Selling Investment Property – Like-Kind Exchanges

Preface: Life will always be to large extent what we ourselves make it. – Samuel Smiles

Selling Investment Property – Like-Kind Exchanges

A well known, but sometimes overlooked, way to transfer investment holdings without paying tax at the time of the transaction is through the use of “like-kind” exchanges. In a like-kind exchange, investment real property is traded for other investment real property. The person transferring one piece of property receives different property, and the basis in the original property generally carries over to the new property. That way, the gain is deferred while other tax attributes are preserved.

Of particular interest are the flexible features that make a like-kind exchange an especially useful technique. First, properties do not have to be of identical type to qualify as like-kind. To take a few examples, commercial buildings have been exchanged for unimproved lots, farm land for city lots, and even cooperative housing stock carrying occupancy rights for a condominium interest in the same property. However, only real property qualifies for a like-kind exchange.

Second, properties do not have to be exchanged at the same time. Therefore, it is not necessary to have already located the exchange property to make a like-kind exchange (an important consideration if the end of a tax year is looming). It is sufficient that the exchange property be identified within 45 days after the relinquished property is given up, and that the identified property be received within 180 days. (However, if the tax return due date for the original transfer year occurs before the end of the 180-day period, the identified property must be received on or before the tax return due date).

 To illustrate how these exchanges can work, consider the following example:

 Fred owns an interest in an office building. He bought it years ago for $10,000, but today it’s worth at least $100,000. Fred has decided to move to Florida and convert his office building interest into an ownership share in a Florida apartment building. Allison wants to buy Fred’s office building interest, and for tax reasons she wants to own the building interest by December 31. Fred wants to avoid the high tax he would have to pay after a cash sale.

 A solution is a deferred like-kind exchange. Fred transfers his building interest to Allison on December 31. Allison agrees to locate and buy a Florida apartment building interest of equal value suitable to Fred. (Fred can even insist that Allison put the purchase price in escrow, so long as Fred has no independent right to the cash). After Allison finds and buys the Florida property, she transfers it to Fred, and the like-kind exchange is completed. Provided the 45/180 day rules along with other requirements are satisfied, Fred receives the Florida property tax-free, with the same basis and holding period he had in the office building.

 As you can see, a like-kind exchange can be an excellent tool that can be used to achieve investment goals. Even in situations where it is impractical to arrange a completely tax-free transaction, like-kind exchanges may still reduce the immediate tax consequences of altering your investment holdings. Any transaction must be carefully structured. 

If you have investment property that may qualify for a like-kind exchange, it is advised to discuss qualifying tax attributes with your tax advisor.

What is Really Bugging the Banks

Preface: Give me a stock clerk with a goal and I will give a man who will make history. Give me a man without a goal and I will give a stock clerk – J.C. Penny

What is Really Bugging the Banks

……The problem is banks cannot pay depositors anything close to what they can now receive from a risk-free T-bill yield. Otherwise, they would be paying depositors more than they are currently receiving from a good percentage of their assets, and their profit margins would disappear. However, if banks don’t begin offering much better rates to their customers’ liquid deposits, it will lead to more money fleeing the banking system, which is a drain on reserves and curbs banks’ ability to lend. This exacerbates the drain on reserves already occurring from the Fed’s ongoing QT program. Banks are then forced to sell assets to meet liquidity requirements, which then puts further downward price pressure on these same assets and attenuates banking reserves further…….…..In other words, we have yet to see the recession become manifest, which is so very clearly predicted by the National Federation of Independent Business’ small business survey, the Index of Leading Economic Indicators, plunging money supply growth rates, the soaring net percentage of banks that are tightening lending standards, and inverted yield curves. The Fed’s additional 25bp rate hike after the May FOMC meeting will serve to exacerbate and expedite the coming recession. And, once that economic contraction finally does arrive, we can expect the stress in the banking system to greatly intensify……..

Read Complete Article here…..

Michael Pento is the President and Founder of Pento Portfolio Strategies with more than 30 years of professional investment experience. He worked on the floor of the NYSE during the mid-’90s. Pento served as an economist for both Delta Global and EuroPacific Capital.

Disclaimer: This blog is for educational purposes only and is not to be construed nor used as investment, tax or legal advice. Contact your advisors to discuss your specific situation.

Paying the IRS – Planning to Pay Individual Estimated Tax

Preface: Patience is a necessary ingredient of genius. – Benjamin Disraeli

Paying the IRS – Planning to Pay Individual Estimated Tax

Some individuals have to pay estimated taxes or face a tax penalty in the form of interest on the amount of tax underpaid. Self-employed persons, retirees and non-working individuals most often must pay estimated tax to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from W-2 wages is not sufficient to cover the tax on other income. The potential tax owed on investment income also may increase the need for paying estimated taxes, even among wage earners.

 The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. That’s because while the IRS will refund the overpayment when you file your return, it won’t pay you interest on it. Individual estimated tax payments are generally made in four installments. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

 Generally, you must pay estimated taxes if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect that your withholding and credits to be less than the smaller of 90 percent of your current year taxes or 100 percent of the tax on your prior year return.

There are special rules for higher income individuals. If your adjusted gross income (AGI) for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of social security taxes for the self-employed.

Suppose you owe only a relatively small amount of tax? There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if you realize you have miscalculated before the year ends? An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can you do? If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

As you can see from this blog, figuring out estimated taxes can be rather complex for individual tax planning. Please call our office if you would like more details on managing estimated income tax payments.


SECURE Act 2.0: Employer-Provided Retirement Plans

Preface: There is always enough time to get those things done that God wants you to do. – Jim Collins

SECURE Act 2.0: Employer-Provided Retirement Plans

The SECURE 2.0 Act of 2022 (SECURE Act 2.0) is designed to build upon the provisions of the original SECURE Act to increase participation and boost retirement savings. The SECURE Act 2.0 does this by expanding upon automatic enrollment programs, helping to ensure that small employers can easily and efficiently sponsor plans for employees, and enhancing various credits to make saving for retirement beneficial to both plan participants and plan sponsors.

Automatic Enrollment

One of the most broadly applicable provisions of the SECURE Act 2.0 requires that, effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than three percent and no more than ten percent of salary. The amount of employee contributions is increased by one percent every year after automatic enrollment, increasing to at least 10 percent but not more than 15 percent of salary. Employees can opt out of the automatic enrollment if they choose or have such contributions made at a different percentage. The automatic enrollment provision is effective for plan years beginning after December 31, 2024.

Many employers have taken it upon themselves to automatically enroll employees in 401(k) and 403(b) plans since first allowed to do so more than 20 years ago, and this has, unsurprisingly, led to an increase in plan participation and retirement savings. However, under this provision, automatic enrollment is required. Exceptions to the automatic enrollment requirement are available for businesses with ten or fewer employees, businesses that have been in existence for less than three years, church plans, and government plans.

Catch-Up Limits

The annual amount that can be contributed to a retirement plan is limited, and this limitation amount is generally subject to annual adjustments for inflation. For plan participants aged 50 or older, the contribution limitation is increased (“catch-up contributions”). For 2023, the amount of the catch-up contribution is limited to $7,500 for most retirement plans, and $3,500 for SIMPLE plans, and is subject to inflation increases. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, or 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is $10,000, and $5,000 for SIMPLE plans. Like the “standard” catch-up amount, these limitations are subject to inflation adjustment.

In addition, the SECURE Act 2.0 requires, effective for tax years beginning after 2023, that all catch-up contributions are subject to Roth (i.e., after-tax) rules, rather than only where allowed by the plan.

Small Employers

Currently, under provisions of the original SECURE Act, a small employer that establishes an eligible plan can claim a credit calculated as a percentage of start-up costs for the first three years. Under the SECURE Act 2.0, effective for tax years beginning after 2022, the length of time for which the credit can be claimed is extended to five years for employers with 50 or fewer employees. Additionally, the amount of the credit is increased for employers with 50 or fewer employees, with a cap of $1,000 per employee. The 100 percent credit amount is phased out for employers with 51 to 100 employees, and drops incrementally to 25 percent in the fifth year.

In addition, the SECURE Act 2.0 retroactively makes the start-up credit available to small employers that join a multiple employer plan (MEP) that is already in existence. Without this fix, the small employer would not be eligible for the credit if the MEP had been in existence for three years. The fix is effective for tax years beginning after 2019.

The SECURE Act 2.0 also provides a credit for small employers that make military spouses immediately eligible to participate in the employer’s retirement plan. The credit is effective for tax years beginning after 2022.

Additional Provisions

The SECURE Act 2.0 includes several other provisions meant to expand participation and boost retirement savings. These additional improvements include:

        • Allowing employers to make nonelective contributions of a uniform percentage to a SIMPLE IRA or SIMPLE 401(k) plan up to 10 percent of compensation, with an inflation-adjusted cap of $5,000. Contribution amounts to SIMPLE IRA and 401(k) plans are also increased in the case of certain smaller employers.
        • Allowing employers sponsoring 403(b) plans, which are typically charitable organizations and other non-profits, to participate in MEPs just like sponsors of 401(k) plans (plan years beginning after 2022)
        • Allowing plans to provide participants with the option of receiving matching contributions to a defined contribution plan on a Roth (i.e., after-tax) basis (after date of enactment)
        • Allowing employers to make matching contributions to employee plans for the employee’s student loan payments (plan years beginning after 2023)
        • Allowing employers to give employees de minimis low-cost incentives, like gift cards, to incentivize employee contributions to qualified plans (plan years beginning after 2022)
        • Allowing employers a grace period to correct mistakes without penalty when establishing automatic enrollment and contribution escalation plans (after date of enactment)
        • Reducing SECURE Act length-of-service requirements for part-time participants in sponsored plans from three years to two years (plan years beginning after 2024)
        • Eliminating notification requirements to unenrolled plan participants, but requiring an annual notification to these participants of plan requirements and deadlines to encourage participation (plan years beginning after 2022)

The changes under provisions of the SECURE Act 2.0 may affect the retirement plan options available to your employees. Please call our office if you’d like more information