Karen
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This web & its information is a
service to Karen Lee Bertiger's prospects, customers and clients. While designed
to provide accurate and authoritative information, it is not meant as a
substitute for your own CPA, professional tax advisor, or attorney. Investment
real estate tax planning depends on your individual facts and circumstances. You
should always consult with your own tax advisor to determine if the ideas and
techniques discussed here apply to your situation. It is
offered with the understanding that Karen Lee Bertiger is not engaged in
rendering legal, tax or accounting service. If legal advice or other
expert tax or accounting assistance is required, the opinion or the services of
a competent professional person in those disciplines should be sought. The
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I Recommend a 1031 exchange for
HIGHLY APPRECIATED REAL PROPERTY FOR A DEFERRAL OF CAPITAL GAINS TAXES AND/OR DEPRECIATION RECAPTURE TAXES!
CHECK WITH YOUR TAX ADVISOR FIRST REGARDING ANY DEFERRAL OF CAPITAL GAINS TAXES
OR DEPRECIATION RECAPTURE - THE TAX LAWS & IRS REGULATIONS HAVE BEEN CHANGING AS
OF LATE 2006. A PRIVATE ANNUITY TRUST MAY REMOVE A HIGHLY
APPRECIATED PROPERTY OR BUSINESS FROM YOUR ESTATE. In my opinion, any sales
listing for business or investment property should include a clause that the
contract is "assignable" in order to preserve your rights to assign the purchase
contract to an exchange intermediary or other trust structures. Be aware that
some standard purchase contracts have clauses that state the contract is NOT
assignable. This could cost you quite a bit of your after tax investment profit
if not handled correctly. Consult your tax advisor, attorney
and/or CPA before
executing any sales agreement. Installment sales can help you pass along a
highly appreciated business asset & defer your immediate capital gains taxes
over time. Remember that to qualify for tax deferral 1031 exchanges of
real property must be of "like kind" according to IRS regulations. Don't read
more into a news story than is legally possible under existing tax law & regulations. Many parties hawking private
annuity trust or structured sale services do not understand real estate tax &
investment issues, installment sales
or 1031 exchanges. Make sure you have a broker who specializes in real estate investments.
Your tax advisor, CPA, etc. should also be specialists in real estate accounting
& taxation.
Most sellers don't seek out attorneys or financial
planners before they consider the sale of their investment or personal real
estate or list it for sale with a broker. But you should know about
many different options
before you list your highly appreciated business
real estate in order to effectively plan the most advantageous disposition of
your property. A mistake in listing a property for sale could affect your
ability to claim tax deferral. Your real estate professional may be your primary source of
information and advice on tax deferment options -- usually Section 1031 Tax-Free
Exchanges. Many are not aware that there are certain terms that need to be
included in both a sales listing agreement as well as as sales or purchase
contract if they do not specialize in real estate investments. Many brokers are
just that -- very good brokers --they may not analyze a property disposition from anything other than
a listing or sale transaction. You are pretty much on your own to protect your
financial interests under those circumstances, so be sure to consult your own
tax and legal advisors. Currently there is another exciting buzz pertaining to a method that can substantially increase
your income and net worth in your retirement years and provide a residual
benefit to your heirs. Be skeptical if anyone is telling you that you can escape
capital gains taxes through anything other than a like-kind exchange; i.e., real
estate for real estate, personal property for personal property. You deserve all the
information you can get about how to structure the disposition of a highly
appreciated asset to minimize your tax burden as well as provide "catch up"
retirement benefits. If you choose to defer to a private annuity trust, taxes on the
private annuity may not be due
during the deferral period (up to age 70 1/2; similar to IRAs). Depending on the
real estate disposition method chosen, you may or may not have an immediate
taxable capital gain. You may be able to remove highly appreciated property from
your estate, which could be more beneficial to you than deferring capital gains
taxes. Real estate investment specialists like to say that you should exchange
properties until you die, since your heirs would then receive a stepped-up basis
on any property they inherited. A specific question to ask your estate planning
& tax advisors would be, "If I utilized 1031 exchanges until my death how would
my estate be taxed both on a federal & state level. You may be shocked at the
answers depending on where you live, how large your estate is & whether there
would be enough in your estate's liquid assets to pay any taxes due. Each
individual situation is different , so it is not possible for one single type of
scenario to apply to all persons or situations. Few real estate agents are or
were aware of private annuity trusts. Only the top professionals in the real
estate investment business may advise you to get further information on capital gains tax
deferment tools and/or other legal methods of reducing your estate taxes. There are quite a few steps to a totally legal transaction
which are left out of most articles in the press these days. Those legalities,
if not completely accurate can lead you into what the IRS calls an "abusive
transaction." The IRS states that an abusive transaction is one that has no true
business purpose or that is done solely for evading taxation. Just as a
reminder, legally arranging your business affairs to pay the least amount of taxes
possible is perfectly legal - tax evasion is not. Tax deferral is a complex legal
and accounting issue that requires the best advisors. Even then, many make
terrible mistakes to their clients' detriment, which is why I recommend that you
ALWAYS obtain a Private Letter Ruling from the IRS regarding your particular
situation if you can afford one & have a complicated situation of facts. Depreciation recapture taxes are also deferred with an exchange. With a cash sale
or an installment sale, the depreciation recaptured on disposition is taxed
immediately. A regular seller-financed nstallment sale spreads out capital gains taxes, but
be sure you understand whether you will have taxes due on depreciation recapture. (There is currently a bill in Congress
to bring the depreciation recapture tax rate down to the capital gains tax
rates, but unless or until it passes and becomes law, you're still stuck paying
these taxes unless you use a tax deferral method such as a 1031 exchange.
NOTE: this is an area where Congress
extended favorable tax treatment at the very end of 2006.) There may also
be estate planning benefits
with a private annuity trust because the entire value of the property is removed from the annuitant's taxable
estate. When, with a regular annuity from an insurance company, an annuitant dies, the
insurance company's annuity payments stop. This leaves nothing
for the annuitant's estate or heirs. With a private annuity, however, whatever the value still remaining in the private
annuity trust passes to the beneficiaries (possibly free of estate and gift taxes
according to certain IRS private letter rulings.) This
type of private annuity trust may be treated as an arms length transaction; a
buy-sell transaction for adequate monetary consideration (the fixed annuity
payment amount is determined by three things: the private annuity's value, the
annuitant's age and the IRS stipulated interest rate.) The property may also avoid going
through probate if your estate is structured properly. In most instances, family
members of a private annuitant control the private annuity
trust and all of the income generated by the asset. These are important to
remember & important questions to ask whether or not you are purchasing an annuity
from an insurance company. Commercially available insurance company annuities stop, leaving no
residual for your heirs. When you exchange your property with your private
annuity trust, the trust can then make a cash sale without the same estate tax
consequences as your estate would have making a cash sale, although deferral of
capital gains is what is being modified in the IRS regulations in late 2006, as
I understand it. If you are also
considering a charitable remainder trust, rather than depending upon the charity
to provide your annuity (and leaving your family with no benefits should you die
early), you could appoint your chosen charity as beneficiary, or contingent
beneficiary, of your private annuity trust.
Private annuity trust payments to you are often higher than charitable remainder trust
annuity payments, as well, so you need detailed numbers from your advisors as
well as an after-tax wealth calculation. If your property is mortgaged, it cannot be
transferred to a charitable remainder trust, but it can be transferred to your
private annuity trust. Depending on the tax calculations, your chosen charity
may also be better off financially if it is named as a beneficiary or contingent
beneficiary in a private annuity trust. It is always a really good idea to have a
detailed discussion with a GOOD
estate planning attorney BEFORE you do anything. If they don't know anything about this, find a better
one. They need to be familiar with the IRS Revenue Rulings and court cases. In
most instances, that would mean an attorney or firm which has both estate
planning specialists and tax attorney specialists (some or most of whom may also be
CPAs.)
If you have a highly appreciated property, and are under the age of 70 1/2,
using my services for business or investment real estate disposition (your
private annuity trust's trustees would actually utilize my real estate
investment services for your Arizona or Florida investment/income/business
property), along with your tax attorney and/or CPA could literally put
tens of thousands to hundreds of thousands of dollars into your future retirement
& help your heir & favorite charities. Call
me for more information on types of questions to ask your legal, tax and financial
professionals At the very least, I recommend
that you engage reputable legal and tax counsel, and request that a Private
Letter Ruling be obtained for your particular situation from the IRS. If your
advisors will not do that, or don't advise it, find better tax counsel. You may
have a need for a tax attorney who is also a CPA and an actuary. Do your due
diligence. This is something that gives everybody headaches even thinking about
it, but only you can do it -- no one else can do it for you.
If you need to speak with a reputable law firm concerning the legal issues
involved, I can recommend speaking with Kirkland & Ellis, based in Chicago. The
firm has quite a bit of relevant business experience and may be able to direct
you to other knowledgeable professionals.
I can also recommend a book, Structuring Venture Capital, Private Equitiy,
and Entrepreneurial Transactions by Jack S. Levin of Kirkland & Ellis on how
to structure a business to take advantage of legal and tax benefits currently
available. The book is updated annually (or used to be), and is also available on a searchable
CD-ROM. You can also get some additional general information from Commerce Clearing House
here.
(CCH is a reputable tax reporting organization.) You can also check out the National Association of Financial & Estate Planning
website by clicking here.
(I do not endorse them. Link is provided for informational and research purposes only.) Also check
IRS Rev. Rulings 55-119 & 69-74
("Basis for computing the depreciation allowance and for determining gain or
loss upon the disposition of property acquired in exchange for an annuity
contract" and "Principles to be applied in determining the tax consequences of
the transfer of appreciated property for a private annuity contract in an
intra-family exchange," respectively.)
How to Get Copies
of Revenue Rulings, etc.
IRS informational page on Abusive Tax Schemes (available from the IRS
website.) You can also find a lot of
information on the Wall Street Journal's website - they've printed several
articles during 2003 and 2004 concerning private annuity trusts.
NOTE: New information has been published
consistently since Congress' tax law extension in late 2006.