"The use of tax laws to achieve anticipated tax advantages embedded in tax provisions."
It was once said that tax mitigation involves the use of tax laws to achieve anticipated tax advantages embedded in tax provisions. We are firm believers in that statement. Our clients do not look to evade taxes but ask us to evaluate and introduce a number of the following techniques to mitigate potential taxable events in their lives.
Real Estate Related Concerns: Capital Gains
1031 Exchange
Broadly stated, a 1031 exchange (also called a like-kind exchange) is a swap of one investment property for another. Although most swaps are taxable as sales, if yours meets the requirements of 1031, you will either have no tax or limited tax due at the time of the exchange.
In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. This allows your investment to continue to grow tax-deferred. There is no limit on how many times or how frequently you can use a 1031 exchange. You can rollover the gain from one piece of investment real estate to another to another and another. Although you may have a profit on each swap, you avoid tax until you sell for cash many years later. Then, you will hopefully pay only one tax, and that at a long-term capital gain rate (currently 15% or 20%, depending on income—and 0% for some lower-income taxpayers).
Delaware Statutory Trust (DST)
DST investments are offered as replacement property for accredited investors seeking to potentially defer their capital gains taxes through the use of a 1031 tax-deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings. The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a trust. Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. DSTs provide the investor with the potential for annual appreciation and depreciation (tax shelter) and most have minimum investments as low as $100,000, allowing some investors the benefit of diversification into several properties.
Listed Public Securities Related Concerns: Capital Gains
Qualified Opportunity Zones
Opportunity zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in the basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
Required Minimum Distributions Related Concerns
Qualified Leveraged Strategy
For many clients qualified plan balances such as IRAs, 401(k)s, 403(b)s, etc. can represent a significant portion of their wealth. Unfortunately, these balances are subject to significant federal and state income taxes, federal estate taxes, and possibly the imposition of a 10% penalty for early withdrawal if the participant begins taking distributions from the plan prior to attaining age fifty-nine and one-half (59 1/2). The Qualified Leverage Strategy uses a permanent life insurance contract to reduce the tax burden on the plan assets, potentially providing additional assets to the participant’s beneficiaries outside of their gross estate. The QLS may further reduce the overall tax burden on the participant and their heirs through a strategic Roth conversion. This is completed through the use of time-tested strategies approved by the Internal Revenue Service and the Department of Labor when organized in a unique way.
IRS Circular 230 notice: In order to comply with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.
