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

"Interview with the Pros" is Revised for 2007

With all of the new and exciting changes in Capital Gains Tax savings, the new revised version of my Interview with the Pros series has been updated for 2007.

You will hear directly from the founder of the charitable foundation offering the installment sale through the foundation for maximum tax savings. The information of how a charitable bargain sale is combined with an installment sale to provide a guaranteed income stream, charitable tax deduction and partial forgiveness of capital gain tax and recaptured depreciation is explained in simple language.

Your CPA and attorney will love this important information. You will know what only about 1% of any potential seller or their counsel even aware of.

My segment is new as well, detailing how the recent changes have opened up ways to help people that didn't exist last October.

Here's the new link Interview with the Pros - 2007 Revision

If you have more than 100K inequity in any investment you are selling, you will receive your investment back tenfold by learning this information prior to sale.

You DO have great options!!

Paula Straub
760-917-0858

Qualification Questionnaire - Find out if you qualify to save thousands in taxes

Californian's Get a Break in 2007

Among new laws taking effect for investment property sales after January 1, 2007 , this one gives a break to most real estate investment property sellers.

Here's an excerp from a San Francisco newpaper article:

-- Lower withholding on property sales: If you sell any type of real estate other than your primary residence for more than $100,000 in California, the escrow company is usually required to withhold part of the proceeds for state taxes.

The old withholding rate was 3.33 percent of the sales price.

"Many times that resulted in over-withholding," says Denise Azimi, a spokeswoman for the California Franchise Tax Board. Sellers had to wait until they filed their return to recoup the excess tax.

Now you have a choice: You can request withholding at the old rate or an amount equal to your estimated capital gain, taxed at your marginal state-tax rate, which for most individuals is 9.3 percent.

If you sold a $1 million property with a $100,000 capital gain, under the old law your withholding would have been $33,333. Under the new option, it would be $9,300, assuming a 9.3 percent tax rate.

The new law applies to property sold starting this year.

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This is especially important to sellers with a high selling price and fairly small gain. I've had client's tell me nightmare stories about having to take out home equity loans to cover the franchise tax!

We here in California will gladly take any new tax breaks we can get!

Paula Straub
www.savegainstax.com

Questionnaire to find out if you qualify to save thousands in Capital Gains Tax

Time to Sell Florida Investment Property?

Hi All,

I've been getting a ton of calls from Florida property owners lately. There is a very good reason for this.

Three things have happened in the Florida real estate market in recent years.

First, property values have increased dramatically. That's good news, of course.

Second, property is being reassessed for the higher values and property taxes are increasing rapidly. Not so good...

Third, due to the recent hurricanes, homeowner's insurance is either being canceled or has become so cost prohibitive that many people can no longer afford it. Again, not good for owners.

My parents live in Florida on a fixed income. They own their home outright, so have the option of not having home owner's insurance. Their carrier is pulling out of the Florida market completely. The 'replacement' carrier is almost tripling the premiums and increasing the deductible. They have decided to take their chances and go without.

For those with mortgages, this is not an option. Most lenders require you carry insurance.

So, now many retirees are finding they can no longer afford to remain in Florida. They are selling their homes and moving to places like the Carolina's and Georgia. Those with second homes are also selling.

Their residences have often appreciated and the sellers will face capital gains issues.

Also, many people own rental properties in Florida. What used to generate a decent income for them, now barely turn a profit. With the tax and insurance increases, the rent profit is diminished considerably. Rents cannot be raised enough to offset the expenses.

Here also there will be a capital gains tax problem on sale.

There are ways to minimize this burden. If you are selling Florida property or know someone in this situation, fill out a questionnaire or call me at 760-917-0858. I can help.

Paula Straub

ps. Check out the new Beginner's Guide to Saving Capital Gains Tax

New Real Estate Investor Product is Launched

It's been in the works for quite a while and now it's online!

Since many of my readers and clients are real estate investors I wanted to put together an educational product addressing issues related to the sale or exchange of real properties.

Whether you are just beginning your real estate investing career or are an old hand with a large porfolio, you need to know what options you have as exit strategies when the time comes to sell. If you don't, you may be burdened with a much greater tax obligation than you ever anticipated.

"The Definitive Beginner's Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax" is available for download at:

Beginner's Guide Resource

There are also a couple of great bonuses thrown in and the cost is minimal.

So, go right now and check it out. If you are still actively investing, this knowledge can be used to your advantage when purchasing property as well.

If you educate the seller that they have options to minimize their taxes, that may seal the deal and put you ahead of your competition.

Paula Straub
760-917-0858
askpaula@savegainstax.com

Qualification Questionnaire for quick personal reply

Off to a great January Start

Happy New Year! I'm very excited to begin 2007.

My product "The Definitive Beginner's Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax" will be launching any day now.

It's geared towards real estate investors and planning for exit stratgies even when just getting started in the business.

I was interviewed for the January 2007 issue of Financial Advisor Magazine and the article just came out. Here is a link to it:

Article in January 2007 Financial Advisor Magazine

Things were changing so fast before press time, it doesn't reflect the most current version of the Installment Sale Through a Foundation, but it does give a great overall view of what's happening in our industry.

Till next time...
Paula Straub

Find out if you qualify to save capital gains tax
Qualification Questionnaire

How do you Treat the New Kid on the Block?

First, if anyone has sent a qualification questionnaire in the last 3 weeks and did not get a response- it was eaten up by the email goblins who sent it to a black hole somewhere. After receiving a call from someone who thought I just wasn't getting back to them as promised, I discovered the email program had decided to just completely break down. It is fixed as of today, and all is back on track. I really hate it when that happens, and it does seem to happen at least twice a year without warning for some reason no one can figure out.

The last few months have certainly brought major changes in the Capital Gains Tax Savings arena. It has become an ongoing evolution and is definitely to the benefit of the seller, as the problem has not diminished as far as the taxes owed if an appreciated asset is sold outright. Not everyone welcomes change, however, and as is all too common - change breeds controversy.

I have come up with an analogy that I believe will describe how different people tend to approach new concepts. It's just a fact of human nature I guess.

Here goes...

Let's say there is a neighborhood full of kids from different families. Some kids have lived there all their lives, some for quite a few years and some are fairly new. They may have some basic disagreements amongst themselves, but they pretty much are able to co-exist with the occasional argument or conflict.

Then a new kid moves into the neighborhood. He's a good looking fellow on the outside, but no one knows much about what he has to offer on the inside because he just showed up in town.

Some of the kids will be eager to shake is hand and look forward to getting to know him better. They'll invite him over, ask him questions and see if he fits into their crowd. They welcome new blood and hope the new guy can bring something positive into their lives. They make the effort right from the start.

Another bunch of kids will keep their distance for a while. They won't introduce themselves right away - they'll watch and see how he seems to fit in with the first group. If all goes well, they'll invite the new guy over when they feel more comfortable opening up. If they see that the first group really doesn't care all that much for the new kid after getting to know him better, they probably won't bother to make an effort later on themselves. They're the wait and see types.

Then there's a third group that is suspicious of anyone new right from the start. They don't want to get to know the new guy- they'd rather just assume he won't fit in and maybe will even make fun of him or try and trip him as he walks by. They're happy with their life as it stands and the group they already know. Plus, someone that good looking probably doesn't have much else going for them anyway, right? Who needs a new friend when they're just fine as they are. They are the nay sayers. It's easy to criticize right from the start.

Back to capital gains tax saving land. The new kid on the block is the Installment Sale Through a Foundation.

There are those who can't wait to find out all about it and how it can benefit them or their clients.

There are those who don't have much of an opinion yet either way. They'll wait and see how it's accepted over time.

And there are those who have taken a stand that they don't think it could possibly have any merit whatsoever- so rather than getting to know how it really works- they prefer to start calling it names and warning others to steer clear. There's got to be something wrong with it right? Even if they don't know exactly what that might be yet. Surely there's got to be something!

I happen to be a member of the first group. Whatever new strategy becomes available I want to be the first to find out all about it. I'll ask questions until I run out. If there is something that could be better, I'd rather ask what can be done to make it right? It's only then that I'll really know if the new kid is worth hanging out with and introducing to my other friends.

As a matter of a fact, so far I like him a lot. He's a work in progress but he has a whole lot more to offer than the kids throwing the stones, and, he's a lot more pleasant to be around.

I'll be launching my new educational product "The Definitive Beginner's Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax" just in time for the holidays. Stay tuned.

Paula Straub
askpaula@savegainstax.com

Qualification Questionnaire (now working again)