Minimizing Sometimes Possible Even After the Sale

Recently, I was presented with a fairly unusual scenario. A man in New York City was paid 500K as a buy out on a rent controlled lease. He'd been there 20 years and was one of only 5 tenants left in a building on prime land where the owners wanted to tear down the building and build a skyscraper.

The buyout was actually considered as a long term capital gain, even though the tenant never owned the real estate. Money had already changed hands, so a taxable event had occurred. It was too late to defer capital gains tax, but not too late to minimize the tax burden due to the best extent possible and still have him meet his goals.

Here was the plan I presented to him. His goal is to use the money to buy a primary residence, and the means is to do a Charitable Installment Bargain Sale using cash.

"If you pay your taxes, you'll owe a little over 25% of 500K or about 125K. So you either start with 375K left over and use that as a down payment on something or strategize for something better. If you put it into real estate, the 375K doesn't earn interest, the equity increases just as it would whether or not the property was financed to a greater extent.

The example attached shows keeping 100K and putting 400K through the public charity in exchange for 507K back over 15 years plus an upfront tax deduction of 216K .

By using the tax deduction, you will reduce your capital gain due by 43% (the 216K deduction) so you will owe about 71K vs 125K. The 100K kept out more than covers your tax bill and leaves you with some to spend. You could use the 29K for a down payment.

The illustration is for 15 years, but can be shorter or longer. Here, you get almost 3K per month for 15 years. This should be enough to pay any mortgage off in the 15 year period if you want to buy a place. This also gives you a mortgage interest deduction to further reduce your taxes and 100K more than you put in back as payments. Most of the payments received will be income tax free, as it is a return of cost basis. Only the interest component is taxable. The funds are also protected from creditors during payout.

You save an immediate 54K in taxes and get basically a rent free place to live that's paid off in 15 years, as well as lower income tax bills and the appreciation which will also be tax free up to 250K.

Let me know if this makes sense to you. I think it really puts you way ahead of paying a lump sum and gives you a steady income stream (mostly tax free) you can depend on and a roof over your head that is basically paid for in total."

The capital gains could have been spread out over the 15 years if a strategy had been put in place prior to sale, but in this case, even after the fact a plan makes a huge difference.

Paula Straub
760-917-0858

Fill out a Qualification Questionnaire to determine how you can save capital gains tax.

Bad Advice Can Really Break You

As I've said before, the calls I dislike the most are from those individuals that have already sold their asset and are desperately trying to figure out a way to reduce their capital gains tax.

My business is not really driven by any particular event, such as tax filing time, but it is from February to April that a lot of people actually realize what their tax consequences are and panic.

In most cases, it is too late to do much but pay the piper. The tragedy is, the money is not always there to cover the bill.

A fellow in Florida sold a rental property last year at a nice profit. He had paid about 70K four years ago and sold for 800K. He owned it with another family member, and both had put quite a bit of money into fixing it up, and had taken out a number of high interest loans to finance it.

His tax preparer had told them they would only owe 5% in capital gains tax, so they each set aside 20K for taxes. After paying off the loans (including a large balloon payment), they each had about 120K left over.

Now with tax deadlines approaching, this same tax preparer has called them back and told them he was wrong in the estimates. What he didn't realize at the time he originally advised them, is that only a small portion was going to be taxed at 5% , and the majority will be taxed at 15%. He also neglected to mention the recaptured depreciation that will also be due, taxed at 25%.

They each will owe more than 40K in additional taxes come April 17. Neither party has this amount left over from their proceeds. They thought they were free to spend the amount left over after they set aside the original 20K. Luckily, they live in a state where there is no state capital gain tax or their problem would be even greater.

They will have to take out loans to pay the tax bill. All this could have been avoided had the right advice been given from the get go. The time to do research and seek specialized counsel is before the sale happens.


Paula Straub
760-917-0858

Fill out a Qualification Questionnaire to find out what options you have to save capital gains tax.

Dismantling a Business Isn't Always Easy

When people come to me to help them minimize their tax burden upon selling a business, they often don't have a clue what tax consequences await them.

Every business is different, but here a some of the factors that determine how much tax will be owed. It can become quite complicated, depending on the business structure, the assets of the business, the parties involved in the sale, etc.

• What entity structure does the business have? C-Corp, Partnership, S-Corp, LLC, Sole Proprietorship, etc. Each entity is taxed differently with different rules
• Who are the owners/partners/shareholders/members, etc. and how is ownership divided?
• What is the sale comprised of? Assets, inventory, real estate, client list, good will, etc.
• Will the entity be shut down on sale or remain intact?
• Do all of the partners agree on sales terms and goals?
• Will the sale be broken down by types of assets, or sold as shares of the company?
• If real estate, when was it purchased, how much debt is there, what is adjusted cost basis, how is the property titled, how much has it been depreciated and by what methods,etc.
• If the sale is within the entity, how do you plan to get the proceeds back to the owners from the entity? Will you get doubly taxed as capital gains and then income tax?

When a business is started and is growing, usually little thought is put into how it will eventually be sold, dismantled and distributed. It can get very complex, but an exit strategy is crucial to maximize return. The sale is often for retirement income, and it can be a very rude awakening to find out when it is too late that the money actually kept will not support you as you had hoped.

This is an area you probably don't want to take upon yourself without help from experienced professionals who can guide you to the best outcome possible.

Paula Straub

760-917-0858

Fill out a Qualification Questionnaire to determine what capital gains tax strategies will help you most.

Special Q and A call Wednesday, March 14

I'm doing a special Q&A call on Wednesday. It will be a lot of fun to just answer questions submitted by readers and subscribers.

You will get to hear what others are concerned about and get caught up to date on all the current changes.

Here's the link:

Q&A Call March 14, 2007

Sign up, get the call in number and passcode and submit your question to be answered live.

See you there

Paula Straub
760-917-0858

Beware the AMT tax trap

I got most of my tax preparation done for my 2006 tax return yesterday. Yeah, it was a riot.

I don't think anyone likes to think about tax time, but I for one do my very best each year to minimize my tax burden using all of the deductions allowed to me under current tax law. I don't want to give away more of my income/proceeds than I have to, or want to.

Below is a link regarding the AMT tax trap that faces millions more each year. It has become a serious problem for middle class America. Fixing it will be extremely costly and difficult.

Good article on the Alternative Minimum Tax Debacle

I don't understand the mentality of "I'll just pay my taxes and be done with it". I face this a lot when potential clients decide tax planning is too much effort, or listen to their CPAs who also don't understand the value of planning and tell them it's easier to just pay the piper.

But, it's not my money or my financial future. I can't worry more about it than the one who faces the dilemma. Just remember, in addition to everything else, a large capital gain often triggers the AMT tax and there goes even more of your money you could have protected.

My best advice: Take the time and make the effort to understand your alternatives. Then, if you choose to "just pay the taxes" so be it.

Paula Straub
www.savegainstax.com
760-917-0858

Find out if you are a good candidate to save Capital Gains Tax. Fill out the Qualification Questionnaire and get a fast, personal response.

The Rules - They Keep on Changing

Just when I think things are finally settling down and there won't be any more changes for a while, they change again. It truly is a process of constant evolution.

Don't get me wrong, change is often good, but it goes to show you that you can't rely on the information given to you by someone who is not monitoring these updates on a daily basis.

What was true 4 months ago was not true 3 months ago and not what was true 2 months ago is not true today. And there were about 20 revisions in between.

Today's change involves the way recaptured depreciation is reported when doing an installment sale through a foundation. I have gone back and revised my last post to reflect this change.

The recaptured depreciation on sale of real estate is now due at time of sale (or on the next tax filing). However, the good news is, that the upfront tax deduction has been increased, so a good portion is canceled out between this deduction and the amount forever forgiven by the charitable bargain sale.

Paying less (total) upfront also increases the net amount to you in each payment you receive throughout your contract from the installment sale portion.

It all gets a bit complicated, but is clearly spelled out in the proposals for each individual case.

This change was incorporated in cooperation with the IRS as a final step in keeping with established tax law.

I'll keep you posted. Don't be surprised if over the next month or three the evolution continues to unfold and more changes arise. I won't be. Keeps me on my toes!

Paula Straub
760-917-0858

Fill out a Qualification Questionnaire to see if you are a good candidate to save capital gains tax.

Are Taxes Inevitable? Maybe, but They Can Be Minimized (revised entry)

Are taxes really inevitable? Maybe, but with proper planning they can be minimized! By Paula Straub

When selling a highly appreciated asset, capital gains tax is always an issue. If it is property that has been depreciated over time, recaptured depreciation is also a concern. Triggering the AMT is a good bet as well. Most investors have no true concept of the amount of their gain that will go to taxes when they sell outright.

Most actually think 15% is all they will owe, but in reality it is usually closer to 25-45%.

Selling businesses or closing down corporations also trigger more tax than is thought. It matters whether you sell an asset within a business and then have to get the money out of the business and into your personal account (often meaning additional income tax) or if you sell the business as a whole as shares or percentage ownership.

No one disagrees there is a tax problem, but finding out what options are available and best suit your needs is the greatest challenge.

Here are the choices under current tax law. Not all are available to every type of asset sale. There are many rules to follow for each, but below the concepts are explained briefly for the sake of this article.

A 1031 exchange. If you have real estate held for investment, this is a good continuation strategy, because you can exchange your property for another of equal or greater value and defer all of your tax consequences. You can also do a 1031 exchange into a tenant in common property if you no longer wish to deal with the headaches of being a landlord and property manager.

A Charitable Bargain/Installment Sale. Used in combination, this is the most recent offering and perhaps the most beneficial of all of the exit strategy choices. You are basically exchanging your asset (business, real estate, stock portfolio, collection, cash, annuity, etc.) for a series of guaranteed payments over a fixed number of years. You are able to spread out your taxable obligation (the capital gains tax burden) over these years and pay it in small chunks versus one huge lump sum at time of sale. Although the recaptured depreciation (if applicable) is paid in the year of the sale, the amount due is significantly reduced by the charitable deduction and the amount forever forgiven. There are also additional benefits to you, as a public charity makes the sale for you. Among them are:

A large charitable deduction up front that can be used to reduce your taxable income from all sources by 30-50%, depending on the type of asset sold. This can be carried forward for up to 6 years total if not fully used in the first year.

A partial forgiveness of both capital gain and recaptured depreciation (if applicable) forever.
Return of the entire asset (less pledge amount) over the stated contracted period with 5.5% interest as a series of guaranteed payments.

Less and less taxable income each year from the amortization schedule of the payments.
A contribution to charity for a good cause without significant loss of principle as in the other charitable sales.

The time/value of compounding money, since the bulk of your tax burden remains working for you over time.

The asset is partially removed from your estate.

The asset passes to your heirs per your instructions should you pass away before receiving all of your guaranteed payments. They can receive it in trust to minimize their tax burden, or as a lump sum with remaining taxes due at receipt.

A Charitable Remainder Trust (CRT, CRUT, CRAT, etc) or Charitable Gift Annuity.
These methods are well documented and do have their place. Basically, the asset (or major portion of it) is earmarked for a charity at your death and you, the seller, receive an up front tax deduction and the interest the asset is able to generate during the course of your lifetime. Your tax burden is relieved since a charity doesn’t pay taxes, but you may have to pay recaptured depreciation and other taxes from a mortgage payoff at time of sale. This option is usually best suited for those with large estates and charitable intentions. It also can be used in combination with the charitable bargain/installment sale if the intent is to get the biggest up front charitable tax deduction, and with a Dynasty Trust if you need to remove the entire amount from your estate.

A Structured Sale. This strategy is offered by a couple of large insurance companies to spread out the capital gains tax obligation over time. Your buyer assigns the obligation to make installment payments back to you over a fixed number of years at a fixed interest rate to an Assignment company owned in part by the associated insurance carrier. The proceeds are invested in a Single Premium Immediate Fixed annuity which will make the payments back to you over the designated number of years. All recaptured depreciation must be paid up front and no additional tax deductions are offered except the ability to spread out your capital gains tax obligation over time. You are locked in at a fairly low interest rate for the length of the contract. One should always compare the benefits side by side, but this option does impose several major limitations.

A combination of two or more of the above options. It doesn’t have to be all or nothing, and you may choose to keep a portion out and pay taxes at time of sale.

The worst injustice you can do is not educate yourself on the options available to you. You always have the right to pay your tax bill, but doing it from a position of knowledge assures you that you have all the facts and choose what is in your best interest.

Paula Straub
www.savegainstax.com
(760)917-0858

Fill out the Qualification Questionnaire to see if you are a good candidate to Save Capital Gains Tax