be established, and future income can be increased. Multiple trusts may be cumbersome and cost more over the long haul to set up, maintain and administer. If all can be done within the same trust, logistics are simplified greatly.

Careful planning is key as always. That and choosing knowledgeable professionals and an established Trust Company.

More information on choices is available in the "Interview with the Pros" resource.

Paula Straub

Tuesday, April 04, 2006

When should you just pay your Capital Gains Tax?

Every day I talk to people who will owe capital gains tax when they sell their asset. It may be a rental property, a stock portfolio, a business, a collectible, etc. They all want to know if there is another option for them rather than writing a check directly on sale to the IRS for the capital gains tax due.

Sometimes, as much as I'd like to help, the only true option is to pay the tax. Now when you hear this, the first reaction is denial. There must be something, right?

If the debt is too high, or the profits too low, it doesn't make sense to pay the fees involved to set up and maintain a trust, and the 1031/TIC option may be out due to not reaching minimum investment level.

If the asset has already by sold and money and title have changed hands, a taxable event has already happened. There are no more options.

About the only way to know if you should just pay your capital gains tax is to have an analysis done and see if there is a better way. At SaveGainsTax you can get started and find out for yourself. The qualification questionnaire is simple to fill out and the response is confidential and timely.

To pay or not to pay will be up to you. Just don't dismiss an option because you aren't familiar with it. Take the time to do a bit of research. Interview with the Pros will save you hundreds of hours of time. The payoff will be well worth it for years to come.

Paula Straub

Tuesday, March 28, 2006

How comfortably will you retire?

Just pick up any newspaper or magazine these days and you'll see how companies are cutting back on benefits. No more pensions, healthcare, etc. We're going to be responsible for our own retirement. I'm not so sure it's really sunk in yet.

My parents lived in the same home for 30 years. My dad worked at the same job for 32 years. They now live a modest, but comfortable life, as they have no mortgage payments, and have a steady income from a pension and social security. Their health benefits are better than mine.

Today, on average, we change jobs and refinance our homes every 3-5 years. The average 401K/IRA will not support a long retirement. I think we're often hoping money will just fall from the sky and take care of us.

My point is, we need to look towards alternative methods of taking what we have and turning it into future income. If you are approaching retirement and have property that has significantly appreciated, or you are selling a business, or have a stock portfolio or collection that you would like to receive benefit from, you will have significant capital gains tax due on sale. You can't afford to give away any more of your proceeds to the IRS than you legally have to.

So, find out about 1031/TIC exchanges, Charitable Remainder Trusts, and Private Annuity Trusts. If they are appropriate for your situation, it could mean the difference of playing golf in retirement or wondering where you're going to get the money to pay for your new prescription not covered under your health plan.

It's never too early to plan for your future.
Paula Straub
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