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Tax Mitigation Playbook: What are the Requirements and Rules for a 1031 Exchange?

1031 Rules require all 1031 exchanges regardless of the type have a 45-day identification period and a 180-day exchange period. For a 1031 exchange to be in accordance with IRC § 1031 Rules, within 45-days of the close of the sale of the Relinquished Property the taxpayer must identify their potential replacement property(ies) in writing to the qualified intermediary. The replacement property(ies) description must be unambiguous and specific using a physical address or legal description.  In relation to the 45-day identification period, there are rules that a taxpayer must follow when identifying their potential replacement property(ies). There are three distinct identification rules that the taxpayer can use, and they can choose the appropriate rule for their specific exchange situation. The three rules are as follows:  3-property Rule: A taxpayer can identify up to three properties without regard to the fair market value of the properties and they must close on at least one of the identified properties for the exchange to be valid.  200% Rule: A taxpayer can identify more than three properties, but the fair market value of all properties combined cannot exceed 200% of the fair market value of the Relinquished property(ies).  95% Rule: A taxpayer can identify infinite properties, the combined value of which exceeds 200% of the value of what they sold, but they must acquire at least 95% of the fair market value of the properties they identify.  All 1031 exchanges have a 180-day time limit starting from the day of the close on the sale of the Relinquished Property. If the taxpayer has not completed the purchase of the Replacement Property before or on day 180, then the exchange is closed, and the taxpayer must recognize and pay taxes on the proceeds from their Relinquished Property sale. There are no extensions or exceptions available. The Complete Playbook

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Boulder Financial Planning, Financial Expertise
Articles
Peter Locke

What is an Estate Plan?

Estate planning is one of the most skipped parts of peoples’ financial lives. Whether you’ve put it off because you didn’t know anything about it, it’s boring, expensive, or because you don’t think you have enough assets, I hope this guide will help you understand why you need a plan, common terms, and how to get started. What is an Estate Plan? Your estate is everything you own. It ranges from your business, house, money, and any other personal belongings. Even if you don’t own a lot of stuff, you still need a plan for where all of these things will go. However, your estate plan is more than just a map of where all your possessions will go. It helps dictate where your kids will go, who will take care of you if you’re unable to, who will handle all your affairs if you can’t, who will take your loved pets, etc. It’s a combination of how to pass down assets, to how the end of your life will be managed, and who will handle everything. Documents Included In An Estate Plan Everyone’s estate plan is slightly different, but there are a few specific documents that most have in common. Last Will & Testament – The goal of a will is to lay out your wishes for who will receive what after you pass away. Designation of Guardianship – This document designates who will look after and care for your children in the event you’re unable to. Living Trust – Very similar to a will where you outline the instructions of who gets what. The difference with a trust is that these assets are placed in there while you are still alive. Once you pass away, these assets will be moved without needing probate. Living Will – This document focuses on your preferences concerning medical treatment if you develop a terminal illness or injury that causes you to lose brain activity. Includes things like, feeding tube, assisted breathing, resuscitation, etc. It may also outline your religious or philosophical beliefs and how you would like your life to end. A living will is only valid if you are unable to communicate your wishes Financial Power Of Attorney* – The financial POA is a document that allows an individual to manage your business and financial affairs, such as signing checks, filing tax returns, and managing investment accounts when and if the latter becomes unable to understand or make decisions. Healthcare Power of Attorney* – Designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity. *Power of Attorney’s can be divided into several different categories. General power POA (gives the agent the power to act on behalf of any matters), Limited POA (gives the agent the power to act on behalf of specific matters or events for a specific amount of time) and Durable POA (remains in control of certain legal, property, or financial matters specifically spelled out in the agreement, even after the principal becomes mentally incapacitated.). What actually happens to an estate after you die? Most people have no idea what the process looks like after someone passes away. Those that do, typically understand why these documents are so important. So let’s dive into this so you get a real-life understanding. Everything you own at the time of your death is part of your estate. Your estate then goes through probate. Probate is the process where the court decides what happens to your assets now that you are gone. This is where having estate planning documents becomes so helpful. If you have a will, the court uses this as their guide to splitting up your estate. If for some reason you don’t have one, you are considered to have died intestate and the court uses local laws to decide who gets your assets. Honestly, you don’t want them deciding who gets your stuff! Not only that, probate can cost anywhere from 2-5% of the value of your estate so having a will helps ensure everything goes to the right people. The best way to avoid probate is by naming beneficiaries on all your important accounts like life insurance, retirement accounts, transfer on death accounts (investment accounts), Payable on Death (bank accounts), beneficiary deeds (real estate). Who handles your estate? When you create your will, you get to name someone as the executor of your estate. This person manages your estate through the probate process. They handle unpaid bills, taxes, debt, and anything else that relates to your estate. They also help distribute your estate to all the right people. Typically, people pick their kids, spouse, or siblings to do this for them as it is not a quick and easy job. You definitely want someone you trust to be your executor. If you do not name someone before you die, the judge will choose someone as your administrator (usually spouse then parent or next in kin) Taxes On Your Estate Many people worry about estate taxes, but it only really applies to people with significant wealth. In 2023, the first $12.06 million of your estate is exempt from federal taxes. The only way you have taxes is if you have more wealth than that or if you live in one of the 12 states that have a state estate tax. These states are: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington. Some of these states have a lower exemption than the federal one so you may have to pay state tax even if none is due federally. You definitely want to be aware of this and plan for it! Your executor is the one who will help handle all the tax bills that could be due. They will use money in the estate to help pay these bills and if they need to liquidate to help pay for taxes, they will. When Do I Need A Trust? Most people have heard

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Investing 101
Articles
Peter Locke

Investing 101

If you’re lucky enough to have previously started investing in your teens consider yourself way ahead of the curve. For the majority of people Investing 101 is for you. Most of us start investing in our mid to late 20s, but for those that start as early as possible can set themselves up for an incredibly lucrative future. Where should you start for Investing 101? There are a couple of places that will have the largest impact on your net worth. If, let’s say you have a summer job and you’re making $5,000-$10,000 a summer or you’re working throughout the year then opening an investment account is a great place to start.  For us, saving anyway in any type of account is great. While we like all accounts for different reasons, we like the Roth IRA the most when you’re young. A Roth IRA is like a bank account with different advantages. It enables you to save money that you’ve already paid taxes on and those savings grow tax free until you turn age 59.5 penalty free. Now we love the Roth IRA because typically when you’re young your income is fairly low so taking advantage of low tax rates is a great strategy.  Since you’ll be in the lowest tax bracket in 2020 (things may change in 2021) then paying taxes now for your money to grow tax free for multiple decades can have a profound impact on your wealth. The reason is called compounding growth. Let’s say you make it very easy on yourself and just buy into the SP500. It’s an index that tracks the 500 largest companies and you can invest in all of them using one investment vehicle. Let’s break Investing 101 down. A stock is a way to own a part of a company. An Exchange Traded Fund (ETF) is a basket of stocks that give investors exposure to typically hundreds of companies. Since you cannot buy an index like the Dow Jones, SP500, or Nasdaq (different indices) directly, you have to buy a vehicle that gives you exposure to them. That vehicle can be a ETF, which is usually a less expensive and passively managed investing vehicle when compared to a Mutual Fund. A Mutual Fund (MF) is a basket of stocks just like an ETF that is more actively managed and usually more expensive way to gain exposure to the same stocks. The difference being whether or not you think someone can actively outperform the index (MF) or you just want general exposure to the index (ETF). You can argue both sides so do what makes you feel comfortable. ETFs and MFs have different tax obligations but this isn’t as big of a concern until you’re in higher tax brackets.  If picking stocks is difficult, you aren’t interested in it, or you just want things to be more simple, investing in ETFs is an incredible way to bring you long term wealth.  ETFs and MFs typically pay what’s called a dividend. This dividend is like a thank you from the company for investing in that company. It’s a cash payment to you, typically quarterly, that you can use to reinvest back into your ETF or MF, a new stock, or whatever else.  Think about your investment portfolio like a business. This is the core to Investing 101. Your business takes money and hopefully makes you money. When you make more money you either spend it on yourself or put it back into the company. When you put it back into the company the company grows and makes you more and more money over time. This is a great way to think about investing in an ETF or MF. Every quarter, without you having to work at all, your fund is paying you and you can reinvest that money to grow your portfolio more and more.  Wealth isn’t created overnight. The secret to wealth is long term saving and investing. Hence, those that have time on their side have the greatest ability to accumulate wealth. So what else should you be thinking about?  After investing in yourself first, think about where else you spend your money. We wrote an article on the difference between erosive and accretive debt. If you find yourself buying lots of clothes, expensive shoes, fancy gadgets, and new cars then you’re not investing in your “portfolio business”. When you stop investing in your business you stop growing. Each time you do this the effect is compounded.  For example, if you invested $1,000 and $100 monthly for 40 years at 9% interest rate (average gain of the SP500) you would have ~$436,000 at the end. But let’s say you invested $1,000 upfront and only $50 monthly over the same time period and same interest rate, you’d have ~$234,000! That is a massive difference for only $50. That could be one meal out for you and your significant other, one new shirt you liked that you didn’t need, a car payment on a new car because you didn’t want a used car.

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