Thought this was a very interesting article in the Real Deal.
An issue came up on a recent transaction and I thought it was appropriate to repost this quick tip originally published 6/24/2007.
Soon after entering into a contract for the sale of a cooperative apartment, order a payoff letter for the underlying loan being secured by the stock certificate and proprietary lease. By ordering a payoff letter, the lender holding your stock certificate and proprietary lease as collateral for the loan will start to the search; assign an attorney to receive the documents who will deliver them to the closing. Upon locating the stock certificate and proprietary lease the lender will send it to this law firm who will hold it until closing. Although the payoff letter can be ordered and updated on relatively short notice, locating the stock and lease may take some time. Ordering the payoff letter early assures the Seller that the stock certificate and proprietary lease will have them when needed. Ordering a payoff letter late in the transaction, may cause delays in closing while the bank locates these documents which will be needed in order to close. Be aware, sometimes lenders may lose your stock certificate and proprietary lease. The lender will issue an affidavit attesting to the misplacement of the stock and lease and indemnify the Seller and the managing agent from any liability resulting from the loss.
TAX INCREASE #1 – 20 PERCENT CAPITAL GAIN TAX IN 2011
On January 1, 2011, the capital gain tax reduction that was signed into law by President Bush under the Tax Increase Prevention
and Reconciliation Act will “sunset.” The tax rate will revert from the current 15 percent rate back to the former 20 percent capital
gain tax rate that was in effect prior to 2003.
TAX INCREASE #2 – 3.8 PERCENT MEDICARE TAX IN 2013
Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.”
In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant
to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent
taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income. Also of relevance for rental property owners, this new tax applies to a real estate investor’s rental income if they have income above the $200,000/$250,000 income thresholds.
The net effect of both capital gain tax increases is a new 23.8 percent tax rate for higher earners—the highest rate for long-term
capital gains since 1997. The Joint Committee on Taxation estimates the new
Medicare tax on investments will cost taxpayers
over $30 billion annually. Additionally, the modified adjusted gross income threshold at which this Medicare tax will apply will
not be indexed for inflation, which means an increasing number of taxpayers will be snared by this tax provision.
Overall, the economic impact of these tax increases will be felt by the very investors who help promote long-term
economic growth. In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of
all dividends and an amazing 84 percent of all capital gains.
THE COMING TAX INCREASES – A COMPARISON
Current January 2013
Conventional Short-Term 35.0% 43.4%
Conventional Long-Term 15.0% 23.8%
AMT Short-Term 28.0% 31.8%
AMT Long-Term 15.0% 23.8%
A SOLUTION AND WAY TO DEFER TAXES – 1031 EXCHANGES
Since 1921, 1031 tax deferred exchanges have been a proven tax saving strategy that helps real estate investors improve their
investment position through the ability to not recognize Federal or state capital gain taxes. See the attached bulletin from Horizon Land Services.
Marie Flavin of IPX, a Qualified Intermediary I have used, sent me the below email regarding certain tax rules and deadlines affecting investors who are deferring their gain through a 1031 tax deferred exchange.
As stated in the below email I received from Marie, the deadline for completing the exchange is the earlier of 180 days from the sale of the old property or the due date of the taxpayer’s tax return for the year in which the old property was disposed. in order to get the full 180 days, the tax payer will need to file an extension.
|Many 1031 Exchanges Will Expire on April 15th!
You Or Your Clients May Have Less Than 180 Days to Complete An Exchange
When a taxpayer sells an investment property and implements a 1031 tax deferred exchange, there are a few time period requirements the taxpayer must follow. 1031 taxpayers have 45 days from the sale of the relinquished (old) property to identify new property to purchase. The deadline for completing the exchange is the earlier of 180 days from the sale of the old property or the due date of the taxpayer’s tax return for the year in which the old property was disposed. If a taxpayer sold property after October 18, 2009 and utilized a 1031 exchange, the taxpayer’s exchange period will expire on April 15, 2010 (assuming the taxpayer is a calendar year paying taxpayer). In order to ensure the taxpayer has a full 180 days to purchase new property, the taxpayer must file for an extension. For example, if the relinquished (old) property closed on December 2, 2009, unless the taxpayer files for an extension, the taxpayer will only have until April 15th to acquire their replacement (new) property. However, if the taxpayer files for an extension of their tax return the taxpayer will have the entire 180 days (May 31, 2010) to complete the exchange.
Tax Forms You May Need
It is important to note that, taxpayers must report their exchange on the tax return for the year in which the exchange begins.
Form 8824 is used to report the 1031 exchange. This form requests the date of the exchange transaction, the date properties were “identified” and financial information obtained from the closing/settlement statement.
Form 4797 is used when depreciable rental or business property is sold.
Form 1041 is used when non-depreciable investment property is sold.
Form 4868 is used to file for an extension.
|Marie C. Flavin, Esq.
Vice President, Northeast Regional Manager
80 Business Park Drive, Suite 205 ● Armonk, NY 10504
(877) 230-1031 Toll Free
Circular 230 Notice: This communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties or (ii) promoting, marketing or recommending to another person any tax-related matters addressed herein.
I have attended seminars with Marie and I can tell you she is very knowledgeable and has been very helpful in the past with some very intricate transactions.
Circular 230 Disclosure Notice: To ensure compliance with Treasury Department rules governing tax practice, I am informing you that any information contained in any post on this blog or in any attachment (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer, and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.