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Tax Mitigation Playbook: How much money do you have to reinvest?

Financial Planning Dentist

In order to defer ALL capital gains and depreciation recapture taxes from the sale of the Relinquished Property the taxpayer must pay an equal or higher price for the Replacement Property than the Relinquished Property was sold. Should any debt or amount not be reinvested this portion, called boot, would be taxable.  

The “Boot” is any non-like-kind property or property(ies) that do not qualify, which could include cash, notes, partnership interests, securities, inventory, or property held primarily for sale not investment, etc. Boot is categorized into two types: cash boot, which is cash received, and mortgage boot, which is any reduction in loan or debt on the exchange. Any boot received during a 1031 exchange is subject to taxation as either depreciation recapture or capital gain. 

It is important to note that any credits on the settlement statement directly paid out to the taxpayer may also result in boot and a taxable event. If certain situations are not handled properly in the construction and administration of the 1031 exchange it can result in credits on the settlement statement. Here are a couple of common situations: 

If earnest money is paid out of pocket by the taxpayer then it will be credited on the settlement statement. To avoid this, the earnest money should be paid by the qualified intermediary out of the exchange funds whenever possible. 

If the settlement statement shows credits for property taxes, security deposit(s), or rent prorations those would be taxable. Instead, the taxpayer should consider asking the seller to pay these items outside of the closing. 

In summary, to avoid a taxable event in its entirety the taxpayer must reinvest equal to or greater than the value of the sale of the Relinquished Property. However, the taxpayer may take cash out, creating boot, but they will have to pay the associated taxes. 

The Complete Playbook

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Your Money, Your Freedom: The 4-Point Fun Guide to Decoding Your Employment Dependency!

Ever wondered how chained you are to your 9-to-5? Or dreamt of making your money work for you while you sip cocktails on a beach, climb mountains with friends, or just hang out with children and grandchildren? Welcome to the guide to adding content to InSight’s – Employment Dependency metric—your secret weapon in the quest for financial freedom! 1. Your Money’s Scorecard Imagine for a moment that your investments are akin to a bunch of lazy couch potatoes. Yes, those starchy loungers sprawled across your financial living room, eyes glued to the TV, completely oblivious to the world of productivity. Now, ask yourself, how many of these lethargic spuds would it take to keep your life’s engine running—your fridge bursting with food, your Netflix subscription ticking over for those all-important binge sessions, and even ensuring there’s enough in the kitty for those spontaneous adventures or cozy dinners out? This quirky analogy is precisely what delving into your investment asset performance feels like. It’s an exercise in evaluating whether your hard-earned money is actively working towards your dreams and lifestyle needs or if it’s just taking up space on the sofa, idly passing time. It’s high time those potatoes were given a meaningful job! If your employment dependency is on the higher side, meaning a significant chunk of your lifestyle relies on your job income, the pressure on these couch potatoes—your investments and savings—is somewhat alleviated. They can afford to be a bit more relaxed because your job is doing the heavy lifting. However, if that dependency figure is alarmingly low, indicating that you’re leaning heavily on your investments to fund your day-to-day life, then it’s a wake-up call for your sedentary spuds. This scenario demands that your investments shed their couch potato persona and shift into high gear. Transforming these idle assets into diligent workers is essential to securing not just your current lifestyle but also your future comfort and financial independence. It’s about making your money work for you, pushing those investments to sweat so you can eventually kick back and enjoy the fruits of their labor. 2. Lifestyle Limbo: How Low Can You Go? How long can you keep sailing smoothly if your paycheck suddenly turns into a ghost, leaving you in a financial limbo? It’s a scenario that many might find daunting, yet it’s crucial in understanding how equipped you are to live not just a life, but your best life, sans the regular income stream. This goes beyond the mere basics of survival; it’s about thriving, indulging in your passions, and maintaining your lifestyle without compromise. The Employment Dependency metric serves as your financial limbo stick in this high-stakes game. How low can you dip without hitting the floor? The beauty of this metric is that the lower your dependency on your employment income, the more freedom you have to enjoy life’s pleasures without the ominous cloud of the next payday looming over you. It’s about achieving that delicate balance where your financial stability is not rocked by the absence of a paycheck, allowing you to lead a life filled with joy, security, and prosperity. Moreover, the concept of employment dependency doesn’t just offer a snapshot of your current financial resilience; it’s also a crystal ball into your future, especially your retirement years. By putting your lifestyle through a “stress test” using the Employment Dependency metric, you gain invaluable insights into how your days of leisure and retirement could look. Will you be sipping margaritas on a beach, or will you be pinching pennies? This metric illuminates the path to ensuring your retirement paycheck—funded by pensions, savings, and investments—can support your dream lifestyle. It’s about preparing today for the tomorrow you desire, making sure that when work becomes an option rather than a necessity, your lifestyle continues unabated. This dual focus on present joy and future security is what makes understanding and optimizing your employment dependency so crucial. 3. What If… The Game Life, with its unpredictable twists and turns, often throws us into scenarios we never saw coming. Imagine one day you’re on top of the world, with a hefty bonus check in hand, ready to splurge or invest. The next day, the tide turns, and those freelance projects that were your bread and butter suddenly dry up. Here’s where playing the “What If” game with your Employment Dependency metric becomes your secret superpower, allowing you to navigate through life’s uncertainties with grace and poise. Think of it as your personal financial forecasting tool, crafting an umbrella sturdy enough to shield you from any storm that life decides to brew. This approach not only tests your financial resilience in times of stress but also empowers you to remain comfortable and secure, no matter the financial weather outside. It’s about preparing for the worst while hoping for the best, ensuring that whatever life tosses your way, you’re ready to catch it with a smile. But let’s push the envelope further. What if your Employment Dependency metric could do more than just safeguard your current lifestyle? What if it could open the door to possibilities you’ve only dreamed of? Imagine living on a cruise ship, traveling the world without a care, or dedicating your days to volunteering for causes close to your heart. By understanding and adjusting your employment dependency, you start to sketch the blueprint of your life’s next chapter. It’s not just about surviving; it’s about thriving in ways you’ve only imagined. This foresight enables you to allocate your finances not just for survival or comfort, but for the fulfillment of your deepest desires and dreams. Asking “What might it require today to get there?” transforms your financial planning from a mere exercise in numbers to a strategic map leading to your ideal future. It’s about realizing that with the right planning and insight, your financial decisions today are the seeds of the lifestyle you aspire to live tomorrow. 4. Your Financial Safety Net Finding yourself high on the employment dependency scale can feel akin

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April 8, 2024 No Comments
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How to Get Wealthy – The Basics of Wealth-Building

Introduction: What is Wealth? The traditional definition of “Wealth” is the quality of life that a person can enjoy, which can be measured in terms of material possessions and financial stability. But the InSight definition is more inclusive. We think “Wealth” is the lasting capacity for something to generate value. This means cash-flow-producing assets. This means your health, investments, age, and behaviors that are accretive to income creation are all part of “Wealth Building.” Leveraging as many of those different channels, at a high level, for as long as possible. Wealth is a term that is often used to describe the accumulation of assets, such as money and property. Wealth is also often used to describe people who have achieved significant success in their careers or other aspects of their life. What is missing in the traditional concept of wealth, and something our clients understand is that Wealth is not a snapshot of your assets, it is the expectation that those current assets have the potential to create future incomes that support your goals. Themes and Topics for Building Wealth In this section, we will explore various topics that one needs to know in order to build wealth. The first step is to have a plan for what you want your money for. It could be for a car, a home, or retirement. You will need to have an idea of what you want your money to do for you in order to make it work. Next, you need to set goals and track your progress with specific steps toward achieving those goals. For example, if your goal is $1 million dollars by the age of 30, then you need to set milestones on how much you should save each month and how much interest it should earn each month in order to reach that goal by the desired date. Finally, there are many ways that one can invest their money such as stocks and bonds, but there are also other options such as real estate investing or starting a business. You may be interested in exploring these avenues depending on what type of Wealth you are looking to create. The key to all of this is the understanding that these investments (of time and money) should have the ability to generate cash flow at the desired rate. Once you have created the “model” for how you plan to build wealth, it’s time to move on to the tool for executing your plan. Understanding Your Worth and Creating an Annual Budget A budget is a plan for the future that helps you to know what your income and expenses will be and how much money you have available at any given time. For many, it can be a very useful tool for making sure that your spending matches up with what you earn. But the limitation is that budget “drafts” rarely become lived out in a family’s financial habits. Budgets are a fine start, but it’s a traditional approach to finance that simply fails over time because the equation is wrong: Income – Budget = Savings We try to coach clients to pivot inversely. Instead of crafting a budget to find savings, craft a savings plan that results in a budget. This puts the most important wealth-generating number (savings) early in the equation. Because we shift that focus and take care of first things first – the budget – which might still be important, is less mission-critical to the success of the financial plan. Our clients think: Income – Savings = Budget Creating an annual budget is a good way to keep track of your spending, set goals, and make sure that your spending is deliberate. But it’s not a good way to drive your worth and execute a financial plan. A change in the budget mindset is key to long-term success. Achieving Financial Goals For Yourself Setting financial goals is an important step in achieving your goals. We think clients should “dream big” and “be honest.” We don’t think those are opposites because we have seen that through planning a financial goal setting they can work cooperatively. What are your current financial goals? What are your long-term financial goals? How much money do you want to make in a year? What is your desired lifestyle? It is pivotal that these expectations for your long-term wealth are established early. A financial goal can be a great way to start living the life you want. Financial goals are not just about getting rich, they are about having the freedom to do what you want. A pair of long-term habits to master are 1) reinvestment and 2) automation – we coach our clients to get comfortable with these concepts: Understanding Money Management Basics and How To Save and Invest Wisely Before you can master your financial goals, it is important to understand how compounding interest works. Reinvestment – Compounding interest is when the interest that has been earned in a period of time gets added to the principal sum, and then earns more interest on that sum. It’s when your money starts making money for you! This is the same as reinvestment. We focus on coaching clients to view their portfolios as a collection of assets that generate cash flow. That cash flow is then reinvested routinely and programmatically. This means that when markets are “down” they are buying new “cashflow” cheaper – then as the market rises, they are selling “cashflow” when it’s overpriced. Automation – Financial goals are important to set. You need to know what you want to save for and how much you need to save on a monthly basis. There are many ways you can automate your savings and make sure that your money is going toward the things you want it to go towards. One way is through your corporate payroll. 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January 4, 2023 No Comments
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Real Estate Investment Due Diligence: Preliminary Assessment

When embarking on a real estate investment journey, one of the first critical steps is the preliminary assessment. This phase sets the foundation for your entire investment strategy and helps you determine whether a property aligns with your goals. In this article, we’ll explore the essential components of the preliminary assessment, including property identification and defining your investment objectives and strategy. Property Identification   1. Location and Geography The adage in real estate, “Location, location, location,” couldn’t be more accurate. The location of a property plays a pivotal role in its potential for success as an investment. Here are key considerations when identifying a property’s location: Neighborhood Analysis: Research the neighborhood’s safety, amenities, schools, and overall quality of life. Is it a desirable area for potential tenants or buyers? Proximity to Services: Evaluate the property’s proximity to essential services such as hospitals, grocery stores, public transportation, and highways. Accessibility can significantly affect property value. Market Trends: Study the historical and current trends in the local real estate market. Is the area experiencing growth, stability, or decline? Are property values appreciating or depreciating? Economic Factors: Consider the economic health of the region. Is there job growth, a diverse job market, or an influx of businesses? Economic stability often translates to higher demand for real estate. Future Development: Investigate any planned or ongoing infrastructure projects, zoning changes, or commercial developments in the area. These factors can impact property values and rental potential. 2. Property Type Real estate encompasses various property types, each with its unique set of characteristics and investment opportunities. Common property types include: Residential: This includes single-family homes, multifamily units (duplexes, apartment buildings), and condominiums. Residential properties often cater to renters or homeowners. Commercial: Commercial real estate includes office buildings, retail spaces, industrial warehouses, and hotels. It offers income potential through leasing to businesses. Industrial: Industrial properties are typically warehouses, manufacturing facilities, or distribution centers. They can provide stable rental income from industrial tenants. Mixed-Use: These properties combine two or more types, such as retail spaces on the ground floor with residential units above. They offer versatility but may require a deeper understanding of multiple markets. Vacant Land: Vacant land can be developed for various purposes, from residential housing to commercial or agricultural use. It offers the potential for significant capital appreciation. Investment Goals and Strategy   1. Identify Investment Objectives Your investment objectives serve as the compass that guides your real estate journey. Common investment objectives include: Rental Income: Generating consistent cash flow through rental properties, which can provide a steady stream of passive income. Capital Appreciation: Focusing on properties in areas expected to experience significant appreciation in value over time, with the intent to sell for a profit later. Portfolio Diversification: Adding real estate to diversify your investment portfolio and reduce risk. Tax Benefits: Utilizing tax advantages available to real estate investors, such as depreciation deductions and 1031 exchanges. Long-Term vs. Short-Term: Determining whether you’re looking for a long-term investment strategy (buy and hold) or a short-term approach (fix and flip) 2. Determine Investment Strategy Once you’ve identified your objectives, it’s crucial to align them with a specific investment strategy: Buy and Hold: Acquiring properties with the intention of holding onto them for an extended period, generating rental income, and potentially benefiting from long-term appreciation. Fix and Flip: Purchasing properties that require renovations or improvements, with the goal of selling them at a higher price after the enhancements are made. Wholesale: Acting as an intermediary between sellers and buyers, typically without taking ownership of the property, and earning a profit through the transaction. Development: Investing in undeveloped land or properties with development potential, where you can build and sell or lease the completed structures. DSTs: A pooled, small-scale, investment vehicle that provides directed exposure to the underlying investment and very limited liquidity. REITs or Funds: Investing in Real Estate Investment Trusts (REITs) or real estate funds, offering diversification and professional management. The preliminary assessment stage of real estate investment lays the groundwork for success. By carefully considering property location, type, investment objectives, and strategy, you set the stage for informed decision-making. This phase is just the beginning of your journey toward achieving your real estate investment goals. Stay tuned for our next articles, where we’ll delve deeper into the various aspects of real estate due diligence to ensure your investments are well-informed and profitable.

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January 3, 2024 No Comments

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