Many successful people have become wealthy from real estate investments. According to Forbes, about 10 percent of the world’s billionaires created their wealth from real estate. A significant portion of these investors were very “hands-on” over the years in the development and management of their properties.
Many real estate investors envision a retirement with ample sources of predictable income but also, hopefully, a life free from the hassles of property management.
Real estate investors face a dilemma when it comes to turning their actively managed real estate investments into a passive retirement plan. Once they sell their real estate, they will owe federal and maybe state income taxes on all realized gains. Since most real estate investors typically depreciate their properties for tax purposes, there may be little or no tax basis remaining. Secondly, if they cash out and pay taxes, it may be difficult to earn as much income with their after-tax proceeds as they were earning prior to the sale.
Fortunately, the IRS currently allows real estate investors to exchange one property for another without paying taxes on the gains. There are certain procedures that must be followed. Specifically, the owner of the old property must be the same as the owner of the replacement property. Also, a qualified intermediary must hold the sales proceeds of the liquidated property to use for the purchase of the new property.
For investors who are looking to enjoy more leisure time, swapping an actively managed property for another actively managed property doesn’t solve any problems. Therefore, the investor must find a property that can be managed passively. There are several large real estate companies currently offering turnkey 1031 exchange diversified passive real estate investments that may be attractive to investors looking for tax efficiency and predictable passive retirement income. Exchanged property will receive a full step up in tax basis at the time of the death of the owner.
With the new tax laws, it has become potentially more difficult to receive optimal tax treatment for one’s charitable donations. Married couples filing jointly now have a $24,000 standard deduction. Unless the total itemized deductions are more than $24,000, it won’t pay to itemize. Moreover, big deductions of the past for state property tax and sales tax are now limited to $10,000. Bottom line is that if you claim the standard deduction, there will be absolutely zero tax benefit to making personal charitable donations.
However, there are some ways to get a tax benefit for charitable donations even if you claim the standard deduction. If you are older than 70½, you can donate directly from your IRA to a charity. By doing this you will be able to donate money that you previously received a tax deduction on without realizing any income. Also, if you are planning to leave money to charity in your will, you may want to consider naming a charity as one of the beneficiaries of your IRA because the charity won’t have to pay taxes on those funds, whereas your children will.
If you are a business owner, the most tax-efficient way to support a charity is through charitable advertising. Purchasing pages in your favorite charity’s ad journal will allow you to fully deduct that payment as a business expense, directly reducing your K-1 income that goes on your 1040 tax return. From the charity’s perspective, it doesn’t really care if its revenue comes from personal donations or business advertising.
Finally, if you have some appreciated stock that you were planning on selling, consider donating some of those appreciated shares directly to a charity. That way you can avoid paying capital gains taxes and the charity can sell your stock without any tax liability.
It is universally agreed that international trade wars are bad for global economies. Tariffs increase prices on goods people buy. Consumers either buy less or they increase consumer debt. Tariffs hurt corporate profits, which is bad for stock prices.
However, President Trump has nevertheless decided to place tariffs on various imports — most notably against Chinese products. He recently announced another $200 billion in tariffs on Chinese imports. Other countries, including China, are retaliating by placing tariffs on American exports. About one-fifth of U.S. exports to China consist of agricultural products, including soybeans, which are by far the United States’ largest single export to China.
The Chinese stock market is down 20 percent since late January yet the S&P 500 is up about 3 percent since the beginning of the year. Apparently, the market is discounting the negative impact of potential prolonged trade wars in the Chinese market much more than it has in the U.S. market. There is a popular school of thought that President Trump is using the threat of prolonged tariffs in an effort to get a more favorable trade agreement for the United States.
Based on the fact that the S&P 500 hasn’t gone down during the beginning of these trade wars, the market seems to be optimistic that a prolonged trade war will be avoided. With midterm elections coming up, President Trump probably can’t afford the economy to take a hit or to alienate the domestic farmers who stand to suffer greatly from tariffs on their crops; at least if he wants to keep a Republican majority in Congress. Therefore, it wouldn’t be surprising to see this “trade war” get resolved prior to the elections. If that is what indeed transpires, I would expect Chinese stocks to bounce back from their significant sell off. However, if the tariffs do turn into a prolonged trade war, look for stocks to suffer.
Seven out of 10 Americans over the age of 65 will need some form of long-term care.* If you are very wealthy, you can probably afford the $41,000 per year for home health care or the $90,000 per year for a semi-private room in a nursing home.** Conversely if you are of modest means, you may be able to qualify for Medicaid to pay for your nursing home.
However, if you are merely comfortable and not wealthy, the cost of paying for long-term care could be the one wild card that could derail a financial plan. Some people purchased long-term care policies only to see their premiums get increased. Others avoided obtaining long-term care insurance because they felt like they wouldn’t need it and they didn’t want to pay for something and not get any benefit.
One of the most palatable ways to cover potential long-term care expenses is through hybrid life/long-term care insurance policies. These plans provide a tax-free life insurance benefit that is also available as a long-term care benefit during the insured’s life.
They can even be designed with full liquidity in case the funds are needed for retirement income or any other purpose. As a planner, I especially like tools that solve important problems but also tools that provide maximum flexibility and options.
If you own a liquid hybrid insurance contract, one of three scenarios will materialize: At some point, you will need to access the funds and accumulated interest in the policy to cover living expenses; you will need the additional pool of funds that the policy provides for long-term care expenses; or, if you were fortunate enough to not have needed long-term care, your heirs will get a sizeable income-tax-free death benefit.
Regardless of which category you wind up in you are covered.
*U.S Department of Health and Human Services
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