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Kevin Taylor

Tax Mitigation Playbook: Allowable closing expenses in 1031 Exchanges

Selling and buying a home is full of fees, expenses, and individual line items that can confuse the process and generate much of the closing paperwork. When selling or purchasing an investment property in a 1031 exchange process, certain selling expenses paid out of the sales or 1031 exchange proceeds will result in a taxable event for the exchanger. The IRS is very clear about many of these costs of selling a property, for example, routine selling expenses such as broker commissions or title closing fees will not create a tax liability.  Inversely most operating expenses paid at closing from 1031 proceeds will create a tax liability for the exchanger. The IRS, over time and in several notes, instructions and guidelines has made the following clear: Allowable closing expenses for IRS 1031 exchange purposes are: Real estate broker’s commissions, finder or referral fees Owner’s title insurance premiums Closing agent fees (title, escrow, or attorney closing fees) Attorney or tax advisor fees related to the sale or the purchase of the property Recording and filing fees, documentary or transfer tax fees Closing expenses that result in a taxable event are: Pro-rated rents Security deposits Utility payments Property taxes and insurance Associations dues Repairs and maintenance costs Insurance premiums Loan acquisition fees: points, appraisals, mortgage insurance, lenders title insurance, inspections, and other loan processing fees and costs To reduce the taxable consequences of these operating, financing, and other closing fees, try to: Pay security deposits, pro-rated rents, and any repair or maintenance costs outside of closing, or deposit these amounts in escrow with the closing agent. Treat accrued interest, prorated property tax payments, or security deposits as non-recourse debt that the exchanger is relieved of on the sale of their old property, which could be offset against the debt assumed on the replacement property. Note: this would only work if mortgage debt is obtained on the replacement property purchase that exceeds the mortgage debt paid off on the sale of the relinquished property. Match any prepaid taxes or association dues credited to the investor against the unallowable closing expenses listed on the settlement statement. Check with your tax advisor prior to the closing to review the closing settlement statements to determine if there is an opportunity to avoid a taxable transaction in your 1031 exchange. It’s possible that an exchanger has a long-term loss carry forward or non-recognized passive operating losses that could offset the taxable amount. Please note that all material provided in this newsletter is for informational purposes only and the author is not providing legal, tax accounting, or other professional services. The accuracy of the information provided as it pertains to your situation is not guaranteed. Please seek professional consultation if legal, tax accounting, or other expert assistance is required.

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Articles
Peter Locke

Sudden Wealth Planning

For those that are thinking about passing wealth on, they must think about how they want that wealth to be spent. For the people that are inheriting wealth, you may have other ideas in mind.  Both people have their own goals and understanding them prior to the actual event happening is important to plan for. By Peter Locke, CFP® In our podcasts and our articles, we speak at length about the three Ps.  And no, we’re not referring to the PPP loans. We’re talking about defining the People that help you, the Process to get you to your goals, and Policies you implement to hold you accountable along the way. Luckily, with everything we do at InSight, we still hold true to our three Ps. People – an heir should surround themselves with people that can help them manage this scenario. By having a professional advisor or consultant, an heir can ensure that they act responsibly with that money in order to make the best decisions possible. Process – When an heir receives money, what happens next.  What are your immediate actionable steps you will take when you receive a lump sum of money or assets. Implement the right procedures prior to the inheritance so you make good decisions. Policy – heirs need to hold themselves accountable. Defining what that looks like can mean different things to different people but overall how will you make sure you do what you said you would do when this happens.  By surrounding yourself with the right people and processes you’ve taken the first two steps now it’s time to implement and monitor. By maintaining your focus on the three Ps, you can stay in line with your values and long term goals instead of getting distracted with what you could buy or do with the inheritance. There is a reason why the majority of people that win the lottery or make a lot of money in sports early run out of money quickly and have nothing to show for it. You may think it won’t happen to you but those are famous last words. With these three Ps, your likelihood of running into problems goes down drastically. The biggest fear parents should have is how unstructured wealth transfers can have damaging effects on heirs and this is due to poor communication and trust. Parents should be preparing heirs about their relationship with money and what it means to them to educate them about best practices and things to stay away from. To teach heirs from an early age about your beliefs about money and good financial practices you can instill generational knowledge to pass down. This is a great time to bring on a third party professional to educate you and your family about how to have these conversations even when you think maturity is an issue. Waiting until you’re (the donor) older leads to quicker conversations instead of good healthy conversations that last over a long time that become part of our children’s subconscious thoughts which leads to better financial decisions. At InSight, we take teaching you how to talk to your children at an early age very seriously. These early and frequent conversations lead to our clients having the confidence to talk to their children about good money habits so that when they’re older they can rest in peace knowing their heirs have a strong foundation to lean on when they inevitably inherit your wealth. If you’re an heir and you have a lot of debt and little savings, paying off your debt may seem like a good idea but academically speaking might not be your best option for two reasons. One, it may give you a false sense of accomplishment that you paid off your debt by living within your means and staying disciplined.  Two, if your interest on your debt is very low then keeping your debt and making minimum payments may be a better long term option. Also, buying that new car or set of golf clubs because they’re really nice won’t give you true happiness. It instead may make you more unhappy because it doesn’t represent your values, it represents what you think other people care about. I have seen first hand how money affects your ability to make rational decisions, especially a sudden increase in wealth. Although the immediate dopamine hit you’ll get from a quick material purchase will be great, you’ll soon realize that you’re now in possession of an erosive debt instead of an accretive debt and your dopamine high will fade away as you pour money into trying to find the next thing. At Insight, we’re your people, we help design the processes for your plan and your heirs plan, and we create the policies to keep you moving in the right direction. For example, parents may be concerned with the negative effects an inheritance could have on their children’s drive and ambition to get ahead, desire for material things, relationship with money, relationships with friends and partners, or just spending beyond their means. With our InSight-full® plan, you and your family get the type of help that you need to make sure your money is used the way you want it to and is protected as much as possible.

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Boulder Financial Advisors
Articles
Kevin Taylor

Cultivating Resilience: Solving Workplace Burnout with Meditation and Mindfulness

Hey, fellow burned-out employee! Are you tired of managing the stress of the workplace only to go home and bring that same stress with you? You are not compensated enough to carry the lingering effect of the workplace into your home, that’s a job for the CEO…and you better believe they have a mechanism for managing this. In today’s fast-paced and demanding work environments, employees often find themselves overwhelmed by stress, leading to burnout. Workplace burnout is a serious issue that affects individuals’ physical and mental well-being, as well as overall productivity. Fortunately, there are powerful tools available, such as meditation and mindfulness, which can help individuals manage workplace stress, find inner balance, and prevent burnout. In this article, we explore how incorporating breathing practices, regulating emotions, and fostering a positive work environment can aid in resolving workplace hostility and stress. The Power of Breathing Practices Breathing practices, such as deep breathing exercises, have long been recognized as effective stress reduction techniques. By deliberately slowing down and deepening our breath, we engage the parasympathetic nervous system, which counteracts the “fight-or-flight” response triggered by stress. This simple yet powerful technique helps regulate our heart rate, lower blood pressure, and induce a state of calm. In the workplace, taking short breaks for deep breathing exercises can help individuals reset their focus and release tension. Whether it’s a few minutes spent in a quiet space or simply closing one’s eyes at the desk, these moments of conscious breathing can alleviate stress and promote mental clarity. By incorporating breathing practices into their daily routine, individuals can cultivate a sense of balance and resilience, enabling them to handle workplace challenges more effectively. Solving Dysregulation: Emotional Intelligence in Action Dysregulation, or the inability to manage emotions appropriately, is a common consequence of workplace stress and hostility. Mindfulness practices can be invaluable in cultivating emotional intelligence, allowing individuals to respond to workplace challenges in a calm and rational manner. Mindfulness encourages individuals to observe their emotions without judgment, creating space for reflection and self-awareness. By paying attention to their internal states, individuals can better understand their emotional triggers and consciously choose how to respond. This self-regulation helps prevent emotional outbursts, conflicts and contributes to a healthier work environment. Moreover, practicing mindfulness enables individuals to develop empathy and understanding toward their colleagues, fostering better communication and collaboration. By promoting emotional intelligence, organizations can create a more supportive and inclusive culture that reduces workplace hostility and improves overall well-being. Creating a Positive Work Environment Addressing workplace hostility and stress requires collective efforts from both employees and employers. Organizations play a crucial role in creating a positive work environment that encourages well-being and prevents burnout. Implementing mindfulness programs, such as workshops or training sessions, can equip employees with practical tools to manage stress and enhance their resilience. These programs may include guided meditation sessions, mindful movement exercises, or discussions on work-life balance. By integrating mindfulness into the organizational culture, companies demonstrate their commitment to employee well-being, fostering a healthier and more engaged workforce. Additionally, employers should encourage open communication, provide opportunities for growth and development, and ensure reasonable workloads. A supportive work environment that values work-life balance, promotes healthy boundaries, and encourages employee feedback is vital in preventing burnout and enhancing overall job satisfaction. Managing Workplace Stress is Risk Management  Managing workplace stress is a crucial aspect of risk management. When employees experience high levels of stress, it can have detrimental effects on their mental and physical well-being, job satisfaction, and overall performance. This, in turn, can increase the likelihood of errors, accidents, burn-out, and poor performance all of which pose risks to your health, and well-being and adds new risks to the financial plan. By incorporating meditation and mindfulness practices, you can proactively address the risk of workplace stress and its potential negative impacts. These practices equip you with the tools to effectively manage stress, improve focus, and enhance your overall well-being. When you are better equipped to handle stress, you are less likely to succumb to burnout, make errors, or experience a decline in productivity. Moreover, a positive work environment created through mindfulness programs and supportive practices reduces the risk of workplace hostility and conflicts. By fostering open communication, empathy, and collaboration, organizations create a culture where employees feel valued and supported. This helps mitigate the risk of negative interpersonal dynamics, which can lead to decreased morale, decreased productivity, and potential legal and reputational risks. Workplace burnout is a pressing issue that affects individuals and organizations alike. By embracing meditation and mindfulness practices, individuals can build resilience, manage stress, and find balance in the face of workplace challenges. Breathing exercises offer a simple yet effective way to regulate the body’s stress response, while mindfulness cultivates emotional intelligence and fosters empathy. Moreover, organizations can contribute to resolving workplace hostility and stress by incorporating mindfulness programs and fostering a positive work environment. Together, these approaches can transform the workplace into a space of well-being, creativity, and productivity.

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