New tax cuts are “pending” and investment diversification as an asset protection strategy is more important than ever.
Have you considered diversifying your investments from the stock market to income-producing real estate?
We are seeing increased investment in income producing real estate such as apartments. The investment vehicle of choice for protection of business and personal assets and preferred tax treatment is the single member limited liability company (“LLC”) .
Single member LLCs – This entity is disregarded by the IRS for income tax purposes so all the tax benefits flow through to the member/investor on his or her 1040 personal tax return. The LLC files no tax return. Tax benefits include depreciation and interest deductions to offset the taxable rental income. Depreciation is a valuable non-cash deduction and it is based on the full purchase price excluding the land. The deduction is based on the premise that the improvements have a limited useful life so the investment is returned pro-rata over the useful life of the asset through depreciation deductions. This also lowers the tax payer’s basis in the property which increases the taxable gain on sale. That is where the magic of IRS Section 1031 comes into play.
IRS Section 1031 Like-Kind Exchanges – 1031 exchange tax deferral is available on sale if the net proceeds are reinvested in a qualifying “like kind” replacement property generally within 6 months of the sale. The theory of tax deferral is that it is more of a theoretical gain if the investment continues in similar replacement property. read more…
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You can tailor your estate plan to your needs and your budget. We also offer a free consultation to all prospective clients. All we ask is that you complete our Confidential Estate Planning Questionnaire. Call or email us today for the questionnaire and to make an appointment for a consultation.
Welcome our new associate Maria Therese Fujiye!
Maria Therese is native to the Pacific Northwest and received her Juris Doctorate from Seattle University School of Law in 2016. During law school, Maria Therese worked as an editorial assistant for a small editing company and externed in the legal department at the Allen Institute for Brain Science. She also co-authored a book chapter exploring the utility of certification marks on public health.
Prior to starting her legal career, Maria Therese worked for the University of California, San Francisco, on a psycho-oncology project aimed at reducing fear of cancer recurrence in early stage breast cancer survivors.
Maria’s law practice areas include health care, estate planning, real estate, probate, elder law and bankruptcy.
Health insurance does not necessarily translate into affordable healthcare.
Typically, people use their credit cards to help pay their medical bills, thereby shifting family budgets even further into the negative. Thus, not surprisingly, healthcare cost is one of the primary reasons people declare bankruptcy.
The stress from financial troubles can be just as devastating as coping with the physical and emotional challenges that accompany a serious illness. Between 2011 to 2014, roughly one in five persons under age 65 was in a family that had difficulty paying medical expenses in the past 12 months, and in 2015, the percentage of adults who delayed or did not receive needed medical care for cost reasons increased as the number of diagnostic conditions increased. And among insured with medical bill problems, a 2016 survey found that over 60 percent reported using most of their savings. read more…
When a spouse passes away, having some difficulties is to be expected. With planning, those difficulties can be limited to emotions and not finances.
Upon losing a spouse one of the biggest problems people often face is understanding and handling family finances. This is a particularly acute issue for many older women who have left management of financial matters primarily up to their husbands. It can also be a problem for older men, if their wives handled everything. Regardless of which spouse predeceases, a lack of knowledge about the finances can cause increased emotional and financial stress at the most inopportune time. This is a mostly avoidable problem. read more…
This is Part 2 of a two-part article. Read Part 1 here…
Now that Donald Trump has been in office for several weeks, the expected changes that we discussed in our last newsletter — repeal of the Obamacare surtax, lower corporate income tax rates, lower individual tax rates, taxes on imports, and child care credits — seem to be on track given the rhetoric from the White House and the majority in the house and senate.
“Risky times are ahead.” – Gerald F. Seib
Beginning as early as Spring 2017, the IRS will begin using private debt collectors to collect unpaid federal income taxes.
The selection of private debt collectors was in response to a law passed by Congress requiring the IRS to outsource tax debts if one of three conditions applies:
- more than one year has passed without any interaction between the taxpayer and IRS;
- one-third of the statute of limitations has lapsed and there is no IRS collector assigned; or
- the IRS is otherwise not working the debt due to lack of resources.
Experts have expressed concern that hiring private debt collectors will add to the problem of scam artists who pose as IRS collectors. Currently, the IRS has a policy of never calling to collect without first mailing a notice, and has urged consumers to ignore scam calls. When private collectors begin calling taxpayers regarding back taxes, it will add to the confusion and make consumers more vulnerable to these scams. Consumer advocate groups are seeking further protections, such as excluding from the program low-income taxpayers and those who owe taxes under the Affordable Care Act. read more…
Article contributed by John Paul Turner, Esq.
It may be hard to imagine, but that home you worked so hard to obtain can be taken by the government for the benefit of the greater good.
In fact, the power of eminent domain has been a fundamental part our of Constitution from the very beginning. Originally adopted by the American colonies from the common law, James Madison included as part of the Fifth Amendment the premise that “nor shall private property be taken for public use, without just compensation.” And, if you think about it, there would be no highways, schools, bridges or parks without the ability of our federal, state and local governments to acquire the real estate necessary to make those public projects a reality.
Condemnation is the legal process by which eminent domain is accomplished and every state has developed a unique set of statues and case law establishing the way in which your property can be taken. However, before any private property can be put to a public use the government agency involved must first prove their project is truly “public” and then establish the property they seek is “necessary” for that public use. Some cases like state highways and train corridors are more obvious public uses than say a convention center or shopping mall with quasi public/private investment. Ultimately, a judge will render a decision on the public use and necessity requirements of each case by examining the facts in evidence and the prior actions of the government in deeming your property necessary for their project. read more…
Now that Donald Trump is transitioning to the Presidency and we have a republican controlled House and Senate we can anticipate some “Reagan like” tax law changes.  When Reagan came into office, tax rates on unearned income were at 70% and the prime rate was at an all-time high of 21.5% and averaged 12.65% over the decade of the 80’s.  The Reagan administration lowered the tax rate on unearned income to individual rates on earned income and long-term capital gains were taxed at a reduced rate of 40%. Now with a Trump administration we might see rates as low as 15% on interest and dividends.
This article will discuss the “clues” that were revealed during the campaign  as to what changes we can expect and how to protect our assets going forward.
What changes can we expect?
- Repeal of the Obamacare surtax – The Patient Protection and Affordable Care Act of 2010 surcharge is equal to 3.8% of a taxpayers “net investment income” from dividends, rents and capital gains. 
- Lower corporate income tax rates. – Currently we have the highest corporate tax rate in the world, at 38.82 %, The next highest is France at 34.43% and the lowest is the United Kingdom at 20%. Expect Trump to push for a corporate tax as low as 15%. Businesses can also expect to benefit from an election that allows fully expensing plant and equipment costs by waiving the deduction to write off interest on business loans.
- Lower individual tax rates – Tax brackets will be reduced from 7 to 3 with tax rates at 12%, 25% or 33%, down from 39.6%.
- Taxes on imports – You can expect higher consumer prices through tariffs on imported goods which leads to inflation which in turn leads to higher interest rates.
- Child Care Credits – even for the wealthy. These credits are a central part of his tax reduction plan.
What are the key planning tips for protecting assets?
- Consider deferring sales of assets such as income producing real estate as these will become more valuable if the surtax is repealed and your net proceeds after tax will be higher if the sale is deferred to 2017.
- May make sense to use C corporations to lower your overall tax rate. With corporate tax rates at 15% and your individual rates as high as 33%, the C Corporation can be used to shelter your income from income taxes while you grow equity in your C corporation.
- Increased job creation through government funded infrastructure type public improvements – see article by John Paul Turner below on The Power of Eminent Domain and the Government’s Right to Take Your Property.
- Protect investment accounts by diversifying into inflationary hedges and investments that do well as interest rates rise while avoiding health care and related industry investments that presents obvious risks due to the uncertainty in the industry.
- Refinance floating rate loans to fixed rates. Lock in these historic low interest rates!
- Defer income into 2017 and accelerate expenses into 2016. Income will be taxed at lower rates and expenses taken in 2016 will be more valuable.
- Defer gains on sales and even consider a 1031 exchange on sales of real estate assets. Even the sale of a conservation easement qualifies as a sale of a “real property interest” that would allow the net proceeds to be reinvested in income producing real estate assets with the rental income being spared of the surtax charge.
- Defer major capital equipment purchase to 2017 to take advantage of the write-offs. Pay cash if possible to avoid the loss of the business interest deduction.
General Recommendations – We can expect change and with change comes uncertainty, which makes investors nervous and more cautious, so it is a good time to re-evaluate your investment portfolio to make sure you have good diversification, including assets and liabilities that grow in value as interest rates increase, such as adjustable rate assets (adjustable rate bonds or annuities) and fixed rate liabilities (on your home loan, for example). Time to lock in these historically low interest rates!
1. I was 30 years old when Reagan took over the oval office. The prospect of change was exciting for young professionals at the time.
2. The Prime Rate is the rate banks charge their best customers on loans. See http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm.
3. You can also visit the Donald J. Trump website at https://www.donaldjtrump.com/policies/tax-plan/
4. Or, alternatively, taxable income minus a threshold amount of $250,000 for married couples filing jointly, $125,000 for single filers, and $200,000 for all others.
Chapter 11 of the bankruptcy code used to be routinely used only by business debtors. But, more and more, the bankruptcy courts are seeing individual debtors turning to Chapter 11 for effective relief as a result of the economic downturn. Most often these type of individual debtors have real estate with negative equity, rental properties in need of debt restructuring, or too much debt for Chapter 13.
Chapter 11 is a section of the bankruptcy code that permits individuals and businesses to either liquidate or reorganize debt. Distinct from Chapter 7 and Chapter 13 bankruptcy cases, Chapter 11 typically involves greater sums of money regarding the assets and debts of the individual or business. Chapter 11 is available for both individuals and businesses. As an individual debtor, you can reorganize the debts that are in your name in an effort to restructure your finances and protect your assets. If you file as a business, you can still reorganize the debt but you are limited to debts of the business.
Chapter 11 is a powerful tool that allows real estate investors to rewrite mortgages. For example, if you own a property worth $250,000 but you owe $350,000 on the loan, Chapter 11 will allow you to reduce the principle balance of the mortgage to the value of the property. This would reduce the mortgage from $350,000 to $250,000. Not only that, but Chapter 11 will also allow you to reduce the interest rate and extend the term of repayment, often times to another 360 months (30 years). This results in a lower monthly mortgage payment and allows the property to become profitable again.
Most individuals use Chapter 13 bankruptcy to reorganize and pay back debt under a repayment plan. However, Congress has limited the amount of debt you may have to qualify for Chapter 13. The current debt limit for a Chapter 13 debtor is $394,725 for unsecured debts, and $1,184,200 for secured debts. If your total unsecured debt is more than this, or if your secured debts are higher than the limits, you could file for Chapter 11 bankruptcy instead. A Chapter 11 allows you to restructure and pay back your unsecured debt in a manner similar to Chapter 13. You will have a regular monthly payment to each of your creditors and once you have completed repayment according to your court-approved plan, the judge will give you a discharge absolving you of any future liability on most debts.
If you’re struggling financially, even if you have a significant asset base, it’s worth exploring your options, which are ample in the bankruptcy courts. Our office is equipped with the resources to evaluate your situation and recommend a path to reorganization, or even debt relief.
Jared Bellum is a contributing author to this blog and has been admitted to practice law in the state of Washington. He practices in the fields of bankruptcy, real estate law, business law and estate planning.