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Malachowski
& Associates


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Mark Malachowski
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San Francisco, CA 94102

(415) 983-0717


 

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San Francisco Estate, Business, and Investor Immigration Law Blog

1031 Exchange Deadline

 

If you just sold real property and want to do a 1031 exchange to avoid capital gain, you are at the “now or never” stage to elect for funds to go to a 1031 Accommodator. Here is the deal in broad strokes:
(1) all tax basis will be allocated to the funds to be reinvested via 1031, so any funds taken as cash will be fully taxable at Federal capital gains and State ordinary income rates — a total approaching 25%, though perhaps the state taxes are a deduction against Federal taxes, which may bring the effective rate more into the 22% range.
(2) You will have a maximum of 45 days after escrow closes to “identify” potential replacement properties. You can identify a total of three or, alternatively, as many as he wants but the total value may not exceed 2X his 1031 funds with Accommodator. So, you could identify a few higher-value properties (a nice vineyard or office rental building) or many lower-value properties, such as rental homes in the San Joaquin Valley or maybe Idaho. It is called a “like-kind” exchange, but all real property is considered “like-kind” to all other as far as I know. You must keep in the money in the U.S. — no villas in Tuscany.
(3) You will have six months from when escrow closes to close on one or more “target” properties.
(4) If you want to leverage, you can add loan monies to the 1031 monies. The leveraging with mortgage money will serve to give you significant tax basis to depreciate, sheltering some money.
Thus, if you are looking at lots of capital gain tax and a 1031 could mitigate the hit, and you will probably invest the funds somewhere, so why not do so in real estate instead of losing 22% or more to the government?

 

Leveraging 1031 Monies

 

You leverage 1031 monies by adding loan monies to the 1031 monies. The leveraging with mortgage money will serve to give you significant tax basis to depreciate, sheltering some money.

Capital Gains on Property Sales

 

By using by a 1031 Exchange when you sell real property you can avoid a 25% capital gain tax by doing a 1031 Exchange. You will have a maximum of 45 days after escrow closes to “identify” potential replacement properties. You can identify a total of three or, alternatively, as many as   you want, but the total value may not exceed 2X your 1031 funds with Accommodator.

See Through Trusts

The advantages of using a trust as a designated beneficiary of an IRA (or creating a See Through Trust) are that they allow spendthrift, divorce, asset and bankruptcy protection. The trust or sub-trusts must be listed on the IRA beneficiary designation form.  The trust must be valid in California, and the beneficiaries must be individuals identifiable at the time of the Trustor’s passing. Care must be taken when considering beneficiaries of widely differing ages in the pool to ensure that benefits are distributed to allow maximum tax advantages.  

Oral Promises and Wills

Wills and TrustsPursuant to California Probate Code Section 21700 - Contract to Make a Will - a person is allowed to establish an agreement between the decedent and the child, friend, or caretaker concerning the decedent leaving them assets. However, there are some hurdles. The California Supreme Court has noted that upon a person's death, "the temptation is strong for those who are so inclined, to fabricate evidence giving color to a claim that the parties entered into... an oral arrangement." Notten v. Mensing , (1935) 3 Cal.2d 469, 477.

 

Under 21700, proof of an oral contract must be clear and convincing evidence of an agreement between the decedent and the claimant or a promise by the decedent to the claimant that is enforceable in equity.

Minimizing the Impact of the Obamacare Surtax on Investment Income

Obamacare's 3.8% surtax on investment income applies to individuals making more than $200,000 adjusted annual income.

With top capital gains tax rates having recently increased from 15% to 20% for individuals with incomes of more $400,000 per year, investors may now be facing a 23.8% tax on net investment income.

This is a fifty-eight percent increase from 2012 tax rates.

A Charitable Remainder Trust may useful in minimizing the impact of this surtax using property that has appreciated.

  • Once the property has been transferred to the trust, it is sold and the proceeds paid out in annual payments of at least 5% of the trust's initial value.
  • The value of the trust at the Trustor's death then goes to the selected charity.
  • The tax advantage is that the trust can sell the appreciated property without incurring the 3.8% Obamacare tax. The beneficiaries are still subject to capital gains owed, but the smaller payments taxed will be spread over a longer period of time.