Tuesday, July 31, 2007

Case Study of Multiple Taxable Events in Same Tax Year

Recently I had a case where the same gentleman- I'll call him Joe- had two separate capital gains triggering incidents happen in the same tax year.

The first was a re-finance of a previous owner carry-back mortgage which triggered the remaining amount to be repaid in full prior to the end of the installment agreement. For several years he had been spreading out the capital gains tax and repaying it as he received principle through the payments made by the buyer. The amount of gain distributed and taxable at the end was about 400K.

The second event was also the result of an installment agreement issue. The buyer had been having trouble keeping up with the payments and foreclosure was the next logical step. A new buyer came to the rescue and agreed to pay off the remainder due from the original installment agreement plus the penalties assessed. This still meant receiving the remaining amount due as a lump sum and this was also about 400K..

It was too late to defer any capital gains tax in the first scenario, but not in the second. Joe did not need to keep a large lump sum, but did need an income stream to replace the payments he had been receiving monthly since his original sales.

So, the best solution was to do two Charitable Installment Bargain Sales. One with 300K cash and one with the remains of the second transaction.

What this accomplished was to give Joe almost a 200K tax deduction to reduce the amount of tax he was going to have to pay from the first transaction. He was able to cut it in half. Then his monthly income will be about $6500.00/month for the next 12 years. He is now 82. The way it is set up, each year those payments become less and less taxable.

Joe also has 100K from the proceeds to pay what taxes are due and put some in the bank for a rainy day or emergency.

If he passes on before the end of the 12th year, his heirs will receive the remaining payments.

Each case has a different solution depending on what there is to start with and what goals you wish to meet. Be sure and find out what your options are, or you may only have one- pay the tax in one big lump sum.

Paula Straub

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