Urgent Tax Alert for Apartment Owners with Larger Estates! Last Chance to Use Discounts to Save Estate and Gift Taxes? – By AOA Member and Estate Planning Attorney, Kenneth Ziskin

If you have, or expect to develop, a “taxable” estate (more than the estate and gift tax exclusion amounts which now protect nearly an $11 million estate for a married couple), newly Proposed IRS Regulations make it IMPERITIVE that you consider advanced estate tax planning NOW.  The new Proposed Regulations, released in August, are designed to take away the ability to use many discount strategies that can eliminate (or substantially reduce) estate and gift taxes for those of you who would otherwise face these taxes.   

To beat the adverse effect of these regulations, you MUST complete transfers to your heirs or specialized trusts before these Regulations are finalized (probably around year-end).  The loss of these discounts could cost a family with $16 million in property that does not do proper advanced planning now as much as $2 million in unnecessary estate and/or gift taxes.  The loss would be far more costly to larger estates. 

In August, the IRS finally published the Proposed Regulations it has threatened since May, 2015.  These Proposed Regulations were designed to limit the use of discounts in family (and maybe other) transactions that sophisticated clients and estate planners had used to reduce estate and gift tax exposure.  We have helped owners do dozens of transactions to take advantage of these discounts to save millions, and expect to do many more before the Proposed Regulations limit their use.

The BAD NEWS is that these Proposed Regulations will preclude the effective use of discounting strategies that advanced estate planners have employed to help clients save billions of dollars in estate and gift taxes over the past few decades. As a result, millions of dollars of value that apartment owners want to pass to family members and other heirs will, instead, be confiscated by the estate and gift tax system.

However, the VERY GOOD NEWS (but ONLY for those who plan in time) is that the IRS proposes that these Regulations become effective 30 days AFTER Final Regulations are published in the Federal Register.

Since the Proposed Regulations contemplate allowing for a 90-day comment period and a public hearing on December 1, 2016, it is virtually impossible for them to become final before the end of this calendar year.  If Hillary Clinton is elected, the IRS may not finalize the Proposed Regulations until early in her administration.  However, if Donald Trump is the winner in November, we expect the IRS may seek to finalize the Proposed Regulations before the end of the Obama administration.

The deferred effective date gives us time to review the Proposed Regulations carefully in order to better understand the impact they will have on transactions after the effective date, and gives you a short period of time to commence planning to “beat the regs.”  I got an advanced copy of the Proposed Regulations and have already scheduled to participate in a conference call with other advanced estate planning colleagues regarding the Proposed Regulations.

The best strategies for taking advantage of discounting strategies before the Proposed Regulations become final will usually involve putting property into carefully structured LLCs or limited partnerships (or to restructure such entities to maximize tax and non-tax benefits) as soon as possible.  Then, apartment owners will want to transfer interests in these entities to Family Security Trusts, Grantor Retained Annuity Trusts, other irrevocable trusts or family members a few months later, but before year-end.  To do this in the best way, owners need to begin the process as soon as practical.

NOTE:  Some of you may have created Family Limited Partnerships or LLCs and retained most of the ownership thereof in anticipation of getting the benefit of discounts when they are transferred after your death.  Much, or all, of this benefit will be lost if you die after these Proposed Regulations become final.   

The only way to avoid the additional taxes these Proposed Regulations are intended to impose is to make completed gifts or transfers of interests in these entities BEFORE the effective date of the regulations.  When done with care by an experienced estate planning attorney specializing in advanced strategies, these gifts and other transfers can be structured to provide substantial income to the original property owners during their life, preserve parent-child property tax reassessment exemptions, retain control for such members, keep the ability to get a step-up in basis at death, and still to maximize wealth transfer to your chose heirs.  But, to maximize the ability to use the discounts, you need to start planning very soon, and then you need to complete transfers of entity interests before the Proposed Regulations are finalized.  These Proposed Regulations mean I need to adjust my Family Wealth Strategies motto to “If you fail to plan WELL and SOON, plan to FAIL!” 

Ken Ziskin is a member of AOA and focuses his practice on integrated estate planning to save income, property, gift and estate taxes for owners of apartments and other income properties.  He has served as an Adjunct Professor of Law at USC, is rated AV Preeminent by Martindale-Hubbell and a perfect 10 out of 10 on legal website www.AVVO.COM.  For more information on the impact which the Proposed Regulations would have on your estate, or to begin the planning process to “beat” the Regulations, contact Ken Ziskin at 818-988-0949, or email him at KenZiskin@Gmail.com  You can see real client reviews of Ken’s services at www.avvo.com/attorneys/91423-ca-kenneth-ziskin-151823.html or on Ken’s website at www.ZiskinLaw.com

Reprinted with permission of AOA (Apartment Owners Association, Inc.) and the author.

More Will Choose To Rent In The Future As Tax Breaks Decline

Reprinted with permission from the author, John Burns

If you rent property to tenants, the outlook for your business and future rental customers is continuing to get better and better. While your apartment and single-family home tenants know that renting has always offered more flexibility for them, the great tax benefit of homeownership is not what it once was.

Real Estate Consulting

More renters are realizing that homeownership does not provide the tax breaks it once did and that renting is a better deal for them than owning, according to a new study from John Burns Real Estate Consulting.

“We believe we have found one of the primary reasons why entry-level home buying has not recovered—and why homeownership has been plunging,” writes John Burns in his market intelligence report. “For decades, homeowners benefitted from both the financial and psychological benefits of paying less taxes. Homeownership came with income tax savings because mortgage interest plus property taxes easily exceeded the standard deduction allowed by the IRS,” Burns writes in the report.

For Many The Tax Savings Is Gone

For most American homeowners that has not been true since 2008 because:

• Falling interest rates and home prices have reduced mortgage interest.
• The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers.

“Today, a typical first-time home buyer financing 95% or less of a median-priced US home pays less than $12,000 in mortgage interest and property taxes, which is not enough to warrant itemizing. Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal,” Burns writes in the report.

Rent vs. Buy

“Years ago, we eliminated income tax savings from our calculation of the rent-versus-buy decision, and I cannot remember the last time I heard a prospective first-time home buyer (not in California or New York) mention income tax benefits as a reason for buying,” Burns says in the report.

In the graph below, “We show the change over time for a typical homeowner couple with an 80% loan-to-value mortgage and a 1.5% property tax rate on the median-priced US home. That owner paid mortgage interest and property taxes in excess of the standard deduction every year from 1972 to 2008. Today, that homeowner’s deductions fall nearly $2,500 short of the standard deduction.”

Every April 15, the most financially qualified renters in the country used to feel the pain of not owning by writing a check to the IRS.

For most, that is no longer the case. The lack of tax savings is just one of numerous reasons why homeownership is the lowest it has been in decades, and we believe homeownership is headed lower.

Homeownership Headed Lower As Renting Becomes The New Normal

“This is just one of many findings in our upcoming book, which will be published later this year, called Big Shifts Ahead: Demographic Clarity for Businesses,” Burns writes.

The Urban Institute said last year in their analysis “The homeownership rate in the U.S., which has been declining since the housing boom, will continue to decrease for at least the next 15 years. The reason is simple: in the millions of new households forming over the next 15 years, new renters will outnumber new homeowners—causing a sustained surge of rental housing demand that will significantly affect millennials, seniors, and minorities, and expose important gaps in our current housing policies.”

This article courtesy of John Burns Real Estate Consulting. If you have any questions, please contact John Burns at (949) 870-1210 or at jburns@realestateconsulting.com

About The Author

Before founding John Burns Real Estate Consulting in 2001, he worked at a national consulting firm for 4 years and for 10 years at KPMG Peat Marwick – 2 as a CPA and 8 in their Real Estate Consulting practice. John has a B.A. in Economics from Stanford University and an MBA from the University of California, Los Angeles, and works in our Irvine office. John has attended home games for all 30 major league baseball teams, seen every Academy Award-winning Best Picture, and regularly runs the hills in Southern California.

 

UNDERSTANDING SUPPLEMENTAL PROPERTY TAXES

By  Patrick McGurk and Lawyers Title. Your support is important to me.  If you would like more information please call me 310 901 5380

SUPPLEMENTAL PROPERTY TAX DEFINED

The supplemental real property tax law came into effect in 1983 and  is part of an ambitious drive to aid California’s public school system. If you plan on purchasing or building a new home, this law will affect you. Supplemental property tax is a one-time tax which dates from the time you take ownership of your property or complete construction until the end of the tax year on June 30.

HOW WILL THE AMOUNT OF MY BILL BE DETERMINED?

There is a formula used to determine your tax bill. Supplemental property tax is based on the difference in assessed value of a home when purchased by the prior owner and the newly assessed value when purchased by you. If you are building a home, the supplemental property tax is based on the difference in value of the land before a home was constructed and the new property value after a home is built. The total supplemental assessment will be prorated, based on the number of months remaining until the end of the tax year, June 30.

WHEN AND HOW WILL I BE BILLED?

You will be advised of your supplemental assessment amount when your property is appraised during the lending process. You will then have an opportunity to discuss your valuation, apply for a Homeowner’s Exemption and possibly file an Assessment Appeal. Your County Controller/Tax Collector will then calculate your supplemental tax and mail a bill. The bill will be sent anywhere from 3 weeks to 6 months after close of escrow. A lien is put on the property for the supplemental taxes, so be sure to pay the taxes by the date noted on the supplemental tax bill.

WILL MY SUPPLEMENTAL TAXES BE PRORATED IN
ESCROW?

No, the supplemental tax is a one-time tax and is in effect from the actual date you take ownership of property, it will be billed to you by your County Controller/Tax Collector.

CAN I PAY MY SUPPLEMENTAL TAX BILL IN
INSTALLMENTS?

All supplemental taxes on the secured roll are payable in two equal installments. The taxes are due on the date the bill is mailed and are delinquent on specified dates, depending on the month the bill is mailed, as follows:

1) If the bill is mailed within the months of July through October, the first installment will become delinquent on December 10 of the same year. The second installment will become delinquent on April 10 of the next year.

2) If the bill is mailed within the months of November through June, the first installment will become delinquent on the last day of the month following the month in which the bill is mailed. The second installment will become delinquent on the last day of the fourth calendar month following the date the first installment is delinquent.

WILL MY SUPPLEMENTAL TAX BE PRORATED?

The supplemental tax becomes effective on the first day of the month following the month in which the change of ownership or completion of new construction actually occurred. The table of proration factors shown in the chart below is used to compute the supplemental
assessment on the current tax roll.

EXAMPLE:

The County Auditor finds the supplemental property taxes on your new home would be $1,000 for a full year. The change of ownership took place on September 15 with the effective date being October 1. The supplemental property taxes would be subject to a proration factor of .75 and the supplemental tax would be $750.