My partner, David Lawrence, is an expert on Section 1031 tax-free exchanges involving investment real estate. His thoughts regarding end of year planning and the advantages of 1031s is below.
Tax Straddling When Selling Investment Property
Between now and the end of the year, taxpayers can legally avoid paying tax for an entire year on sales of investment real estate.
How? Just start a 1031 like-kind exchange at the closing of your sale this year. Assuming a good faith qualified intent, if you don’t find replacement property that you like, or if you otherwise don’t purchase replacement property within the 1031 exchange time limits, then you have the option to be taxed in 2014 or 2015 without penalty. You get a 1 year tax deferral just for trying.
If you successfully find suitable replacement property, all the better – you get a complete tax deferral. If you don’t, you still get a prize for trying – legally pushing off taxation to a later year.
This so-called tax straddle is expressly permitted by the IRS. By combining the 1031 exchange and 453 installment reporting rules, taxpayers can treat the cash received from their 1031 exchange qualified intermediary in early 2015 as a payment in 2015 instead of 2014. Taxpayers essentially get the benefits of an installment sale without the risks of a buyer failing to pay the future installment price.
Taxpayers should speak with their tax advisors (like us), since tax straddling doesn’t apply to all sales and any gain attributable to debt and mortgage payoffs will still be taxed in 2014, the year of sale.
Please call us with any questions or if we can help you save taxes. David Lawrence, 703-218-2181, on behalf of the OF&P Tax Group.
In an October online article in The Wall Street Journal, the reporter described how Congress is examining large IRAs, and IRAs holding real estate and closely held business interests. Congress’ concern is that IRA income tax advantages are being used by the wealthy in ways beyond that contemplated by the original legislation. Traditional IRAs grow tax-free, with no distribution requirements until an individual attains 70 ½. Surviving spouses can receive tax free rollovers from a deceased spouse and thereby enjoy the same benefits. IRAs can also be "stretched" to provide income tax benefits for children and future generations. More recently, Roth IRAs, which are funded with after tax dollars, allow tax free withdrawals.
In current times, with social security funding concerns and most employers eliminating defined benefit plans, the need for individuals to plan for their own retirements is even more pressing. So why would Congress attack IRAs? Well, think Mitt Romney, with over $100 million in an IRA, and others with IRAs owning business assets that are growing without annual income tax. Of course, at Mr. Romney’s death, unless he leaves his IRA to charity, 40% will be paid to the IRS for estate tax, and his IRA beneficiaries will also be subject to income tax on withdrawals; so perhaps Congress should remember the Government will get their share sooner or later.
Notwithstanding, Congress and the President are examining whether limitations need to be placed on IRAs. For example, the President wants to prohibit contributions to IRAs that have more than $3 million of assets. Congress may eliminate stretch IRAs, mentioned above. Also, Congress is considering greater limitations on the types of assets that can be held by an IRA.
No, it is not R.I.P. for IRAs. But in this era of budget concerns, IRAs are another financial mainstay under attack.
Russ Alan Prince, for Forbes, published an article on October 13, titled "The Very Wealthy Embrace Severe Disaster Contingency Planning." The article outlined how today, "the exceptionally wealthy [are] vulnerable to geopolitical instability, market volatility, career criminals, and even unscrupulous associates." According to the article, how do the wealthy protect themselves? With a team of elite advisors, possessing expertise and training, who prepare for whatever crisis may arise (in theory).
How should the rest of us prepare for today's hazards? Well, perhaps we can't afford a team of elite advisors. But how about this for starters?
- Insurance: adequate life insurance, health insurance, disability insurance and property and casualty insurance, including umbrella coverage.
- Sufficient savings to pay the bills for a six month to one year period in the event of an illness or job loss.
- Basic estate documents, i.e., wills, revocable trusts, powers of attorney and medical directives.
- If there is tangible property (jewelry, china, items of sentimental value), that you intend to leave to individuals, such items and individuals should be specifically identified to avoid hard feelings later.
- And among a group consisting of your adult children, other family members, friends and advisors, one or more of them know where you keep your important records so that, upon the unexpected, your family is not engaged in detective work to find key documents and assets.