Category Archives: estate planning

How Stepped-Up Basis Affects a 1031 Exchange

How Stepped-Up Basis Affects a 1031 Exchange

It may make the case for replacing a property far less compelling.

  

Provided by Terri Fassi, CPA, MBA, CDFA

 

Have you inherited a home or income property? If so, you may be weighing your options: you could hang onto it, you could sell it, or you could replace it through a 1031 exchange. One major factor affecting your choice will be the property’s tax basis – the value of that real estate in the eyes of the tax collector.1

The tax basis of a property changes over time, and it can change dramatically when a property is inherited or gifted. Usually, the basis is “stepped up.” Let’s explain what that phrase means.3

When you buy real estate, your starting tax basis is known as the cost basis. The cost basis is defined as the full purchase price for the property. If you buy a home for $300,000 (with or without financing), your initial tax basis is the cost basis of $300,000.1

When you inherit real estate, your basis is not the original owner’s cost basis. Instead, it is the fair market value of the property at the time of the owner’s death. This adjustment is known as a “step-up,” and it provides many heirs with a nice tax break.1,2

As an example, say someone inherits a 12-unit apartment building. The full purchase price of the building was $300,000 in 1990, but the fair market value of the building was $600,000 at the owner’s death. The heir sells the building for $620,000. Her tax basis is $600,000, which means her total taxable profit on the sale will be only $20,000 instead of $320,000. Correspondingly, she faces capital gains tax on $20,000 of profit rather than $320,000 of profit.1

When basis is stepped up, there may be much less incentive to replace a property (and defer tax on the gain) through a 1031 exchange. Selling the property may be the better option.

A 1031 exchange – an alternative to a conventional sale – offers you a legal way to replace an unwanted property with a more desirable one, without triggering capital gains taxes in the year of the swap. These like-kind exchanges are facilitated with the assistance of a third party – a qualified intermediary who can help you complete the exchange within 180 days of the initial property transfer (and before you file your 1040 for the tax year involved).3    

If you want to quickly sell inherited real estate, the case for a 1031 exchange weakens. If your goal is to unload the property within a few months, it may not appreciate much (or at all) in that time. The taxable profit above the stepped-up basis may be small or nonexistent, so capital gains tax may not be much of a concern. If you decide to hang onto the property for a couple of years, then the case for initiating a like-kind exchange grows stronger.3

What variables factor into the decision to sell or exchange? First, the fair market value of the property has to be determined. Take the original total purchase price of the property, add the value of any improvements, and subtract any depreciation taken. That is your adjusted basis.1,2

Once you have that number, plug it into the middle of another equation: Projected Sale Price – (Adjusted Basis + Projected Agent Commission + Projected Title Fees + Any Other Probable Closing Costs) = Realized Taxable Gain.2

Now onto determining the tax due. As a simple rule of thumb, multiply the depreciation that will be taken from the realized taxable gain by 25% to estimate recaptured depreciation. Then apply federal capital gains tax, state capital gains tax, and (in some circumstances) county capital gains tax to the remaining balance to arrive at the recognized gain, or the total capital gains tax you are projected to owe. If that total capital gains tax is not burdensome to you, you may opt to just sell the property rather than exchange it.2

Before making any move, be sure you confer with a tax professional or a real estate professional to evaluate these options.

 

Terri Fassi may be reached at 970-416-0088 or terri@fassifinancialnetwork.com

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

  

Citations.

1 – nolo.com/legal-encyclopedia/determining-your-homes-tax-basis.html [9/13/16]

2 – atlas1031.com/blog/1031-exchange/bid/82182/1031-Exchange-and-Stepped-Up-Basis [2/19/13

3 – cincinnati.com/story/money/2016/05/05/property-exchange-can-defer-avoid-tax/83982782/ [5/5/16]

 

A Caregiver’s Financial Responsibilities

A CAREGIVER’S FINANCIAL RESPONSIBILITIES

Key questions for you & your family to consider.

 

Provided by Terri Fassi, CPA, MBA, CDFA

    

A labor of love may come to involve money issues. Providing eldercare to a parent, grandparent or relative is one of the noblest things you can do. It is a great responsibility, and over time it may also lead you and your family to reflect on some financial responsibilities. Here are some questions to consider.

Q: How will caregiving affect your own financial picture? Try to estimate a budget, either before you begin or after a representative interval of caregiving. How much of the elder’s finances will be devoted to care costs compared with your finances? If you are thinking about quitting a job to focus on eldercare, think about the resulting loss of income, the probable loss of your own health care coverage, and your prospects for reentering the workforce in the future.

Q: How much will “aging in place” cost? Growing old at home (rather than in a nursing home) has many advantages. Unfortunately, over time, the cost of care provided in the home can greatly exceed nursing home services. So you must weigh how long you can manage with home health aide services versus adult day care or nursing home care.

Q: How much do you know about your loved one’s financial life? Caring for a parent, grandparent or sibling may eventually mean making financial decisions on their behalf. So you may have a learning curve ahead of you. Specifically, you may have to learn, if you don’t already know: 

– Where your loved one’s income comes from (SSI, pensions, investments, etc.)

– Where wills, deeds and trust documents are located

– Who the beneficiaries are on various policies and accounts

– Who has advised your loved one about financial matters in the past (financial consultants, CPAs, insurance agents, etc.)

– Assorted PIN numbers for accounts and of course Social Security numbers

Q: Is it time for a power of attorney? If a loved one has been diagnosed with Alzheimer’s or any form of disease which will eventually impair judgment, a power of attorney will likely be needed in the future. In fact, if you try to handle money matters for another person without a valid power of attorney, the financial institution involved could reject your efforts.1

When a power of attorney is in effect, it authorizes an “agent” or “attorney-in-fact” to handle financial transactions for another person. A durable power of attorney lets you handle the financial matters of another person immediately. A springing power of attorney only lets you do this after a medical diagnosis confirms a person’s mental incompetence. (As no doctor wants a lawsuit, such diagnoses are harder to obtain than you might think.)1

You want to obtain a power of attorney before your loved one is unable to make financial decisions. Many investment firms will only permit a second party access to an account owner’s invested assets if the original account owner signs a form allowing it. Copies of the durable power of attorney should be sent to any financial institution at which your parents have accounts or policies. Whoever becomes the agent should be given a certified copy of the power of attorney and be told where the original document is located.2

Q: Is it time for a conservatorship? A conservatorship gives a guardian the control to manage the assets and financial affairs of a “protected” person. If a loved one becomes incapacitated, a conservator can assume control of some or all of the protected party’s income and assets if a probate court allows.3

To create a conservatorship, you must either request or petition a probate court, preferably with assistance from a family law attorney. A probate court will only grant conservatorship after interviews and background check on the proposed conservator and only after documentation is provided to the court showing financial and mental incompetence on the part of the individual to be protected.3

A conservatorship implies more vigilance than a power of attorney. With a power of attorney, there is no ongoing accountability to a court of law. (The same goes for a living trust.) There is little to prevent an attorney-in-fact from abusing or neglecting the protected person. On the other hand, a conservator must report an ongoing accounting to the probate court.4

Q: If a trust is created, who will serve as trustee? As some carereceivers acknowledge their physical and mental decline, they decide to transfer ownership of certain assets from themselves to a revocable or irrevocable trust. A settlor (or grantor) creates a trust, a trustee manages it and the assets go to one or more beneficiaries. (The trustee can be a relative; it can also be a bank or an attorney, for that matter.) At the settlor’s death, the trustee distributes the settlor’s assets according to the instructions written in the trust document. Probate of the trust assets is avoided – so long as the assets have been transferred into the trust during the settlor’s lifetime.4

A trustee has a fiduciary responsibility to watch over the financial legacy of the settlor. Practically speaking, a trustee needs to have sufficient financial literacy to understand tax law, the managing of investments and the long-range goals noted in the trust document. Some families consider all this and opt to manage trusts themselves; others seek the services of financial professionals.

If the carereceiver has a living trust or another form of trust already, you may still need a power of attorney as percentages of his or her assets or income may not end up in the trust. (There is nothing from preventing a trustee from also being the agent in a power of attorney.) Additionally, while a living trust is essentially a will substitute, you will still need a pour-over will to supplement it. That is because in all probability, some of the settlor’s assets won’t be transferred into the trust during his or her lifetime. A pour-over will is the legal mechanism that “pours” those stray assets into the trust when the settlor passes away. If 100% of the settlor’s assets are transferred into the trust during the settlor’s lifetime, a pour-over will becomes superfluous.4

Q: Finally, do you understand the potential for liability? As a caregiver, you have a physical, psychological and legal duty to the carereceiver. If you neglect that duty, you could be held liable as many states have laws demanding that caregiving meets certain standards.

These laws are basically similar: a caregiver must not abuse the carereceiver in any conceivable way, and any incidents of such abuse must be reported (there are often state and local “hotlines” set up for this). The elder must have adequate nutrition, clothing and bedding, and the environment must be clean and not pose health hazards.

If you have obtained a power of attorney for finances, then appropriate amounts of the elder’s money must be spent on necessary health services and other services on behalf of his/her well-being. Failure to do so could be interpreted in court as a form of abuse or neglect.

When abuse and neglect occur, they may have roots in caregiver burnout – the caregiver is constantly cross and irritable with the carereceiver, or stress defines the experience, or an overwhelming sense of duty or anxiety prevents the caregiver from having a life of his/her own. If you ever feel you are approaching this point, it is time to call for assistance or to assign caregiving to professionals.   

Useful URLs. Some good websites can help you connect to great resources: try the U.S. Administration on Aging’s Eldercare Locator (eldercare.gov), the National Council on Aging’s online benefits checklist service (benefitscheckup.org) and the National Association of Area Agencies on Aging (n4a.org/about-n4a/?fa=aaa-title-VI).5

 

Terri Fassi may be reached at 970-416-0088 or terri@fassifinancialnetwork.com

 

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 


Citations.

1 – www.law-business.com/powers-of-attorney [4/27/12]

2 – www.kiplinger.com/article/retirement/T066-C000-S002-managing-your-parents-money.html [3/11]

3 – dhs.sd.gov/gdn/guardianshipfaqs.aspx [6/2/12]

4 – www.caregiver.org/caregiver/jsp/content_node.jsp?nodeid=434 [1/15/13]

5 – money.usnews.com/money/blogs/the-best-life/2011/07/18/10-tips-for-caring-for-aging-parents [7/18/11]

 

Estate Planning vs Advanced Estate Planning

ESTATE PLANNING vs. ADVANCED ESTATE PLANNING

Who needs what? What’s the difference?

 

Provided by Terri Fassi, CPA, MBA, CDFA

Everyone has an estate. Rich or poor, it doesn’t matter. When you die, you leave behind an estate. For some, this can mean property, cash money, assets and more. For others it could be as simple as the $10 bill in their wallet and the clothes on their back. Either way, what you leave behind when you die is considered to be your “estate”.

Why plan? Well, even if you’re just leaving behind the $10 bill in your wallet, who will inherit it? Do you have a spouse? Children? Is it theirs? Should it go to just one of them, or be split between them? This (quite simply) is what estate planning is all about. Estate planning determines how your money and assets (property – both real and personal) will be distributed after your lifetime.

Who needs estate planning? While it is absolutely possible to die without planning your estate, I wouldn’t say it is advisable. If you die without an estate plan, your family could face major legal issues and (possibly) bitter disputes. So in my opinion, everyone should do some form of estate planning. Your estate plan could include wills and trusts, life insurance, disability insurance, a living will, a pre- or post-nuptial agreement, long-term care insurance, power of attorney and more.

Why not just a will? Did you know that your heirs may need to file a petition to probate your estate … even if you have a will? Basically, a will tells the world what you’d like to have happen, but other items (like properly prepared and funded trusts) can provide the tools to make things happen, and help your heirs to avoid probate.

So, what is “advanced” estate planning? Advanced estate planning is generally something those with a very high net worth should consider. For example, if you are single and your net worth exceeds $1.5 million dollars, or if you are married and (as a couple) your net worth exceeds $3.5 million dollars, you should consider advanced estate planning. The main purpose of advanced estate planning is to reduce taxes. The use of unified credit, gifting strategies, trusts and more can help your heirs receive the highest benefits possible under federal and state laws.

Where do you begin? Whether you need basic or advanced estate planning, I would advise you to speak with qualified professionals. A Financial Advisor can refer you to a good estate planning attorney and a qualified tax professional, and lead a team effort to assist you in drafting your legal documents. Many financial professionals have relationships with attorneys and accountants, so the advisor you consult may be able to refer you to the right specialists.

 

Terri Fassi may be reached at 970-416-0088 or terri@fassifinancialnetwork.com

 

These are the views of Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

 

* As of 2006