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.
Warmly,
Paula Straub
ps. If you have questions you would like to see addressed, please email them to me at askpaula@savegainstax.com
Thursday, October 19, 2006
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
(760)917-0858
Sign up for additional tips at Save Real Estate Gains
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
(760)917-0858
Sign up for additional tips at Save Real Estate Gains
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
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
SaveRealEsateGains
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
(760)917-0858
SaveRealEsateGains
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
(760)917-0858
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
http://www.Paula-Straub-Capital-Gains-Tax-Site.com
ps. Call me for your free consultation and know what your options are. (760)917-0858
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
http://www.Paula-Straub-Capital-Gains-Tax-Site.com
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
Weekly Telecall
Free Qualification Questionnaire
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
Weekly Telecall
Free Qualification Questionnaire
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
askpaula@savegainstax.com
http://www.paula-straub-capital-gains-tax-site.com
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 http://www.savegainstax.com
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
askpaula@savegainstax.com
http://www.paula-straub-capital-gains-tax-site.com
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 http://www.savegainstax.com
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