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Given the wave of mortgage foreclosures for commercial and residential real estate, as well as the sour economy forcing many current owners to renegotiate for better loan terms, you should know that these events could likely carry significant income tax consequences.

Internal Revenue Code section 61(a)(12) states that taxable gross income includes income from the cancellation of debt.  This is important for many property owners going through foreclosures, short sales, or seeking a reduced settlement payment on the balance owed on a mortgage note as they will incur income tax liability for debt cancellation. 

For example, the lender decides to foreclose on a property you own.  The bank auctions or sells the property for much less than the amount remaining on your loan with the lender.  Knowing that you may not have the funds to pay back the remaining balance on the loan, the lender “forgives” or “discharges” the amount you owe.  What the lender will do, however, is send you a 1099-IRS form stating that you received income from the lender in the amount of the loan that was forgiven.  You will have to pay income tax on that amount.

Another area where a taxpayer with property subject to a loan should exercise caution is when she is seeking to alter the terms of the loan instrument.  IRS Treasury Regulations state that a significant modification of existing loan terms can result in cancellation of indebtedness income, which is subject to income tax.  These significant modifications include, but are not limited to, altering interest rates, changing the payment schedule, substituting or releasing original collateral, and the addition or deletion of co-guarantor/co-obligors.

Tax consequences are one of many concerns that property owners need to consider if they are going through loan modifications or forced sales.  There are few exceptions where the IRS will exempt your debt cancellation from taxation, but you need to consult with an attorney to ensure your circumstances will result in no or minimal tax liability.  The professionals of Larsen & Teusink PC are experienced in reviewing lender agreements and negotiating on the behalf of property owners to best minimize their tax burdens.  Contact our office today to schedule a consultation.  678.553.2923.

Posted under Commercial Real Estate, Foreclosure, Property Law, Tax Law, Tax Planning

Not everyone has tens of millions of dollars on hand to leave behind to loved ones when they pass away.  The absence of great wealth, however, should not serve as an impediment to providing comfortable support for your survivors.  A great way to leave loved ones with adequate financial support after death is through the use of life insurance.

First, for State probate concerns, life insurance contracts and proceeds are non-probate assets and do not require court supervision, inventory, and public scrutiny.  Unlike wills, insurance contracts need not become a part of the public record when probating an estate.

Second, life insurance proceeds flow to the intended beneficiary free of income tax.  Internal Revenue Code section 101(a) provides that gross income does not include amounts received under a life insurance contract if those amounts are paid by reason of the death of the insured.

Third, with proper estate planning, life insurance proceeds can pass to the beneficiaries free of estate tax.  Under Internal Revenue Code section 2042, life insurance proceeds will not be subject to estate tax if the proceeds are not payable to the deceased’s/insured’s estate.  Also, life insurance proceeds will not be included in the deceased’s gross estate if the deceased relinquished all incidents of ownership over the insurance policy.  Incidents of ownership include (but are not limited to) the power to change beneficiaries, the right to borrow against the policy or offer it as collateral, and the power to assign or cancel the policy.  The policy holder needs to make sure that she/he relinquishes any of these incidents of ownership and does not die within three years of that relinquishment (under Internal Revenue Code section 2035, transfers made within three years of death are included in the decedent’s gross estate).

To avoid any gift tax consequences for the payment of insurance premiums, one should consider establishing an Irrevocable Life Insurance Trust.  A person can use her/his yearly annual gift tax exclusion (a person is allowed to currently make $13,000 in gifts to another each year) to make the payments to the trust which in turn will make payments on the premiums.  This will help ensure that the beneficiaries and estate will not incur any estate tax liability on the life insurance proceeds.

The attorneys of Larsen & Teusink PC are skilled in establishing life insurance trusts and many other instruments to best organize and plan your estate.  Contact one of our professionals today to schedule a consultation and to start planning your legacy.  678.553.2923.

Posted under Estate Planning, Probate Law, Tax Law, Tax Planning

Even though our nation’s economy is floundering, there are many potentials out there for the savvy investor.  Many investors with ready funds have turned to taking advantage of the depressed real estate market.  As many homes and commercial buildings are going through forced sales due to foreclosure, investors with cash-in-hand are able to buy many of these properties at a discounted rate.  In order to protect and shelter that investment (as well as the investor’s other assets), however, one should consider shifting the recently purchased property to a newly formed business entity.

Why go through all of the hassle and extra cost?  Business formation and continued operation as a business will shield an investor from most personal liability for negligent acts and omissions tied to that particular property.  For example, if you own land that is residential real estate worth $50,000, and someone incurs injuries on your property in the amount of $100,000, without proper business formation, an individual could go after you in court for your personal assets for the entire $100,000, not just the property valued at $50,000.

Also, another added benefit of business formation and operation is that costs incurred through your activities for the business entity yield significant tax benefits.  If a parcel of property is held as an investment for at least a year and one day, the land is then considered a capital investment.  When sold, a capital investment is sold at a lower tax rate than ordinary income.  Additionally, having a business entity makes more accessible certain business deductions not otherwise available to casual investors of property.  All of these advantages would greatly outweigh the initial planning costs involved with hiring a skilled attorney.

To make the most of these and many other benefits, one should consult an attorney to determine how best to establish your real estate investment business entities.  The attorneys of Larsen & Teusink PC have extensive knowledge of tax and business law to best protect you from law suits and tax liability.  Contact one of our professionals today to schedule an appointment.  678.553.2923.

Posted under Business Law, Commercial Real Estate, Planning Law, Property Law, Real Estate Law, Tax Law, Tax Planning

Whether you agree with the 2001 and 2003 tax cuts enacted under the Bush administration, you should know that after 2010, many tax rules will revert to the pre-2001 laws.  Many tax rates will increase for individuals, married couples, and corporations not only for the taxation of income, but the rates for gains on the sale of capial assets.

Starting in 2011, the highest earning taxpayers will see their income taxes increase from either 3% or 4.6%.  Taxation on capital gains (long-term investments) shall be raised from 15% to 20%.  Estate tax credit levels and rates shall revert back to pre-2001 levels, allowing for only a $1 million credit as opposed to the $3.5 million credit for 2009.  Further, with the recent passage of the recent Healthcare Reform legislation, numerous taxes will be imposed on all taxpayers.

If you hold substantial investments, assets, or expect an increase of income, now is time for you to consider what you can do to avoid as much tax liability as possible.  Generally, a taxpayer can avoid uneccessary tax payments by accellerating income receipts now and deferring deductions for subsequent tax years.  Each taxpayer’s situation is different, but in most circumstances, significant tax savings may be available for those who simply act before the end of 2010.

The skilled attorneys at Larsen & Teusink PC can determine what steps you can take to avoid paying as much tax as possible.  Call one of our professionals at 678.553.2923 today to schedule a consultation.

Posted under Tax Law, Tax Planning