Alternative Minimum Tax Impact From Investing Activities

Income that is earned from investments is a significant factor in the amount of Alternative Minimum Tax an individual pays. Certain types of investment income (dividends, capital gains, certain interest, e.g.) as well as the amount of this income in relation to the taxpayer's other income, all factor into the AMT formula. A taxpayer usually has much more control over investment income than he does his salary, for example, making this source of income much more important from an Alternative Minimum Tax planning point of view. In general, an investment portfolio can be changed any time a taxpayer finds it advantageous to do so.

Discussed below are a few key items associated with investing activities, and the AMT planning opportunities that may exist.

Dividends and capital gains

Most dividends on common stocks are "qualifying," and, thus, are eligible for a lower tax rate than "ordinary income," which consists of things such as salaries and wages, interest income, rental income, and the like. Similarly, a capital gain that qualifies as a "long-term" capital gain also is eligible for this lower tax rate. Even though the tax rate on dividends and capital gains is the same for both the Regular Tax and the AMT, the effect on a taxpayer's exemption amount can mean that these items of investment income are the reason a taxpayer is paying the AMT.

Planning strategy - determine the real tax rate being paid on dividends and capital gains. For maximum returns, investors should always consider after-tax yield when evaluating investment alternatives.

Tax-exempt bond interest

In general, municipal bond interest is exempt from Federal tax. However, certain muni bonds are designated "private activity" bonds, depending on how the proceeds of the bond issuance are used. Interest from private activity bonds continues to be exempt for the Regular Tax, but it is fully taxable for the AMT, with the result that the after-tax yield is significantly less than what the taxpayer originally thought he was earning. Note that, in order to boost yields, certain muni bond funds may allocate a portion of their portfolios to private activity bonds.

Planning strategy - Again, a taxpayer always should be considering after-tax yield in evaluating investments. An AMT payer generally should not be holding private activity bonds. If the investment is in mutual fund form, there are plenty of muni bond funds available that do not invest in private activity bonds.

Partnerships and other "pass-through" investments

In many cases partnerships themselves will have AMT items, but since a partnership "passes through" these items, it is the individual partner who ends up paying the AMT. For example, a real estate partnership may use a depreciation method that is allowable for the Regular Tax but is not allowable for the AMT. This difference in depreciation methods is an AMT item that will be reported to the partner on the Form K-1 he receives from the partnership, which, in turn, must be reported on the partner's own AMT schedule, the Form 6251.

Note that this same pass-through treatment results in the case of S corporations, LLCs, and certain estates and trusts.

Planning strategy - Before investing in a partnership, an individual should inquire about AMT items that the partnership may generate. Once invested, it generally is too late to do anything about them.

Conclusion

While the old maxim that taxes should not determine an investment strategy is true, nevertheless an investor who is stuck in the AMT may be earning a significantly lower after-tax yield on his investments than he realizes. Remember that it is only after-tax income that an investor actually gets to keep; ignoring taxes, especially the AMT, is unwise.

Purchase Or Sale of an LLC's Member's Interest

THE SELLER
In general, the sale by a member of a limited liability company ("LLC") interest is treated as the sale of an asset separate and distinct from the underlying assets owned by the LLC. Gain or loss is recognized based upon the difference between the amount received for the LLC interest and the tax basis in the LLC interest. A member's tax basis in his or her LLC interest is equal to the amount of cash the member contributes to the LLC, the basis the member had in any property contributed, and the member's share of the LLC's debt. A member's tax basis is increased by the member's share of LLC income or gains and any additional contributions the member makes to the LLC. A member's tax basis is decreased by any cash distributions the member receives, by the basis of property distributed to the member, and by net losses the member deducts. This gain or loss is considered gain or loss from the sale or exchange of a capital asset except if the gain is attributable to "unrealized receivables and inventory." The determination of whether the capital gain or loss would be treated as long-term capital gains (held for more than one year and subject to a 15% tax rate) or short term capital gains (held for shorter than a year and subject to ordinary income tax rates) will depend on the selling member's holding period. In general, the holding period would begin when the member acquires an interest in the LLC.

THE PURCHASER
The purchase of a member's interest in an LLC is treated as the purchase of an LLC interest separate and distinct from the purchase of the underlying assets of the LLC.

The purchase of an LLC interest requires that the buyer allocate the entire purchase price to the purchase of the interest. The tax basis of the purchasing member's interest is determined under the basis provisions of the Internal Revenue Code and will be generally be the cost of the interest. The purchase, however, does not affect the tax basis of the assets already owned by the LLC.  Thus, the purchasing member may be required to recognize a gain if there are appreciated assets owned by the LLC which are sold after the buyer becomes a member.

There is a provision in the Internal Revenue Code, Section 754, that allows the purchaser to adjust the proportionate share of the tax basis of the assets owned by the LLC  so that purchasing member can adjust his or her basis of the LLC assets to reflect the purchase price paid for the LLC interest. The basis adjustment affects only the purchasing member and not the other members of the LLC. The Internal Revenue Code Section 754 election is an elective provision.

REMAINING MEMBERS
The sale by one of the members may or may not affect the remaining members. The sale by a member can affect the LLC and the remaining members if the sale causes the LLC to terminate. If 50% or more of the total interest in the LLC's capital and profits are sold or exchanged, the LLC will be deemed to be terminated for tax purposes only. If the LLC is not terminated, the remaining members are not affected for tax purposes by the sale of an LLC interest.

Disclaimer: The information provided herein is not legal advice, but a general overview and should not be construed as legal advice.

2010 Tax Year

2010 was a crazy, tumultuous for tax law complete with a white knuckle final law that passed at the last-minute. For a super-nerdy accountant guy like me this was more drama then Super Bowl and the finale of my wife's favorite soap opera combined. Now that the dust has settled, and you're doing end-of-year tax planning or preparing to file 2010 tax numbers, the question is "Tyler, what really changed with all these laws and how does it affect me as an entrepreneur." Great question, let's investigate.

Basically, there were three big tax acts in 2010: the HIRE Act, the Patient Protection and Affordable Care Act, and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The last of these, we'll call it the Tax Relief Act, basically kept in place all of the so-called Bush Tax Cuts through 2012. The second, we'll call it Patient Protection, will primarily promise higher taxes for some taxpayers in future years, and the first, the HIRE Act has some sweet short-term discounts to encourage hiring.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 in brief

This act was passed primarily to continue most of the tax cuts put in place during the Bush Administration until 2012, an election year.

Income Tax Rates - 2009 individual income tax rates will be continued for 2010 and through 2012 for all taxpayers.
Capital Gains Tax Rates - 2009 rates on capital gains and qualified dividends will be extended through 2012.
Payroll rebate - 2% Social Security rebate for employees - The employee's share of Social Security taxes will reduce from 6.2% of wages to 4.2% for 2011. Self-employment tax will decrease to 10.4%. The best part of the deal is that social security benefits will not be affected by discount, although, at some point in time some taxpayers will have to foot the bill for it.
What employers have to do - employers "must implement the new rules as soon as possible but no later than January 31," in the words of the IRS. If you don't catch this by the first payroll then you can make an adjustment to the second to compensate.
What employees have to do - absolutely nothing. It is your employer's responsibility to comply.
AMT Patch - the exemption amount for the Alternative Minimum Tax is increased to $47,450 for individuals, $72,450 for married taxpayers filing a return jointly and $36,225 for married but filing separately couples.
Estate Tax - Among the biggest dramas of 2010 has been whether George Steinbrenner's heirs would inherit his estate without owing any estate tax ("death tax" to you tea party types). Well, thanks to this bill I can confidently tell you maybe, but probably not. For 2010 estate managers will have the option of selecting the new regime of a $5 million dollar exclusion with a 35% rate thereafter or of opting under the system that would have a 0% rate but would have denied the "step-up" in basis that inheritors have received under the previous rules. It gets complicated and few of my readers are passing on >$5 million estates in 2010 (unless you plan on dying tomorrow).
Bonus Depreciation - what's sexier than 50% bonus depreciation? Try 100% bonus depreciation! For select fixed assets placed in service from September 9, 2010 through the end of 2011, 100% of the purchase price of the asset may be depreciated in the year of purchase. For the entrepreneurs with smaller businesses this is important because you can take bonus depreciation even in a loss situation whereas Section 179 cannot put you into a loss. Also, bonus depreciation could be advantageous with the purchase of a vehicle used for business purposes.

HIRE Act

The HIRE Act was only in effect for 2010 and provided employers with an incentive to hire previously unemployed persons by giving them a 100% reduction on the employer portion of the payroll tax of the qualified hiree. Furthermore, if the employee remained hired for 52 consecutive weeks then the employer could be eligible for a credit of up to $1,000 per employee. While it is too late to hire a new employee if you hired someone eligible for the credit don't forget to apply for the $1,000 credit when they hit 52 weeks!

Tax Planning in 2011

The oldest trick in the book for tax planning is for cash-basis (as opposed to accrual basis) taxpayers, like most of you, to accelerate expenses into the current year through a number of tactics, including accelerated depreciation (like Section 179 or the 100% bonus depreciation available in 2011) or through the purchase of goods and services in the current year that won't be needed or utilized until the subsequent year. Alternatively, the taxpayer could delay the receipt of revenue by not sending out billings until the subsequent year. This is the "kick the can down the road" strategy for taxes; the income will eventually have to be recognized (nerdy accountant speak for saying that taxes will be owed on it) but we would rather that day came later instead of sooner. Well, the problem with this strategy comes in times of increasing taxes, such as we are likely to enter soon. All of the above mentioned laws that provide or extend tax benefits are temporary measures that will expire in 2012, an election year. Most of the political junkies who follow these things would guess that taxes will have to rise in order to keep pace with the gigantic debt the United States is ratcheting up. If this is the case then in 2011 you could actually find yourself in the position of wanting to prepay your taxes by accelerating revenue or deferring expenses.

An additional tax bill that has already been passed into law, as part of the Patient Protection and Affordable Care Act, and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, will tack on an additional 0.9% Medicare tax for married filing joint taxpayers earning greater than $250,000 and for single taxpayers earning greater than $200,000 for the 2013 tax year by 0.9%. In addition, those same taxpayers will be charged a 3.8% Medicare tax on earnings on investments; which were previously not subject to employment taxes.

In conclusion, 2010 was a year of great uncertainty and apprehension regarding taxes for the productive class. In the end, most tax hikes and any tax reform was pushed further down the road; leaving us with something rather like 2009. Certain tax hikes are already in the books, albeit not taking effect until further down the road, and taxpayers can expect additional uncertainty in 2012 when the current tax rates expire.

0% Long-term Capital Gains Rates? To Good to Be True?

Time is running out for the 2008 0% long-term capital gains rate. As a taxpayer your taxable income will need to remain below the 15% tax bracket (under ~$31,000 for single and ~$61,000 for married filing joint) and you need to have long-term (one year and one day or longer) gains before the end year.

The three primary challenges to be rewarded with the zero percent (0%) rate will be to actually have gains in stock positions, not have your gains be offset by prior year carried forward capital losses and to recognize the gain before Congress changes the law. A lot of gains over the past year(s) have now been erased with the declining asset prices (i.e. stock market, etc.) in additional with the lack of savings by Americans may make finding the assets to sell to trigger the gains challenging. The current financial bailout Congress is digesting may result in changes to the tax code which will be focused on increasing tax revenues.

The continued government deficit spending will more than likely result in future increases in long-term capital gains tax rates and income come tax rates. It may be best to trigger your long-term capital gains before any tax law change to ensure you remain in the 15% or under tax rate.

Remember, you can control the capital gains and losses you trigger by selling your stock. You should plan using the finalized tax rates and determine if triggering the gains are in your best interest.

Since tax planning can be more complicated than it sounds you should contract your tax advisor if you have any specific questions.

HUF and Tax Implications

Hindu Undivided Family is defined as consisting of a common ancestor and all his lineal male descendants together with their wives and unmarried daughters. Therefore, a HUF consists of all males & females in the family. Daughters born in the family are its members till their marriage and women married into the family are also members of the HUF.

In this context, "Hindu" mean all the persons who are Hindus by religion. Section 2 of the Hindu Succession Act, 1956, elaborately declares that it applies to any person, who is a Hindu by religion and it includes a Virashaiva, a Lingayat or a follower of Brahmo, Prathana or Arya Samaj, a Buddist, Jain or Sikh. In CWT In the case of Smt. Champa Kumari Singh (1972) 83 ITR 720, Supreme Court held that the HUF includes Jain Undivided Family. HUF is a separate entity for taxation under the provisions of sec. 2(31) of the I. T. Act. It means that the one person can be assessed as an individual and also as a Karta / Chief of his family.

HUF Formation - An HUF is automatically constituted with the marriage of a person. No formal action is required to create an HUF. The HUF being the result of birth, possession of joint property is only an appendage of the HUF and is not necessary for its constitution. So, one person cannot form an HUF. Family is a group of people related by blood or marriage. However, the property held by a single co-parcener does not lose its character of Joint Family property solely for the reason that there is no other male or female member at a particular point of time. Once the co-parcener marries, an HUF comes into existence as he alongwith his wife constitutes a Joint Hindu Family. This was held in the case of Prem Kumar v. CIT, 121 ITR 347 (All.)

It can be noted that, the technical status of an HUF continues even in the hands of females after the death of sole male member. Even after the death of the sole male member, the original property of the HUF remains in the hands of the widows of the members of the family and the same need not divided amongst them.

An HUF need not consist of two male members- even one male member is enough. The understanding that there must be at least two male members to form an HUF as a taxable entity is not applicable. - Gauli Buddanna v. CIT, 60 ITR 347 (SC); C. Krishna Prasad v. CIT 97 ITR 493 (SC) and Surjit Lal Chhabda v. CIT, 101 ITR 776 (SC). A father and his unmarried daughters can also form an HUF. CIT v. Harshavadan Mangladas, 194 ITR 136 (Guj.)

Nucleus of HUF - With several rulings it is now established that, nucleus or ancestral joint family property is not required for the existence of the HUF.

Karta - He is the person who manages the affairs of the family. Generally, the senior most male member of the family acts as Karta. However, any other male member can also act as Karta with the consent of the other member. Narendrakumar J. Modi v. Seth Govindram Sugar Mills 57 ITR 510 (SC).

Property - The HUF property may consist of ancestral property, property allotted on partition, property acquired with the aid of joint family property, separate property of a co-parcener blended with or thrown into a common family pool. The provisions of sec. 64 (2) of the Income Tax Act, 1961 have superseded the principles of Hindu Law, in a case where a co-parcener impresses his property with the character of joint family property.

Female members cannot merge her separate property with joint family property, but she can make a gift of it to the HUF. Pushpadevi v. CIT 109 ITR 730 (SC). Female members can also bequeath their property to the HUF, CIT v. G.D. Mukim, 118 ITR 930 (P & H).

Multiple Family Structures - An HUF can consist of several branches or sub-branches. For example, a person with his wife and sons constitutes an HUF. If the sons have wives and children, they also constitute smaller HUFs. If the grandsons also have wives and children, then they also constitute HUFs. It is irrelevant whether the smaller HUFs hold any property. Nucleus property can be acquired by partition of bigger HUF or by gifts from any member of the family or even by a stranger or by will with intention of the donor or the testator that the said gift or bequest will form the HUF property of the donee. An HUF can be composed of a large number of branch families, each of the branch itself being an HUF and so also the sub-branches of more branches. CIT v. M.M.Khanna 49 ITR 232 (Bom).

Tax planning through HUF -
(i) Increase the number of assessable units through the device of partition of the HUF.
(ii) Create separate taxable units of HUF through will in favour of HUF or gift to HUF.
(iii) Enter into family settlement / arrangement.
(iv) Payment of remuneration to the Karta and also to other members.
(v) Providing loans to the members of the HUF.
(vi) Gift to members.

Partition of HUF - The tax liability can be reduced by partition of the HUF. This can be easily done in a case where the partition results in separate independent taxable units. Suppose an HUF consists of father and two sons and there are two business establishments, a house property and other sources of income with the HUF. If the members of the HUF have no other sources of income then partition of the HUF can be done by giving one business establishment to each of the sons, house property to the father and dividing the other sources in such a manner so as to make the partition equitable. Such a partition of HUF will reduce the tax liability considerably. The position may, however, be different in a case where the members of the HUF have got high individual incomes. In such a case it is not advisable to break or partition the HUF. The HUF should be allowed to continue as a separate taxable unit.

In case, where the HUF has only one business establishment, which can not be physically divided, it may be converted into a partnership firm or a company. At present, rate of firm's tax and the rate of tax in case of a company, is 30% flat, therefore conversion of HUF business into a partnership or a company is not advantageous. The incidence of, in such a case, can be better reduced by payment of remuneration to the members of the HUF. Partial partition of HUF is also a very effective device for reducing its tax liability. Partial partition is recognized under the Hindu Law. However partial partition of an HUF is no more recognised by the Income Tax Act. The provisions of sec. 171 partial partitions can still be used as a device for tax planning in certain cases. An HUF not hitherto assessed as undivided family can still be subjected to partial partition because it is recognized under the Hindu Law and such partial partition does not require recognition u/s. 171 of the Income Tax Act, 1961. Thus a bigger HUF already assessed as such, can be partitioned into smaller HUFs and such smaller HUFs may further be partitioned partially before being assessed as HUFs. Besides any HUF not yet assessed to tax can be partitioned partially and thereafter assessed to tax.

Legal aspects and partition of HUF -
(i) Assets distribution in the course of partition would not attract any capital gains tax.
(ii) No gift tax liability.
(iii) No clubbing of incomes u/s. 64.

Create Separate Taxable Units - It is now well settled law that there can be a gift or will for the benefit of a Joint Hindu Family.It is immaterial whether the giver is male or female, whether he or she is a member of the family or an outsider. What matters is the intention of the donor that the property given is for the benefit of the family as a whole. Suppose there is an HUF consisting of Karta, his wife, his two sons, daughter-in-law and grand children. A gift or will can be made for the benefit of the two smaller HUFs of the sons. The bigger HUF will continue as a separate taxable unit even after the death of the Karta. There may also be a case where the father or mother has self acquired properties. They have a son and his family but there is no ancestral property as a corpus of their family. Then, father & mother or both can leave their property for the benefit of their son's family, through their respective wills.

Family Settlement / Arrangement - Family settlements / arrangements are also effective devices for the distribution of ancestral property. The object of the family settlement should be broadly to settle existing or future disputes regarding property, amongst the members of the family. The consideration for a family settlement is the expectation that such settlement will result in establishing or ensuring amity and goodwill amongst the members of the family. Since family arrangement does not involve transfer, it would not attract gift tax, capital gains tax or clubbing. By a family arrangement tax incidence is considerably reduced or it may even be nil. Suppose a family consists of Karta, his wife, two sons and their wives and children and its income is Rs. 6, 00,000/-. The tax burden on the family will be quite heavy. If by family arrangement, income yielding property is settled on the Karta, his wife, his two sons and two daughter-in-law, then the income of each one of them would be Rs.100,000/- which would attract no tax & if the assessment year is 2007-08, then the tax liability would be reduced form Rs. 100,000/- to nil.

Remuneration to the Karta & members - The other important measure of tax planning for an HUF is to pay remuneration to the Karta and its members for the services rendered by them to the family business. The remuneration so paid would be allowed as a deduction from the income of the HUF and thereby tax liability of the HUF would be reduced, provided the remuneration is reasonable. The payment must be for service to the family for commercial or business expediency. Jitmal Bhuramal v. CIT 44 ITR 887(SC).

Loan to the Members - If the business, capital or investment of the HUF is expanding then such expansion can be done in the individual names of the members of HUF by giving loans to the members from the HUF. The HUF may or may not charge interest on the loans given. Where after partition of an HUF, two members became partners in three firms on behalf of their respective HUFs and they also became partners in a fourth firm, the funds were obtained by means of loans from other three firms, the share incomes of the members from the fourth firm was assessable as their individual income only. CIT v. Champaklal Dalsukhbhai, 81 ITR 293 (Bom.).

Gift of Assets to Members - Generally, the Karta of an HUF cannot gift or alienate HUF property but he can make certain gifts to the female members. Gift of immovable property within reasonable limits, can also be made by a Karta to his wife, daughter, daughter-in-law or even to a son out of natural love and affection. Gift of immovable property within reasonable limits can be made only for dutiful purpose e.g. marriage of a daughter etc.

If the HUF has surplus funds or property, then, the Karta can make gift of movable assets to his wife, daughter or daughter-in-law at one go or over a period of time. However, it may be noted that with effect from 1.10.98, the applicability of Gift Tax is no more in force. Therefore, no Gift Tax will be payable by a person making the gift from on or after 1.10.98. However, w.e.f. 1.10.2004 Gift received from other than relatives exceeds Rs.25,000/- then that amount is liable to Income Tax u/s. 57. It may be remembered that gift for marriage or maintenance of daughter is not liable to Gift Tax. Further clubbing provisions of sec. 64 would not be applicable if the gift in validly made in accordance with the rules of Hindu Law. Besides, if a gift made to the minor daughter of the Karta is valid then the provisions of sec. 60 of the Income Tax Act would not be attracted. CIT v. G. N. Rao, 173 ITR 593 (AP). Whereby, section 60 relates to transfer of income where there is no transfer of assets.

Other Tax Planning -
(i) Transfer of individual property to the family.
(ii) Family reunion after partition.
(iii) Inheritance by succession

Partnership Firm & HUF - An HUF cannot become a partner in a firm. The Karta or a member of the HUF can represent the HUF in a firm. A female member can also represent HUF in a partnership firm, CIT v. Banaik Industries 119 ITR 282 (Pat.). Where remuneration was received by a member of HUF from a firm, where he was partner on behalf of HUF for managing firms business such remuneration was his individual income, CIT v. G. V. Dhakappa 72 ITR 192 (SC); Premnath v. CIT 78 ITR 319 (SC). However, income received by a member of HUF from a firm or company is taxable as the income of the HUF, if it is earned detriment to or with the aid of family funds, otherwise it is taxable as the separate income of the member, P.N. Krishna v. CIT 73 ITR 539 (SC). Members of HUF can constitute Partnership without affecting a partition or without disturbing the status of joint family. Ratanchand Darbarilal v. CIT 15 ITR 720 (SC). However, on viewing at the present rate of firm's tax, conversion of HUF business into partnership is not advantageous.

Selling Your Business - Deal Structure and Taxes

The purpose of this article is to demonstrate the importance of the tax impact in the sale of your business. As an M&A intermediary and member of the IBBA, International Business Brokers Association, we recognize our responsibility to recommend that our clients use attorneys and tax accountants for independent advice on transactions.

As a general rule, buyers of businesses have already completed several transactions. They have a process and are surrounded by a team of experienced mergers and acquisitions professionals. Sellers on the other hand, sell a business only one time. Their "team" consists of their outside counsel who does general business law and their accountant who does their books and tax filings. It is important to note that the seller's team may have little or no experience in a business sale transaction.

Another general rule is that a deal structure that favors a buyer from the tax perspective normally is detrimental to the seller's tax situation and vice versa. For example, in allocating the purchase price in an asset sale, the buyer wants the fastest write-off possible. From a tax standpoint he would want to allocate as much of the transaction value to a consulting contract for the seller and equipment with a short depreciation period.

A consulting contract is taxed to the seller as earned income, generally the highest possible tax rate. The difference between the depreciated tax basis of equipment and the amount of the purchase price allocated is taxed to the seller at the seller's ordinary income tax rate. This is generally the second highest tax rate (no FICA due on this vs. earned income). The seller would prefer to have more of the purchase price allocated to goodwill, personal goodwill, and going concern value.

The seller would be taxed at the more favorable individual capital gains rates for gains in these categories. An individual that was in the 40% income tax bracket would pay capital gains at a 20% rate. Note: an asset sale of a business will normally put a seller into the highest income tax bracket.

The buyer's write-off period for goodwill, personal goodwill, and going concern value is fifteen years. This is far less desirable than the one or two years of expense "write-off" for a consulting agreement.

Another very important issue for tax purposes is whether the sale is a stock sale or an asset sale. Buyers generally prefer asset sales and sellers generally prefer stock sales. In an asset sale the buyer gets to take a step-up in basis for machinery and equipment. Let's say that the seller's depreciated value for the machinery and equipment were $600,000. FMV and purchase price allocation were $1.25 million.

Under a stock sale the buyer inherits the historical depreciation structure for write-off. In an asset sale the buyer establishes the $1.25 million (stepped up value) as his basis for depreciation and gets the advantage of bigger write-offs for tax purposes.

The seller prefers a stock sale because the entire gain is taxed at the more favorable long-term capital gains rate. For an asset sale a portion of the gains will be taxed at the less favorable income tax rates. In the example above, the seller's tax liability for the machinery and equipment gain in an asset sale would be 40% of the $625,000 gain or $250,000. In a stock sale the tax liability for the same gain associated with the machinery and equipment is 20% of $625,000, or $125,000.

The form of the seller's organization, for example C Corp, S Corp, or LLC are important to consider in a business sale. In a C Corp vs. an S Corp and LLC, the gains are subject to double taxation. In a C Corp sale the gain from the sale of assets is taxed at the corporate income tax rate. The remaining proceeds are distributed to the shareholders and the difference between the liquidation proceeds and the stockholder stock basis are taxed at the individual's long-term capital gains rate.

The gains have been taxed twice reducing the individual's after-tax proceeds. An S Corp or LLC sale results in gains being taxed only once using the tax profile of the individual stockholder.

Selling your business - tax consideration checklist:

1. Get good tax and legal counsel when you establish the initial form of your business - C Corp, S Corp, or LLC etc.

2. If you establish a C Corp, retain ownership of all appreciating assets outside of the corporation (land and buildings, patents, trademarks, franchise rights). Note: in a C Corp sale, there are no long-term capital gains tax rates only income tax rates. Long-term capital gains can only offset long-term capital losses. Personal assets sales can have favorable long-term capital gains treatment and you avoid double taxation for these assets with big gains.

3. Look first at the economics of the sales transaction and secondly at the tax structure.

4. Make sure your professional support team has deal making experience.

5. Before you take your business to the market, work with your professionals to understand your tax characteristics and how various deal structures will impact the after-tax sale proceeds

6. Before you complete your sales transaction work with a financial planning or tax planning professional to determine if there are strategies you can employ to defer or eliminate the payment of taxes.

7. Recognize that as a general rule your desire to "cash out" and receive all proceeds from your sale immediately will increase your tax liability.

8. Get your professionals involved early and keep them involved in analyzing various bids to determine your best offer.

Again, the purpose of this article was not to offer you tax advice (which I am not qualified to do). It was to alert you to the huge potential impact that the deal structure and taxes can have on the economics of your sales transaction and the importance of involving the right legal and tax professionals.

Why the Tax Gains Calculator is Good For the Professional Landlord

On the subject of capital gains tax calculations it is a very tedious task for the up to date or professional landlord. The method of this calculation is very difficult and if it is not done in the correct way then the results will be devastating in terms of cost. But to some extent the technology and the modern world of business there has been a specialist's software to help with this issue of property management.

The right thing for the professional landlord to use is a capital gains tax calculator, because this would put the landlord on top of his game in terms of deciding certain moves from there in terms of property and taxes. The property gains tax calculator is one of great importance to the landlord as this software allows him to quickly make certain difficult calculations in mere seconds. This particular program mentioned is high in standards and can deal with current and even previous calculations of tax years.

The real purpose of the tax gains calculator is that it helps the individual to really assess what it is he needs to deal with and also taxes and liabilities plus it give any landlord an option and certain tips to deal with his situation as everyone is different. There are a number of ways for the information to be provided, as this information is very vital no matter which one of the programs you are using. The landlord also needs to know all the critical figures on the summary of liability and then they should know all of that particular information and everything else.

Tax Benefits of Buying Investment Properties

Property investing has proved itself is a wealth creation vehicle for many generations now. Many families have built their wealth on property acquisitions over a long period of time which now places them in an enviable financial position.

As it becomes clear that current superannuation plans may leave many retirees in a less than comfortable position, the property market provides an alluring alternative. But it is not just a simple matter of buying a property and rubbing your hands with glee at the inevitable positive returns. Careful professional advice is required and tailoring an investment strategy to suit your individual circumstances is vital.

Many first-time investors make glib references to the tax advantages that attached to property investment but a few simple points still need to be clarified. In this article will examine the important taxation considerations of property investment including negative gearing, depreciation, capital gains tax, and how tax benefits can make your investment pay.

* Negative gearing. This term simply describes the fact that you are borrowing money to make an investment. When the costs of the investment are higher than the return you achieve, you are said to be negatively geared. For example when an investment property has an annual net rental return which is less than the interest charged on the investment loan, the property is said to be negatively geared. This loss of income from the property is eventually made up over time as the property value increases. In the meantime however a high income earner can benefit from this as the losses can be offset against their taxable income. Although you should never specifically aim for a negative gearing position, you can take advantage of it if it suits your personal circumstances, and if the properties capital growth potential is going to be positive and greater than the cost of funds, otherwise it is a futile endeavour.

* Depreciation. One of the tax advantages in owning an investment property is that you can claim for depreciation of certain items and reduce your taxable income in the process. Things like refrigerators, furniture and cooktops can be written off over the effect of life of the asset. Naturally, you need specialist advice here and an accountant is the obvious choice. The Australian taxation office determines the schedules and allowances but you still need the services of an accountant and a quantity surveyor to make sure you get the greatest depreciation deduction. New properties have greater depreciation. You can claim two components, the building as well as the fixtures & fittings.

* Capital gains tax. This is charged on the capital gains that your investment property enjoys over the period you own it only if you sell it You become liable to pay the capital gains tax where your gains exceed your capital losses in any income year. This is where specialist advice really comes into its own as you can take advantage of capital losses if you sell the property at the right time. This is a very complex area that your specialist property adviser or accountant can assist you with. Otherwise if you are building wealth, you can get your property revalued and lend against its increased value to purchase another property without triggering capital gains tax.

* Making your investment payoff. After you have owned an investment property for a number of years, you are likely to enjoy substantial capital gains. Additionally, your rental income over the same time can greatly assist loan repayments to a point where it there is very little effect on your cash flow, or to the point of being positively geared. Reviewing your position at that time, you may be ready to add another property to your portfolio.

Take advantage of these tips and plan your property investment strategy only after consultation with experts.

Tax and Death, the Only Two Certainties in Life

I have written in the past about the illegality of the current income tax scheme; or more correctly, the illegal and unconstitutional methods the IRS uses to force people who are not liable for income tax to pay income tax. We the people need to keep more, if not all of our own hard-earned money. "That is the great problem of socialism, those employed by the state will act in their best interest and in this case, it is to take money from you so that they can have a bigger pay check--that is the point of this tax. Why not now? The options are numerous. On a personal note, the most logical and responsible thing to do with this money is to use it to pay down debt.

That aside, Bush hopes this windfall will give the economy a "shot in the arm"--he obviously anticipates that that spend-happy consumers will fritter away the funds on consumer electronics, overpriced sneakers, fried snacks, or whatever useless junk Madison Avenue can shove down our throats. Buy tax-exempt municipal bonds. Donate it to charity: Some people say, "I would do more of this if I had the extra money to spare". A 1031 exchange allows you to exchange your existing property for another property and defer paying the capital gains tax.

He wants to raise the tax rates on capital gains and dividends for "rich" people from the current 15% rate to somewhere in the 20%-28% range. The government won't be robbing us in broad daylight and take money directly out of our pay checks. Most economic opinions do not favor pre-paying a mortgage. Everywhere you turn, there is talk about how bad things are and, it is my opinion that half the problem may be that people believe that things are bad whether or not they are personally affected.

And, prices on many key products have gone up, like gas and food. We are working towards that right now. Part of the problem is that we have just been spoiled and lucky over the past 20 years by lower than usual tax rates on income and investments relative to US history. During the recent debate between Democratic politicians, Obama indicated that he wanted to almost double the maximum tax rate on capital gains from 15% to 28%. Continue to give assets with large capital gains to charities.

Capital Gains Tax Laws Explained

Would you like to know what is considered capital gains by the IRS? Would you like to know how much it might cost you?

Capital gains is what the IRS says is your profit when you sell something that is defined as a capital asset. Real estate, mutual fund shares, stocks, and bonds are all considered capital assets. If you inherited a home or real estate you might be subject to the capital gains tax.

How Much is The Capital Gains Tax Rate?

Your tax will depend on a few things. If you have a short term capital gain you will be taxed at your normal tax rate. However, if you have a long term gain you will be taxed at 15%. If you are in a tax bracket of 14% or less you'll be taxed at 5%.

How do I know if I have a short term or long term gain? To determine whether you have a long or short term capital gain is quite simple. Property that you own for less than one year is defined as short term. Property that you own for more than one year is defined as long term.

What if I lost money?

If you lost money on a capital asset it can be deducted on your taxes. Money that you lost on an investment is used first against profits you've made on another investment. Short term and long term capital losses can both be deducted but there are certain rules for each type of capital gain.

Year-End Tax Tips - Moves to Make When Tax Rates May Be Going Up

Normally, when you engage in year-end tax planning, you might tend to sell stocks on which you have incurred losses to offset those where you have gains, in order to pay as little capital gains tax as possible. In general that still applies. But the capital gains tax rate is scheduled to go up in 2011 from 15 to 20% and further in the ensuing years. This is unless Congress steps in and changes the law to continue the low rate that has been in effect since 2003.

Given this, it may make sense to sell more of the high gaining stocks now, if you were planning on selling them over the next year anyway. Certainly, if any of the following reasons are true you may want to sell your gainers now instead of later:

1) You intended to take some money out of the stock market in the near future.

2) You don't like the future prospects of the stock.

3) You need to re-allocate your portfolio.

4) You have a large gain, you're neutral on the prospects of the stock, and you have enough losses on other stocks to offset the gains now.

However, you should not do this if you would not have otherwise have sold your stocks over the next several years. This is because you do have to pay tax on any net gains, and if you delayed paying the tax for a few years or more, you wouldn't have to pay any tax at all now. Delaying a capital gain for a number of years could make the net investment worth more by enough down the road to justify paying the higher capital gains rate then. In other words, even if the gain is taxed at a higher rate then, the compounded gain on the stock and 20% of the earnings (what would have been taxed away) will likely earn more than the difference in the capital gains tax rate.

The "higher capital gains rate next year" concept also creates the reverse logic on the stocks where you've had losses. Normally you might want to sell them to offset gains and accrue additional tax benefits. But now the losses may be worth more next year if you have gains to offset then. Some of your actions may be guided by your expectations of next year's stock market performance. But a good strategy might be to only use the amount of stock losses this year that leaves you with enough expected losses next year to cover your expected gains next year.

And so the overall point would be to shift inevitable realized overall gains to this year, and losses to next year.

Of course, none of this advice trumps standard investment considerations. You should buy stocks you believe will go up and sell those you think will go down. But for those subject to the above conditions, these rules may leave more money in your pocket.

How to Invest in a Tax-Efficient Way

Let's discuss how to ensure your investment portfolio is efficient not just from a risk perspective, but from a tax standpoint as well. You may not be able to control the market, but you do have a lot of control over your taxes. By understanding basic tax rules and using tax-efficient investment strategies, you can minimize the annual tax bite on your taxable accounts.

The most tax-efficient investment strategy is simple: hold shares for as long as possible, thus deferring the taxes on your capital gains until you sell. An extremely tax-efficient portfolio would therefore be a selection of growth stocks you bought and held for the long haul. In this case, growth stocks would be preferred, because they tend to pay little or no dividends. Your return would be mostly made up of long-term capital gains. Best of all, you'd get to decide when you pay the tax by choosing when to sell them.

However, a portfolio full of growth stocks isn't without problems. For starters, concentration in few securities and the lack of diversification from being in mostly one asset class create volatility. You need the diversification of a balanced portfolio over several asset classes to reduce this volatility. It's important to keep in mind, then, that investing tax-efficiently is a balancing act. Though the reality is there will always be trade-offs, your overarching goal should be to minimize taxes while still attempting to achieve superior investment returns.

Another issue with long-term investments is they tend to scare some investors into holding even when it's not wise to do so, since these investors believe selling would trigger additional capital gains. Remember, the tax decision should never overrule the investment decision. Assessing the tax consequences of your investments at each stage-contribution, accumulation, and distribution-is the key to success in the world of tax-advantaged investing. Just don't loose sight of the investment return like one of my clients, Joe Mitchell, unfortunately did.

Case Study: Joe Mitchell, investor

Joe Mitchell had accumulated a large position in Dell Inc., the computer company. He purchased most of the stock in the 1990s, and through several stock splits, he'd accumulated over $250,000 worth of the stock with a total cost of $50,000.

The stock had been doing well until 2005 when the stock price started heading south. By the middle of the year, Joe's Dell stock was down over 10%, yet the stock market was still going up. Still, Joe refused to sell any of the stock, because he didn't want to pay capital gains tax. By the end of the year, his stock value had fallen to less than $178,000, and the stock market was up that year by 4.9%.

Had Joe sold the stock when it was down 10%, he would've owed $26,000 in capital gains tax ($225,000 - $50,000 = $175,000 X 15%). He would've been left with $199,000 that could've gained back 4.9% in an index fund.

Joe's mistake is easy to see in hindsight (the perfect vision!). Of course, you won't know at the time if the stock's going to recover or if the investment you choose with the proceeds is going to perform better than the one you just sold. But in Joe's case, the stock was moving at such a sharp contrast to the stock market's overall direction he should've at least sold part of the position by mid-year. Dell went on to lose 16% in 2006 (S&P 500 +15.8%) and another 2% in 2007 (S&P 500 +5.5%). Again, investment reasons should always trump tax reasons.

Keep in mind that if mutual funds are the building blocks of a portfolio, tax-efficient investing begins with the simple notion good fund managers who are sensitive to tax issues can make a difference on your after-tax return. A "good manager" from a tax perspective harvests losses, pays attention to the holding period, and controls the fund's turnover rate. Studies show the average actively managed mutual fund operates at 85% tax efficiency.

Most fund managers are tasked solely with generating a return. They don't think about working with taxable and non-taxable portfolios, and they don't care about short-term gains. Of course, in your IRA or 401(k), you don't care about short-term gains either, but short-term gains in a taxable account can be disastrous. However, mutual fund managers are often not as concerned as you are with keeping taxes low. These professionals are concentrating on maximizing pre-tax-not after-tax-returns. The difference is an important one.

It's clear the best after-tax returns start with the best pre-tax returns, but even the fund industry itself has come around to the need for examining after-tax returns. Let's dig in with an explanation of the more tax-efficient types of funds:

Index funds: Index mutual funds are designed to match the performance and risk characteristics of a market benchmark like the Standard & Poor's (S&P) 500 Index. They've long been the easiest way to construct a tax-smart portfolio. Index funds don't need to do much buying and selling, because the makeup of the portfolio changes only when the underlying benchmark changes. Since the portfolio turnover in these funds is low, stock index funds can often reduce an investor's tax exposure. But investors should understand there are few absolutes: index funds can also realize gains. When a security is removed from a fund's target index, stock in the company must be sold by the fund and new stock purchased. Index funds also tend to have lower expense ratios because they aren't actively managed. Lower expenses mean you get to keep more of the gain in your pocket.

Exchange-traded funds (ETFs): Exchange-traded funds (ETFs) are a popular alternative to mutual funds due to their tax efficiency and lower operating fees. The fact ETFs offer more control over management of gains is very attractive to the tax-efficient investor. ETFs look like index funds but trade like stocks. The most popular ETFs use broad market benchmarks such as the S&P 500 Index or the Nasdaq 100 (QQQQs or Qubes). There are ETFs that represent nearly all parts of the market (midsized value, small growth, and foreign companies) as well as various sectors (telecom, utilities, technology).

Most ETFs have even lower expenses than their index fund counterparts. Unlike mutual funds, ETFs can be bought and sold throughout the day, rather than just at the end of trading. ETFs tend to have little turnover, few capital gains distributions, and a low dividend yield-making them very tax-efficient.

In addition, ETFs aren't vulnerable to the hysteria of other investors because liquidity is provided through the stock market. When the stock market declines, many investors panic and pull out. Mutual fund managers are then forced to sell positions to provide cash to the sellers. Those shareholders that keep their shares suffer a double whammy-a loss of market value and taxable gains created by the manager selling securities in the fund. Many investors have no idea this can happen. Yet ETFs don't have to sell securities to meet redemptions.

Despite their benefits, ETFs pose a problem for individual investors in the sense ETFs aren't no-load. Rather, you have to pay commissions to buy and sell them. If you're investing regular sums over time, those costs can easily negate any break you get on annual expenses. ETFs are a better bet for those with a lump sum to invest.

Tax-efficient mutual funds: Some types of mutual funds are more tax-friendly than others. Tax-efficient mutual funds, for example, are managed by professional fund managers who attempt to minimize the buying and selling of securities and thus are less likely to pass along taxable gains to individual investors. These professionals use a variety of strategies and objectives, including indexing and careful security selection, to offset most capital gains with capital losses.

These funds are actively managed, but by good managers who pay attention to the tax ramifications of their trading. Some simply keep turnover low, minimizing the capital gains they have to realize. Others try to match the sale of any winners with dumping their losers, so gains can be offset by losses.

Keep in mind that of course you can still rebalance in a taxable account. As long as you've held the stocks or stock funds at least a year, you'll benefit from a lower capital gains rate. This allows you to improve your investment portfolio without major suffering at tax time. Many investors unknowingly expose themselves to unnecessarily high rates of income taxes when they sell shares from their taxable investment account at a profit and haven't held the position for 12 months. One strategy for rebalancing in taxable accounts is to take all distributions in cash instead of reinvesting the distributions back into the original fund. The cash can be used to invest in the underweighted parts of the portfolio. This avoids the need to sell positions to rebalance.

Review Your Portfolio

Tax-efficient investing requires active involvement. That starts with looking for tax-efficient mutual funds as discussed above. You also need to monitor the portfolios so losses are harvested to offset gains. In addition, you must pay attention to holding periods to ensure the asset has been held at least 12 months.

Start by screening your funds for performance and then for tax efficiency. Separate your list of funds that meet your performance criteria by tax efficiency. You don't want to completely exclude funds that aren't tax-efficient, because these can be held in your tax-deferred accounts. You don't need or want to be in a tax-efficient fund with your qualified retirement plan. Remember the trade offs I mentioned earlier between performance and tax efficiency? Returns tend to be lower in tax-efficient funds. Inside a qualified plan, you want the managers to be more aggressive and make moves in the portfolio, if they considered the tax consequences, they might choose not to make.

One of the biggest mistakes investors make is failing to harvest losses in their portfolio. A lot of people think just because an investment is worth less than they paid for it, they haven't really lost any money, because they didn't sell it. Tell that to the holders of Enron stock! You should start by evaluating the investment. If you had cash today, would you still invest in that same position, or are there other opportunities that look better? If the answer is no, take the loss and reinvest elsewhere. The loss could be worth thousands in saved taxes. The reason most investors don't use this strategy is because loss harvesting is labor intensive-and nobody wants to admit to taking a loss.

Recommendations for Investing in a Tax-Efficient Way:

o Investing tax-efficiently is a balancing act between diversified asset classes that minimize taxes yet still achieve superior returns.

o The tax decision should never overrule the investment decision.

o Index funds, exchange-traded funds, and tax-efficient mutual funds are all good tax-efficient investment choices.

o In terms of your retirement accounts, tax efficiency shouldn't be your goal; your retirement account investments should be more aggressive so they result in bigger returns over the long haul.

o Review your portfolio regularly, and don't be afraid to harvest losses-especially since you may be able to take the losses as a tax write-off.

Exemptions From Capital Gains Tax in Spain

Capital Gains Tax in Spain is payable on the profit from the sale of certain assets in Spain, including antiques, art and jewellery, stocks and shares, property and businesses.

Exemptions from Capital Gains Tax on Property

Residents over 65 are exempt from this tax on the profit made from the sale of their principal home, irrespective of how long they have owned it.

Importantly the Spanish Tax Office defines "a principal home" as the place where you have lived permanently for at least 3 years; thus residents below 65 are exempt from CGT on the profit made from the sale of their principal home, provided that all the profit is invested in the purchase of another principal home in Spain within two years of the sale.

Any profit that is not reinvested is subject to CGT at the income tax rate.

Gains revealed as a result of the death of a taxpayer, gifts to government entities and donations of certain assets in lieu of tax payments are exempt from CGT.

Capital losses can be offset against capital gains, but not against ordinary income.

Capital losses in excess of gains can be carried forward to offset against future gains for a five-year period.

Capital Gains Tax Rates

On January 1,2010, Spain raised its CGT from 18% to 19% on profits up to 6.000 Euros made in one year.

As of June, 2010, the tax increase is frozen at 19% for non-resident property sellers, meaning they pay only 1% extra.

Capitals Gains Refunds

The European Court of Justice has ruled that non-resident sellers, all the way back to 1997, can claim a refund for any excessive CGT that they paid. The European Court of Justice over-ruled Spain's claim to a four-year statute of limitations on claims.

How to Avoid Capital Gains Tax and Inheritance Tax on the Transfer of Property to Children

Capital gains tax. Lets look first at the capital gains tax position of a transfer of property. On the assumption that the parent is UK resident and domiciled any transfer of property will be subject to UK capital gains tax. You'll therefore need to calculate the gain arising and crucially to consider the offset of reliefs to reduce this gain.

It's worth noting that the residence of the child is irrelevant for UK tax purposes. Therefore, even if they are tax resident in a tax haven, the UK resident and domiciled parent will still have to consider their own capital gains tax position.

As parents are classed as 'connected' with their children for capital gains tax purposes, any transfer from the parents to the child is treated as a market value transfer. As such, even though the children don't pay any proceeds to the parent for the property when calculating the capital gain it is the market value of the property that needs to be considered.

The gain will therefore represent the uplift in value from the date of acquisition or probate value to the market value at the date of transfer. Note if the property was acquired before March 1982 there are special provisions that can apply to deem the cost to be the market value at March 1982.

What reliefs are offset?

It is the reliefs that can significantly reduce any capital gain. The main reliefs that any parent would be looking to consider to reduce the capital gain would be:

Indexation relief if the property was acquired before April 1998. This adjusts the cost (or probate value) for the effects of inflation up until April 1998
Taper relief. You'll need to consider what type of property it is. If you're looking at transferring a residential property it will nearly always be a non business asset. This will reduce the capital gain by up to 40% if you've owned it for at least ten years. Ownership of less than this will qualify for a reduced rate of taper relief (eg ownership of 5 years will qualify for taper relief of 15%) dependent on the period of ownership above three years. So three years ownership qualifies for 5% relief, four years for 10% etc.If however the property is either a Furnished holiday let or is used for the purposes of a trade (eg it is a shop, office or factory that is transferred and it has been used by a trader) it will qualify for at least some business asset taper relief. This can be very beneficial as maximum business asset taper relief can reduce the gain by 75%. So if you're looking at transferring a business asset the gain is likely to be significantly reduced.




Gift relief. If a property is used for the purposes of the parents trade or their trading company they may be able to claim gift relief. This allows a deferral of the gain arising (provided the child agrees!) and allows the parent to pass the property to the child free of capital gains tax. The future disposal of the property by the child would then crystallise the deferred capital gain.
Annual exemption. If the parents own the property jointly the humble annual capital gains tax exemption should not be forgotten. It allows each individual to exempt (currently) £9,200 of any gains from capital gains tax in each tax year. So if the parents had no other capital gains, the annual exemption could ensure that a gain of around £18,400 was fully exempt from tax.
Other capital gains tax exemptions such as rollover relief and the EIS deferral relief would not apply as there are no disposal proceeds!

Non UK resident parents

If the parents are non UK resident and non UK ordinarily resident they can transfer UK property to their children free of CGT subject to two caveats.

Firstly this doesn't apply to any property that is used for the purposes of a UK trade. Therefore if you run a UK business and use the property for that business you can't claim the CGT exemption even if you're non UK resident.
Secondly if you own the property at the date you leave the UK you'll need to ensure that you remain non UK resident for at least five complete tax years to avoid UK capital gains tax. If you come back before the expiry of five tax years the capital gain will be charged in the tax year of your return.

Non UK domiciled parents

If the parents are UK resident but non UK domiciled they can transfer overseas property to their children free of capital gains tax. This applies irrespective of the residence and domicile status of the children. If the property was UK property this exemption would not be available and the capital gain would simply be charged as usual.

Form of transfer

It's important to note that the transfer needs to be of the beneficial interest in the property. This does not necessarily tie in with the legal interest.

This means that if you wanted to transfer the property to your children you could transfer just the beneficial interest and retain the legal interest, or transfer the legal and beneficial interest together. If you transferred just the legal interest and retained the beneficial interest there would be no effective transfer for Capital Gains purposes and you'd still be treated as the owner of the property in law.

It can sometimes be easier to just draft a deed of gift and arrange for the beneficial interest to be transferred.

Inheritance taxAny transfer at undervalue from the parents to the children will usually be a potentially exempt transfer ('PET') for inheritance tax purposes. Again I'm assuming initially that the parents are UK resident and domiciled.

So in the case of a gift of the property the full market value of the property will be treated as a PET. If the children were to pay some of the value to the parents it would only be the difference between the market value and the amount paid that would be a PET.

With a PET there is no immediate Inheritance tax charge on the parents and provided they survive for at least seven years from the date of the transfer the amount gifted would be excluded from their estates for inheritance tax purposes.

Note that the residence and domicile status of the children is again irrelevant.

Non Resident parents

Non UK resident parents would have no impact on the Inheritance tax position, and the transfer would still be a PET for inheritance tax purposes.

Non Domiciled parents

If the parents are non UK domiciled they can transfer overseas property to their children free of any Inheritance tax implications -- irrespective of whether they survive for seven years or not. UK property is unaffected (unless it's owned via an offshore company) and non UK domiciled parents would still be classed as making a PET on the transfer of UK property to their children.

Gift with reservation of benefit rules

If the parents make a gift to the children and retain a benefit in the property transferred there are special anti avoidance rules than can ensure that the property is not classed as a PET for Inheritance tax purposes.

Instead the property remains within their estate for Inheritance tax purposes until the benefit ceases. This could apply for instance if the parents continue to live in the property, of if they continue to benefit from the rental income obtained from the property. One way that they could get around having the property still in their estate would be to pay the children a market rate for the benefit that they get from the property (eg market rental).

Stamp duty Land TaxUnless the property is mortgaged the parents should be able to transfer the property to the children free of stamp duty providing it is a genuine gift. If there was any proceeds payable to the parents this would then be classed as 'chargeable consideration' for stamp duty purposes and a stamp duty charge would need to be calculated.

Note that if there is a mortgage or any other form of debt that is transferred from parents to the children with the property this would also be classed as 'consideration' for the purposes of stamp duty.

Impact of the Capital Gains Tax Increase on the Sale of a Business

Business owners and management teams that are contemplating a sale of their company are now evaluating the impact that the 'timing of sale' has on the net proceeds received, as a result of the upcoming 33% capital gains tax increase. Many business owners have seen a decline in revenue and profit over the last several years and are expecting an improvement in the future. Since most business valuations are derived, largely in part, by the earnings the company generates, the general consensus is that a higher value will be obtained by delaying the sale. Achieving the highest business valuation is often the sole concern with little consideration to the net after tax dollars. Many business owners are now re-evaluating this thought process given the significant capital gains tax increase that will take place on January 1, 2011.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law on May 28, 2003. Among other things, this 2003 tax law created lower dividend and capital gains rates for all investors. Under this Act, the maximum net capital gains tax for assets held for more than one year was lowered from 20% to 15% (and from 10% to 5% for taxpayers in the 10% or 15% tax bracket). The Tax Increase Prevention and Reconciliation Act of 2005, which extended the 15% capital gains tax rate, "sunsets" on January 1, 2011. The term sunset is a time phase-in provision which means that without further Congressional action, the previous law, including the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), will go back into effect. Therefore, the top 15% capital gains rate will revert to its former pre-May 6, 2003 level of 20%, effectively a 33% increase.

This tax increase should be one of many factors that are considered when evaluating the optimal time table for a business sale. For those owners or management teams that do not plan to sell for 5-10 years this event should not become an inducement to rush out and sell the company. For those owners that are considering a sale over the next few years, the impact that this tax increase has on the after tax dollars received in a sale could be very significant and therefore, a thorough evaluation should be performed by the owner to assess the actual effect between selling a business now or years in the future. By analyzing the net after tax proceeds from a business sale in years 2010 thru 2013, the business owner or management team will recognize that even with a 10-15% growth per year, and maintaining consistent earnings with a constant exit multiple, the incremental value attributed by the growth in income and revenue, in most cases, would be completely negated by the increase in capital gains taxes. Therefore, while the value of the business is anticipated to be higher in years 2011 and beyond, the net after tax proceeds, could be considerably less.

There are many considerations involved in the sale of a privately held business and this article is written with the intention of helping business owners understand the potential impact that the 2011 capital gains increase will have on the sale of their privately held business. Understanding the effect of the impending capital gains tax increase enables business owners to make informed decisions as it relates to maximizing the net after tax dollars through the intelligent structuring and timing of the business sale transaction. The tax implications will vary for every business based upon the type of assets being sold and the structure of the transaction and it is strongly recommended that a business tax advisor be involved in the process.

6 Ways to Defer Your Capital Gains Tax

If there is one tax that seems to be a concern for property owners that are planning to sell their property, it is the capital gains tax. This is a tax that is placed on profits that result from the sale of assets such as property, stocks, and bonds. One common attribute to the capital gains tax is that it will take a huge chunk of your profits from the sale on your property.

So your primary object, as a seller, should be to defer or reduce this tax as much as possible. Here are six techniques that you can use to defer or reduce your capital gains tax: 

1. Tax Loss Harvesting

This is where you sell your securities at a loss. The purpose is to offset your capital gains for months, or even years, into the future.

2. Charitable Trust

Giving equity to a charity will allow you to reduce your taxes..

3. Installment Sale

If you except payments for your sale in installments over the course of years. 

4. Deferred Sales Trust

The Trust receives your profits from the sale of your property or assets. Your taxes will be deferred for the duration of the installment note.

5. 1031 Exchange

The 1031 Exchange allows you to defer by exchanging your property for "like kind" property. This typically applies to property only.

6. Structured Sale

This is a type of installment sale that allows sellers to defer any recognition of gains on the sale of real estate.

There are advantages and disadvantages to the above six methods.  It is important that before you utilize any of these deferment methods that you research everything you can about it. Which one you decide to use will be based on your own individual circumstances.

Tax Deferral 1031 Exchanges and Cost Segregation

Tax deferral through 1031 exchanges, or tax-free exchanges of real estate, have become a popular method of tax deferral of capital gains taxes. Almost by definition, individuals who utilize the 1031 exchange option are reluctant to pay taxes that can legally be avoided. 1031 exchangers have asked if they can receive tax deferrals and enhance depreciation. The short answer is yes.

A complete answer needs to consider the remaining cost basis for the property that has been exchanged. If the remaining cost basis is minimal then tax deferral is minimal and, it is probably not financially feasible to utilize cost segregation. If the remaining cost basis (plus the amount of additional cash contributed) is at least $500,000, tax deferral is increased and it is worth reviewing whether cost segregation makes sense.

The total value of the new property is proportionally allocated to the remaining cost basis of the 1031 exchange property (and any additional basis from new investment). For example, if the five-year property is 10% of the value of the new property, and the remaining cost basis is $3,000,000, a value of $300,000 ($3,000,000 x 10%) would be allocated to the five-year property.

One interesting issue is whether five-year property in the new property is considered personal property. To gain the tax deferral benefits, a 1031 Exchange must involve like-kind property. For example, if you sell a house and purchase a lake house, boat and jet ski as your exchange property, the boat and jet ski would be considered "boot", taxable as ordinary income and the owner does not receive any tax deferral. The boat and jet ski are considered "boot" since they are personal property and the property that was sold was real estate.

Since five-year property is referred to as personal property in IRS documentation, there has been confusion regarding this issue. The IRS defers to state law regarding whether items are real property or personal property for the purpose of determining whether there is "boot." Carpet and vinyl tile are both significant five-year life components. While they are considered personal property for depreciation purpose, they are considered real property by state law (in most states). Hence, they are not considered "boot." and the owner can experience tax deferral.

Tax deferral from cost segregation is effective for 1031 exchange purchases provided the remaining cost basis is at least $500,000. Exchange buyers can defer taxes and reduce taxes on the old property and increase depreciation for the new property

Cost segregation produces tax deferrals and reduces federal income taxes across the country and in every size market. Below are just a few examples of where cost segregation generates meaningful tax deductions.

City:

Baltimore, MD
Houston, TX
Bridgeport, CT
Dallas/Ft. Worth, TX
Hartford, CT
San Francisco, CA
Washington, DC
Las Vegas, NV
Memphis, TN
Tampa, FL
Albany, NY
St. Louis, MO
Tulsa, OK
Columbus, OH
Santa Rosa, CA
Fresno, CA
Detroit, MI
Ft. Lauderdale, FL
Cincinnati, OH
Cleveland, OH
Scranton, PA
Indianapolis, IN
Albuquerque, NM
Wichita, KS
Milwaukee, WI
Stockton, CA
Little Rock, AR
Bakersfield, CA
Oklahoma City, OK
Nashville, TN

Cost segregation produces tax deductions and tax deferrals for virtually all property types.

Property Type:

Regional mall
Truck terminal
School
Manufacturing/processing
Retail
Shopping center
Cold storage facility
Tennis club
Country club
Medical office

Almost every industry, including the following, can generate cost-efficient tax deductions and tax deferrals by using cost segregation.

Industry:

Arts, Entertainment, and Recreation
Laundry facilities
Furniture stores
Paper manufacturing
Machinery manufacturing
Metal manufacturing
Computer and electronic manufacturing
Golf courses and country clubs
Textile mills
Truck transportation

Tax Rates - Going Up

Over the next year or two it is very likely that tax rates on income, capital gains, and dividends are likely to go up. That is an unfortunate but likely reality especially for those people whom the politicians consider "rich" like most of the people who receive this newsletter. Rising tax rates are a virtual certainty and a promise if leading presidential candidate Barak Obama wins the election this fall (he is currently ahead in the polls). Longer term over the next 10-20 years it is also very likely that we will have higher tax rates due to the current budget deficit and the looming Social Security/Medicare financial shortfalls. Those social programs face severe financial shortfalls over the next 20+ years and taxes will have to be increased, or benefits substantially reduced, or both to keep those programs alive. Fixing the Alternative Minimum Tax will not be cheap either.

Part of the problem is that we have just been spoiled and lucky over the past 20 years by lower than usual tax rates on income and investments relative to US history. The government has kept tax rates low, allowed government spending to grow too fast, run budget deficits, and deferred facing reality by delaying fixing the long term Social Security/Medicare financial problem.

The current top federal marginal tax rate on income of 35% is well below the average in US history and is near the lowest it has been since the 1930's. The top rate was as high as 90% in the 1940's and 1950's, dropped to around 70% in the 1960's and 1970's, and dropped to around 50% in the early 1980's. We have been lucky to have had a top tax rate on income of between 30% and 40% since the late 1980's. There is lots of room for that top tax rate to go up, looking at history.

The current 15% tax rate on capital gains and dividends is also very low relative to history, and is probably the lowest we will see for several decades. This low 15% rate on capital gains is the lowest since the 1930's in the US. Typical capital gains tax rates in US history since the 1940's have been in the 20%-40% range. If nothing happens the Bush tax cuts will expire over the next year or two and then capital gains and dividend tax rates will jump back up automatically.

Presidential Candidates McCain and Obama on Future Taxes
Barack Obama is calling for higher taxes (ordinary income tax, capital gains tax, dividend tax, and social security taxes) on families earning more than $250,000 per year. Obama wants to raise the top ordinary income tax rate from 35% to 39.6%. He says he will not raise your taxes if your income is under $250,000 and "chances are you will get a cut". He wants to raise the tax rates on capital gains and dividends for "rich" people from the current 15% rate to somewhere in the 20%-28% range. On estate taxes Obama is proposing a $3.5 million exclusion for 2010-2011 and beyond and a top estate tax rate of 45% (the same as the current federal estate tax rate).

John McCain wants to make permanent the current federal income tax rates (top rate of 35%), and cut corporate tax rates from 35% to 25%. He opposes the Obama plan to lift the earnings cap on the social security payroll tax. McCain wants to keep the current 15% tax rate on long-term capital gains and dividends. With a likely democratically controlled Congress he may have to compromise and these capital gain/dividend tax rates may go up anyway to the 20% level. On estate taxes McCain proposes raising the exclusion to $5 million for 2010-2011 and beyond and cutting the estate tax rate to only 15%. Of course all political campaign promises and tax plans from both sides should be taken with a huge grain of salt.

What smart things can you do about rising tax rates?

1. Sell some assets you own that have a big capital gain now while the rates are low. If you have an asset with a large long-term gain that you were thinking about selling anyway in the next couple of years you may want to consider selling it now before the capital gains tax rates go up. This may be especially true if you have other reasons to sell the asset as well (concentrated stock/option position in one stock, concentrated family business holding, large real estate holding, a big holding that has had a huge run up recently, etc.). For investments that you may want to hold for a long time it may be better to just continue to hold on to them and let the tax-deferral continue for many years.

2. Use Roth IRA and/or Roth 401K accounts if you can. Roth accounts are taxed now (with current low tax rates) and are tax-free later when you start withdrawing the assets (and when income tax rates are likely higher). Therefore if tax rates go up in the future you will not care (as much) because assets withdrawn from Roth accounts are not taxed. Many people have incomes that are too high to be eligible for Roth IRA accounts (modified adjusted gross income must be below $116K single or $169K for a couple). Under current law (which may be changed) investors of all income levels will be allowed to rollover their current IRA's (of any size) into Roth IRA's in 2010. This could be a smart thing to do in 2010 if future income tax rates turn out to be significantly higher than they are in 2010. Of course if Obama wins the election income tax rates may already be higher in 2010.

3. Continue to give assets with large capital gains to charities. You get the full value of the asset as a deduction regardless if the capital gains tax rate is 15% or 25%. If income tax rates go up your charitable deduction is actually worth more against your income taxes.

4. Factor in higher tax rates in your long-term financial planning. The bottom line is you will need to save more, spend less, work longer, or invest smarter to make up for the higher future tax rates. This is especially true if most of your net worth is in tax-deferred IRA's and 401K's which are taxed at the full ordinary tax rates when withdrawn in retirement. Your tax rate in retirement could be as high (or higher) than your current tax rate.

5. Buy tax-exempt municipal bonds. These bonds typically benefit when ordinary income tax rates rise. Don't buy these in your tax-deferred 401K or IRA accounts.

Selling Your Investment Property in 2010 Could Save You Thousands in Taxes

If you are an investor looking to sell one or more of your real estate holdings, you might want to consider completing the sales transaction in the next year. At the end of 2010, tax cuts put in place by President Bush will be reset to standard income tax rates and you will lose your opportunity to take advantage of the lower rates.

As an investor looking to sell a house fast, you are most likely already familiar with capital gains taxes, but most home buyers are not. Therefore, the decision to buy houses in PA is not made because of the capital gains tax reductions that you, the seller, will get if the property sells before the end of 2010.

The current capital gains tax rate is actually a two-fold calculation. If you are selling a property for which you have claimed depreciation, then you must be aware of the total amount of the depreciation claimed. Many investment home buyers bought properties as part of a we buy houses type program and want to sell the house now. In that case, the capital gains tax rate will be 10%.

On the other hand, if you have claimed depreciation be aware that when you find a home buyer, you will be taxed at 25% for the amount that you claimed in depreciation when you sell your house now. The advantage of selling is still in your favor however, since the remaining sales revenue will be taxed at the lower 10% rate.

This advantage means that you will keep more of the profits when you sell your house now, instead of waiting until after the end of 2011. Whether you pay just the lower amount of capital gains tax, or you split the percentage rate, you will still likely earn more from the sale in the next year than at any point in the future.

The market is definitely leaning toward sellers right now, because there are many individual home buyers in Philadelphia and investors looking to buy houses in PA. They are looking for deals, and although the idea of selling at a lower price does not always seem appealing in comparison to waiting a year or so to sell, today it is not a bad idea to sell a house fast for a lower price. This is because even at a lower selling price, your property is going to bring you larges profits than if you wait a year and sell for a significantly higher price.

Keep this information in mind as you make decisions regarding your real estate investments, particularly if you are already planning to sell in the near future. There hasn't been a better market for home buyers in years, and fortunately for the investor, prices are higher than they were over the last few years and there is a significant profit to be made by selling in the next year.

Buying Investment Property in Australia - What You Must Know About Tax, GST and Capitals Gains

Investment properties are a great long-term investment. However, if you're considering buying residential or commercial investment property you need to be up to speed on important tax, GST and capital gains rules.

That way, you know exactly where you can save money - and what you're up for depending on your situation.

Tax rates if you don't have an Australian Business Number (ABN)

If you buy a residential property you don't need an ABN. However, if you ever purchase any goods or services for the property that cost more than $50, your supplier has to include an ABN on their invoice, or 48.5% of your payment will have to go to the tax office.

For example, if an electrician invoices you $500 to install some lights and there's no ABN on the invoice, you pay him $257.50 and withhold $247.50 for the Tax Office.

If you own a commercial property, you definitely need an ABN, or the business renting your property has to withhold 48.5% of their rent for tax - and we don't want that!

GST and commercial property rent

You usually only have to worry about GST when you buy a commercial property. If your:

gross rent, excluding GST, is more than $50,000 a year, you need to be registered for GST.
gross rent is less than $50,000 you can voluntarily register for GST.

And if you are registered for GST you:

must include it in the rent you charge
can claim GST credits for any rental expenses
need a tax invoice to claim the GST credits on any purchases you make
must give your business tenant a tax invoice so that they can claim the GST in the rent.

GST and your renter

If your renter is registered for GST and they use the premises solely for business:

the amount of rent will include GST
you can claim GST credits.

If your renter is not registered for GST or the rent is partly for private use:

GST is based on the market value not the amount they pay you.

For example, say you rent office space to someone who's not registered for GST and they pay you $220 per week, but the market value rent is $440 per week. You'll still need to account for $40 GST so you can claim GST credits.

Are you earning additional income from the property?

On top of rent, there are other potential income streams to remember, such as:

profit generated from the use of the rental property.
bond money if you entitled to keep any
insurance payouts for things like such as compensation for lost rent

Claiming on property expenses

At the other end of the scale, there are the inevitable expenses such as:

maintenance costs
body corporate fees and charges.

What you might be able to claim expenses for

In addition, there are things you might be able to claim for over a number of years including:

borrowing expenses
amounts for decline in value of depreciating assets
a capital works deduction for the cost of capital improvements
capital repairs once the cost has been charged to the appropriate fund.

What you can't claim expenses for

Make sure you don't include:

time rented below commercial value. For example, if you let your daughter run her business out of there at no cost until she gets on her feet, you can't claim deductions for this period.
levies paid to a special fund for particular capital expenditure.
special contributions for major capital expenses to be paid out of the general purpose sinking fund.
costs of buying and selling the property (see capital gains below)

More than one owner

If you own your property with someone else then rental income and expenses must be attributed to each co-owner according to your legal interest in the property regardless of any other agreement you might have.

Capital gains tax on rental property

Capital gains tax is the tax you pay on any gain made on an income-producing asset eg investment properties. Depending on when you bought your rental property, capital gains tax might apply when you sell it.

Some of your expenses can reduce your capital gains tax. However, there are some expenses - like the costs of buying or selling the property - you can't claim as deductions.

And if the property is owned by more than one person, each of you may have to pay capital gains tax based on your legal interest in the property.

Keep records of everything

You need to keep records of all your income and expenses relating to your rental property. And hold on to them for five years after you sell it.

For capital gains tax purposes, you must have records stating whether you:

bought the property
inherited it
received it in a divorce settlement or as a gift
make improvements to property.

Note: The information within this text and any reference to Australian taxation issues are intended as a guide only. You should seek accounting and tax advice based on your personal situation.

Capital Gains Tax and the IRS

The capital tax for the IRS is applied to take money from any profit than an individual makes on a capital asset. If certain things such as pleasure and convenience it is basically seen as a capital asset. This particular list includes bikes. Cars, homes and stock and bonds, and when one of these capital assets is sold there and then the tax are applied to it.

No upward limit is there for the amount of profit you can receive from your asset when it is time to report your tax sheet, and on the issue of your losses than cannot go over $3000 for the year. Another thing that most people don't notice is that this tax is also involved with any thing that was inherited. This means that if you obtained an asset from a family member and in the process of selling it, it will be taxed and has to be reported. If this particular item is stocks in a company this termed as capital gain and also coin collections. When selling an item you should know that the period of time you owned it for is incorporated with the various taxes, meanwhile if you own something for less than a year this would be taxed more than the long term asset.

A long term asset is one which is held for 365 days or longer. If you are facing losses of more than $3000 dollars for the year you should put the balance on the next year's income tax return which is still the minimum of $3000 dollars.

How a Charitable Remainder Trust Avoids Capital Gains

Charitable remainder trusts can increase your income, avoid capital gains taxes, lower or eliminate estate taxes, serve as another type of retirement plan, serve humanity and put a warm feeling in your heart. Here is an example that applies to anyone contemplating selling a highly appreciated asset.

In the Path of Progress

Clarence and Mildred had a farm that has been in the family since 1930. They raised corn and had a few cattle. However, the farm has been inactive since Clarence died 10 years ago.

The farm used to be out in the country. Over the years, the neighboring city has expanded to the point that its boundaries have almost reached the farm.

A real estate development firm with an offer she finds difficult to believe has recently contacted Mildred. They want to build a giant shopping mall on her property. Moreover, they are willing to pay 14 million dollars for her 80 acres.

As much as Mildred is tied to her home of 40 years and the lifestyle, this is an easy decision. The farm was originally homesteaded and has no basis. How can she minimize the capital gain tax?

The procedure would call for her to gift the farm to a charitable remainder trust. The trust would then sell the property to the real estate developer. She should employ an estate planning attorney to assure that the gift to the trust and the subsequent sale to the real estate developer are not construed as a prearranged series of transactions.

Using a charitable remainder trust gives Mildred the following benefits:

1. She does more than minimize the capital gain tax; she avoids it altogether. If the capital gain rate is 15%, this saves $2,100,000 in capital gains taxes. Mary is frugal. She has saved every button that has ever come off a shirt, blouse or shirt. She is also leery. She figures she can put that $2,100,000 to better use than the people in Washington D.C.

2. A charitable remainder trust mandates an annual payout of at least 5%. That's $700,000 a year. She is set for life and can take all the grandchildren to Disney Land every year.

3. She will get a huge tax deduction based on her charitable contribution to the trust. It will be so big that the IRS will let her carry the unused portion forward for a total of six years. It's a good bet she will pay no income tax for the next six years.

4. She can name any number of charities to receive the 14 million in the trust when she dies. Ultimately, she could have a new church building, a wing on the hospital or scholarships named after her and Clarence for her generosity. The number of people who would benefit in the future is too many to count.

5. If she is concerned about disinheriting her heirs, she can use some of the income to buy a life insurance policy and name her children and grandchildren beneficiaries. She could also gift up to (currently) $12,000 per year to as many people as she wants without any gift tax implications.

6. No estate tax will be due at her death.

7. The 14 million will be professionally managed inside the charitable remainder trust. She has no investment worries and can set the trust up so she has a guaranteed income. Downturns in the economy, weather catastrophes or world events will have no effect on her income.

It's true that Mildred could simply sell the farm and pay the capital gains tax. Aside from the capital gains tax, coming into this large sum of money could create more problems.

She would have to invest it while fending off suggestions from well-meaning relatives. She would have some estate planning to do to avoid half of her estate going to the government in taxes when she dies.

When you put the charitable remainder trust on the table as an option, most of these problems vanish and many additional benefits appear.