Capital Asset Taxes - Gains Or Losses

Basically everything you own is a capital asset, this is quite true whether you are using it for business or luxury. The people of the internet revenue service are very much interested in your capital assets. This is because the IRS likes to get everything they can and only leave a little space for you to deal with the value of your loss.

A very important thing to do also is to make sure you pay your taxes on your gains in value of the capital assets when you are going through the procedure of selling them. The short fall of this is that you will only get to claim a loss for things like stocks. This is not quite fair but that the way it is you will have to take it or leave it. The proper way of reporting you losses and gains is by subtract the purchase price from the price which it was sold for, This is then reported to the IRS on a report known as schedule D, and this should be attached to your 1040 tax return.

These capital gains and losses are classified under two different categories such as long term and short term. The main issue now is how long you have owned this capital asset you wish to sell. If the time period is less than a year it is considered as a short term gain or loss. And if the time you were holding the asset for passes a year you then have a long term investment.

IRS Capital Gains - This Tax is You Watching Your Investment Dollars Going Away

The IRS capital gains tax is the method the US government uses to tax any profit you may incur from being a savvy investor.

Capital gains and losses from a person's investments in capital assets do not occur in the purchasing and owning assets. The only time there is a tax liability is when a capital is sold for a profit. This includes financial investment like stocks and bonds along with personal assets like boats and other recreational items. These types of capital assets are divided into short term and long term capital gains and losses.

A long term capital gain or loss occurs when a capital assets is held for more than one year before it is sold. A short term capital gain or loss is when the capital asset is sold within one year of it purchase. The major distinction between the two is the rate at which they are taxed. The short term capital gains tax is at a higher rate a majority of the time.

There are other capital assets that are taxed differently than the short term and long term gains, these are items that are considered art or collectibles. These are taxed at the highest rate of any asset upon their sale. The final tax rate is dependent on the tax payers overall income level.

There are also capital losses. The IRS does not require you to report these because they cannot tax them. If you have a capital loss, you can report them but the amount is limited to $3000 per filing year. If your losses are greater than they must be carried over to the next tax filing year.

This is the basics of the IRS capital gains and losses explanation. More information can be found at the IRS website.

Of course, the above is not legal or accounting advice - it is for informational purposes only. Before making any decisions regarding legal or tax matters, it is vital that you consult a licensed professional lawyer or tax accountant.

Convert Income to Capital Gain and Pay Less Tax

Most people distinguish between capital and income. You read about people, especially retired people, whose capital sits in a bank or building society account while the owner lives on the income alone (mustn't touch the capital!). For people with little money and financial knowledge this is not a bad rule, except of course the capital depreciates every year due to inflation.
I learnt many years ago that you should regard your money as a machine that generates cash. At times the machine may grow bigger or smaller, but as long as it continues to generate the cash, that is OK. The cash may be income, interest, dividends or capital gains - it doesn't matter. It's still money in your bank account. And in the short-to-medium term, as long as you don't need to touch your capital, it doesn't matter if it shrinks. (Actually you gain a little bit - investment fund managers take a fee each year that is usually calculated as a percentage (1% - 1.5%) of the fund value, so whenever the fund shrinks, their fee falls).

This all assumes you have a cash reserve of readily accessible 'rainy day' money (in a high interest account, not a high street bank, please!).

In the UK, when you retire, you have to draw your pension (state as well as personal and/or company pension) as taxable income, and this uses up your personal allowance and your low rate tax band: any additional income is then taxed at 22% (and then 40% if you have a very good income!).

However, if the funds that generated this additional income are invested in a way that will produce capital gains instead, these gains are tax-free (up to about £8,000 per tax year, an amount that is usually indexed annually in the Budget). Capital losses can be carried forward for up to six years and offset against subsequent gains.

This rule applies to everybody, but this example (roughly; figures have been rounded for simplicity) applies to people aged 65+ and shows how this can work. In each case, the person is assumed to have an annual income of £20,000.

Case 1. Total income: £20,000, all from pensions, interest and dividends.

Tax on the first £7,500 (personal allowance) 0

Tax on the next £2,500 (lower rate 10%) 250

Tax on the last £10,000 (standard rate 22%) 2,200

Total tax paid: £2,450.

Case 2. Total income: £20,000, of which £15,000 is income from pensions, interest, etc. and the other £5,000 arises from capital gains.

Tax on the first £7,500 (personal allowance) 0

Tax on the next £2,500 (lower rate 10%) 250

Tax on the last £5,000 (standard rate 22%) 1,100

Tax on the £5,000 capital gain 0

Total tax paid: £1,350.

All you have done is exchange £5,000 of income for £5,000 of capital gain, and you've saved about £1,100 in tax.

Case 3. If you can get the income down to £12,000 and the capital gain up to £8,000, you will do even better:

Tax on the first £7,500 (personal allowance) 0

Tax on the next £2,500 (lower rate 10%) 250

Tax on the last £2,000 (standard rate 22%) 440

Tax on the £8,000 capital gain 0

So the tax paid drops again to £690, saving about £1,750 compared to Case 1. And remember, you can do this every tax year!

How to Compute Short Term and Long Term Capital Gain Tax From Investments in Stocks

Most of you must be aware that as per Income Tax Act, 1961, any income or gain from any source is liable for payment of tax. Gains from investments in stocks are liable for Capital Gain Tax, which is divided into short term and long term capital gain tax. Gains from investments held for less than one year (but more than one day) is chargeable as STCG Tax and gains from investment held for more than one year is chargeable as LTCG Tax. Calculation of profit and loss from investments in stocks and the resulting tax liability is relatively easy, as it involves simple math. However, many people are often scared when it comes to income tax calculations. In this article, I have explained how to calculate profit and loss and tax from the transactions involving investments in stock.

First of all, let me make it clear that stock trading and investment in stock are two different aspects from the point of view of income tax. In this article, I have not touched income from stock trading (day trading or Intra-Day transactions), and trading in Futures and & Options or income from speculative business, as is known in the Income Tax jargon.

Let's see how to calculate STCG and LTCG Tax.

1. Profit and Loss: Profit and Loss = Cost of Sale - Cost of Purchase (Cost of Acquisition);

Cost of sale = The gross sale or realization amount - Expenses incurred for selling the stocks

Cost of acquisition = Gross purchase amount + Expenses incurred on buying the stocks

2. Expenses: Transactions involving sale and acquisition of stocks include the following types of expenses. You can refer the Contract Notes issued by your broker to find out the exact amount of brokerage, Service Tax, Securities Transaction Tax and Other Statutory Fees

Brokerage: Brokerage paid to your brokers is the main component of expenses on sale and acquisition of stocks.

Service tax and Education Cess: Your stock broker has to pay service tax and education cess at the rate of 10.3% on the brokerage amount, which in turn is passed on to you.

Other Charges: Transactions in stock involve other statutory charges such as stamp duty, turnover tax, and transaction charges of the stock exchanges, which are also passed on to the investors.

DP Charges: It includes DEMAT annual maintenance charges and transaction charges. You can get the amounts from DP Statements issued by your broker.

Securities transaction tax (STT): Although STT is an expense for you but it cannot be claimed as a deduction from the profit and loss from investments in stocks and therefore, in your calculations of profit and loss, you have to exclude STT.

3. Capital Gains Tax: After having calculated the profit and loss, the next step is to calculate the tax liability. At present, the rate of short term capital gain tax is 15% and long term capital gain on investments in stocks is exempted from income tax, that is, long term capital gain tax is zero.

You can visit Financial Awareness Portal to get more info with practical examples on how to compute Short Term and Long Term Capital Gains Tax using a spreadsheet.

Exchange Your Way Out of Capital Gains Taxes - Tax Loophole Series

There is an old saying "When There is a Will, There is a Way" And many people definitely have a desire to avoid capital gain taxes when selling investment property.

Tax Loophole: When one kind of investment real estate is traded for another, the capital gains tax is fully deferred.

Generally you are not required to report a taxable gain when business or investment property is exchange for "like kind" business or investment property. The key here is the term "like kind" which refers to the characteristic of the property - NOT it's quality. Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality.

Examples of Exchanges:

1. Exchange a rental apartment in the city for a rental home in the country.

2. Exchange a city block for farm land

3. Exchange a rental house for a commercial building.

Note: If cash is received in a tax-free exchange you may have to report and pay capital gains taxes based upon the cash received.

The possibilities and options are many. Imagine trading a rental home with a low monthly cash flow for a commercial building with a higher monthly cash flow, just because the owners want to retire?

The most common type of Exchange is known as the Forward Delayed Exchange. The Taxpayer sells investment property and will acquire a replacement property of equal or greater value within 180 days. There are stick stipulations and loads of paper work; you will need a real estate professional or attorney that specializes in 1031 Exchanges.

5 Tax Moves to Make Now

For many, April 15 is the chosen date to start thinking about tax planning, but by then it's too late - four months and 15 days too late. Tax planning is a game plan, most effective when implemented throughout the year. And 2010 is an especially important year to plan considering the Bush Tax Cuts are set to expire and what changes health care reform may bring to the tax code.

To help you game plan, we've put together these five tax moves to take advantage of changing tax laws and to better prepare for the upcoming tax season. Implement these now, and you could save a bundle on April 15.

Assess Capital Gains - The current long-term capital gains tax rate, with some exceptions, is either 0 percent or 15 percent depending on what ordinary income tax rate you fall into. But in 2011, these rates increase to 10 percent and 20 percent. That means if you have some investments that have done well, you may want to consider selling them this year to take advantage of the lower tax rates. If you are currently within the 0 percent long-term capital gains rate, it's probably an easy decision. But for those in the 15 percent bracket, saving 5 percent over next year's higher rate is significant also. Of course, an investment's tax consequences are just one factor to consider when deciding whether to sell, so consult with your financial adviser first.

Make Money Now - When the Bush Tax Cuts expire in 2011 some of the higher income tax brackets will get even higher. The top two rates for the 2010 federal income tax brackets are 33 percent and 35 percent, which will increase to 36 percent and 39.6 percent in 2011. Congress will decide later this year what effect these changes will have on lower tax brackets (tax rates could decrease for individuals earning below $250k according to President Obama's proposed budget), but the lower tax brackets are set to increase as well if no change is made. If you fall into a rising tax bracket, and are a small business owner or independent contractor, you may want to accelerate income into 2010 if at all possible. You also may want to consider shifting income by hiring your children or other family members who are in a lower tax bracket. This may also be a strategy for you to have your child or family member deduct their education expenses, where you may have not been able to because your income was too high.

Go Green (Home Edition) - Several energy tax credits are set to expire this year, including a tax credit up to 30 percent of the cost ($1,500 maximum) on certain qualifying home improvements, such as roofs, water heaters, and HVAC systems. These may be extended, but to qualify this year, make sure to verify the product you want to install qualifies for the tax credit, and get the work done this year before the credit expires. There are some other energy tax credits that do not expire until 2016 but these improvements are very rare. They are presented in the link above.

Make a Non-Cash Charitable Donations - Year after year, this is the number one tax strategy that tax payers who itemize fail to consider. To claim the deduction, the donations must be substantiated by a written receipt that includes the name of the charity, dates and location of the donation, and a reasonably detailed description of the property donated. If the value of the donated items is less than $250, a receipt is not required. For items with a total value more than $500, you will need to file Form 8283 and you may need a qualified appraisal for donating items or a group of items valued at more than $5000. For the Salvation Army's Non-Cash Charitable Donation Valuation Worksheet, to help you value your donations, click here.

Get Organized - Last minute tax preparation not only costs a few night's sleep, it can also cost you money. Remember you don't pay taxes on what you make; you pay taxes on what you make minus your expenses and deductions, so don't wait until tax season to organize your information. First step, buy a good accordion file. Then keep records of your taxable investments to help you calculate gains and losses. Keep your business receipts organized and separate from personal expenses (we suggest a business bank account and/or credit card). If you've made home improvements that qualify for tax credits, keep your receipts in a separate file. Staying organized takes just a few minutes a week, but it can save you a lot of headaches when it comes time to file your taxes and will reduce the risk that you'll miss a tax deduction.

Top Ten Tax Tips For Foreign Property Owners

1. Don't Forget You Still Have UK Tax To Pay!

Arguably, this is more of a warning than a tip, but it is vital to remember that any UK resident individual buying property abroad is still exposed to UK tax on that property. This may include UK Income Tax on rental income, UK Capital Gains Tax on property sales and UK Inheritance Tax on any foreign properties you leave to your children.

The UK tax burden is often greater than any foreign tax liabilities, so it makes sense to undertake UK tax planning for your foreign property. Many of the same planning techniques that work well on UK property can be used equally on foreign property, although the overseas angle adds an extra dimension and brings both additional opportunities and additional pitfalls to be wary of.

2. Main Residence Relief for Foreign Holiday Homes

There is nothing in the UK tax legislation to say that a foreign holiday home cannot be a UK resident individual's main residence for Capital Gains Tax purposes.

A holiday home can be treated as your main residence by making an election to that effect, generally within two years of buying the property.

The foreign property must be your own holiday home for at least part of the time but, by making the election, you will be able to exempt some or all of the capital gain on your foreign home from UK Capital Gains Tax.

Beware, however, that you're only allowed one main residence and, if you're married or in a civil partnership, you're only allowed one between you, so electing to treat your holiday home as your main residence could backfire if you sell your main house back in the UK.

You can get the best of both worlds though, if you only elect to treat your foreign property as your main residence for a short period, say a week. How does this help? Well, since every main residence is also exempt for the last three years of ownership, that week buys you three years. In other words, you lose one week's worth of exemption on your main house but gain three years (and a week) of exemption on your foreign holiday home.

3. Travel at the Treasury's Expense

If you're renting out foreign property, you have a foreign rental business. Like any other business, you're entitled to claim tax relief for your business expenses. That includes any travel costs which you incur for business purposes.

Furthermore, all foreign property rentals are treated as one business. Hence, for example, you could claim the cost of going to Dubai to look for a possible new rental property against the rental income from a villa which you already have in Spain.

4. Understand the Local Taxes

Most countries will tax foreigners on any property they own in the country. Local taxes often apply to property purchases and sales and to rental income. Furthermore, you will often have to pay annual taxes on foreign property, even if you do not rent it out, and many countries also have gift and death taxes.

You will get double tax relief in the UK for any foreign tax on the same income or capital gains when the UK accepts that the foreign tax is broadly equivalent to the UK tax you are paying.

Beware, however, that every country has a different tax regime and not all of them are compatible with the UK tax system. If you suffer a foreign tax which is different in character to any UK tax, or which arises when no UK tax is due, you may not get any relief for it in the UK.

So, a foreign tax at 30% which is deductible from your UK tax liability on the same income may actually cost you less than a foreign tax at 10% for which no double tax relief is available. All these factors need to be considered before you invest in foreign property.

5. Do You Want Double Tax Relief?

As a general rule it is usually worth claiming double tax relief for any foreign taxes whenever you can. By claiming double tax relief, you deduct the amount of foreign tax paid from your UK tax liability.

However, you cannot get any repayment of foreign tax through a double tax relief claim and the best you can ever do is to reduce your UK tax liability to nil.

Sometimes, the foreign tax may actually exceed the amount of the taxable income or capital gain for UK tax purposes. In these situations, it is better to claim the foreign tax as an expense rather than to claim double tax relief.

Where you claim foreign tax as an expense, it reduces the amount of the taxable income or capital gain and can even create a loss. This loss can be carried forward to give you future tax relief and hence, in some situations, can actually give you better value for your foreign tax than a double tax relief claim.

6. Reduce Your Foreign Exchange Tax Risk

All UK tax calculations for individual taxpayers are carried out in pounds sterling. This creates some particular problems when it comes to capital gains on foreign property. You may make very little gain in the local currency, but when you translate your purchase and sale costs back into sterling, you may have a big Capital Gains Tax exposure in the UK.

Let's say you buy a property in Utopia for 100,000 Utopian Dollars at a time when the exchange rate is two Utopian Dollars to the pound. That means you have a purchase cost of £50,000.

Later, you sell the property for 120,000 Utopian Dollars. In local terms, you have a modest gain of 20,000 Utopian Dollars. However, let us suppose that the exchange rate is now 1.2 Dollars to the pound. This means that your sale proceeds for UK Capital Gains Tax purposes are £100,000 and you have a taxable gain of £50,000.

Maybe that's fair: after all, if you bring the money back to the UK, you will have made a profit of £50,000 on your investment.

Beware, however, that if you hang on to your Utopian Dollars, they will become a new chargeable asset for UK Capital Gains Tax purposes and may give rise to a capital gain or capital loss when you eventually spend them or exchange them into sterling or any other currency.

The real problem to watch is that if you make a capital loss on your foreign currency in a later UK tax year (year ended 5 th April), you will not be able to set that loss off against the earlier capital gain on your foreign property.

The tax tip here, therefore, is to make sure that you dispose of your foreign currency sale proceeds in the same UK tax year as you dispose of the foreign property itself.

7. Get VAT back with leaseback

In the UK, we are accustomed to the idea that any purchase of residential property is exempt from VAT. This is not the case in every country, however, and many European countries charge VAT, at rates of up to 20%, on new residential property purchases.

One way to recover the VAT on such a purchase is to enter into a 'leaseback' scheme. Under these schemes you, the owner, lease the property back to a hotel operator. This means that your property becomes a business property and you are able to recover the VAT. Typically, you are allowed a few weeks of personal use of the property each year and, eventually, after a suitable number of years, it is yours outright again.

The scheme only works for certain types of property, such as hotel rooms and apartments, and may carry disadvantages for other foreign taxes, such as higher Income Tax rates; so it's one to investigate carefully before you sign up.

8. Borrow to Save

Many countries impose Wealth Tax, Inheritance Tax, or both, on foreigners owning property in their country.

Wealth Tax is usually an annual charge on the property owner's net wealth in the country.

Foreign Inheritance Tax also usually applies only to a foreigner's net assets in the country.

In most cases, you can reduce your net wealth in the foreign country for tax purposes by taking out a mortgage on your foreign property. In this way, it will usually be just your net equity in the property which attracts foreign tax.

If you don't actually need a mortgage, you can invest the borrowed funds somewhere else outside the country where your property is located.

9. Avoid Evasion

When you buy property in a foreign country, you will usually also be acquiring tax obligations in that country. In fact, many countries require prospective foreign property purchasers to register themselves with the local tax authority before they can complete their purchase.

If you want to sleep at night, you need to make sure that you fulfil your local tax obligations in the country where your property is situated. Many foreign tax authorities have the power to seize property where taxes are unpaid.

Naturally enough, the local tax authority will write to you in their own language. Do not ignore this correspondence just because you don't understand it: this is no defence. You will need local help and advice to make sure that you deal with the local tax authority appropriately and meet all of your obligations as a taxpayer in the country.

10. Expect the Unexpected

If the UK tax system is all Greek to you, or seems like Double Dutch, why should you expect foreign taxes to be any different? Every country has its own tax and legal system and, when you buy property abroad, you must abandon all of your preconceptions.

Assume nothing until you have investigated the local tax system thoroughly. Your destination country will have different taxes, different tax rates, a different tax year and a whole different set of rules, regulations, reliefs and exemptions.

Local property law and succession law is likely to be different too and a UK investor who overlooks this fact may suffer a great deal more than just tax!

2011 US Tax Changes for Investments

Disclaimer: I am not a Certified Public Accountant (CPA), tax advisor or tax lawyer. Please talk with your CPA, tax advisor, or tax lawyer before making any investment decisions that may have tax consequences for your investments. One of my investment rules is know the tax ramifications of any investment that you plan to make before you make it, and make it tax efficient, whether under current tax laws or forecasted future tax changes. Taxes and/or government fees will be increasing over the next 5 years to help pay for the federal, state and local government deficits and future government entitlement programs (for example, health care). For example, to pay for the new health care plan high income earners in 2013 will experience an increase in Medicare payroll tax (.9%) and an additional tax (3.8%) on qualified dividends and capital gains.

Former President George W. Bush's tax cuts (BTC) were intended to expire at the end of 2010, reverting to the previous tax code for long-term capital gains and qualified dividends, reviving the estate tax and restoring the top marginal bracket of 39.6% at the beginning of 2011. On December 17, 2010 President Obama and the US Congress extended Bush's tax cuts for another 2 years (ending January 1, 2013), made changes to the estate tax and added a 2% reduction of the payroll (social security) tax. This will be one of largest stimulus packages for the US economy ever - approaching $1 trillion US.

Long-term capital gains tax (on assets held longer than one year): The current tax rate of 0% for taxpayers in the 10% and 15% tax brackets as of 2008 and 15% for everybody else will not change for the next two years. The pre-BTC rates were 10% for the 15% tax bracket and 20% for everybody else.

Qualified dividends: Qualified dividends will continue to be taxed at a maximum rate of 15% for the next two years. The pre-BTC rate was ordinary income based on your highest tax bracket. For example if you were a high income earner and your tax bracket was 39.6% your qualified dividends would have been taxed at 39.6% (this could be as high as 43.4% in 2013).

Top income tax bracket: Bush's tax cuts eliminated the top income tax bracket of 39.6% making the 35% the highest tax bracket and created a new 10% bracket for low income earners. Congress and President Obama extended 35% as the highest tax bracket and the 10% tax bracket for the next 2 years.

Revival of the estate tax:In 2010, as a result of several unusual circumstances, there is no limit on the size of an estate that is exempt from federal estate taxes. Starting in 2011 (and ending in 2013) the exemption will be $5 million per person and for a married couple up to $10 million will be exempt from federal and gift taxes. The top tax rate applied to the portion of estates exceeding those limits will be 35%, the lowest tax rate in 80 years.

Payroll tax decrease: Wage earners received a social security tax reduction of 2%, making the tax rate 4.2% up to the cap of $106,800 in 2011 (the cap will increase in 2012). If your wage income is at or over the cap, this will result in savings of $2,136, or about $40 per weekly paycheck. Congress did not renew the Making Work Pay tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns (this was up to a maximum adjusted gross income level). Consequently, working individuals who earn less than $20,000 ($40,000 for married taxpayers filing jointly) will have less money in their paycheck starting in 2011.

The tax rate on long-term capital gains and qualified dividends which are most important to investors will stay the same for the next two years. All these tax changes will revert to their pre-BTC tax rates on January 1, 2013. With President Obama, all of the House of Representatives and 1/3 of senators up for reelection at the end of 2012, expect the US tax rates to be a major campaign issue in the 2012 election.

A good strategy is to always keep interest/ dividend-paying and non-tax efficient investments in your non-taxable accounts. Also, any investments for which there is a high degree of difficulty determining the tax liability, i.e. trading stocks, future contracts, exotic ETFs, etc., should be invested through your non-taxable accounts.

Between the extended Bush tax rates and payroll tax decreases (costing the US government almost $1 trillion in revenue over the next two years) and Quantitative Easing 2, the US government has created the largest stimulus ever in its quest to grow the economy and reduce a persistent US unemployment rate hovering close to 10%. If this stimulus does not lead to job growth and reduce the unemployment rate, the issue will become: how do you reduce structural unemployment issues which take a long time period to resolve? This will be difficult to resolve in the current US political environment which everything is short focus on the next election.

Florida Property Taxes - Reduce Them, Or Your Capital Gains Tax, With These Strategies

If you decide to relocate to Florida, you'll have property taxes just as in any other state. The good news is that Florida property taxes are very reasonable. The median home value in Florida is $189,500. The average property tax is $1,495, which means Florida has the 22nd highest average tax amount in a comparison of all 50 states. As a percentage of a home's value, Florida property taxes are approximately .79% of the home's value (28th highest out of 50).

Florida property taxes as a percentage of a person's income are slightly higher, measuring an average of 2.95% and putting Florida at the 19th highest position in this measurement. So from these statistics, you will likely find that the dollar amount of your Florida property taxes and the percentage of your home's value that the taxes represent will be similar to or lower than what you pay now. However, if you were earning a salary in Florida, you'd find your property taxes might represent a higher percentage of your annual income than you were paying in your old state.

However, there are two strategies you can use to reduce the amount of tax that you will have to pay. One will reduce your annual property tax, and one will allow you to reduce the tax you will pay on the sale of your home. Unfortunately, only one or the other will apply at the same time.

First, there is the Florida homestead exemption that is applied to a home that is your permanent and full-time residence. In other words, it's not just your vacation home.

If you do have a vacation home in Florida, you will have to pay full Florida property taxes. However, there has been an interesting change in the IRS laws regarding 1031 exchanges, more commonly referred to as the 'swapping' of investment property. Under the IRS laws, an investment or business property can be sold and the proceeds will be tax-free if they are reinvested in a 'like-kind' property. However, this meant that homeowners were not allowed to use their own property as a vacation home without risking that it would be considered 'mixed-use' (taxable) rather than an investment property.

With the changes in the law, there is now a 'safe harbor' for these sales that so that you can enjoy your vacation home in Florida and eventually sell it at a higher value, then roll the proceeds into another home in a tax-deferred sale. The advantage is two-fold; you get to rent the home for the majority of the year, earning income to pay the mortgage. And you get to enjoy the home yourself without losing your earnings to taxation at the time of sale. In order to avoid taxation on the gains as personal income, you need to do the following:

· Purchase the home and keep it for a minimum of 24 months
· For each of the 12 month periods you own it, you must rent it out for at least 14 days of the year at market value
· Stay in it yourself no more than 14 days or 10% of the time you rented it out, whichever is greater.

Remember to always consult your accountant or tax attorney before making a 1031 exchange. The rules can change quickly, and you don't want to act under a false assumption.

The Tax Benefits of Buying a Home

There are many tax benefits to buying a home. They are definitely worth keeping in mind if you are a renter considering buying a home for the first time. Such benefits include mortgage interest deductions, property tax deductions, a capital gains tax exclusion, and preferential tax treatment.

In short, tax laws in the United States favor home owners. For instance, if your mortgage balance is smaller than the value of your home, you can fully deduct the mortgage interest applying to your home loan on your tax return. When you make a mortgage payment, interest is often the biggest component. For example, if your monthly payment is $1,200 then you might find that $1,162 is going toward interest while only the remainder of the monthly payment is touching the principal balance. It follows that being able to tax-deduct twelve months of interest is a huge benefit!

As a first time home owner you can also benefit from property tax deductions. Property taxes on your first home are fully deductible for income tax purposes. Also, property tax increases are limited to the lesser of the inflation rate or 2 percent per annum after assessing the value of the home when it's sold.

Home owners can also benefit from a capital gain exclusion. If you have lived in your home for at least two of the past five years then you may exclude profit of up to $500,000 (for couples) or $250,000 (for individuals) from capital gains tax. This exclusion can be used on your taxes every other year or every 24 months. This means you could foreseeable sell your home every two years and make a profit, tax free.

Home owners also receive other kinds of preferential tax treatment when they own a home. Even if you sell your home and receive more profit than the allowable exclusion for capital gains tax purposes, such profit will be considered a capital asset (providing you have been in possession of your home for more than one year). Capital assets receive preferential treatment by the IRS for tax purposes.

In addition to the many tax benefits of home ownership you will build equity when you own a home. The more payments you make, and the more you reduce the outstanding balance of your mortgage, the more equity you will build. Your credit score will also improve due to making monthly payments on time.

So... if you are a renter thinking about buying a home, definitely take the various tax benefits into account, as well as the general benefits of home ownership!

Six Ways to Defer Capital Gains Tax

When a property owner is ready to sell a particular property the one tax they are very concerned about is the capital gains tax. This particular tax is coming from certain sources such as properties and assets and also from stocks and bonds, and the one draw back of this particular tax is that it takes a rather large sum out of your profit of the transaction. Therefore one of your main objectives as a person selling a property is that you should work to cut this tax to as low as you can.

This list consists of six different ways to defer or cut the tax which would be taken from your profit of the sale. The first one is tax lost harvesting which is a place where you go and sell your securities, and the whole idea of this is to create an offset to your capital gains for years to come. The second is charitable trust in which you can give so of your equity funds to a charity in order to cut some of the taxes you would pay. The third option is an installment sale and this way is if you accept installments for over a period of several years.

Fourth is the option of deferred sales trust in which this trust receives the money from your transaction and then the taxes will be deferred for the period of the installment note. There is also the 1031 exchange this process allows you to defer by exchanging a certain property and it can only be done with property. And the sixth on is structured sale this is a system which allows the seller to defer from any gains from the transaction.

Avoiding Capital Gains Tax

What You Should Know About Home Selling And Capital Gains

There is a way around capital gains taxes, and it's through home sales exclusion. Homeowners everywhere know about the tax breaks the US government is serving up, especially the ones on tax deductions and mortgage interest. Home sellers stand to benefit big time. Majority of them will not owe the IRS (Internal Revenue Service) a cent.

Some Info On Capital Gains And Selling Your House

Selling your main residence can earn you profits amounting to as much as $250,000. That's as a single owner. You can make two times that amount if married. All these come with no capital gains taxes owed.

In the past (pre-May 7, 1997), people escaped having to pay taxes on profits made from home sales one way: using the same money to purchase other, pricier homes within a couple of years. Sellers age 55 and older had another option. They could opt for a one-time tax exemption offer in profits worth nearly $125,000.

The passing of the 1997 Taxpayer Relief Act eased the home sale tax load borne by the millions of homeowner taxpayers. Per-sale exclusion amounts seen today, replaced the once-in-a-lifetime or rollover alternatives.

Who Is Qualified? This is determined through the "USE" checklist or test. Exemptions restricted to every couple of years. People are only exempted from home sale capital gains taxes once per two-year period.

1. USE Test - You're qualified for home sale capital gains tax exemption if you owned and inhabited a residential place for two of the last five years prior to selling, but there can be interruptions in the timeframe involved. You can reside in the house during year 1 and rent it out for the next three years, move back in for year 5 and still be eligible.

2. Failing the USE Test - If you flunked the USE test, there's still hope. You can avail of prorated exclusions on capital gains, provided your home was sold because you switched jobs, had health reasons or other unexpected circumstances. Say you lived in a house for just one year because of employment changes. This entitles you to an exemption of $125,000 or half the original $250,000 exemption you would've gotten.

3. Nursing home exception - Although ordinarily you're required to own and reside in the property for two of the most recent five years, this requirement can be driven down to just one of the five years for those who wind up living in nursing homes. Even better, the length of stay in nursing homes is credited to the USE test, treating the nursing home much like the original house.

If you've been toying with the idea of selling your house for months, but are a few months shy of the two-year requirement, hang in there just a bit more until you complete the entire 24 months. It will mean bigger capital gains for you.

This article is just general information on capital gains tax on real estate sale. You should always consult with a tax person or an attorney at law on any tax matters or questions you may have on capital gains taxes on real estate.

Deferring Taxable Gain on the Sale of Your Business Or Real Estate Assets

Business owners who sell a business, assets held or used in their business, or real estate used in their business operations can face significant capital gain taxes.  These capital gain taxes due from the sale of your company, assets or real property can be minimized or even eliminated with the proper tax deferral or tax exclusion planning in conjunction with your legal and tax advisor. 

There are numerous tax deferred and/or tax exclusion strategies available for the sale of businesses, assets and real estate.  It is critical that careful tax planning be a priority in order to properly deal with the potential capital gain taxes that will be generated by the sale of your property.

The 1031 Tax Deferred Exchange May Not Be Suitable

Owners of real or personal property, such as a business interest, assets used in a business or real property that have been held for rental, lease, investment or used in a trade or business, frequently structure tax-deferred exchanges pursuant to Section 1031 ("Section 1031") of the Internal Revenue Code ("Code") in order to defer the payment of their taxable gains.

However, tax-deferred exchanges pursuant to Section 1031 are not always feasible, suitable nor appropriate for taxpayers when they are selling their company, assets used in their company or real property used in their business operation. 

Section 1031 Exchange transaction structures require business or property owners to exchange equal or up in net sales value by acquiring one or more replacement properties that are of like-kind.  Locating suitable replacement properties to be acquired as part of the Section 1031 Exchange in order to replace the relinquished property (business) can be extremely challenging, very stressful, and virtually impossible in some cases. 

The taxpayer may have absolutely no wish to reinvest his or her net sale proceeds into another business operation of like-kind, or any kind, for that matter.   Taxpayers may just wish to "cash out" and pay their taxes. 

Taxpayers may have reached a point in their life when they merely wish to sell, cash out, pay the taxes, and absolutely not reinvest in another business, assets or real estate. They may not even want to see another business as long as the live.  Some taxpayers may opt to sell and pay their capital gain taxes in the current year, but many would prefer to implement some kind of tax deferral or tax exclusion strategy that would allow them to defer the payment of their taxable gains over a period of time of their choosing rather than get hit with them all in the year of sale.

Deferring Capital Gain Taxes Without a 1031 Exchange

There are a number of tax deferred and tax exclusion strategies available that a taxpayer can use to defer the payment of taxable gains, so it is important that the taxpayer meet with his or her tax advisor to review all of their tax strategies. The following are the two most common tax-deferral strategies available for the sale of businesses, assets used in your business or real estate:

Seller Carry Back Note (Seller Financing)

The taxpayer could structure the sale of his or her business operation by carrying back a note, which is often referred to as seller financing or a seller carry back note. Seller financing is merely an installment note or promissory note where the buyer of the business entity or assets/property makes periodic payments to the seller. Depreciation recapture taxes, if any, are due and paid in the year the business, assets or real estate were sold. The capital gain taxes are partially or fully deferred over the term of the note and are taxed as principal loan payments are made to the taxpayer.

The installment note or promissory note strategy has positive and negative features. The obvious positive is that you can sell your business, asset or property and defer the payment of your taxable gains by structuring a seller carry back note.

However, the risk of buyer default on the installment note is a considerable negative. The process to foreclose or otherwise take back the business or asset/property can consume significant amounts of time and money and the business, asset or property may have been irreparably damaged during the buyer's ownership and management.

Deferred Sales Trusts or DSTs

Deferred Sales Trusts or DSTs are highly effective tax-deferred strategies, similar to the installment sale or seller carry back note, but without the risk of buyer default.  The Deferred Sales Trust receives all of the net cash proceeds from the buyer at the closing of the sale transaction, thus removing the buyer from involvement in the Deferred Sales Trust  transaction.  Deferred Sales Trusts can provide other great tax and estate planning strategies as well.

Deferred Sales Trusts are drafted pursuant to Section 453 of the Internal Revenue Code, just like the installment sale note or promissory note in seller financing. The capital gains tax is realized or triggered, but not recognized or paid, because it is deferred over a period of time selected by the taxpayer.

The capital gains tax liability is partially or fully tax deferred over the term of the installment sale note created within the Deferred Sales Trust account, which you will negotiate in advance directly with the Trustee of the Deferred Sales Trust. 

The CGT Revolt, What It Really Means

The Capital Gains Tax revolt by the Conservative back benchers is both more and less serious than it appears. This will not bring down the coalition, but that something like this occurs at the beginning of a new government should worry David Cameron.

The Capital Gains Tax revolt is actually quite moderate.  John Redwood's letter, which seems to have crystallised a lot of the latent unease, accepts the need to raise taxes and that "investment" gains may be a good place to raise those taxes - particularly a tax that is so prone to having income being repackaged into gains. What it argues for is the re-introduction of some recognition of a length that an investment was held. In itself this will not reduce the gains by a lot, although it may add some complexity to what was a wonderfully simple tax.

In itself this should not worry the government.  Yes the people who will suffer are high earners who have saved money and invested them into real assets - classic Conservative voters - but they were going to get hit any way, and they knew it.

However this should not have happened so early in the life of the parliament.  After 13 years of opposition the Conservatives are now sitting on the government benches, and issues that Conservative MPs and activists really care about, such as Europe and immigration, are being taken seriously.  There is also the fact that in the first couple of years there is usually quite a lot of scope for movement into government, which should concentrate otherwise rebellious minds.

So why is the revolt happening at such an early stage of a new government?  The Conservative back benches are unhappy.

They are not unhappy with the coalition itself.  After all they had a week before the coalition agreement to work out whether a couple of years of Labour would be preferable to what they have now, and they realised that on balance it was not. So they are reconciled to the coalition.  Of course they would have been happier if there were more Conservative policies and more government jobs for Conservatives, but they knew that with a coalition that these things would happen.

What they are really angry about is why they got to a point where they needed a coalition.  Of course it is easy to complain about the fact that the Conservatives are hurt by the distribution of seats, but this was the classic situation where voters are crying out for a strong Conservative government - and they did not get it.

The problem is that no one is being allowed to admit that the election did not go to plan, that David Cameron failed to get a majority and that pandering to hostile elements failed.  Until that happens they can expect more revolts.

President's 2011 Proposed Budget Sets Wealthy at $190,650

The definition of a wealthy American acording to President Obama just keeps changing. In the 2008 Presidential race, then candidate Obama, stressed that those making under $250,000 would not see any tax increases. Well, folks, he lied. If you make $190,650 or more you are being targeted as "wealthy" in President Obama's 2011 Proposed Budget. The proposed budget is filled with numerous, significant, tax increases. Most of these tax changes take effect in 2011. The purpose of this article is to highlight what those tax increases are and how they will affect you personally, as well as other provisions in the budget, both good and bad.

Tax Increases in President's Fiscal Year 2011 Budget Proposal:

1. Tax brackets will increase from 36% to 39.6% for married couples with taxable income, after the standard deduction and two personal exemptions, of $231,300;
2. Tax brackets will increase from 36% to 39.6% for single individuals with taxable income, after the standard deduction and one personal exemption, of $190,650;
3. Reinstating the loss of itemized deductions for higher income taxpayers;
4. Reinstate the loss of personal exemptions for higher income taxpayers;
5. Limiting the benefit of itemized deduction to an effective tax rate of 28%, for taxpayers who are in the 36% or 39.6% tax brackets;
6. Increasing taxation of commodities dealers by taking away capital gains treatment on income realized from their investment transactions;
7. Punitive bank taxes imposed on the largest banking institutions to pay for TARP Losses incurred by the federal government. This bank tax would apply to all large banks, even if they did not take any TARP money.
8. No interest deduction for US corporations who borrow money that is then invested oversees;
9. Increasing capital gains tax rates from 15% to 20%;
10. Increasing taxation of dividends from 15% to 20%;
11. Bring back the marriage penalty on certain deductions;
12. Eliminating certain tax benefits for oil, gas and coal companies (no more intangible drilling expensing, enhanced oil recovery credits or percentage depletion deductions);
13. Repealing the LIFO accounting method for inventories;
14. Imposing a permanent.2% unemployment insurance surtax.

Tax reductions in President's Fiscal Year 2011 Budget proposal:

1. New Jobs tax credit of $5,000 for 2010 only;
2. Extend bonus first-year depreciation;
3. 0% capital gains tax rate on qualified small business stock held for at least five years. Effective for such stock acquired after February 17, 2009;
4. Removing company provided cell phones from the listed property category;
5. Extending the Making Work Pay Credit for 2010;
6. Making the American Opportunity Tax Credit for higher education expenses permanent;
7. Extending through 2011 the optional deduction for state and local general sales tax;
increasing the child and dependent care tax credit for families earning up to $113,000 a year;
8. Extending the 65% COBRA premium subsidy to cover workers involuntarily terminated before 2011;
9. Expanding the Saver's Credit to match 50% of a contribution up to $500 per individual ($1,000 for married couples);
10. Doubling the maximum credit to $1,000 per year for three years for small employers that establish a new retirement plan;
11. Making the Research and Experimentation Credit permanent.

Military Personnel and Capital Gains

On the issue of a military personnel selling a property but this sets them free of deciding if they should sell or not as they are not taxed for certain things, meanwhile the civilian has to decide very carefully what he wants to do as he will be taxed heavily. There had been news the other day of real estate prices rising and the good news about this is that all these spots have lots of appreciations.

But the very bad news is that the government in turn likes to take advantage of that particular tax, news of this makes military personnel wonder if there is a better way for them as they work with the government. And the news for these people are not so bad, because there real estate sale can avoid capital gains tax but under a governed system. As people know before that if you sell your property and it sells for more than you paid for it then that is looked at as capital gains.

If the relevant capital gain is no more than two hundred and fifty thousand or $500,000 for a couple you will be able to avoid paying the capital gains tax as long as you have lived in the house for a minimum of two out of five years. And a great thing about this is that everyone is treated equally, but for military personnel who own homes the rules are the same for both them and the civilian and it comes with a particular exception.

Capital Gains When Selling Your Home

Over the years the tax laws have changed with regards to how the sale of your home is taxed. There were once laws that said that you could rollover the profit from the sale into a new more expensive home. There used to be a one time exclusion on the sale of your home if you were over 65. Those laws are now no longer valid and have been replaced by the current law.

The current law states that if you purchase a home, and live in it for 2 out of 5 years, you do not have to pay capital gains (or any other tax) on up to $500,000 gain for a married filing joint couple or $250,000 gain for a single person. In plain English, this means that if a couple purchased a home for $200,000, lived in it for 2 years and then sold it, they could sell it for $700,000 without paying any taxes on the profit ($450,000 for a single person). There is no limit, you can buy and sell a home every two years with the same exclusion.

What if you do not live in the home for two years? There are three exceptions to the two year rule.

1. Change in Place of Employment. The IRS says that if you, your spouse, a co-owner of the home, or a person whose main home is the same as yours changes employment, you can still take the exclusion. The employment can be a new employer, the same employer or self employment. The new employment must however, be at least 50 mile farther from the home you sold than the old place of employment. The change of employment must take place while you are living in the home.

2. Health. The IRS says that you can claim the exclusion if you have to move because of a specific medical problem. This can be for a parent, grandparent, stepparent, sibling, step sibling, half sibling, mother or father in law, aunt, uncle, nephew, niece or cousin. The move must be to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness or injury. You can't take the exclusion if you move just because it will benefit a persons general health or well-being unless a doctor recommends the change of residence.

3. Unforseen Circumstances. Unforseen circumstances is an event that you could not reasonable have anticipated before you bought and moved into the property. They include things such as natural or man made disasters, act of war or terrorism, death, unemployment (if you qualify for unemployment), divorce or legal separation, multiple births resulting from the same pregnancy or a change in employment that results in the inability to pay your ordinary living expenses. Unforseen circumstances does not cover if you just prefer a different home or your finances improve or you spend too much to maintain a luxurious life style.

Examples:

Employment: Justin was unemployed and living in a townhouse in Florida that he owned and used as his main home since 2005. He got a job in North Carolina and sold his townhouse in 2006. Because the distance between Justin's new place of employment and the home he sold is over 50 miles, he qualifies for the exclusion of the gain from the sale of the townhouse.

Health: In 2005, Chase and Lauren, husband and wife, bought a house that they used as their main home. Lauren's father has a chronic disease and is unable to care for himself. In 2006, Chase and Lauren sell their home in order to move into Lauren's father's house to provide care for him. Because they are moving to care for the father, they qualify for the exclusion.

Capital Gains Tax Rate - Your Ultimate Guide

The principle that is always used by money investors is long term investment. It does not just give you a greater chance of making profits more, it will also save you some money on the tax that you will be paying.

Actually, the capital gains tax rate that you pay will depend on some things like the time you bought the property, the time you sold the asset, your general income level, and will sometimes depend also on what changes are made on the tax code.

Nowadays, capital gains taxes are almost forgotten. Other tax payers who belong in the two lowest tax groups may end up without a tax bill. On some cases, zero capital gains apply for some tax payers. Other investors will notice that they are taxed at a rate of 15 per cent. Other rates like 25 and 28 per cent apply for some special conditions.

A common thing that the different tax levels have in common is that they are also called as long term capital gains. This also means that these capital gains tax rates apply to properties that are held for at least 366 days or more than a year.

The tax demand offered by the long term capital gains tax rate is usually lesser than what you pay on your normal income. It is actually the tax payer's level of income that can determine which among the capital gains tax rate will apply.

If the profit of your investment lifts you to a higher group or bracket, you may probably be taxed at a combination of rates. Also, you could be asked to pay another rate dependent on the type of asset that you are trying to sell.

For investors who belong in the 10 to 15 per cent income tax brackets, they receive no tax billing. This is called zero capital gains tax rate. This took effect last year.

Before, people who belong to this group had to give 5 per cent of their long term capital profits and that any long term property they sell shall be exempted from capital gains taxes.

For you to be able to qualify for the zero tax rates, married people must make not more than $65,100 while single people must earn half of that or lesser for them to have zero tax rate for assets or properties that they have acquired for more than one year.

Although low income people most likely are not investors, the tax benefit can actually help other individuals like retirees who have meager or no income.

Before the administration of George Bush, those investors who have total income which belong to the upper four groups of tax payers had to pay a tax rate of 20 per cent while those at the bottom brackets had tax rates of 10 per cent.

However, changes in the tax law last May of 2003 decreased the tax rates by 5 per cent each and as mentioned before, eventually became zero percent during 2008.

Capital Gains Tax Tip - When Do You Pay Taxes on Stock Trading?

Stock trades are taxed as capital gains, instead of regular income. They are computed on the IRS Schedule D form, and follow different rules than the income from a job.

This article presents an overview of the process:

1. Taxes after sales - No taxes are paid until after a stock is sold - when it can be determined whether a gain or loss occurred. In other words, if you only buy stocks and never sell them, you will never owe a tax!

2. Cost basis - This is the method used to figure out which shares were sold. For example, if you bought 10 shares of stock ABC at $10, another 10 shares at $15, and then sold 10 shares at $12, do you have a gain of $2 per share, or a loss of $3 per share?

If ABC was a mutual fund, then the cost basis is easy - it is simply the average of all shares purchased. In our example, the cost basis would be $12.50 per share, so we would have a loss of 50 cents per share.

With stocks and Exchange Traded Funds (ETF's), the IRS does not allow us to average the costs basis. Instead, we can select from the LIFO or FIFO method. You choose separately for each stock but, for any one stock, once you choose FIFO or LIFO, you can not switch to the other.

The LIFO (Last In, First Out) method matches shares that are sold with the last shares bought and works backwards. So, in our example, the 10 shares we sold were from the $15 batch, so we have a $3 per share loss, and we have 10 shares left with a cost basis of $10.

The FIFO (First In, First Out) method matches shares that are sold with the first shares bought and works forwards. So, in our example, the 10 shares we sold were from the $10 batch, so we have a $2 per share gain, and we have 10 shares left with a cost basis of $15.

3. No Social Security or Medicare Taxes - Capital gains are not subject to these taxes.

4. Long term vs. short term capital gains - Any stock held at least one year and one day are considered long term capital, and are taxed at a lower rate. Any stock sold earlier is considered short term, and is taxed at the same rate as your regular income.

5. Capital Loss Limit - If, after adding up your stock market gains and losses, you have a loss larger than a certain limit ($3,000 at the time of this article), then you can only subtract this limit from your other income. You have to carry over the rest of the loss to the next year.

For example, if you made $40,000 in your job and lost $40,000 in the stock market, you cannot say that you made $0 for the year. Instead, you have income of $37,000 and you have to carry over $37,000 in stock losses to future years.

6. Wash rule - If you sell a stock for a loss and count it as a capital loss, then you cannot buy the stock back until at least 30 days have passed.

Guidelines of Keeping Short Term Capital Losses Deductible

One of the worst but most frequent things that an individual receives is a high tax bill at the end of the year. A huge hit from capital gains taxes are very bad as it can turn a nice year into a year that is not so nice at all. And even worse they can turn a very positive year into a year of overall losses.

To avoid an event such as this one would take maybe a whole year of planning; meanwhile creating a tax problem can be caused from a slight mistake. Most of the investors are very much inclined with the fact that will have to pay taxes on their profits while trading stocks, bonds and securities. These securities have two categories which are short term capital tax and also long term capital tax. Long term gains go through the benefit of a reduced tax, and the short term tax is fully taxed at the nominal rate of the investor.

There can be a significant twist to the events depending on the tax bracket of the individual and also where does this individual's money come from. For most investor the capital gains tax rate is only 15%, particular individual's can benefit from a lower long term capital gains rate. Most of the predominate investors are in the tax bracket of 30 to 35%. The overall pan out for this is that taxes for short term capital gains are a difference of about 20% and long term taxes are more beneficial.

Take the Cash and Run - The 351 Exchange Explained

Many real estate investors have heard of the 1031 exchange, a technique where property held for investment is exchanged for "like kind" property thereby deferring capitol gains taxes until a later tax year. While investors like being able to defer taxes until a later year, many complain that they'd like a way of eliminating capital gains taxes altogether. Another major gripe of 1031'ers is that the proceeds of the transaction must be used to immediately acquire a replacement property. Failing to find a suitable property causes the entire deal to fail and leaves the investor saddled with a large tax bill. Not cool. The solution: an alternate technique, called the 351 exchange. This method allows for both, tax deferral and flexibility to use the transaction proceeds as the investor sees fit.

Here's how it works:
The 351 exchange allows the investor to defer, and maybe eliminate, the capital gains liability on the sale of real estate by exchanging title to the property for stock in a c-corporation created specifically to acquire real estate for resale purposes. No Capital gains taxes are recognized when the real estate passes to the c-corp and the c-corp pays ordinary income, not capital gains, taxes when the property is eventually sold. What's more, the proceeds from the sale do not necessarily need to be reinvested in more real estate. Unlike a 1031 exchange, the cash resulting when the c-corp eventually sells the real estate can be spent on anything that could be classified as "ordinary and necessary" for the operation of a real estate business. Cool trick huh? Lets take a look under the hood.

Here's why it works:
The property is permitted to pass from the investor free of capital gains taxes due to Section 351 of the Internal Revenue Code. It provides that "No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control [at least 80% ownership] of the corporation."

The explanation of how, and why, the c-corp can sell the property free of capital gains tax is a bit more involved. Generally, you will have a capital gain or loss if you sell or exchange a capital asset. Almost everything you own and use for personal purposes or investment is a capital asset except that property held mainly for resale is not considered a capital asset. IRS Publication 538 tells us that "Stock in trade, inventory, and other property you hold mainly for sale in your trade or business are not capital assets." The c-corp that you will use to dispose of property in a 351 exchange, was created especially for the purpose of buying real estate for resale meaning that the property is treated as inventory rather than a capital asset. A good understanding of this concept of inventory v. capital asset is key to appreciating the benefit of the 351 exchange. Here are some examples:

• Apartment bldg. rented for income- Capital Asset
• Homes owned by a builder for sale to the public- Inventory
• Merchandise held by a retailer for eventual resale- Inventory
• House owned by a flipper for rehab & resale- Capital Asset
• Office bldg. owned by a doctor to house his practice- Capital Asset

What about taxation on the sale of inventory?
I'm glad you asked. Unlike individuals who generally receive income, pay taxes, then pay expenses out of the difference; a corporation earns revenue, deducts expenses, and pays taxes on whatever is left. The name of the game is to have as little left over as possible. The c-corp has the benefit of several well known and perfectly legal methods of handling expenses that are not available to individuals or to other types of business entities. These include things like employee benefit/compensation plans (where you are the employee of course), vehicles, and health insurance, retirement plans, rental of office space plus the accompanying expenses such as utilities and supplies, and of course, to purchase more real estate (for resale), which will also be classified as inventory, not a capital asset

Aren't C-Corporations subject to double taxation?
Therein lies the rub...or so it appears. The subject of double taxation is seen by many planners and advisors as the main drawback with using the c-corp. Double taxation comes into play where after-tax earnings of a C-Corporation are distributed to shareholders as non-deductible dividends. While this is a valid concern in theory, in practice, it really should not trouble most small corporations with earnings under $5 million because of the many deductible ways to pull money out of a c-corp and avoid double taxation such as:

• Employee Compensation Plans
• Interest Payments (including loans you might make to your entity)
• Lease Payments (includes vehicles, equipment, airplanes and real estate)
• Retirement Plans (for you and your family)
• Benefit Plans (including Life and Health Insurance)
• Non-Taxable Reimbursements to you for personal funds you expended on behalf of your C-corporation.

It's not all upside though
By now you're probably saying, "What's the catch?" The catch is that the 351 exchange is not right for everyone. Many of us believe that real estate investments are long term commitments, like a marriage, as opposed to trades in the stock market which tend to be short term in nature, like taking home someone you just met at a night club (exciting but often risky and usually short-lived). If you fall into the long-term category, you're likely looking to trade-up in real estate rather than cash-out. In this case, a 1031 exchange might be more your flavor. The other issue is the cost and somewhat complex process of starting and maintaining the corporation.

While the cost and procedure of setting up a c-corp are not that onerous, there is a bit of formality. Establishing a c-corp will require the filing of certain documents with the State and complying with a few legalities. There will be attorney's fees involved in getting it off the ground as well as annual fees to maintain compliance. Because of the cost, the 351 exchange is probably better for the larger real estate investors as opposed to the guy that rents out a couple houses.

Final synopsis
In the end the 351 exchange might be a great option for investors looking to cash out and use the proceeds for something other than immediately buying another property. But don't take my word for it. All of you real estate moguls, and moguls to be, should consult with a competent real estate/tax attorney before committing to any transaction.

The Capital Gains Loopholes Are Beginning to Shrink

The Capital Gains Tax has always been a hefty portion of the equation when you invest in real estate. Up until now, the benefits were generous for residents or investors who lived in their homes. Now, however, the tables seem to be turning on the investors.

If you are a homeowner who lives in their primary residence for at least two years and you're single, the capital gains allowance for you is $250,000. If you are living under the same circumstances, but married, the same allowance is $500,000. That has not changed.

Capital gains are assessed on the profit made when selling your house. That is not, generally, equal to the amount of sale.

There has been a change in the law under circumstances where the owner purchased the home, and then rented it for a period of time before taking possession of it as their primary residence for at least two years.

It was once possible to sell the home under these circumstances and convert the profit from renting the home into a tax-free income under the capital gains protection.

Even though the owner has lived in the home as their primary residence for at least two years, as the tax law requires, the time during which it was rented is now considered a taxable period. The new law states the capital gains allowance is to be tabulated pro-rata, and that it shall be divided between the time it was taxable (while it was rented) and the time it was not (while the owner lived there).

Let's draw an example of how this works. You buy a house in June of 2009 for $400,000. You rent it for three years and then live in it for two before selling it in June of 2014 for $700,000. So, you have a net gain of $300,000 for our example. Under the prior set of tax laws, you could use your allowance as a single person to the tune of $250,000. That means you would only have to pay tax on $50,000.

Under the new law, you can claim your capital gains allowance of $250,000, but only against two fifths of the $300,000 you made selling the property. This means that your allowance covers only $120,000 of the money you got for selling the property. That leaves you in the bucket for capital gains tax on the remaining $180,000.

You are now going to pay capital gains tax on $180,000 as opposed to $50,000. Some change, huh?

Capital Gains Tax - Emergency Tax Planning Guide Review

I have been saying for quite some time that the difference in rates between UK income tax at 50% and capital gains tax at 18% is unsustainable. Sooner or later the government will seek to close the gap. Well it looks like that time has come. There are undoubtedly major tax increases on their way but if only it were entirely that simple. UK Chancellors have for many years been trying to simplify the tax system only to end up making it more complex.

The whole debate recently about capital gains tax raises a number of questions. As we stand a few weeks before the emergency budget a new book has been published which very usefully seeks to answer and identify the main questions that need asking now. "Capital Gains Tax: Emergency Tax Planning Guide" is a brand new title by Carl Bayley. The book was published in early June just weeks before the scheduled June 22nd emergency budget. You may want to give a little thought as to why someone would go to all the trouble, time and cost of producing a painstakingly constructed 105 page book that has a shelf life of only a few weeks. I suspect that the author realises that the ideas and planning expressed will endure beyond the emergency budget. I would tend to agree with this but as always tax law changes constantly so you need to take professional advice before taking any action.

I have to admit that I am a fan of Carl Bayley's work. This author produces 'Plain English' tax Guides specifically for the layman. He has a particular talent for translating the complex and often inexplicable world of taxation into the kind of clear, straightforward language that UK taxpayers can understand. As a UK tax professional I am very used to having to trawl through dry, complex legislation. Reading Carl's work is a breath of fresh air. Very often his guides give me an idea I can put into practice or remind me of something forgotten. I am usually one of the first to go out and buy as soon as I am aware Carl has produced a new guide.

Many people are indeed considering their options and asking themselves key questions, such as:

How will my business or investments be affected?
Should I sell before the increase takes effect?
When will that be?
Is it already too late?
Is it worth it?
Is there another way I can beat the increase?

In tax planning it is vital to take all taxes into account, not just the one you are trying to avoid! I always say there's no point doing one thing to save inheritance tax if at the same time by taking this action you inadvertently give yourself a capital gains tax liability. One thing I do like about this book is that it recognises this important concept so often overlooked by the amateur do it yourself tax planner.

One of the major problems with this guide is alluded to earlier. Published only a few weeks before the budget and by the time you read it won't it be too late to take action? Well of course there is that strong possibility in which case if you're serious about this you had better get this guide pretty quick. There is a possibility however that none or at least all of the doors will be closed on 22nd June.

Not all CPAs and Attorneys Are Knowledgeable on Capital Gains Tax Issues

A good CPA is worth their weight in gold. A cracker jack attorney can save your bacon when it comes to upholding your legal rights and due justice. What happens when you ask them for assistance with something like your capital gains tax problem when you're ready to sell your highly appreciated asset?

Chances are, you may get incorrect or incomplete advice which may result in the unnecessary loss of a lot of cash and income growth potential.

I am a great believer in working closely with competent CPA's and Attorneys. As a matter of fact, many times it is an absolute necessity. To complete a good Capital Gains Tax Saving Strategy, the Financial Advisor, CPA and Attorney should all be in harmony so that the client can hang onto as much gain as possible.

That said, an incompetent or unknowledgeable professional can really cause great financial harm. Just because someone passed their CPA or Bar exam at one point does assure that they are well versed on capital gains treatment. A good professional will either admit to their lack of knowledge, or take the initiative to do the proper research to bone up on the subject.. One may have to pay for their research time, however, as most do nothing for free.

Case in point; I have a client in the mid-west. She has been having great difficulty finding a good tax professional in her area (fairly rural). She needs a good professional, as we are considering doing partial 1031 exchanges with her property. The first person she called told her she had no options but to pay capital gains tax on sale.

I set out to find her someone that knew what they are doing. I contacted a "find a good CPA" type of site and told them what I was looking for. They gave me a name and I called them. The fellow I spoke with seemed to be on the same page, so I had him contact my client.

I then got an email from my client. Someone from his office had contacted her. She told my client she was knowledgeable on capital gains treatment and proceeded to give my client blatantly incorrect tax advice without knowing what she was doing or taking a complete financial workup.

I called the CPA I talked to and relayed what the "assistant" said. He promised to contact my client and straighten out the misunderstanding. Then, much to my dismay, he contacted the client and gave more wrong information!

I am not a CPA or licensed tax professional. I can go to the IRS website to verify information I am forwarding, however. I proceeded to find the correct information and email it in writing to both my client and the "tax professional".

Needless to say, my client will not be using this particular CPA. What a complete waste of precious time and energy, however. This is exactly what I was trying to avoid in the first place.

I have had very similar experiences with attorneys. They may be great at some things they do on a regular basis. However, many will not do their research on something they are not familiar with before dismissing it out of hand. This is a great disservice and can cost a client a huge sum of proceeds.

The moral of this story is: make sure you are consulting with experienced and knowledgeable professionals when exploring capital gains tax strategies. I have found that if all parties are on a conference call, the correct information can be discussed amongst all, and if there are conflicting opinions, everyone involved can produce the correct information from a qualified source and disburse it to all parties.

A professional team is crucial when implementing a capital gains tax strategy. Don't take the advice of someone who dismisses something out of hand without giving specific reasons to both you and the party recommending the strategy.

After all, if you needed brain surgery, you wouldn't go to your general practitioner would you?

Tax Example For Commercial Real Estate

First, if you buy and sell property and make a profit, you incur capital gains. Long-term capital gains are generally taxed at a rate lower than your personal income tax rate. That is a bonus and another reason to leave your 9 to 5 job and start a career in real estate. The IRS considers long-term investments as those lasting over a period of one year. Short-term capital gains are taxed at your normal income tax rate, which could be as high as 35 percent for some taxpayers.

Although the capital gains rate and holding periods seem to fluctuate with changing administrations, the recent tendency has been to keep the rate below your ordinary income tax rate. Before May 6, 2003, the rates were 20 percent for most long-term gains and 10 percent for taxpayers in the 15 percent category. Currently, the long-term capital gains rate is 15 percent for most taxpayers. If you fall into the 10 or 15 percent tax brackets, the capital gains rate is only 5 percent. The incentive is simple. Hold on to real estate longer than a year before selling to reduce your tax liability. For foreclosures and properties that you were planning to resell, it will be necessary to rent out the property for at least one year before selling. Capital gains occur when you buy a property and sell it for more than what you paid for it or the basis of the property. The basis can be affected by expenses, but for simplicity if you bought a property for $50,000 and sold it a few years later for $65,000, then you have incurred a capital gain of $15,000 and it will be taxed at 15 percent. So, you owe Uncle Sam $2,250.

That's pretty easy so far. Now, how about depreciation? If you depreciate a rental house, then there will come a day of reckoning. In essence, the government has loaned you money and now it's time to pay back your debt. Depreciation recovery is taxed at your tax rate, or 25 percent in most cases. In our previous example, you may have depreciated the property for a few years. Let's say the depreciation taken is $5,000. This $5,000 is recovered and taxed at 25 percent. To summarize, you bought an investment property at $50,000 and sold it for $65,000. You depreciated the property so that its new basis is now $45,000. You owe taxes on $20,000, but at two different rates as shown below: Investment Property Example Purchase Price = $50,000 Purchase Price Sale Price Tax Rate Taxes Due Appreciation = $15,000 15% $2,250 Original Basis = Depreciation = $5,000 25% $1,250 $50,000 New Basis = $45,000 Not Applicable $0 Total $3,500 So are there any ways around paying these taxes? The simple answer is yes.

Avoiding Capital Gain to Maximize Profit

This article is written expressly for the purpose of reading in the United States of America, since it is the American system upon which the article is based. Readers outside the US may find the system in their respective countries to be different or similar.

Investing in anything means putting capital into it, and hoping it will grow. When it does grow and the time comes to collect, you may soon find that you will not get the maximum amount due to taxes. If these assets become more valuable under your ownership, you could face capital gains. The tax applied to the sale of non-inventory assets like stocks, bonds, and real estate whose value has gone up from the time they were acquired is called capital gains tax. Simply put, if you buy stocks, bonds, or real estate and are able to sell them for more than what they cost you, you are required to pay a capital gains tax.

Now we understand that taxes are necessary to ensure better lives for everyone, but that does not mean it doesn't hurt to pay taxes. Capital gains taxes can be particularly difficult, since one may feel that they are entitled to the whole amount. There is a way to avoid capital gains taxes though, called a 1031 exchange. This refers to provisions made possible via the Internal Revenue Code section 1031, which specifies how capital gains and associated taxes can be deferred.

The gist of it is that you do not "sell" your assets, but instead "exchange" them for something else. There is a fundamental difference there, and that is why 1031 exchanges can help you get the max out of your investment's growth. To illustrate, perhaps an example is in order.

Say you own stocks in a mining company. That mining company has performed well for the past years, and has seen its value rise. Your stocks in turn grow to about 1.2 times the original size. Now, if you were to sell those stocks and cash out so to speak, you would lose some amount to taxes and not get the total 120% return of investment you wanted. Instead, you can reinvest that amount by exchanging your current stocks with stocks totaling a higher value from another mining company. This will not garner any capital gain, since no sale was made and so no tax could be placed against it. You retain your 120% return of investment fully, although it remains in stocks form and not cash. If you planned to invest the money anyway, then this is definitely worth a shot. This exchange of assets with no loss constitutes a 1031 exchange.

The application for a 1031 exchange is rather complicated, as is anything that has to do with finance and taxation. There are rules which identify eligibility to apply, as well as conditions to be satisfied for it to be considered legal. It would be best to turn to a qualified professional for advice, or to a Qualified Intermediary to actualize it.

Selling Your Business - A Tool To Reduce Capital Gains Taxes

"I would rather expire at my desk than to sell my business and pay Uncle Sam one dime in taxes." How many owners that have paid their fair share of taxes for twenty years of building their business feel this way? The tax bite is the single biggest factor in an owner's reluctance to sell his/her company.

I have previously written articles discussing various aspects of transaction structures to minimize taxes. As a result, I am often contacted by a panicked seller that is a week from closing his business sale as he looks in disbelief at his accountant's spreadsheet detailing the tax burden of his impending sale.

Recently, the seller of a Sub Chapter S Corporation with an $8 million transaction value contacted me. The tax basis was below $200,000 and $4 million of the transaction value was the assumption of debt. When the dust settled, he was looking at a capital gains tax liability of a staggering $965,000 while only receiving the remainder of proceeds after the assumption of debt. The assumption of debt is considered as part of the capital gain for tax purposes.

The owner sent his accountant's spreadsheet to me and since I am not a tax accountant, I sent it to my tax wizard at BDO Seidman. He found a few small tweaks, but said that there was not much that could be done from an accounting standpoint for this owner. When I reported this back to the seller I could feel his disappointment and frustration.

So I began my quest for a better solution. After several dozen phone calls to my professional network, I was directed to a little known vehicle called a Private Annuity Trust. This vehicle has passed the scrutiny of the IRS and the Tax Court. It is not a way to avoid the payment of taxes, rather a method of deferring them with substantial economic benefit to the owner's beneficiaries.

Below is a simplified description of the process. As the owner contemplates the sale of his business (or any highly appreciated asset for that matter) he "sells" it to a trust PRIOR to its ultimate sale. This trust purchases the asset at FMV and exchanges an annuity payment stream complete with IRS life expectancy tables and interest rates. The trust then sells the company to the buyer to fund the annuity.

The transaction is accompanied by a gift to the trust in the amount of 7% of the face value of the annuity. This is so it qualifies as a trust by creating an entity with economic value. Remember, the private annuity is viewed as having zero economic value because the asset minus the obligation theoretically equals zero.

The trust is in the name of the owner's beneficiaries and all aspects of the trust are controlled by the trustees/beneficiaries and not by the owner. The trust for the benefit of the heirs owns the assets and owns the annuity payment obligation. The trust can be structured to defer the annuity payments for a period of time to coincide with the owner's need to receive these payments, lets say, for example, ten years During those ten years the trust's investments or a commercial annuity grow without incurring a tax bite for the business sale.

When the annuity payments start, the owner is taxed at his then current tax rate for the portion of the annuity payment attributable to the capital gains, his basis (no tax), and depreciation recapture from the sale, and the income produced from the annuity. The annuity pays the owner and spouse this annuity payment until last to die or until the annuity investments run out. If the owner and spouse die, any remaining assets are transferred to the beneficiaries outside of estate tax liability.

If your investments perform at the rate used in the annuity calculation and the last to die lives to their exact life expectancy, theoretically the trust value will be whatever the gift portion (7% of the selling price) has grown to. However, if the investments do very well and you outlive the life expectancy tables, you could receive payments well in excess of the original annuity face value. Those excess payments would be taxed at your then current income tax rate.

If the investments do well and the value grows above the required annuity reserve amount, the excess can be distributed to the beneficiaries as income.

In the simplest of views, this acts like an IRA. You are not currently taxed on the amount you put in, it grows tax deferred and you pay taxes upon distribution, hopefully at a far more favorable tax rate. In the case of the frustrated seller from above, what if he deferred all payments by ten years on the full sale price and the $965,000 in capital gain taxes owed? He had a life expectancy of 20 years beyond the start of the distributions. The $965,000 that he did not pay in taxes grows at 7% to $1,939,323 by the time distributions start.

Every annuity payment contains a portion of the capital gain or 1/20th of the total capital gain annually. Therefore, the bulk of the resulting investment value of the capital gains tax deferral provides huge returns for years to come.

If it seems too good to be true, remember it is tax deferral and not tax avoidance. The owner has sold his business first to the trust in return for an annuity payment stream. The owner cannot control the trust. To the extent that the owner wants immediate access to some of the sales proceeds, he would pay all taxes in proportion to the amount he is receiving. In cases like the one above, this tax deferral tool can have a dramatic impact on the financial status of the owner and his heirs by allowing the tax deferred funds to compound for many years before their ultimate distribution and the payment of any tax.

Reducing Tax on Investments: Minimising Capital Gains Tax

Capital gains tax (CGT) is payable on the sale not only of stocks and shares but also of anything other than household goods and personal effects up to the value of £6,000 and private motor vehicles. Subject to certain exceptions, you do not pay CGT on any gain you make when you sell your home. Nor, on the other hand, can you set off any loss against gains made elsewhere.

Capital losses are set off against capital gains in the same tax year and after that there is an annual exemption, currently £7,500. As a result, few people pay CGT.

If the net result of a year's transactions before the annual exemption is a loss, it can be carried forward to succeeding years. The annual exemption cannot be carried forward, but can be applied to the net gains for a year before any loss brought forward which, if not then used, can be carried forward again.

The following investments are exempt from CGT:

gilt edged stock
company debentures and loan stocks
friendly society savings schemes
ISAs and PEPs
company share option schemes
enterprise investment schemes and venture capital trusts
commercial forestry

As with tax on income, investments which are free of capital gains tax need to be good investments in their own right. A taxed gain is better than no gain at all.

Indexation and taper relief

For purchases before April 1998 the cost can be indexed, that is adjusted by the cumulative rate of inflation (RPI) between purchase and April 1998. However, indexation cannot be taken beyond breakeven, i.e. it cannot be used to create a loss.

If you held any shares before 6 April 1998, it is a good idea to calculate the indexed cost now, as it will not change. This can be done by using the CW indexation allowances for April 1998, available in Inland Revenue leaflet CGT1, which can be obtained from your local tax office.

From April 1998, indexation was replaced by taper relief which is based on the length of ownership. It only applies to shares held for at least three complete years, although an extra year is added to the total for shares owned on 17 March 1998.

The percentage of the gain chargeable reduces to 95% after the third complete year and by a further 5% for each successive year, to a minimum of 60% after ten complete years.

For example, if you bought shares in August 1996 and sold them in June 2001, the taxable gain would be calculated as follows:

The original cost would be increased to 5 April 1998 in accordance with the CW indexation allowance for the period, to give the indexed cost.
The excess of the selling value over the indexed cost gives the taxable gain before taper relief.
Although the shares have only been held for two full years since April 1998, as the shares were held on 17 March 1998 an extra year is added, making a total of three years, so taper relief reduces the chargeable gain to 95%

More favourable taper relief applies to business assets, and since 6 April 2000 it also applies to all shares owned in your employing company and to all shares in unquoted and AIM quoted companies.

The percentage of the gain chargeable in this case reduces to 87.5% after the first complete year, to 75% after two years and 50% after three, to a minimum of 25% after four years.

Where shares qualify as business assets only from 6 April 2000, the gain for shares owned on that date has to be apportioned between the two periods.

Calculating the taxable gain

The method of calculating the chargeable capital gain, following the introduction of taper relief.

The complications of indexation and taper relief can be ignored if your gross gains for a year do not exceed the annual exemption, currently £7,500.

Reinvestment relief

Chargeable gains on disposals can be deferred indefinitely if the amounts realised are reinvested in new share issues from qualifying companies under the Enterprise Investment Scheme.

Tax payable

The net chargeable gain for the year is added to your income and is taxed at 10% if any falls within the personal allowance or the 10% band, at 20% for any within the basic rate band (not 22% as for income) and 40% thereafter. CGT liability cannot be set against personal allowances.

Annual planning

This is mainly a matter of ensuring you make use of your annual tax free allowance.

You should keep a running record of your sales during each financial year (starting 6 April), with a note of the gain or loss, after adjusting for indexation and taper relief.

Check on the cumulative position at the beginning of March. If you have a substantial amount of your annual allowance still available, then take a look at the unrealised gains in your portfolio.

Bed and breakfasting

Before 17 March 1998, any unused annual allowance could be applied to unrealised gains before the end of the tax year by selling the shares one day and buying them back the next. This has been stopped by introducing a minimum 30 day interval between selling and buying back, otherwise the two transactions will be ignored for CGT purposes.

It is of course possible to take the risk of being out of the market for 30 days.

Other alternatives are:

If you have not used all your current year's ISA allowance or have uninvested amounts in a PEP, then you can 'bed and ISA' or 'bed and PEP', that is buy back into an ISA or PEP.
If you are married you can sell and your spouse buy back (or vice versa).
You can buy a similar share (e.g. BP for Shell) or your best choice of new investment.

In all these alternatives the sale and buy back can be done simultaneously, so there is no risk of adverse price movement overnight.

The disadvantage is that costs of both selling and buying (including stamp duty) are incurred, although some stockbrokers will forgo some or all of their commission on the second transaction. Also you lose the difference between the buying and selling prices.