Financial Literacy and Prudence

[MJ DeMarco]

Here's a rare example from the trenches of modern "spend-now, worry-about-it-later" America...congratulations to the gentleman who will receive the windfall.

And the question for Diane is .... is this treated as capital gains if he sells for $1mm? Basis is the cost of the ticket to the ball game and Southeby's auction fees?

 

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[MJ DeMarco]

I love that Lamborghini has moved into the mindset of most .... to be the affluent italian sports car of choice, surpassing Ferrari (for all your Ferrari lovers out there ... I can't resist making note of this sidebar) Awww... :nopity:

 

[Diane Kennedy]

Yes, it's capital gains, but it's either short-term or long-term, depending on when he sells it. If he holds it for 1 year + 1 day, we're looking at long-term capital gains. That's generally taxed at 15% federal max.

BUT if he's subject to AMT (alternative minimum tax), and I think he will be, it's taxed at 28%.

How about if he donates his highly appreciated asset to a charitable remainder trust, lets the trust sell it (no tax there) and invests 100% of the proceeds from the sale into some type of cash flowing asset? The income from the trust will go to him (and be taxable), but he's got a charitable deduction to offset at least some of the income. Upon his death, the charity gets the corpus (principal) of the trust. So, he does good too.

Don't you love this game? (And I don't mean baseball)

 

[MJ DeMarco]

Yes, it's capital gains, but it's either short-term or long-term, depending on when he sells it. If he holds it for 1 year + 1 day, we're looking at long-term capital gains. That's generally taxed at 15% federal max.

BUT if he's subject to AMT (alternative minimum tax), and I think he will be, it's taxed at 28%.

How about if he donates his highly appreciated asset to a charitable remainder trust, lets the trust sell it (no tax there) and invests 100% of the proceeds from the sale into some type of cash flowing asset? The income from the trust will go to him (and be taxable), but he's got a charitable deduction to offset at least some of the income. Upon his death, the charity gets the corpus (principal) of the trust. So, he does good too.

Don't you love this game? (And I don't mean baseball)

Great info .... so if the trust sells the ball for $1m then proceeds to buy an apartment building which cash flows $5K/mo, he gets $5K/mo taxable at his marginal rates -- but what is his charity deduction in aggregate? $1m? Is that amortized over a X period of time from year to year?

Don't you love this game? (And I don't mean baseball)

I just wrote a $140K check to the US Treasury .... so the quick answer is NO. I hate the fricken game because I always lose it. :smxD:

 

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[Diane Kennedy]

Great info .... so if the trust sells the ball for $1m then proceeds to buy an apartment building which cash flows $5K/mo, he gets $5K/mo taxable at his marginal rates -- but what is his charity deduction in aggregate? $1m? Is that amortized over a X period of time from year to year?

The charitable remainder trust is a great way to handle appreciated property sales. So, if the ball sells for $1 m, the entire $1 m gets invested. I'd hope for closer to $8K per month cash flow since you'd likely be free and clear on the building. At any rate, yes, that all can be distributed to you. You get a charitable deduction based on the value of the ball. There is one catch though - your charitable donation each year is most likely limited (unless you have a bunch other income) to the amount of your income and it can only roll forward for 5 years.

But contrast that with Plan B: Sell the ball and assume you'll pay capital gains tax, only to find out it's really AMT - so write a check for $280,000, leaving you $720,000 left over to invest with.

Plan A: Charitable Remainder Trust $1 mill invested at 10%, $8,000 per month + charitable donation deduction for first 5 years.

Plan B: $720,000 invested at 10%, $6,000 per month, fully taxable

There is a downside - you have removed an asset from your estate. In Plan B, your heirs could inherit whatever is left when you die. In Plan A, a charity receives what's left when you die (hence the name Charitable "Remainder")

On your personal tax stuff - sorry about that. I've been thinking about your situation after reading your SUCCESS STORY. I'm guessing you have a lot of IP, which for the future could be used in a good tax strategy. I'll think about it and start a thread maybe this weekend on using IP to pay less tax.

BTW I still haven't done my personal returns for 2006. So, if anyone is freaking out about not doing theirs yet...just know that all the CPAs usually file at the 11th hour. Less chance of audit.

 

[FT1]

I love that Lamborghini has moved into the mindset of most .... to be the affluent italian sports car of choice, surpassing Ferrari (for all your Ferrari lovers out there ... I can't resist making note of this sidebar) Awww... :nopity:

:eusa_naughty:

:smxE:

:tdown:

 

[AroundTheWorld]

Diane,

What happens to the depreciation on the building?

This sounds like a great alternative when you can't 1031.

 

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[MJ DeMarco]

BTW I still haven't done my personal returns for 2006. So, if anyone is freaking out about not doing theirs yet...just know that all the CPAs usually file at the 11th hour. Less chance of audit.

Neither have I -- my CPA just finished my business returns and the personal won't get done for another 30 days. If only we can defer estimated taxes like this!!

Great info Diane. Speed+

 

[Wolfgang5150]

FYI - There was a great story here about the kid who caught the ball. (BuffaloNews.com) He was a college student at the Univeristy of Buffalo and was travelling to Australia with a friend. They had a long layover in SF, so they bought bleacher tickets to the game. He was wearing NY Mets gear - the crowd was razzing him the whole game. Guess he got the last laugh.......
Kevin S.
Orchard Park, NY

 

[Wolfgang5150]

follow-up. The ball just sold for $752K.............
SAN FRANCISCO (AP) — Barry Bonds' record-breaking 756th home run ball was auctioned Saturday for $752,467, well more than the estimates by memorabilia experts.
Home run No. 755, the ball that tied the record, also auctioned for $186,750, including the bid and fee, according to Sotheby's/SCP Auctions.

Not too bad for a trip to the ballpark...............
Kevin

 

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