Tax considerations

1
In this chapter

• Tax considerations
• True cost of housing
• Reverse mortgages
• Installment sales and 1031 exchanges
• Pensions, 401k accounts, and IRAs
• Medicare, Medicaid, and Social Security
• Schemes and scams

2
Declaring a Domicile

• Concern for seniors who maintain a home in more
  than one state
• Impact on income and real estate tax
• Be prepared with information on any senior tax
  breaks

3
Capital Gains Tax

• Difference between the adjusted basis and the
  current sales price
• Basis increased by capital improvements, reduced
  by depreciation?high basis is best
• Long-term gains on assets owned for 12 months,
  short-term gains taxes at ordinary income rates
• Losses deductible up to 3,000 annually, carry
  over or carry back

4
Sale of a Personal Residence

• 250,000/ 500,000 for married couples excluded
• Must be primary residence for total of 2 or more
  of the 5 years prior to the sale
• If illness or disability, job relocation, or
  specified unforeseen circumstances, for sale
  prorated gain is excluded
• Requires physician certification

5
Basis Step-Up

• Heirs receive a stepped-up basis of fair market
  value at the date of the decedents death
• Capital gains tax forgiven
• Does not apply to property acquired by decedent
  by gift within one year of death

6
Understanding Estate Tax

• Important issue for high net-worth individuals,
  about 2-3 of taxpayers
• Transfers between spouses are exempt and personal
  residence is excluded from gross estate
• If value of the estate exceeds exemption, the
  amount over the exemption is taxable
• Eliminated in 2010, returns in 2011

7
Gift Tax

• Moves assets out of the gross estate
• Pleasure of making a gift
• Assures gift goes to a particular person
• Each spouse can gift up to 12,000 to an
  individual ? total of 24,000 annually
• No repeal in 2010

8
Unified Credit

• Applies to both gift and estate tax es
• Any portion of the unified credit not used to
  eliminate gift tax can be used to reduce or
  eliminate the estate tax

9
Generation-Skipping Transfer Tax

• Gifts made during life or as bequests if the
  recipient or heir is two or more generations
  younger than the donor
• Lifetime exemption of 2 million through 2010,
  back to 1 million in 2011
• Not included in the unified credit

10
Social Security and Pensions

• Social Security is taxable if modified adjusted
  income exceeds a base amount
• Distributions from pension accounts generally
  taxable because contributions to are made with
  pre-tax dollars

11
1031 Exchange

• Defer capital gains tax on the exchange of
  property used in trade or business or held for
  investment
• Continuation of the ownership
• Issue for owners of investment/income real estate
• Learn to recognize exchange situations and assist
  clients in finding experts

12
1031-Exchange Goals

• Increase equity
• Consolidate assets or diversify
• Relocate
• Conserve and compound an estate
• Other

13
1031 Basic Rules

• Property must be used in trade or business or
  held for investment
• Exchanged for like-kind
• Same title holders for relinquished and
  replacement properties
• 45 days to identify, 180 days to close
• 3 replacement properties or 200 of the value or
  receive 95 of the aggregate value

14
Documenting Intent

• The purchase and sale agreement (or an addendum)
  should state exchangers intent
• It is the intent of the seller to perform a
  Section 1031 exchange and the buyer is asked to
  cooperate by signing an Assignment Agreement at
  no cost or liability to the buyer.

15
Personal Residence Received in an Exchange

• Must be owned for 5 years and lived in for 2
  years from the date of the exchange before the
  owner can sell the residence and claim the
  250,000 capital gains exclusion on the sale of a
  personal residence
• Wait 2 years before moving into the residence

16
TICs

• Popular with high net-worth individuals who want
  to maintain an investment of real estate, realize
  income from it, but be free from day-to-day
  management
• Partial interest usually in a very high
  investment-grade commercial property
• Minimum buy-in usually 250,000

17
Qualified Intermediaries (QIs)

• Involvement of an expert exchange accommodator is
  essential
• QI disposes of the exchange property, holds the
  sale proceeds, acquires and transfers a
  replacement property, and disburses funds
• Avoids actual or constructive receipt of any of
  the exchange proceeds

18
Why Exchanges Fail

• Missed time deadlines
• Lack of replacement properties
• Negotiations break down
• Lack of patience

19
Typical 3-Way Exchange
20
True Cost of Housing

• Looks at how a homes economic worth can be best
  used
• Helps evaluating the options?to remain in a
  home, apply for a reverse mortgage, sell and rent
  
• Provided worksheet is NOT investment advice

21
Reverse Mortgages

• For individuals aged 62 or older
• Enables conversion of home equity into cash
• Can help when high prices and taxes are pushing
  someone out of his or her home
• Compare to selling the home
• www.reversemortgage.org

22
Reverse-Mortgage Benefits

• Tap the built-up equity
• No income or credit qualifications
• No risk of foreclosure
• Tax-free income
• No impact on Social Security, Medicare, or
  pension payouts

23
Reverse-Mortgage Uses

• Annuity for lifetime income
• In-home care
• Supplement monthly income
• Renovate
• Pay off credit cards, back taxes, loans
• Buy a home
• Other needs and dreams

24
Reverse-Mortgage Products

• Home Equity Conversion Mortgage
• Federally insured
• FHA limits
• Fannie Mae Home Keeper
• Financial Freedom Senior Funding Corporation

25
Reverse-Mortgage Myths

• The bank winds up owning the home
• The bank gets it all
• Could owe more than the house is worth
• Could lose to foreclosure
• Have to pay back everything owed

26
Reverse-Mortgage FAQs

• What are the borrowers obligations?
• Who is eligible?
• What types of property are eligible?
• How are funds paid out?
• What is a reverse line of credit?
• When must a reverse mortgage be repaid?

27
Reverse-Mortgage FAQs

• How much cash can a borrower obtain?
• What are the costs?
• What is a TALC disclosure?
• What are the steps in the application process?
• What counseling is required?

28
Reverse-Mortgage FAQs

• Where does closing take place?
• When is a reverse mortgage not a good idea?
• Can another home be purchased with a reverse
  mortgage?

29
Reverse-Mortgage Terminology

• 203-b limit
• Acceleration clause
• Deferred payment loan
• Leftover equity
• Margin
• Maturity
• Non-recourse mortgage
• Proprietary reverse mortgage
• Reverse annuity mortgage

30
Installment Sale Benefits

• A larger pool of potential buyers
• Tax benefits
• Good interest earnings
• Relatively safe investment

31
IRAs

• Individual IRA
• Simplified Employee Pension (SEP)
• Roth IRA

32
Can an IRA Own Real Estate?

• Real estate investment trust (REIT)
• Land, commercial property, rental residential
  property
• Requires an IRA custodian or trustee specializing
  in real estate or self-directed IRAs
• No personal use, no personal residence
• The IRA can sell the property or transfer the
  title to the owner at age 59½

33
Pension Plans

• Annuities
• Savings Incentive Match Plan (SIMPLE)
• Defined benefit
• Defined contribution

34
Social Security, Medicare, SSI, Medicaid

• Social Security and Medicare not need based
  Medicaid and SSI are need based
• Medicaid federal program administered by states
• Medicaid eligibility maximum 2,000 in liquid
  assets
• Reverse mortgage income okay if spent in the
  month received
• 3-year look-back for eligibility

35
Spending Assets

• When to withdraw cash?
• How much?
• From which savings?pension, 401K, IRA, savings,
  home equity, other?

36
Scams and Schemes

• Deed scams
• Phone calls verifying information
• High pressure sales
• Phony home repairs
• Identity theft
• Fraudulent mortgage notices