Bottom Line – Installment Sale Through a Foundation – Part V

So far, I have addressed some of the ins and outs of the 1031 exchange, the Charitable Remainder Trust, the Structured Sale, and now will do the same for the Installment Sale Through a Foundation.

There is no one particular strategy that is right for everyone, and it behooves you to work with someone who can review your whole financial picture and needs so that you can compare and contrast all of your options and find the right one or ones for you.

The Installment sale through a foundation works with pretty much all highly appreciated assets. Currently, there is only one foundation set up to handle this transaction though I predict more will follow suit over time. This strategy had been in the works for over a year to handle the disposition of C-Corps, but was put into full swing in January 2007 following the removal of the Private Annuity Trust for tax deferral by the IRS in October 2006.

A Charitable Bargain Sale is performed by a 501C3 Charitable Foundation and the asset is purchased by the Charity at a discount from Fair Market Value. The Charity then sells the same asset at fair market value to your buyer and receives the proceeds in cash.

The amount of discount is your donation to the charity, which launches a charitable deduction for you to reduce your taxable income for up to a total of 6 years, or until the deduction granted has been fully used up. If there are taxes due for depreciation recapture or due to forgiveness of debt, this deduction will reduce the amount owed at time of your next tax filing. There will also be partial forgiveness of capital gain and depreciation recapture on the amount donated.

The charity then enters into an installment sale agreement with you, the seller, to pay back the remainder of the money over time in installment payments with a fixed interest rate on those monies between 5.5 and 6%. The remainder of the capital gains tax due is paid only as received as in the Structured Sale and is spread out over many years.

Your actual tax deduction will be greater than the original contribution, as there is a projected deduction added for an additional contribution at the end of the contracted payments. Any interest earned in excess of the interest paid out to you will go to the charity once the installment agreement has been satisfied. The charity provides a letter of explanation regarding the deduction to the IRS at time of close and to you for your records.

Since you have an installment contract with the foundation, if there is a need to amend the terms in the future, as long as both parties agree and any penalties for early withdrawal are accounted for and paid, the contract can possibly be amended or canceled. Please note, although circumstances may warrant such an act, it is almost always better financially to stick to the original terms.

So, what you need to address is how much will it cost to set up? How is my money invested and protected? What if something happens to the foundation? Are there any ongoing fees? Do I have legal representation? Do my heirs get any monies left over if I pass away before the installment agreement has been satisfied?

Because your monies are invested and segregated with a large insurance company in a commercial annuity product with a principal guarantee there is little risk of loss, as is the case with the Structured Sale. Since here the annuity is not annuitized, it allows for a higher interest rate payout and more flexibility.

It is always a good idea to compare each vehicle side by side for your unique situation. The bottom line should be safety, tax minimization and overall return. The whole idea is to keep as much of your proceeds as legally possible and to do it with as little risk as possible.

It is just as imperative to work with a professional who understands the ins and outs of each strategy and can explain the pros and cons of each. If you don’t know the right questions to ask or what answers to expect, you may not fully understand what you have committed to and it will be too late to change your mind.

This is where I can be of most help.

Paula Straub
http://www.savegainstax.com/
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

Wildfire Aftermath

I just want to take a moment to thank everyone who sent their good thoughts my way during the recent fires here in San Diego. It worked because my home was spared despite spending three days with my bags packed and on standby evacuation status.

Many others weren’t as fortunate and are faced with the inordinate task of getting their lives back on track after losing everything they own.

A tragedy such as what happened throughout Southern California will have some far reaching impacts that most don’t think about.

Those who lost businesses no longer have a source of income but may still have outstanding business expenses to deal with. Those who lost homes with mortgages still have those payments to make as well as the cost of alternative living arrangements.

Those with properties for sale in affected neighborhoods will no doubt be forced to reduce asking prices or hang onto them for years.

Many will face foreclosure or bankruptcy. Insurance often does not cover all the expenses which arrive and it takes a long time to rebuild.

Real estate is a great investment in most cases and should be part of any portfolio. If you are house rich and cash poor any act of nature can upset your financial and retirement plans. And, yes, it Can happen to you.

Ask any of the people affected by these fires if they’d rather have a guaranteed income stream still arriving every month at this point or a paid up home which has just been demolished. I know what my choice would be.

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

The IRS Giveth, and the IRS Taketh Away

If you haven’t noticed a pattern yet, when tax law changes to benefit one segment of the population (resulting in a loss of revenue to the IRS), there is usually some other change that reduces benefits to a different population segment, thus making up for the former loss.

Such is exactly what will happen if pending legislation passes into law.

HR 3648, or the Mortgage Cancellation Tax Relief Act, passed the House of Representatives Oct. 4, 2007 and is up for consideration in the Senate. If the bill becomes law, its tighter restrictions may require a new strategy for some investors.

Here is the gist in laymen’s terms of what this might mean to the average investor.

If you are in danger of foreclosure on your existing mortgage, a buyer may make a deal with your lender to purchase your home for less than what you owe. You are “forgiven” the difference from the lender, but under current tax law you must declare this forgiven amount as income on your tax return and pay income tax on money you don’t have. If you are already having trouble making mortgage payments, you often have trouble coming up with this extra tax payment and you are back to square one.

HR 3648 would exempt you from having to declare this as income in this situation. That’s the good news, but that’s a lot of money the IRS would be losing.

So, in order to save those with mortgage issues, the proposal is to tighten the rules for taking some personal exclusions on primary residences. Currently, if you own and live in your home for at least 2 of the last 5 years, you are allowed a personal exclusion of 250K if single and 500K if married filing jointly for capital gain when you sell.

What patient and savvy planners have been doing is selling their primary residences, taking the exclusion and moving into their appreciated second home or investment property for 2 years and then selling it and taking another exclusion to once again avoid capital gains tax.

What HR 3648 will do is limit the amount of exclusion available to you to the gain accrued only during the time you reside in that second property. So, if the property had increased in value by 300K prior to you moving in, then another 100K in the 2 years you resided in it, your exclusion would be limited to 100K when you sold and not the currently allowed 400K total gain (if married).

As with any tax law, if you are in neither of these situations you probably could care less. If you fall into the second category you will need a “plan B” to minimize your capital gains. Just be aware that laws constantly change and what is true today may be obsolete tomorrow. It’s a full time job just keeping up!

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

Bottom Line - Structured Sales - Part IV

This is the fourth part in a series designed to give some food for thought when considering different tax saving strategies.

When utilizing a structured sale, there are several different parties involved. The company handling the proceeds from the sale and effectively making payments back to you over time is the “Assignment Company”.

Your buyer actually never revokes his obligation to make the payments to you, but assigns this obligation to the assignment company. There is not a whole lot of risk in doing this the way it is set up, but some buyers may not be on board with the concept.

The assignment companies currently offering the structured sales are located offshore in Barbados. There are many favorable tax breaks for offshore companies, but should the need arise to ever enter into a legal action with an offshore company, it is a bit more complicated than if the company were in the USA. They are subject to different tax laws and it is a bit more involved to litigate outside the US.

The insurance company who will hold your funds in a single premium immediate annuity and pay you somewhere between a fixed 3-4% interest rate is a large, well established company such as Prudential or Allstate. Due to current requirements for all insurance companies, there is little risk that you will not be repaid as promised.

Once the payments begin, there is little to be done but receive them until the obligation has been repaid. Canceling is not really an option without incurring major loss.

If you have a large amount of depreciation recapture, or a large mortgage, there will be a significant tax obligation due on sale. These numbers need to be addressed prior to implementation so you keep enough out of the transaction to pay the tax bill and don’t get stuck owing money you must take from savings or worse yet have to take out a loan to pay back.

You do get the chance to spread out the remainder of capital gains tax due over time, the risk is low and the fees are minimal. You have to weigh this against what you will owe right away, and the fact that you are locked in for many years at a low interest rate and little option to change the terms or cancel without substantial penalties.

As always, if you have a good understanding of what is involved, you are better able to choose what suits your needs. Make sure you always deal with an experienced party who will make sure the transaction is set up properly and follows all the IRS guidelines and reporting procedures.

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

Bottom Line - The Charitable Remainder Trust (or any Irrevocable Trust) Part III

The Charitable Remainder Trust has been around for quite a while as well. It comes in many different forms that have acronyms like CRT, CRUT, CRAT, NIMCRUT, CGA. There are a couple of capital gains tax strategies that also involve non-charitable irrevocable trusts.

The differences are too complex to go into detail in this article, but the gist is that you pledge all or part of an asset to a charity either immediately or at your death for benefits like a tax deduction, tax forgiveness and an income stream while living. For the non-charitable trusts, you basically give up control of your asset for a series of installment payments and pay taxes as you receive principle.

The IRS allows you favorable tax treatment if you pledge to a charity and exchange control of your asset for a series of interest payments. Here are some considerations when contemplating an irrevocable trust.

Who will own the trust? The Charity or (if a non-charitable trust) Related and/or Unrelated parties? What happens if something happens to one of the owners? Who does ownership pass to then? Will the new owner have your best interests at heart?

What happens if the trust defaults on making payments?

One might be perfectly comfortable with a chosen representative, but what if they pass away or are no longer able to handle their responsibility?

What are the costs involved in setting up and maintaining a trust? Once you find out what it costs to establish one, administer one, file annual tax returns and audit one on an ongoing basis you may be taken aback at how fees diminish anticipated returns.

Who is the trustee? This is supposed to be a knowledgeable person and fiduciary who invests the funds prudently with the main goal of meeting the payment obligation for the length of the agreement.

You might be lured into believing the assets will generate high returns on an ongoing basis and are not limited to principle protecting vehicles. What you may not realize is:
If the trust does make more money than it is obligated to pay out to you each year it must file its own tax return and pay income tax. Trust income tax rates are higher than personal income tax rates and can quickly reduce a gain.
Most of the money you will receive in annual payments will be taxed at ordinary income rates. Depending on the amount and your tax bracket, this might also take a huge chunk of your payment stream.
If the funds are not in a guaranteed environment, this means the funds can also lose money. If your payments are fixed, the trust can run out of money prior to your full payout. If you are getting variable income, it can decrease in future years, just when you may need more to offset inflation. Do you have other sources of income if this should happen?
The more actively managed the funds are, the higher the trading costs and management fees. This also requires more careful auditing and oversight.

A charitable trust will leave the remainder to the charity at your death. If you have heirs to consider, you may have to use insurance to replace the amount passed to charity. Are you insurable? Can you afford the insurance premiums?

Again, the considerations above are not comprehensive but should give much food for thought. There are ways to protect your funds and still give you a good return. For many, slow and steady should outweigh shooting for the brass ring at a stage in life where protection is more important than accumulation and the associated risk.

Paula Straub
http://www.savegainstax.com/
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

A Good Problem to Have

It is true, the more money you have, the more options you have. That’s all good, and evidenced by a recent situation I encountered.

A man and his wife in their mid-fifties were receiving their portion of family real estate holdings in an upcoming sale. Their portion of the gain was 4.5 million dollars. They live in California, and there was depreciation recapture involved, so their tax obligation was over 1.3 million dollars if they sold outright and paid their tax bill.

We discussed many options and there was no bad plan. Most of us would be thrilled to have the choices they did. This was not their only asset or source of income. Even if they paid their taxes it would not have affected their current or future life style.

What they decided to do was a bit surprising, but given their situation, it worked for them.

They chose to do a 1031 exchange, but their choice of exchange property was a 4.5 Million dollar single family home that they eventually want to make their primary residence.

They plan to rent it out for a couple of years (who actually rents a 4.5M house?) to satisfy the exchange rules and then move in.

Even in California, 4.5M buys a pretty darn nice property. I can’t even fathom paying property taxes, insurance costs and upkeep on an annual basis- even if there is no mortgage. But then again, this is a problem I would love to have!

As you can tell, this couple can afford to take a loss if they have to. They have other assets and income which are unrelated to this property, and have options most of us will never have to worry about deciding between.

Their biggest concern going forward will be estate planning for passing wealth tax efficiently to future generations. (lucky kids)

I wonder if they have any interest in “adopting”. I am going to throw my hat in the ring.

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

The Cost of a 1031 Exchange

To do a 1031 exchange, you must file paperwork with a Qualified Intermediary prior to close of escrow. The QI receives the money from the sale of your relinquished property and holds it until you purchase the exchanged property. They release the funds in escrow at the close of the exchange. You must never have possession of these funds per IRS 1031 exchange rules.

There are not enough regulations to govern those acting as Intermediaries. Property sellers in Idaho found out the hard way. Below is the link to the article describing how many exchangers lost their entire investment.

http://www.idahostatesman.com/localnews/story/171612.html

There is a way to insure your funds. It is in associating with an experienced QI who is educated, insured and bonded and also pays interest on your funds while they are being held.

Fees differ even within the same state. The most expensive one is not necessarily the best. I refer my clients to a well known national firm who charges a flat $400.00 fee per exchange. I receive no compensation from these referrals. I just know they know what they are doing, the client is taken care of and that the money will be safe.

Another way a poor intermediary can harm you is if they do not keep up with your particulars and work with you to insure all of the deadlines are met. Many will leave it up to you to keep track of important dates and will only inform you it is too late if you should fall outside the IRS parameters.

Learn from the unfortunate mistakes of others. Enlist the help of experienced professionals who will guide you through whatever process you choose and make sure all is done correctly, legally and timely. It’s taken me a long time to develop a team I can count on. When we work together they become your team as well.

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php