Read a good article on 1031/TIC exchanges in the Baltimore Chronicle today.
Sometimes it's good to read about them from an independent source. Here's the link to the Boston Chronicle webpage.
I am currently in the process of revamping my SaveGainsTax website and adding another site with more information and articles. The exact time frame for launch is still up in the air, as the "creative" web guy works at his own pace. I'll keep you posted.
I'm going to be hosting a special call in a few weeks with a guest speaker. I'll post more later, but the subject will be on how to evaluate commercial property and where some of the better buys are today. It'll be very informational for all of you looking into being TIC owners who are used to individual rental properties.
That's all for now. Check back for updates!
Paula Straub
760-917-0858
Free Report "7 Secrets to Help You Hang Onto Your Capital Gains"
Wednesday, June 21, 2006
Monday, June 12, 2006
Vacation and Second Homes- Do they qualify for a 1031 Exchange?
Here is a great article by Stephen Wayner of Bayview Financial Exchange Services. Stephen is the QI expert on my "Interview with the Pros" resource and knows his stuff!
I often get asked if vacation and second homes qualify for a 1031 exchange. Here's what Stephen has to say:
How Can I Qualify my Vacation or Second Home for a 1031 Exchange?
By Stephen A. Wayner, Esq., CES, SVP Bayview Financial Exchange Services
With the recent gains in the real estate market, the approaching retirement
age and increased mobility of the "baby boomer" generation, and the record
wealth transfer now in full flower, professionals are seeing a growth in
pent-up demand for Code Section 1031 Tax Deferred Exchanges. Taxpayers are
frequently asking their professional advisors whether they can qualify
their vacation homes, or primary and secondary residences for a Code
Section 1031 exchange.
Exchange Mechanics. There are two properties that are considered in the
typical exchange: the property being sold (the "relinquished property"),
and the property being purchased (the "replacement property").
Vacation Homes. Vacation homes, primary and secondary residences
(hereinafter referred to collectively as "Personal Use Realty") generally
have not qualified for Section 1031 tax deferral, if either the
relinquished property or the replacement property is Personal Use Realty,
since they are not considered to be "held" for investment or business
purposes. If either: (1) the relinquished property was previously used as
Personal Use Realty; or (2) the replacement property is intended to
ultimately be used as Personal Use Realty; in order to conduct a valid
§1031 exchange it is often necessary to have such property rented to
unrelated parties for a period of time both before and after the exchange.
How Can I Make Sure my Property Qualifies? Section 1031 contains no fixed
amount of time needed to qualify a transaction for tax-deferred status.
Instead, Section 1031 requires that the taxpayer have the intent to hold
the property for either an investment purpose or a business purpose, at the
time of the exchange to avoid a taxable exchange. The case law on Section
1031 follows a line of precedence where courts will attempt to determine
the taxpayer's intent. The court applies a "facts and circumstances" test
to objectively measure whether the taxpayer had a bona fide intention to
hold each property as investment or business property at the time of the
exchange. The taxpayer's actions, written and oral communications, and tax
filings, constitute evidence for examination if the Internal Revenue
Service challenges the tax-deferred status of the exchange. The following
chart illustrates some of the factors that the Internal Revenue Service
will likely examine:
EVIDENCE AGAINST INVESTMENT OR BUSINESS INTENT
The taxpayer puts up a "for sale" sign, lists the property for sale, or
signs a listing agreement soon after its purchase.
The taxpayer applies for "owner occupied" financing on the property.
The taxpayer inadvertently checks a box in the Purchase and Sale Contract
that he intends to live in the property.
The taxpayer moves into the replacement property soon after its purchase.
The property is not rented during the term that the property has been held,
or the leases have been in effect for a brief period.
The taxpayer claims the "mortgage interest" deduction for the property on
his tax return.
The taxpayer "swaps" rental time in the replacement property for rental
time in another party's property.
EVIDENCE FOR INVESTMENT OR BUSINESS INTENT
The taxpayer sells the property on his own, receives an unsolicited offer,
or lists the property for sale after holding as investment for a
substantial length of time.
The taxpayer obtains financing listing himself as a non-occupant investor.
The taxpayer is careful to read the entire Purchase and Sale Contract to
avoid any reference to his occupying the property.
The taxpayer waits for at least two (2) tax filing periods before moving
into the property.
The property has been rented by its tenants for a significant time.
The taxpayer treats the property on his books and income tax returns as
investment or business use property
The taxpayer does not exchange rental time or act in a manner similar to a
"time-share" arrangement.
Changes in Purpose. The purpose for holding the property must be for
investment or business use in order to qualify for Section 1031 treatment;
nevertheless, the purpose may change during the holding period. In Internal
Revenue Service Revenue Ruling 57-244, property that the taxpayer
originally owned as his primary residence and was later converted into
rental property, qualified as investment property. The determination of the
taxpayer's intent is made at the time of the exchange, not at the time of
the property's acquisition.
How Much Personal Use is Permitted? Mere incidental personal use of
property that is otherwise considered investment property may not
disqualify the property from 1031 Exchange treatment, according to Internal
Revenue Service Private Letter Ruling 8103117 (remember that these rulings
are only binding with respect to the taxpayer who requested the ruling,
though they are some evidence of the IRS's position) . "Incidental personal
use" is not defined by the Code, Regulations, or by other guidance issued
by the IRS. If the property is not rented out by the taxpayer, then use of
the vacation home for anything other than "incidental personal use" will
disqualify the property from receiving tax-deferred exchange treatment.
For exchange purposes, subsection (d) of Section 280A contains the primary
test likely to be applied. Personal use of the property does not exceed the
greater of:
1. fourteen (14) days; or
2. ten percent (10%) of the number of days that the property is rented at
fair market value to others.
Is there a Minimum Holding Period? Some commentators have believed that the
taxpayer should hold each exchange property for at least two (2) years. In
Rev. Rul. 84-121, the Internal Revenue Service asserted its position that
relinquished property acquired and exchanged soon after its acquisition
will not qualify for a Section 1031 exchange, because the taxpayer is
deemed to have acquired the property with the intent to dispose of it,
rather than to hold it for investment or business purposes. Some of the
courts, especially those in the Western States have construed Section 1031
much more liberally. In Bolker v. Commissioner, 760 F.2d 1039 (9TH Cir.
1985), the court permitted a holding period of only three (3) months to
qualify for a 1031 exchange. The court opined that the taxpayer satisfied
the holding and intention requirements by owning the property without the
intent to liquidate the investment or to use it for personal pursuits.
However, this case is the exception rather than the majority rule.
===================
As always, each situation must be reviewed in its entirety to determine what options are available.
Warmly,
Paula Straub
SaveGainsTax
760-917-0858
I often get asked if vacation and second homes qualify for a 1031 exchange. Here's what Stephen has to say:
How Can I Qualify my Vacation or Second Home for a 1031 Exchange?
By Stephen A. Wayner, Esq., CES, SVP Bayview Financial Exchange Services
With the recent gains in the real estate market, the approaching retirement
age and increased mobility of the "baby boomer" generation, and the record
wealth transfer now in full flower, professionals are seeing a growth in
pent-up demand for Code Section 1031 Tax Deferred Exchanges. Taxpayers are
frequently asking their professional advisors whether they can qualify
their vacation homes, or primary and secondary residences for a Code
Section 1031 exchange.
Exchange Mechanics. There are two properties that are considered in the
typical exchange: the property being sold (the "relinquished property"),
and the property being purchased (the "replacement property").
Vacation Homes. Vacation homes, primary and secondary residences
(hereinafter referred to collectively as "Personal Use Realty") generally
have not qualified for Section 1031 tax deferral, if either the
relinquished property or the replacement property is Personal Use Realty,
since they are not considered to be "held" for investment or business
purposes. If either: (1) the relinquished property was previously used as
Personal Use Realty; or (2) the replacement property is intended to
ultimately be used as Personal Use Realty; in order to conduct a valid
§1031 exchange it is often necessary to have such property rented to
unrelated parties for a period of time both before and after the exchange.
How Can I Make Sure my Property Qualifies? Section 1031 contains no fixed
amount of time needed to qualify a transaction for tax-deferred status.
Instead, Section 1031 requires that the taxpayer have the intent to hold
the property for either an investment purpose or a business purpose, at the
time of the exchange to avoid a taxable exchange. The case law on Section
1031 follows a line of precedence where courts will attempt to determine
the taxpayer's intent. The court applies a "facts and circumstances" test
to objectively measure whether the taxpayer had a bona fide intention to
hold each property as investment or business property at the time of the
exchange. The taxpayer's actions, written and oral communications, and tax
filings, constitute evidence for examination if the Internal Revenue
Service challenges the tax-deferred status of the exchange. The following
chart illustrates some of the factors that the Internal Revenue Service
will likely examine:
EVIDENCE AGAINST INVESTMENT OR BUSINESS INTENT
The taxpayer puts up a "for sale" sign, lists the property for sale, or
signs a listing agreement soon after its purchase.
The taxpayer applies for "owner occupied" financing on the property.
The taxpayer inadvertently checks a box in the Purchase and Sale Contract
that he intends to live in the property.
The taxpayer moves into the replacement property soon after its purchase.
The property is not rented during the term that the property has been held,
or the leases have been in effect for a brief period.
The taxpayer claims the "mortgage interest" deduction for the property on
his tax return.
The taxpayer "swaps" rental time in the replacement property for rental
time in another party's property.
EVIDENCE FOR INVESTMENT OR BUSINESS INTENT
The taxpayer sells the property on his own, receives an unsolicited offer,
or lists the property for sale after holding as investment for a
substantial length of time.
The taxpayer obtains financing listing himself as a non-occupant investor.
The taxpayer is careful to read the entire Purchase and Sale Contract to
avoid any reference to his occupying the property.
The taxpayer waits for at least two (2) tax filing periods before moving
into the property.
The property has been rented by its tenants for a significant time.
The taxpayer treats the property on his books and income tax returns as
investment or business use property
The taxpayer does not exchange rental time or act in a manner similar to a
"time-share" arrangement.
Changes in Purpose. The purpose for holding the property must be for
investment or business use in order to qualify for Section 1031 treatment;
nevertheless, the purpose may change during the holding period. In Internal
Revenue Service Revenue Ruling 57-244, property that the taxpayer
originally owned as his primary residence and was later converted into
rental property, qualified as investment property. The determination of the
taxpayer's intent is made at the time of the exchange, not at the time of
the property's acquisition.
How Much Personal Use is Permitted? Mere incidental personal use of
property that is otherwise considered investment property may not
disqualify the property from 1031 Exchange treatment, according to Internal
Revenue Service Private Letter Ruling 8103117 (remember that these rulings
are only binding with respect to the taxpayer who requested the ruling,
though they are some evidence of the IRS's position) . "Incidental personal
use" is not defined by the Code, Regulations, or by other guidance issued
by the IRS. If the property is not rented out by the taxpayer, then use of
the vacation home for anything other than "incidental personal use" will
disqualify the property from receiving tax-deferred exchange treatment.
For exchange purposes, subsection (d) of Section 280A contains the primary
test likely to be applied. Personal use of the property does not exceed the
greater of:
1. fourteen (14) days; or
2. ten percent (10%) of the number of days that the property is rented at
fair market value to others.
Is there a Minimum Holding Period? Some commentators have believed that the
taxpayer should hold each exchange property for at least two (2) years. In
Rev. Rul. 84-121, the Internal Revenue Service asserted its position that
relinquished property acquired and exchanged soon after its acquisition
will not qualify for a Section 1031 exchange, because the taxpayer is
deemed to have acquired the property with the intent to dispose of it,
rather than to hold it for investment or business purposes. Some of the
courts, especially those in the Western States have construed Section 1031
much more liberally. In Bolker v. Commissioner, 760 F.2d 1039 (9TH Cir.
1985), the court permitted a holding period of only three (3) months to
qualify for a 1031 exchange. The court opined that the taxpayer satisfied
the holding and intention requirements by owning the property without the
intent to liquidate the investment or to use it for personal pursuits.
However, this case is the exception rather than the majority rule.
===================
As always, each situation must be reviewed in its entirety to determine what options are available.
Warmly,
Paula Straub
SaveGainsTax
760-917-0858
Wednesday, June 07, 2006
Private Annuity Trusts in the News
Came across a great article today on Private Annuity Trusts I wanted to share.
Saving Money with Private Annuity Trusts
I have been seeing more and more articles in the news as of late, and some are better written and more factual than others. There is the occasional slam, but usually from someone who isn't as knowledgeable or just enjoys bashing.
They don't work for everyone, but when they do, they save a great deal of money for the person(s) involved.
Paula Straub
www.savegainstax.comaskpaula@savegainstax.com
Saving Money with Private Annuity Trusts
I have been seeing more and more articles in the news as of late, and some are better written and more factual than others. There is the occasional slam, but usually from someone who isn't as knowledgeable or just enjoys bashing.
They don't work for everyone, but when they do, they save a great deal of money for the person(s) involved.
Paula Straub
www.savegainstax.comaskpaula@savegainstax.com
Wednesday, May 31, 2006
How you own your investment can make a big difference when you sell
Often, when we set up a business, take out a mortgage, buy a stock, etc. we rarely think about what happens when we sell.
Like everything in life, a little proper planning can make all the difference down the road.
A C-Corp may make the most sense tax-wise for a business, but it may complicate or even negate using a capital gains saving strategy when the business is sold. Tax laws are different for different corporate structures.
LLCs haven't been around all that long in the general scheme of things, but this structure is often more flexible and friendly when sale time comes.
Owning a piece of investment property jointly with your spouse makes perfect sense when the marriage is going well, but if divorce becomes imminent, there can be one less than friendly spouse when it comes time to sell the property, and this could put a wrench in the plans of the other.
Business Partnerships go bad occasionally, and if the proper agreement wasn't made at the time of formation, it may be almost impossible to come to friendly terms if each partners interests and goals are different when the business is sold.
There is no one right way to own or structure things. It would be prudent, however, to set up an agreement ahead of time, that in case the worst were to happen, all parties agree on how things will be handled. It's much easier to do when cool heads prevail and there is no party feeling wronged or disillusioned.
Whenever entering into an investment, consider what its purpose is, and if it were ever to be sold in the future, what outcome would best suit all parties?
Paula Straub
SaveGainsTax
KeepYourCapitalGains - Free Report
askpaula@savegainstax.com
Like everything in life, a little proper planning can make all the difference down the road.
A C-Corp may make the most sense tax-wise for a business, but it may complicate or even negate using a capital gains saving strategy when the business is sold. Tax laws are different for different corporate structures.
LLCs haven't been around all that long in the general scheme of things, but this structure is often more flexible and friendly when sale time comes.
Owning a piece of investment property jointly with your spouse makes perfect sense when the marriage is going well, but if divorce becomes imminent, there can be one less than friendly spouse when it comes time to sell the property, and this could put a wrench in the plans of the other.
Business Partnerships go bad occasionally, and if the proper agreement wasn't made at the time of formation, it may be almost impossible to come to friendly terms if each partners interests and goals are different when the business is sold.
There is no one right way to own or structure things. It would be prudent, however, to set up an agreement ahead of time, that in case the worst were to happen, all parties agree on how things will be handled. It's much easier to do when cool heads prevail and there is no party feeling wronged or disillusioned.
Whenever entering into an investment, consider what its purpose is, and if it were ever to be sold in the future, what outcome would best suit all parties?
Paula Straub
SaveGainsTax
KeepYourCapitalGains - Free Report
askpaula@savegainstax.com
Monday, May 22, 2006
Retirement expenses that can blow your nestegg
It's been a "challenging" couple of weeks. My parents were finishing a tour of California and ending in San Diego where I live. They were to spend 3 days near me and then head home to Florida.
The day they arrived in San Diego my Mom missed a step and fell wrong on her hip. It was broken and she required immediate total hip replacement. Not only did the logistical nightmare begin, but now the expenses are multiplying quicker than the US debt.
My parents are the type of people that believe they would never need long term care insurance. They are typical of many aging baby boomers who think things only happen to other people. Now they know.
I am diverging today from my usual capital gains post in hope that even one person may benefit from my parent's story.
Since they live in Florida, my Dad had to cancel his trip back and pay the penalty to change his flight. He was able to stay with me and have me as a temporary chauffer, but not all are that lucky.
My mom went from the hospital to acute rehab (at $1500./day) and then will have to go to assisted living until the doctor feels she is ready to fly home. She will probably need to upgrade to business or first class to be able to stand the long flight. Who knows how much post therapy she will need in the coming months.
They have good health insurance. It doesn't cover custodial care or assisted living. My parents have a pension and a paid for house, but really can't easily afford 20-30K out of savings. Their budget is tight.
The moral of the story is, stuff happens. More than you might want to admit. This is probably the first of several medical crisis with a lasting consequence.
For all my clients that have chosen to just "pay their capital gains taxes", think of how having that extra money working for them would have helped in a similar unexpected event.
Statistics say that 60% of people over 65 will need long term care. PLEASE be sure you can afford to cover your expenses if you choose not to have coverage. One mis-step can cost you your retirement savings.
Paula Straub
SaveGainsTaxaskpaula@savegainstax.com
Free report at KeepYourCapitalGains
The day they arrived in San Diego my Mom missed a step and fell wrong on her hip. It was broken and she required immediate total hip replacement. Not only did the logistical nightmare begin, but now the expenses are multiplying quicker than the US debt.
My parents are the type of people that believe they would never need long term care insurance. They are typical of many aging baby boomers who think things only happen to other people. Now they know.
I am diverging today from my usual capital gains post in hope that even one person may benefit from my parent's story.
Since they live in Florida, my Dad had to cancel his trip back and pay the penalty to change his flight. He was able to stay with me and have me as a temporary chauffer, but not all are that lucky.
My mom went from the hospital to acute rehab (at $1500./day) and then will have to go to assisted living until the doctor feels she is ready to fly home. She will probably need to upgrade to business or first class to be able to stand the long flight. Who knows how much post therapy she will need in the coming months.
They have good health insurance. It doesn't cover custodial care or assisted living. My parents have a pension and a paid for house, but really can't easily afford 20-30K out of savings. Their budget is tight.
The moral of the story is, stuff happens. More than you might want to admit. This is probably the first of several medical crisis with a lasting consequence.
For all my clients that have chosen to just "pay their capital gains taxes", think of how having that extra money working for them would have helped in a similar unexpected event.
Statistics say that 60% of people over 65 will need long term care. PLEASE be sure you can afford to cover your expenses if you choose not to have coverage. One mis-step can cost you your retirement savings.
Paula Straub
SaveGainsTaxaskpaula@savegainstax.com
Free report at KeepYourCapitalGains
Thursday, May 11, 2006
Good news on Capital Gains
Just back from a business trip where lots got done and set into motion. It's going to be an exciting second half of the year.
Our government just extended the lower capital gains tax rates for another 2 years. See link:
http://www.cnn.com/2006/POLITICS/05/10/house.tax/index.html?section=cnn_latest
They added a bit to the limits to avoid the dreaded Alternative Minimum Tax, but a lot of people will be still be caught in that trap. Let's hope they eliminate it all together one of these years!
I'll be back on track starting next week. Have a new website with free report available here.
Happy Mother's Day to all you moms. My mom will be visiting from Florida this year.
Paula Straub
SaveGainsTax
760-917-0858
Our government just extended the lower capital gains tax rates for another 2 years. See link:
http://www.cnn.com/2006/POLITICS/05/10/house.tax/index.html?section=cnn_latest
They added a bit to the limits to avoid the dreaded Alternative Minimum Tax, but a lot of people will be still be caught in that trap. Let's hope they eliminate it all together one of these years!
I'll be back on track starting next week. Have a new website with free report available here.
Happy Mother's Day to all you moms. My mom will be visiting from Florida this year.
Paula Straub
SaveGainsTax
760-917-0858
Thursday, April 27, 2006
Another scenario for 1031/TIC Exchanges
The trick is always in the planning. Sometimes you can have your cake and eat it too.
In helping a client determine what the best strategy was for them, a couple of things came into play. They had land that had really appreciated that they had owned for about 10 years and they wanted to sell. The sale price was about 800K (gains 700K).
They would like to exchange for two land parcels that were 150K each and eventually build on them. They didn't particularly want any other properties at this point. They were still left with 500K from their exchange that they would have owed taxes on.
When introduced to the concept of exchanging that 500K with a tenant in common property that would not only provide them income and appreciation potential without management hassles, this fit their needs perfectly.
They will be able to do a complete exchange, not pay any capital gains tax at this time, have their two lots for future use and have income from a good portion that is 100% more than they were getting from vacant land over the last 10 years.
They are well on their way to really building their wealth and retirement nest egg.
Paula Straub
Click Here to get assistance
Interview with the Pros - Educational resource
askpaula@savegainstax.com
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