If only that were true... It is true that the capital gains tax rate for low income tax brackets (10% and 15%) in 2008 goes to 0%.
But, before you run out and plan to sell your rental with a 300K gain, be sure you understand that most of that gain will not be taxed at 0%. Bummer, I know...
We don't know what the qualifying incomes are for 2008, but for 2007 they are up to $31,850.00 for individuals and $63,700.00 for married couples filing jointly.
So, if the levels didn't change for 2008 (they usually go up slightly each year) and you are married making 50K/yr as a couple, only the first $13,700.00 of capital gain is taxed at 0%. The remainder is taxed at 15%. So, in the above example, $286,300.00 is taxed at the 15% maximum long term rate.
Don't forget to add your state and/or city taxes into the equation as well. This can easily add another 5-9.5% depending on your state of residence and state of property sale.
And, don't forget the recaptured depreciation tax This doesn't get the 0% break either.
So, don't plan on reaping the entire profit tax free in 2008 if you have a large gain. The IRS isn't quite that generous!
Paula Straub
760-917-0858
www.savegainstax.com
savegainstax@gmail.com
Fill out a Qualification Questionnaire at http://www.savegainstax.com/qq.html to find out if you qualify to hang onto your capital gains.
Thursday, July 05, 2007
Wednesday, June 27, 2007
Marital Primary Residence Exclusion on Death of Spouse
I’m often asked whether the 500K marital exclusion carries over upon the death of a spouse. The answer is not always straight forward.
Typically, if both spouses owned and lived in a home for at least two of the last five years and file a joint return, there is a 500K exclusion on capital gains tax when the house is sold.
If one spouse dies and the house is sold in the same tax year, a joint return can still be filed and the exclusion taken. Otherwise the exclusion drops to 205K for the remaining spouse.
However, other tax rules may come into play.
If the deceased spouse passed their portion of the home to the surviving spouse, in most cases the surviving spouse receives a step up in basis for the half they just inherited. So, if the house was purchased for 100K and each spouse owned 50%, each have a cost basis of 50K. If the house is valued at 400K when the first spouse passes away, their half is now stepped up to 200K, so the remaining spouse now has a new cost basis of 250K.
Also, if the couple lives in a community property state, the remaining spouse may qualify for a 100% step up in basis if the property is titled as community property with rights of survivorship.
Rules vary from state to state, but finding out how you would be affected if you are married and your spouse passes away is crucial. It is a discussion every couple should have, as it is certain we will pass on and we commonly don’t have a say as to when this will be.
Most couples have no idea how the death of their spouse will affect their financial future. Children with aging parents should also take an active role in making sure their parent’s affairs are in order.
Paula Straub
760-917-0858
savegainstax@gmail.com
www.savegainstax.com
Fill out a qualification questionnaire and find out if you qualify to hang onto your capital gains. http://www.savegainstax.com/qq.html
Typically, if both spouses owned and lived in a home for at least two of the last five years and file a joint return, there is a 500K exclusion on capital gains tax when the house is sold.
If one spouse dies and the house is sold in the same tax year, a joint return can still be filed and the exclusion taken. Otherwise the exclusion drops to 205K for the remaining spouse.
However, other tax rules may come into play.
If the deceased spouse passed their portion of the home to the surviving spouse, in most cases the surviving spouse receives a step up in basis for the half they just inherited. So, if the house was purchased for 100K and each spouse owned 50%, each have a cost basis of 50K. If the house is valued at 400K when the first spouse passes away, their half is now stepped up to 200K, so the remaining spouse now has a new cost basis of 250K.
Also, if the couple lives in a community property state, the remaining spouse may qualify for a 100% step up in basis if the property is titled as community property with rights of survivorship.
Rules vary from state to state, but finding out how you would be affected if you are married and your spouse passes away is crucial. It is a discussion every couple should have, as it is certain we will pass on and we commonly don’t have a say as to when this will be.
Most couples have no idea how the death of their spouse will affect their financial future. Children with aging parents should also take an active role in making sure their parent’s affairs are in order.
Paula Straub
760-917-0858
savegainstax@gmail.com
www.savegainstax.com
Fill out a qualification questionnaire and find out if you qualify to hang onto your capital gains. http://www.savegainstax.com/qq.html
Monday, June 25, 2007
Q and A Regarding "Intent" and the IRS
When it comes to taxes, the IRS does often look at “intent” to determine whether certain things qualify for certain tax rules.
Such as, when you purchase a property, do you intend to hold it for investment purposes or is your intent to fix it up and sell it right away?
I got a question today from a military individual stating he had purchased a property that was “going to be” his primary residence, but he had never lived there and had rented it out since purchase. He had been renting in another state for the last few years.
Now he wants to sell and wanted to know if he can qualify for the personal residence exemption.
Unfortunately, he can’t. To satisfy the test for exemption you have to both own and reside in a primary residence for at least 2 of the last 5 years. Intent to live there does not come into play unless you actually do.
And, no, it also doesn’t matter if he sells the “intended” house and buys a new primary residence and lives there immediately. He still doesn’t qualify for the exemption.
One possible option, if he is patient, is to do a 1031 exchange on the property he is selling and purchase a home he would eventually like to live in. If he rents out the new place for a couple of years, and then moves in, he can eventually (after 5 years) in this case, qualify for the personal exemption when he sells.
Paula Straub
760-917-0858
savegainstax@gmail.com
http://www.savegainstax.com/
Fill out a Qualification Questionnaire and find out if you qualify to hang onto your capital gains. http://www.savegainstax.com/qq.html
Such as, when you purchase a property, do you intend to hold it for investment purposes or is your intent to fix it up and sell it right away?
I got a question today from a military individual stating he had purchased a property that was “going to be” his primary residence, but he had never lived there and had rented it out since purchase. He had been renting in another state for the last few years.
Now he wants to sell and wanted to know if he can qualify for the personal residence exemption.
Unfortunately, he can’t. To satisfy the test for exemption you have to both own and reside in a primary residence for at least 2 of the last 5 years. Intent to live there does not come into play unless you actually do.
And, no, it also doesn’t matter if he sells the “intended” house and buys a new primary residence and lives there immediately. He still doesn’t qualify for the exemption.
One possible option, if he is patient, is to do a 1031 exchange on the property he is selling and purchase a home he would eventually like to live in. If he rents out the new place for a couple of years, and then moves in, he can eventually (after 5 years) in this case, qualify for the personal exemption when he sells.
Paula Straub
760-917-0858
savegainstax@gmail.com
http://www.savegainstax.com/
Fill out a Qualification Questionnaire and find out if you qualify to hang onto your capital gains. http://www.savegainstax.com/qq.html
Wednesday, June 20, 2007
At What Point do You Need to Have an Exit Strategy in Place?
If you have an asset such as a business, a stock portfolio, real estate or a pricey collection it is never too soon to educate yourself about how you plan to exit or sell. Although a lot may change before the actual sale, you never know exactly when some unforeseen event may trigger the need to sell.
As to how soon you should have a specific strategy in place, the answer is definitely prior to close.
Below are some of the main considerations which need to be taken into account.
1. Your age now and your age at time of sale
2. The amount of gain you will potentially realize and the amount you’d owe in taxes if you had to pay at time of sale.
3. Your need for income- now or in the future
4. Whether or not you are at a point in life where you can invest the proceeds in anything with risk of loss or if you need asset protection.
5. Your needs to provide for your heirs.
6. Your estate planning needs and charitable intent, if any.
7. Any other income and assets you have and how the sale of the one in question might impact the rest.
8. The manner in which title is held and if the proceeds must be divided.
There are a lot of important factors with each unique situation. You need to work with someone who not only keeps up on the ever changing tax laws, but who also has the ability to guide you in the right direction that will meet your goals and make sure everything is done right.
There are good educational resources available at
www.Paula-Straub-Capital-Gains-Tax-Site.com if you’re in the research stage.
If you have a current sale pending, fill out a Qualification Questionnaire at www.savegainstax.com/qq.html and find out what you need to get started on right now.
Paula Straub
760-917-0858
savegainstax@gmail.com
Wednesday, June 13, 2007
Is 960K a Lot of Money to Write a Check For?
Occasionally I have a case that gives me pause. I have to wonder at what point loss of money is no longer important to some.
I’d like to hear some opinions from my subscribers. After you’ve read this article, if you would, drop me a quick email to savegainstax@gmail.com and let me know how you decide how much is too much to pay in taxes- assuming you have a solid alternative.
My recent discussions were with a son regarding the sale of his family business. His parents were the only stock holders so they made the final decision. They were in their early 70s and about to retire. Both are in good health.
The business had a gain of about 3.2 million dollars and the tax bill was going to be approximately 960K. Real estate was involved, so recapture of depreciation was also an issue.
The son was concerned about losing that much of their profits, so he was doing some research on how they could minimize their tax burden. Any way we looked at it, it behooved them to do something rather than nothing. Their options were all very good.
To make a long story short, the parents decided they would just sell and pay the taxes due. Granted, paying taxes is everyone’s right and Uncle Sam will be very happy to receive close to one million dollars in a nice lump sum. (I just wish it was put to better use once collected)
Although 2.24 million (after taxes) is certainly a grand profit, I can’t help but think the 960K tax bill is way to much hard earned money to part with. Here are some thoughts that keep me in a quandary.
The parents had more than enough to live comfortably with the after tax proceeds. But, since they have children and grandchildren, it would mean a much larger legacy for their heirs if they paid less in taxes and left more at their passing.
If they didn’t care about their heirs, what about earmarking that money for a charity with a good mission? It could have made a significant contribution towards disease, poverty, spiritual enrichment, global warming, etc.
The after tax money still has to be invested somewhere. Their intent was not to begin long term real estate accumulation or gamble in the stock market at their age. If placed in taxable investments with principle guarantee for safety, this means a fairly low interest rate, and what they need to live on is taxed at ordinary income tax rates when withdrawn. So, why not have spread out the tax burden, and be taxed at mostly capital gains tax rates vs income tax rates and increase their lifetime income as well?
This money is still also in their taxable estate. It is subject to creditors, medical expenses, and possible estate tax when they pass.
Even keeping out a large lump sum and reducing the taxes due on it with a tax strategy and spreading out the taxes on the remainder over a number of years would make a lot of sense.
My only conclusion is that to some individuals, once they have a certain amount of money, paying a large tax really doesn’t seem that burdensome. To me, no matter how much I have accumulated, I don’t see myself paying close to one million dollars if I have a valid alternative. I bet Donald Trump or Warren Buffet would agree.
Drop a line and let me know if, in the same situation above, you would have paid the 960K and have been done with it, or if you would try and keep as much of that working for you for as long as possible.
Is there really a point where money doesn’t matter?
I’ll keep a tally and send out the results in a future email.
Paula Straub
760-917-0858
savegainstax@gmail.com
www.savegainstax.com
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains.
http://www.savegainstax.com/qq.html
I’d like to hear some opinions from my subscribers. After you’ve read this article, if you would, drop me a quick email to savegainstax@gmail.com and let me know how you decide how much is too much to pay in taxes- assuming you have a solid alternative.
My recent discussions were with a son regarding the sale of his family business. His parents were the only stock holders so they made the final decision. They were in their early 70s and about to retire. Both are in good health.
The business had a gain of about 3.2 million dollars and the tax bill was going to be approximately 960K. Real estate was involved, so recapture of depreciation was also an issue.
The son was concerned about losing that much of their profits, so he was doing some research on how they could minimize their tax burden. Any way we looked at it, it behooved them to do something rather than nothing. Their options were all very good.
To make a long story short, the parents decided they would just sell and pay the taxes due. Granted, paying taxes is everyone’s right and Uncle Sam will be very happy to receive close to one million dollars in a nice lump sum. (I just wish it was put to better use once collected)
Although 2.24 million (after taxes) is certainly a grand profit, I can’t help but think the 960K tax bill is way to much hard earned money to part with. Here are some thoughts that keep me in a quandary.
The parents had more than enough to live comfortably with the after tax proceeds. But, since they have children and grandchildren, it would mean a much larger legacy for their heirs if they paid less in taxes and left more at their passing.
If they didn’t care about their heirs, what about earmarking that money for a charity with a good mission? It could have made a significant contribution towards disease, poverty, spiritual enrichment, global warming, etc.
The after tax money still has to be invested somewhere. Their intent was not to begin long term real estate accumulation or gamble in the stock market at their age. If placed in taxable investments with principle guarantee for safety, this means a fairly low interest rate, and what they need to live on is taxed at ordinary income tax rates when withdrawn. So, why not have spread out the tax burden, and be taxed at mostly capital gains tax rates vs income tax rates and increase their lifetime income as well?
This money is still also in their taxable estate. It is subject to creditors, medical expenses, and possible estate tax when they pass.
Even keeping out a large lump sum and reducing the taxes due on it with a tax strategy and spreading out the taxes on the remainder over a number of years would make a lot of sense.
My only conclusion is that to some individuals, once they have a certain amount of money, paying a large tax really doesn’t seem that burdensome. To me, no matter how much I have accumulated, I don’t see myself paying close to one million dollars if I have a valid alternative. I bet Donald Trump or Warren Buffet would agree.
Drop a line and let me know if, in the same situation above, you would have paid the 960K and have been done with it, or if you would try and keep as much of that working for you for as long as possible.
Is there really a point where money doesn’t matter?
I’ll keep a tally and send out the results in a future email.
Paula Straub
760-917-0858
savegainstax@gmail.com
www.savegainstax.com
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains.
http://www.savegainstax.com/qq.html
Monday, June 04, 2007
5 Common Mistakes People Make When Selling Their Highly Appreciated Assets and How to Avoid Them
You may have spent many years of your life waiting for your real estate, business, practice, stock portfolio or collection to grow in value. Then, the time comes when you are ready to sell. You find a buyer, negotiate a fair price, and then lose 15-45% of your gains to Uncle Sam, the average being about 25%.
The good news is that you have choices to avoid a good portion of this loss. You can also avoid the following mistakes I find most common amongst less savvy sellers. Below are just a few.
Mistake number 1: Not having a plan in place prior to sale. Worse yet, not even knowing you have multiple options available to you.
Mistake number 2: Getting your financial and tax planning advice from someone not qualified to provide it. Chances are, your hairdresser or golf buddy don't keep up to date on this type of specialized subject. Yet, I see time and time again, people relying more on the opinion of a relative or acquaintance than on the experience of a specialist. If Uncle Joe is the one making the choice for you at least bring him into the loop at the beginning so he hears the same information you do and can have his concerns addressed.
Mistake number 3: The misconception that you must have "total control" of your asset of all times. The IRS has specific rules that in order to defer or spread out repayment of capital gains, most strategies require that you are not able to be in full control of your asset and still enjoy tax benefits. Your control is in setting up a plan that will meet your needs over the period of time you choose. Social Security or a Pension plan pays you over time and with a payment you can rely on receiving. The same concept applies here.
Mistake number 4: Forsaking safety for the unrealistic "big score". Unless you are at a point in life where you can gamble your principle, this is not the time to think you will get double digit returns each and every year without the very real risk of major loss. If you don't have a time horizon of at least 10 years before you need to access any of the funds to live on, this is the time to protect yourself and insure against loss. Keep a portion aside if you still want to play the odds.
Mistake number 5: Doing nothing for fear of making some sort of mistake. This is not to say jump into something you don't understand. Instead, take the time to understand the pros and cons. Ask the questions you are most concerned about and be sure you have received answers that make sense and make you feel comfortable before proceeding ahead. Get a second opinion from another qualified source, but make sure everyone talks to each other instead of one "professional" bad mouthing the other with misleading facts. Be suspicious of anyone not willing to joint conference to present their view and address their concerns. Your advisor should always put your interest first.
Do be proactive. Do consult with someone who specializes in this area. Be honest about your major concerns and don't be afraid to ask questions until you are satisfied with the answers. A good plan will save you a lot of money, protect you through your retirement years, and provide the security your asset sale was meant for.
Paula Straub
www.SaveGainsTax.com
760-917-0858
savegainstax@gmail.com
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax.
The good news is that you have choices to avoid a good portion of this loss. You can also avoid the following mistakes I find most common amongst less savvy sellers. Below are just a few.
Mistake number 1: Not having a plan in place prior to sale. Worse yet, not even knowing you have multiple options available to you.
Mistake number 2: Getting your financial and tax planning advice from someone not qualified to provide it. Chances are, your hairdresser or golf buddy don't keep up to date on this type of specialized subject. Yet, I see time and time again, people relying more on the opinion of a relative or acquaintance than on the experience of a specialist. If Uncle Joe is the one making the choice for you at least bring him into the loop at the beginning so he hears the same information you do and can have his concerns addressed.
Mistake number 3: The misconception that you must have "total control" of your asset of all times. The IRS has specific rules that in order to defer or spread out repayment of capital gains, most strategies require that you are not able to be in full control of your asset and still enjoy tax benefits. Your control is in setting up a plan that will meet your needs over the period of time you choose. Social Security or a Pension plan pays you over time and with a payment you can rely on receiving. The same concept applies here.
Mistake number 4: Forsaking safety for the unrealistic "big score". Unless you are at a point in life where you can gamble your principle, this is not the time to think you will get double digit returns each and every year without the very real risk of major loss. If you don't have a time horizon of at least 10 years before you need to access any of the funds to live on, this is the time to protect yourself and insure against loss. Keep a portion aside if you still want to play the odds.
Mistake number 5: Doing nothing for fear of making some sort of mistake. This is not to say jump into something you don't understand. Instead, take the time to understand the pros and cons. Ask the questions you are most concerned about and be sure you have received answers that make sense and make you feel comfortable before proceeding ahead. Get a second opinion from another qualified source, but make sure everyone talks to each other instead of one "professional" bad mouthing the other with misleading facts. Be suspicious of anyone not willing to joint conference to present their view and address their concerns. Your advisor should always put your interest first.
Do be proactive. Do consult with someone who specializes in this area. Be honest about your major concerns and don't be afraid to ask questions until you are satisfied with the answers. A good plan will save you a lot of money, protect you through your retirement years, and provide the security your asset sale was meant for.
Paula Straub
www.SaveGainsTax.com
760-917-0858
savegainstax@gmail.com
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax.
Thursday, May 24, 2007
Case Study - Sale of LLC
Sometimes one does not have control over when their asset is sold. This was the case of a 54 year old woman recently.
As part of a divorce settlement she was awarded a percentage in her former husband’s LLC which held a shopping complex. She was a minority shareholder, so had no decision making clout.
For years her only income was her share of the rent which was about 45K/year. She only worked sporadically part time so this was what paid the bills. Then one day she was told the property had sold and would close within the week.
Her share would amount to about 1.2 million dollars after costs of sale, and her tax bill would be approximately 360K. That is almost 1/3 of her asset. Of course she went into panic mode and didn’t have a lot of time.
We were able to put together a plan where she kept out 200K (and had a big tax deduction to minimize the taxes due at sale). This was money to keep and reinvest. The other 1M would go through the Installment Sale through a Foundation.
This triggered a large tax deduction ($1,429,891.40) she could enjoy for the first 6 years, partial forgiveness of capital gains tax ($24,548.47) and recaptured depreciation and a guaranteed income stream for 40 years of $55,195.68 annually which would become increasingly less taxable each year.
This guaranteed her income until age 94, gave her money to invest outside of the sale for additional future income, and reduced her taxable income by 30% over the next 6 years.
Even though the majority share holders went their separate ways and did their own thing, it did not mean this minority shareholder was obligated to follow suit.
If you find yourself or someone you know in a similar situation, give me a call and let’s explore your options.
Paula Straub
760-917-0858
Savegainstax@aol.com
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax.
http://www.savegainstax.com/qq.html
As part of a divorce settlement she was awarded a percentage in her former husband’s LLC which held a shopping complex. She was a minority shareholder, so had no decision making clout.
For years her only income was her share of the rent which was about 45K/year. She only worked sporadically part time so this was what paid the bills. Then one day she was told the property had sold and would close within the week.
Her share would amount to about 1.2 million dollars after costs of sale, and her tax bill would be approximately 360K. That is almost 1/3 of her asset. Of course she went into panic mode and didn’t have a lot of time.
We were able to put together a plan where she kept out 200K (and had a big tax deduction to minimize the taxes due at sale). This was money to keep and reinvest. The other 1M would go through the Installment Sale through a Foundation.
This triggered a large tax deduction ($1,429,891.40) she could enjoy for the first 6 years, partial forgiveness of capital gains tax ($24,548.47) and recaptured depreciation and a guaranteed income stream for 40 years of $55,195.68 annually which would become increasingly less taxable each year.
This guaranteed her income until age 94, gave her money to invest outside of the sale for additional future income, and reduced her taxable income by 30% over the next 6 years.
Even though the majority share holders went their separate ways and did their own thing, it did not mean this minority shareholder was obligated to follow suit.
If you find yourself or someone you know in a similar situation, give me a call and let’s explore your options.
Paula Straub
760-917-0858
Savegainstax@aol.com
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax.
http://www.savegainstax.com/qq.html
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