The 1031 Exchange – An Effective Real Estate Investment Resource
A 1031 exchange is known as a like-kind exchange and can be an effective tool for those who have investment real estate. When selling investment real estate, most people face a significant tax burden. A like-kind exchange can significantly reduce or even eliminate this burden.
The 1031 Exchange Rule
Property can only qualify for a like kind exchange if they follow specific rules as laid out by the US tax code. Investment properties can only be exchanged for properties that are another investment. For example, you cannot trade a business property for a residential property unless the residential property is going to generate income. The second (and perhaps most often violated) rule for a 1031 exchange is how the proceeds of the sale are handled. For example, you cannot take the proceeds from one sale and buy or pay off another property you own. This type of transaction will result in all proceeds being taxable. [Read more...]
Roth 401(k) plans get a big boost in new law
he new tax law that resolved the “fiscal cliff” issue in January allows employees with a 401(k) plan at work to roll over any or all of the assets in their current plan into a Roth 401(k) plan. This is a big change, and should at least be considered by anyone who is eligible.
In a traditional IRA or 401(k) plan, employees contribute pre-tax earnings to the plan. The assets grow tax-free until retirement age, at which point the employee can withdraw them and pay ordinary income tax on the withdrawals.
With the new law, it’s likely that many more employers will begin to offer Roth 401(k)s as a result of employee demand.
With a Roth IRA, though, employees contribute post-tax earnings to the account, but when they withdraw the assets years later, the withdrawals are tax-free.
The new Roth 401(k) plans follow the same idea – earnings are contributed post-tax, but withdrawals are tax-free. [Read more...]
Many estates can now save money by filing tax returns – even if they don’t have to
A federal estate tax return doesn’t have to be filed every time someone dies. In fact, most estates never have to file one. However, a provision in the new “fiscal cliff” tax law may make it very advantageous to file an estate tax return if the deceased person is survived by a spouse – even if a return is not legally required.
Here’s why: Generally, when a person dies, his or her estate can give an unlimited amount to a surviving spouse. After that, if the person’s bequests (plus large lifetime gifts) total more than a certain “exemption amount,” then an estate tax is due. For 2013, the exemption amount is $5.25 million.
It’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.
Traditionally, the exemption amount applied separately to each spouse. So if a husband died first, his estate could use his exemption amount, and when his wife died later, she would get her own exemption amount.
But under a change in the law starting in 2011, if the first spouse to die doesn’t use all of his or her exemption amount, the difference can be passed along to the other spouse. (The 2011 law was temporary, but the new “fiscal cliff” law makes it permanent.)
So suppose a husband dies and doesn’t use any of his $5.25 million amount (because he leaves everything to his wife). When the wife dies, her exemption amount will be her own $5.25 million plus the $5.25 million that the husband didn’t use. So instead of being able to leave $5.25 million tax-free to her heirs, she can leave $10.5 million tax-free – a potential savings of millions of dollars.
However, this only works if the husband’s estate filed an estate tax return and elected to pass the exemption amount on to his wife. If the husband’s estate didn’t file a return (because it wasn’t legally required), then all the potential tax savings are lost.
This means that it’s almost always a good idea to file an estate tax return for anyone who dies and is survived by a spouse.
Even if it seems highly unlikely that a surviving spouse will be worth more than $5.25 million when he or she dies, it’s still a good idea to file a return, because Congress could always change the exemption amount. In fact, if not for the “fiscal cliff” law, the exemption amount this year would be only $1 million.
Short-term rentals can sometimes lead to long-term neighbor problems
The number of people who rent a home or condo while on vacation – instead of a hotel or motel room – is skyrocketing. This can be a great thing for a vacationer, who may get a lot more space and convenience at the same or lower cost.
But it’s not necessarily a great thing for neighbors, particularly if several homes in a neighborhood are rented on a frequent basis. On a quiet residential street, short-term rentals can create a variety of noise, parking, congestion and trash problems.
Increasingly, the issue is resulting in disputes and even court cases.
Many communities have laws on the books that ban or severely restrict rentals of less than a month or even less than a year.
The explosion of vacation rentals is partly due to the weak economy. Owners of vacation homes often decide to rent them rather than try to sell them in a soft market. And struggling homeowners may rent their own homes to make ends meet, particularly if they live near a vacation area or the location of a local festival or event, such that for a few weeks a year a rental may be very profitable. [Read more...]
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Annual gift tax exemption increased to $14,000
The annual gift tax exemption has been increased to $14,000 in 2013, up from $13,000 last year. That’s due to an adjustment for inflation.
This means that you can give any person $14,000 this year without any gift tax liability at all. Making annual gifts of the exemption amount is one of the best and easiest forms of estate planning, because it transfers assets from one generation to the next without any tax liability whatsoever.
If you have multiple heirs, the amount you can give away tax-free multiplies quickly. For instance, if you have two children, and each child is married and has two children, you can give $14,000 to each child, spouse and grandchild. That’s eight recipients at $14,000 each, or a potential maximum gift of $112,000 a year.
Keep in mind that a spouse can also make gifts. If your spouse gave an additional $14,000 to each recipient, that would be $224,000.
If you’re thinking about making regular annual gifts, you might want to consider setting up trusts for the beneficiaries and making gifts to the trusts – especially if your grandchildren are young. [Read more...]
U.S. Government issues new rules for home mortgages
A federal government agency has issued new rules for home mortgages that will rewrite the way that banks decide who gets a home loan.
The rules are designed to prevent a replay of the housing crisis that resulted from a flood of easy-money loans a few years ago. However, the new rules could have the effect of tightening the availability of mortgages, at a time when banks are already being extremely strict about granting loans.
Under current law, if a homeowner defaults on a mortgage, the homeowner can potentially sue the lender for issuing a loan that the homeowner couldn’t reasonably be expected to pay off.
The way the new rules work is that they give banks and other lenders a “safe harbor” – that is, they say that if a bank issues a loan that meets certain criteria (called a “qualified” mortgage), then it can’t be sued if the borrower defaults.
This will create an enormous incentive for banks to issue only mortgages that are “qualified.” While it’s possible that some lenders will continue to issue other types of mortgages, this will be the exception rather than the rule, because lenders will be facing potential legal liability if they do so. [Read more...]
How the new tax law will affect your estate planning
In a big surprise to many people, when Congress passed a law to resolve the “fiscal cliff” in January, it retained the large ($5 million-plus) estate, gift, and generation-skipping transfer tax exemptions that had been available in 2011 and 2012. These taxes will now be 40% of amounts over this exemption.
Without this new law, the exemptions would have dropped to only $1 million at the start of 2013, with a tax rate of 55%.
The exemptions will now be $5 million in 2011 dollars, with adjustments for inflation each year. For 2013, they will be $5.25 million.
This is great news for people who want to transfer wealth to the next generation while avoiding taxes. It means that anyone who didn’t use the “window” in 2011 and 2012 to make large gifts without incurring gift tax has a reprieve, and can make those gifts this year.
That makes 2013 a great time to review your estate plan. While it’s possible to make large tax-deferred gifts right now, we don’t know how long this opportunity will continue, and it’s possible that Congress could change the rules again. Also, the Obama Administration has indicated that it wants to restrict some other popular estate planning techniques, including grantor retained annuity trusts, valuation discounts, family limited partnerships, and dynasty trusts. So it might be wise to investigate these options now before they disappear. [Read more...]
