I've recently purchased performance reporting software to compile performance reports for my clients. This will provide a "cross-check" with the data provided by Shareholder Services Group, my custodian. The reports will be provided through the Virtual Vault on my website. I hope to have this process up and running soon.
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Financial StrategiesPlanning Techniques, Procedures and Guidance for Military Professionals
Happy Independence Day! (I heard some guys on the radio pushing to call it that instead of the 4th...I think I like it). Summer is practically half over and it won't be long until we are sending the kids back to school.
Summer is the time for Vacation and my main article talks about turning a rental house into a Vacation House and avoiding taxes on the sale. It is a little complicated, but it can be done.
Speaking of school, tuition bills will be due soon. The second article covers how you can use your 529 plan funds and maintain their tax-free status.
My Quick Comment talks about the new DFAS password requirements...they surprised me.
I wrap up this issue with an investing theme with articles about earnings and bond investing.
Enjoy July and I'll be talking to you soon!
Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
Sell Your Rental House...Skip the Taxes
Many Active Duty Military Members and Retirees end up with rental Real Estate (of course lots of other people do too). It is one of the many consequences of short-notice PCS moves or PCS moves during depressed Real Estate cycles. But with that Real Estate comes a looming tax bill....but that tax bill can be avoided with proper planning.
What Do You Mean I Have a Tax Bill? I'm Losing Money!
Most of us remember a time when people made money on real estate. But there are situations where even if you are losing money or if the house qualifies as your primary residence you could still have a tax bill. There are three scenarios where you will owe taxes, and two of them you may think you are off scott-free.
- The House sells for more than the adjusted basis of the house (calculating basis is a topic for another day and isn't always price + improvements).
The house sells for less than the adjusted basis
- You owe Capital Gains Tax on the amount the selling price exceeds the adjusted basis
- You owe Tax on Depreciation Recapture (the amount you depreciated or should have depreciated the property)
- You may owe ObamaCare Medicare Surtaxes as well (on both the Capital Gain and Depreciation Recapture).
You lived in the house enough to qualify it as your primary residence (either with or without special military rules) and you sell for more than the adjusted basis
- You owe Tax on Depreciation Recapture
- You may owe ObamaCare Taxes on the Depreciation Recapture
- You owe Tax on Depreciation Recapture
- You may owe ObamaCare Taxes on the Depreciation Recapture
- You will NOT owe Capital Gains Tax on the amount the selling price exceeds the adjusted basis
You can defer taxes on the sale by doing what is called a 1031 Exchange (sometimes called a Starker Exchange). In a 1031 Exchange you exchange your rental property for a like-kind property and defer the taxes. The rules for a 1031 exchange are complicated, but you don't have to physically exchange properties. You can sell and then buy a new property. There are some rules...
- You can't take out any cash and your loan must equal or exceed the amount of your current loan
- You must use a qualified custodian to receive the funds...you can't touch them
- You must identify the new property within 45 days of closing on your property
- You must close on your new property within 180 days of selling the previous rental
If you do these things (get competent advice) you defer the gain and depreciation recapture and the basis of the new property will be reduced by the amount of depreciation you defer.
Wait! That is Only Postponing the Problem
True, the tax has only been deferred. But there is a way to never pay the taxes...Let's look at one scenario
- You own a Rental Property outside Podunk AFB. You never plan to return there to live. You want to sell the house, but you don't want to pay the taxes.
- You've always wanted a Vacation Condo on the Beach
- You sell the Rental and buy a Vacation Condo via a 1031 exchange.
- You set the Vacation Condo up as a rental. You can even use it a few days yourself (rules vary).
- You maintain the property as a rental for a minimum amount of time (usually one year) and until you no longer need the rent to pay the mortgage/expenses.
- You fix it up and use it as a Vacation Home
- Here is the key...you own it until you die
- At the time of your death the basis of the house steps-up to the Fair Market Value at the time of death (current law)
- The House is sold with no Income Tax or ObamaCare Surtax (there could be estate taxes and probate fees) or the heirs keep it to use and never owe taxes on the amount shielded by the step-up rules.
Prior Planning Prevents....
There are limitations to how much you can affect your tax bill. But, here is one way where you might be able to stick it to the man and get your dream vacation home too! Plan first, pay taxes second...
I logged onto the DFAS website the other day and was not surprised to be told I needed to change my password. What I was surprised about was the new password rules. Your password needs to
- Be 15-30 Characters in Length
- Contain at least 2 Uppercase letters
- Contain at least 2 lowercase letters
- Contain at least 2 numbers
- Contain at least 2 special characters
Don't worry about remembering it though...you have to change it every 60 days. I'm all about cyber-security, but this will be interesting!
Understanding 529 Plan Distributions
Parents looking to take advantage of the many benefits of saving for college with a 529 plan will want to know the full details on which educational expenses qualify for tax-free distribution status -- and which do not. (1) In Publication 970, the IRS gives detailed guidance on qualified expenses. Here are a few important points.
- Tuition and fees are covered in full.
- Room and board, if the student is enrolled at least half time. But such expense must be not more than the greater of (1) the allowance for room and board, as determined by the school, that was included in the cost of attendance; or (2) the actual amount charged if the student is residing in housing owned or operated by the school.
- Food. If you spend a certain amount for a meal plan, that entire amount can be deducted, even if used for coffee or ice cream and not a full meal. Weekend meals can also be included if the dining halls are not open.
- Books and supplies. Any fees associated with purchasing school textbooks are considered qualified, as are required equipment or supplies such as notebooks and writing tools.
- Computers/laptops, but only if required by the school. If required, Internet fees and PDAs or "smart phones" may also qualify.
- Special-needs services required by special-needs students that are incurred in connection with enrollment or attendance at school.
What's Not Covered
- Student loans. Interest on or repayment of student loans is not considered a qualified expense by the IRS.
- Insurance, sports or club activity fees, and many other types of fees that may be charged to students but are not required as a condition of enrollment.
- Transportation to and from school.
- Concert tickets or other entertainment costs, unless attendance is requisite to a course or curriculum.
Note that expenses must apply to a qualified college, university, or vocational school for post-secondary educational expenses. Also keep in mind that taxes and a possible 10% penalty will apply to all distributions that are not considered qualified educational expenses by the IRS, so be sure to check first.
When tapping your 529 account, be sure to avoid taking too much or too little.
- If you take too much: The excess will be classified as a nonqualified distribution. You or your beneficiary will have to report taxable income and pay a 10% federal penalty tax on the earnings portion of the nonqualified distribution. The principal portion is not subject to tax or penalty.
- If you take too little: If your child graduates and does not attend post-graduate school -- or if you do not have another child you can change the beneficiary designation to -- you'll be left with a 529 account that, if used for any other purpose, will incur tax and a 10% penalty. If you have a substantial balance left in your 529 account, consider tapping the account at the earliest tax-free opportunity.
Also be sure to coordinate with other family members who may have funded 529 plans for your child to help determine which accounts should be used first.
1Investing in 529 plans involves risk, including loss of principal. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.
Before you invest in a 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency.
This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
From the Financial Presses
Understanding Wall Street's Quarterly Earnings Game
It's widely accepted that earnings are the single most important determinant of a company's stock price. Lots of factors enter the equation that determines the value of a company's stock, but earnings-also known as profits and net income-literally constitute the bottom line....(Read More Here
Take Steps to Build a Bond Ladder
Are you striving for greater diversification in your portfolio? You could do it one step at a time with a bond ladder....(Read More Here
|Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
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