In recent surveys one of the biggest concerns of retirees is that they will run out of savings or not have enough money to live on down the road.
Between inflation, health care, long term care, the uncertainty of social security and nonexistent or dwindling retirement and/or pension income, it is a very valid concern.
For many, appreciated assets such as real estate, their businesses, stock portfolios, or professional practices are intended to be the mainstay for retirement purposes.
Often, 20, 30 or even 40 years have been spent in the accumulation phase. The value of the asset has probably increased many times over. It is reasonable to think that this increase is yours to keep when it comes time to sell.
The reality is that depending on the asset and how it is held, 15-50% of your profits might be given in the form of taxes to the IRS, never to be seen again. Can you really afford to lose that much and still survive financially throughout your remaining retirement years?
Even if you can, do you want to?
A common thought is to pay the tax and reinvest what is left over. Sounds good, right? You’ll be back to where you started in no time. Chances are good that you are wrong again.
If you are close to or in retirement, you need to protect this money, as you cannot afford to lose any via a risky investment. There is no longer time to recover large losses because you are not working as much or at all. You also have to realize you will be draining this asset over time to live on, so each year less interest will accumulate.
So, you have to put it in a relatively safe investment. Safe investments tend to have low returns. Often these returns are taxable, so the proceeds are further lowered by income tax. You’ve just given away a good portion of your asset sale to taxes, and now that lump sum goes to work at low interest rates, it decreases over time, and the interest is often taxable.
If it is invested in a less liquid area such as real estate or annuities, you won’t be able to easily access your principle in large amounts anyway. Borrowing equity from a property means making payments to a lender, and where is the repayment money going to come from if you are not working?
Look at how long you have held your asset and how often you have ever needed a large lump sum all at once. The income you received was most likely on a monthly basis all along, either as rental or business income. Don’t forget, if you do need a large sum for some reason, you still have collateral the bank recognizes to borrow against, or you might keep some as cash for emergency purposes.
The bottom line is that you, the seller, often benefit most when you retain as much of the asset appreciation as possible, defer or spread out the tax obligation for as long as possible, and receive a guaranteed monthly income over a number of years or the rest of your life depending on how you set it up. This is the philosophy of retirement plans, pensions, annuities, social security and all other forms of retirement income vehicles.
Ask yourself if it is your goal to have enough money to live on forever, or if you want to face the dilemma of re-entering the work force at an advanced age to make ends meet? That is, if it is even possible due to inevitable health constraints and job availability.
Don’t think with a short term vision. Look far into the future and take steps to secure it for you and your family.
Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html
Tuesday, September 11, 2007
Know Your Risk Tolerance
Everything in life has risk. When it comes to finances, whether they are placed into a savings account, cd, the stock market, real estate, hedge funds, etc. there is an associated risk.
The extremes are that the savings account risk is that your money won’t keep up with the cost of inflation. On the other end of the spectrum, the investment could potentially lose all value.
When you are selling a highly appreciated asset, you need to determine exactly what risk tolerance is for the proceeds. This will help determine what course of action is right for you.
Here are just some of the factors that should be considered.
Do you have other assets or is this your only one?
Are you still earning income, close to retirement, or already retired?
Are you comfortable owning stocks, real estate, annuities or fixed rate savings?
Do you need a certain amount of monthly income, do you want to leave the largest legacy or is your intent to be charitable?
Do you need to remove assets from your estate for estate tax planning purposes?
Do you pay too much in ordinary income tax?
How important are guaranteed returns?
Do you understand the benefit of the time value of money?
Are you aware of how leveraging your assets may increase your return potential?
How would a loss of any kind affect the rest of your finances?
Identifying the risk is just the beginning of your decision making process. However, it will narrow down which options allow you to sleep comfortably at night. When all is said and done this is perhaps the most important aspect there is.
Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html
The extremes are that the savings account risk is that your money won’t keep up with the cost of inflation. On the other end of the spectrum, the investment could potentially lose all value.
When you are selling a highly appreciated asset, you need to determine exactly what risk tolerance is for the proceeds. This will help determine what course of action is right for you.
Here are just some of the factors that should be considered.
Do you have other assets or is this your only one?
Are you still earning income, close to retirement, or already retired?
Are you comfortable owning stocks, real estate, annuities or fixed rate savings?
Do you need a certain amount of monthly income, do you want to leave the largest legacy or is your intent to be charitable?
Do you need to remove assets from your estate for estate tax planning purposes?
Do you pay too much in ordinary income tax?
How important are guaranteed returns?
Do you understand the benefit of the time value of money?
Are you aware of how leveraging your assets may increase your return potential?
How would a loss of any kind affect the rest of your finances?
Identifying the risk is just the beginning of your decision making process. However, it will narrow down which options allow you to sleep comfortably at night. When all is said and done this is perhaps the most important aspect there is.
Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html
Let Me Be Your Advocate
Having someone on your side who knows the right questions to ask is crucial.
I think the only thing worse than not knowing the right questions to ask is not knowing if the answers you get are accurate, complete or even truthful.
I run into this same dilemma every time I take my car in for service. Outside of the basics, the mechanic can convince me that I won’t even make it home without an expensive repair because my knowledge of auto mechanics is minimal.
A good solution for me is to bring along a friend who is more familiar with the inner workings of autos. Once the mechanic realizes that he or she is speaking with someone knowledgeable, it is less likely that they will propose a repair that is unnecessary or overcharge.
One of the services I offer my clients is to be their advocate when speaking with an individual making an alternate proposal. I know exactly what questions need to be asked and the answers that should be forthcoming.
All parties involved should be present on a conference call, so there is no “he said, she said” and everyone hears the same thing. On my end, I also welcome anyone the client would like to have present during our discussions, so that any questions they have are also addressed.
Once you have all of the pros and cons of each option, you have the tools to make a truly educated choice.
Remember that as long as whoever you are dealing with is being straight with you, you’ll know you are doing the right thing for your situation.
Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html
I think the only thing worse than not knowing the right questions to ask is not knowing if the answers you get are accurate, complete or even truthful.
I run into this same dilemma every time I take my car in for service. Outside of the basics, the mechanic can convince me that I won’t even make it home without an expensive repair because my knowledge of auto mechanics is minimal.
A good solution for me is to bring along a friend who is more familiar with the inner workings of autos. Once the mechanic realizes that he or she is speaking with someone knowledgeable, it is less likely that they will propose a repair that is unnecessary or overcharge.
One of the services I offer my clients is to be their advocate when speaking with an individual making an alternate proposal. I know exactly what questions need to be asked and the answers that should be forthcoming.
All parties involved should be present on a conference call, so there is no “he said, she said” and everyone hears the same thing. On my end, I also welcome anyone the client would like to have present during our discussions, so that any questions they have are also addressed.
Once you have all of the pros and cons of each option, you have the tools to make a truly educated choice.
Remember that as long as whoever you are dealing with is being straight with you, you’ll know you are doing the right thing for your situation.
Paula Straub
http://www.savegainstax.com/
askpaula@savegainstax.com
760-917-0858
Fill out a Qualification Questionnaire and find out if you qualify to save capital gains tax at:
http://www.savegainstax.com/qq.html
Wednesday, September 05, 2007
Selling Stock Portfolios
Most people typically don't sell huge amounts of stock in a single year unless they need a big loss to offset other large gains.
However, sometimes one has no choice. A common situation is when someone is given or buys stock options for a very low price and hangs onto them hoping the price will really rise.
When this happens, there are times when the company issuing the stock has the opportunity to repurchase these shares or options at a set price. Or, the company is sold and the new company will buy the old shares outright.
Some municipal bonds can also be called if the issuing municipality can refinance the bonds at a lower interest rate. This often makes a sale the best choice, rather than receiving a lower interest rate and reduced income.
So, assuming you sell these assets for more than you originally paid for them, you are faced with a capital gain and capital gains tax.
If the amount is significant, it often behooves you to put a tax savings strategy in place before the sale happens. The Charitable Installment Bargain Sale lends itself well to this situation.
For instance, a million dollar stock sale launched an immediate 337K tax deduction, forgiveness on 55K and a 15 year payout of $92,657 per year for a total of $1,389,859. If tax had been paid at time of sale, it would have totaled around 243K. This tax repayment can now be deferred over 15 years, so nearly one quarter of a million dollars continues to work for the seller earning interest.
The tax deduction also is enough to reduce the sellers income tax bill by 30% over the next six years, resulting in significant additional savings.
The key, as always, is in knowing what options are available and initiating a beneficial tax strategy prior to sale.
Paula Straub
www.savegainstax.com
760-917-0858
Fill out a qualification questionnaire and find out if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html
However, sometimes one has no choice. A common situation is when someone is given or buys stock options for a very low price and hangs onto them hoping the price will really rise.
When this happens, there are times when the company issuing the stock has the opportunity to repurchase these shares or options at a set price. Or, the company is sold and the new company will buy the old shares outright.
Some municipal bonds can also be called if the issuing municipality can refinance the bonds at a lower interest rate. This often makes a sale the best choice, rather than receiving a lower interest rate and reduced income.
So, assuming you sell these assets for more than you originally paid for them, you are faced with a capital gain and capital gains tax.
If the amount is significant, it often behooves you to put a tax savings strategy in place before the sale happens. The Charitable Installment Bargain Sale lends itself well to this situation.
For instance, a million dollar stock sale launched an immediate 337K tax deduction, forgiveness on 55K and a 15 year payout of $92,657 per year for a total of $1,389,859. If tax had been paid at time of sale, it would have totaled around 243K. This tax repayment can now be deferred over 15 years, so nearly one quarter of a million dollars continues to work for the seller earning interest.
The tax deduction also is enough to reduce the sellers income tax bill by 30% over the next six years, resulting in significant additional savings.
The key, as always, is in knowing what options are available and initiating a beneficial tax strategy prior to sale.
Paula Straub
www.savegainstax.com
760-917-0858
Fill out a qualification questionnaire and find out if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html
Thursday, August 23, 2007
Business Lending- Have Funds Dried Up?
The last post was on how the tightening credit market is affecting sellers of residential real estate. Now here is what I am seeing regarding commercial financing for business purchases.
I have several clients in various stages of selling their businesses. The reasons for sale vary from retirement to having an offer come from out of the blue, to exiting one business to begin something new.
I am seeing requests for due diligence become longer than in the past, and I believe in some circumstances this is in part because it is becoming more difficult to raise the necessary capital to complete the buy.
In one incidence, an employee wanted to purchase the business from her employer. The business was successful, she had the right experience and skill to run it, and it had been established in the community for 26 years. She had good personal credit, but she was unable to find any lender to issue the funds. There have been two other parties interested in the three months since, but none have come forth with the capital to date.
Another case finds a younger owner who was approached by a large corporation with a proposal to purchase his successful business which he began about 10 years ago. The offer was so strong he couldn't refuse and the purchaser promised a sales contract within a couple of weeks. That was 4 months ago. Every time I check in, the buyer is still interested, but is saying they are taking longer to get the funding together than expected. They have provided some earnest money, but being in limbo is very frustrating.
There are still plenty of buyers with existing capital to make business purchases, and I believe the sales in the examples above are going to happen, just not in the time frames that were initially outlined.
There will always be transactions happening. A bit more patience is now often necessary.
Next: Selling stock portfolios
Paula Straub
760-917-0858
www.savegainstax.com
Fill out a Qualification Questionnaire to find out if you qualify to save capital gains tax.
http://www.savegainstax.com/qq.html
I have several clients in various stages of selling their businesses. The reasons for sale vary from retirement to having an offer come from out of the blue, to exiting one business to begin something new.
I am seeing requests for due diligence become longer than in the past, and I believe in some circumstances this is in part because it is becoming more difficult to raise the necessary capital to complete the buy.
In one incidence, an employee wanted to purchase the business from her employer. The business was successful, she had the right experience and skill to run it, and it had been established in the community for 26 years. She had good personal credit, but she was unable to find any lender to issue the funds. There have been two other parties interested in the three months since, but none have come forth with the capital to date.
Another case finds a younger owner who was approached by a large corporation with a proposal to purchase his successful business which he began about 10 years ago. The offer was so strong he couldn't refuse and the purchaser promised a sales contract within a couple of weeks. That was 4 months ago. Every time I check in, the buyer is still interested, but is saying they are taking longer to get the funding together than expected. They have provided some earnest money, but being in limbo is very frustrating.
There are still plenty of buyers with existing capital to make business purchases, and I believe the sales in the examples above are going to happen, just not in the time frames that were initially outlined.
There will always be transactions happening. A bit more patience is now often necessary.
Next: Selling stock portfolios
Paula Straub
760-917-0858
www.savegainstax.com
Fill out a Qualification Questionnaire to find out if you qualify to save capital gains tax.
http://www.savegainstax.com/qq.html
How the Lending Crunch Affects Sellers
I'm sure you've been seeing all the stories about mortgage lenders cutting jobs, filing for bankruptcy, and tightening the rules on new loans. It is indeed a mess.
If you are selling an asset- how does this affect you? The next couple of posts will give examples of what I am seeing on a weekly basis.
First are those selling residential real estate. Properties that were previously selling typically within a month are now taking much longer. Often times, even when an offer is made and accepted, the financing which the buyer supposedly qualified for falls through before close of escrow and the process begins all over again. There is a lot of "hurry up and wait".
Prices are being reduced and saving capital gains tax becomes even more important for those who need to sell. Others, who have less pressing needs are deciding to re-rent if this is possible and a few are offering seller financing.
This too shall pass, as all forms of investments surge in some cycles and decline in others. It's a reminder that diversification is critical to any financial plan.
Next - selling businesses
Paula Straub
www.savegainstax.com
760-917-0858
Fill out a qualification questionnaire and find out if you qualify to save capital gains tax.
http://www.savegainstax.com/qq.html
If you are selling an asset- how does this affect you? The next couple of posts will give examples of what I am seeing on a weekly basis.
First are those selling residential real estate. Properties that were previously selling typically within a month are now taking much longer. Often times, even when an offer is made and accepted, the financing which the buyer supposedly qualified for falls through before close of escrow and the process begins all over again. There is a lot of "hurry up and wait".
Prices are being reduced and saving capital gains tax becomes even more important for those who need to sell. Others, who have less pressing needs are deciding to re-rent if this is possible and a few are offering seller financing.
This too shall pass, as all forms of investments surge in some cycles and decline in others. It's a reminder that diversification is critical to any financial plan.
Next - selling businesses
Paula Straub
www.savegainstax.com
760-917-0858
Fill out a qualification questionnaire and find out if you qualify to save capital gains tax.
http://www.savegainstax.com/qq.html
Tuesday, July 31, 2007
Case Study of Multiple Taxable Events in Same Tax Year
Recently I had a case where the same gentleman- I'll call him Joe- had two separate capital gains triggering incidents happen in the same tax year.
The first was a re-finance of a previous owner carry-back mortgage which triggered the remaining amount to be repaid in full prior to the end of the installment agreement. For several years he had been spreading out the capital gains tax and repaying it as he received principle through the payments made by the buyer. The amount of gain distributed and taxable at the end was about 400K.
The second event was also the result of an installment agreement issue. The buyer had been having trouble keeping up with the payments and foreclosure was the next logical step. A new buyer came to the rescue and agreed to pay off the remainder due from the original installment agreement plus the penalties assessed. This still meant receiving the remaining amount due as a lump sum and this was also about 400K..
It was too late to defer any capital gains tax in the first scenario, but not in the second. Joe did not need to keep a large lump sum, but did need an income stream to replace the payments he had been receiving monthly since his original sales.
So, the best solution was to do two Charitable Installment Bargain Sales. One with 300K cash and one with the remains of the second transaction.
What this accomplished was to give Joe almost a 200K tax deduction to reduce the amount of tax he was going to have to pay from the first transaction. He was able to cut it in half. Then his monthly income will be about $6500.00/month for the next 12 years. He is now 82. The way it is set up, each year those payments become less and less taxable.
Joe also has 100K from the proceeds to pay what taxes are due and put some in the bank for a rainy day or emergency.
If he passes on before the end of the 12th year, his heirs will receive the remaining payments.
Each case has a different solution depending on what there is to start with and what goals you wish to meet. Be sure and find out what your options are, or you may only have one- pay the tax in one big lump sum.
Paula Straub
760-917-0858
savegainstax@gmail.com
Fill out a Qualification Questionnaire to see if you qualify to hang onto your capital gains.
http://www.savegainstax.com/qq.html
The first was a re-finance of a previous owner carry-back mortgage which triggered the remaining amount to be repaid in full prior to the end of the installment agreement. For several years he had been spreading out the capital gains tax and repaying it as he received principle through the payments made by the buyer. The amount of gain distributed and taxable at the end was about 400K.
The second event was also the result of an installment agreement issue. The buyer had been having trouble keeping up with the payments and foreclosure was the next logical step. A new buyer came to the rescue and agreed to pay off the remainder due from the original installment agreement plus the penalties assessed. This still meant receiving the remaining amount due as a lump sum and this was also about 400K..
It was too late to defer any capital gains tax in the first scenario, but not in the second. Joe did not need to keep a large lump sum, but did need an income stream to replace the payments he had been receiving monthly since his original sales.
So, the best solution was to do two Charitable Installment Bargain Sales. One with 300K cash and one with the remains of the second transaction.
What this accomplished was to give Joe almost a 200K tax deduction to reduce the amount of tax he was going to have to pay from the first transaction. He was able to cut it in half. Then his monthly income will be about $6500.00/month for the next 12 years. He is now 82. The way it is set up, each year those payments become less and less taxable.
Joe also has 100K from the proceeds to pay what taxes are due and put some in the bank for a rainy day or emergency.
If he passes on before the end of the 12th year, his heirs will receive the remaining payments.
Each case has a different solution depending on what there is to start with and what goals you wish to meet. Be sure and find out what your options are, or you may only have one- pay the tax in one big lump sum.
Paula Straub
760-917-0858
savegainstax@gmail.com
Fill out a Qualification Questionnaire to see if you qualify to hang onto your capital gains.
http://www.savegainstax.com/qq.html
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