Finance2007   Finance for personal business

Critical illness insurance:

Critical illness insurance will cover you in the event of a serious illness such as cancer, coronary artery by-pass surgery, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. Additional conditions covered by this insurance can include aorta graft surgery, benign brain tumour, blindness, coma, deafness, heart valve replacement or repair, loss of limbs, loss of speech, motor neurone disease, paralysis/paraplegia, Parkinsons disease, terminal illness and third degree burns. Not all insurance companies will necessarily cover all of these illnesses, whilst some insurance companies will cover more; it is always worth reading the terms and conditions before you sign anything.

Critical illness insurance policies typically offer a tax-free lump sum if you are diagnosed with one of the above illnesses and meet the conditions outlined in the policy contract. The lump sum is most often used to cover the remainder of the mortgage, although can be spent on home alterations or medical care etc.

Life insurance:

Life insurance is usually taken out if your family or partner is financially dependent on your income. Life insurance can also be purchased as life assurance and in this form, can offer a method of protection cover and savings. However, most people simply use it as a form of financial protection for their mortgage and therefore their family. There are three main types of life insurance: term insurance, whole life insurance and endowment insurance. More information can be found on these forms of life insurance on the Association of British Insurers website, listed in the resources section of this article.

Mortgage life insurance:

Mortgage life insurance is essentially the same as a decreasing (lump-sum) term life insurance policy and is designed to pay out a lump sum upon the death of the policy holder, should it occur during the term of the mortgage. The size of the lump sum will decrease over the term of the life insurance policy, in the line with the outstanding mortgage repayments. E.g. As you pay off your mortgage, the amount of cover will decrease as the need is less significant.

Mortgage protection:

Mortgage protection, also called mortgage payment protection, is a type of insurance that can help protect mortgage payments and associated household costs in the event of unemployment, illness or an accident. Through mortgage payment protection, you can insure your monthly mortgage payment, monthly life premiums and the monthly cost of your buildings and content insurance. Typical mortgage protection cover could include:

* Unemployment and disability insurance cover
* Accident or sickness
* Unemployment only insurance cover
* Disability only insurance cover

Loan payment protection:

Loan payment protection policies are designed to protect the repayments to any loans you may have taken out. They work on a similar basis to mortgage payment protection, but for a wider scope of borrowing. Premiums for loan payment may be greater than those for mortgage protection.

Income protection:

In the event of unemployment, sickness or an accident, income protection insurance offers a limited income. Do make sure you understand the terms of the policy however, as the income that you received through cover may be significantly less than the income you receive through employment.

Private medical insurance:

Private medical insurance is a policy which will provide financial cover for medical treatment in the event of an acute condition. According to the Association of British Insurers, the majority of insurers define an acute condition as a disease, illness or injury that is likely to respond quickly to treatment which aims to return you to the state of health you were in, immediately before suffering the disease, illness or injury, or which leads to your full recovery.

Private medical insurance provides reassurance for people who know that treatment is available promptly should they become ill or injured.

Resources:
http://www.abi.org.uk/ The Association of British Insurers
http://www.moneynet.co.uk/insurance/index.shtml Consumer Insurance Comparison Research
http://www.moneynet.co.uk/home-car-travel-insurance-guide/index.shtml Insurance Guide

A critical part of selling a home is the appraisal. Heres how to plan for it.

You have a contract to sell your home and now the appraiser is coming. The appraisal needs to come in at a good price in order for your buyer to get his loan. What should you do?

The Appraiser Says

Appraisers typically tell people not to do anything special before they come. They tell the owner they see lots of houses and they can look past a little clutter and dust. Dont be nervous, they counsel. Appraisers are sincere people. Im sure they mean what they say.

I Say

On the other hand, appraisers are human. They respond to cleanliness and order and to good maintenance the same way buyers do. If youve let your hair down, get your home back into show condition before the appraiser comes.

Everything you know about a tidy approach to your home, well mulched flower beds, door knobs that are attached firmly and work smoothly, lack of finger prints, lack of clutter, and all the rest applies. Take a look at a Uniform Residential Appraisal Report form if you doubt me. The age of the home and the effective age are asked for under the General Description. Dont you think how well your home appears to be cared for affects the number that appears under effective age?

The Uniform Appraisal Report requires information about materials (and their condition) used for floors, walls, trim and finishing elements, bathroom floors and wainscots, and for interior doors. Appraisers train themselves to notice these details. If yours are dusted, polished, and free of scratches and fingerprints, dont you think you might be giving your appraisal a nudge in the right direction?

The Report also asks about kitchen equipment (refrigerator, range and oven, disposal, dishwasher, fan and hood, microwave, and washer and dryer). Do you think itd be a good idea to have them clean and purring?

The Report asks about amenities such as fireplaces, patios, decks, porches, fences, pools, and sheds. If an appraiser is going to take special note of such things, shouldnt they be swept, cleaned, and have paint in good condition? Also, clean out the gutters if they need it. If it should be raining on the day your appraisal is done, you want your house to handle the rain water well.

Let me share the comments section of an appraisal which got the owners what they wanted. I think itll give you a good feel for what you need to do. The subject is well maintained and no physical, functional or external inadequacies were noted. Marketability is enhanced by hardwood flooring throughout a majority of the home, an updated kitchen, fresh interior and exterior paint, transom windows, built-ins, a front porch, a rear patio, a large storage shed, 4 fireplaces, etc.

The appraiser is a human being. Make sure you do everything you can to appeal to them and youll get a good appraisal.

A 401(k) plan is an employer sponsored plan. The employer makes direct contributions to the account that are deducted from the employee’s paycheck. Most companies will match the paycheck contribution up to a certain percentage. In general, the contributions are before tax dollars and grow tax deferred until they are withdrawn. After-tax contributions are also allowed.

You should contribute as much as you can to your 401(k). Don’t overextend yourself, but you don’t want to waste the opportunity to deposit tax free, tax deferred money and have it matched. The amount the company matches you for is free money. Don’t let it go.

In 2005, the maximum before tax annual contribution that an employee can make is 14,000. If the employee is over 50 years of age, he or she can contribute 16,000. The limit is set to increase by 1,000 in 2006.

Your 401(k) is simply an account; you chose the investments within the account. There is usually an array of mutual funds presented to you, but you must decide the allocations. There is no one to advice you when it comes to role fees and expenses that will affect your overall returns.

First, decide how much risk you are willing to assume. How much volatility within the portfolio can you stand?

If you are in your 20’s and early 30’s you have the time to be aggressive with your investments. The time factor allows you to recover from slumps in the stock market. As you age, your investments should become more conservative to protect your earnings.

Many 401(k) plans have tools, such as online calculators and worksheets, which help you in determining how much risk you should accept. The best tool is often to seek the advice of a competent financial planner. It is worth it to hire a planner to evaluate your assets and earning ability if the end result is a comfortable retirement.

If you find that you are in need of money, most plans will allow you to borrow up to 50% of your vested balance, but not over 50,000. You usually have to repay the money with interest within five years. The interest payments go into your account, so you are paying yourself the interest. There are downsides, though.

The money you have withdrawn as a loan isn’t appreciating. The original contributions were made with pre-tax dollars, but the money you payback is after-tax. If you don’t pay back the money it will be considered a normal distribution, and taxed and penalized.

If you leave the company, in most cases you will want to take your 401(k) with you. You can role it over into another company’s 401(k) plan program or into your own IRA at a brokerage. With an IRA, you will have more control over your account, and better investment options.

Whatever you do with your IRA, make sure that you follow all procedures to the point. You don’t want to accidentally withdraw your money and have to pay the taxes and penalties. This is a very costly mistake.

If you are an entrepreneur, you can open an individual 401(k). This gives you the option of investing thousands of dollars more than in other kinds of self-employment retirement accounts. An individual, or solo, 401(k) is available to businesses that only have the owner and spouse as employees. This means that if you work for someone else and have a business on the side, you can open an individual 401(k).

After years of conducting tens of thousands of successful 1031 exchanges, we found that there are a number of frequently asked questions related to this type of transaction

Equity and Gain

Is my tax based on my equity or my taxable gain?

Tax is calculated upon the taxable gain. Gain and equity are two separate and distinct items. To determine your gain, identify your original purchase price, deduct any depreciation which has been previously reported, then add the value of any improvements which have been made to the property. The resulting figure will reflect your cost or tax basis. Your gain is then calculated by subtracting the cost basis from the net sales price.

Deferring All Gain

Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?

Yes, the gain will be totally deferred if you:

1) Purchase a replacement property which is equal to or greater in value than the net selling price of your relinquished (exchange) property, and
2) Move all equity from one property to the other.

Definition of Like-Kind

What are the rules regarding the exchange of like-kind properties? May I exchange a vacant parcel of land for an improved property or a rental house for a multiple-unit building?

Yes, “like-kind” refers more to the type of investment than to the type of property. Think in terms of investment real estate for investment real estate, business assets for business assets, etc.

Simultaneous Exchange Pitfalls

Is it possible to complete a simultaneous exchange without an intermediary or an exchange agreement?

While it may be possible, it may not be wise. With the Safe Harbor addition of qualified intermediaries in the Treasury Regulations and the recent adoption of good funds laws in several states, it is very difficult to close a simultaneous exchange without the benefit of either an intermediary or exchange agreement. Since two closing entities cannot hold the same exchange funds on the same day, serious constructive receipt and other legal issues arise for the Exchangor attempting such a simultaneous transaction. The addition of the intermediary Safe Harbor was an effort to abate the practice of attempting these marginal transactions. It is the view of most tax professionals that an exchange completed without an intermediary or an exchange agreement will not qualify for deferred gain treatment. And if already completed, the transaction would not pass an IRS examination due to constructive receipt and structural exchange discrepancies. The investment in a qualified intermediary is insignificant in comparison to the tax risk associated with attempting an exchange, which could be easily disqualified.

Property Conversion

How long must I wait before I can convert an investment property into my personal residence?

A few years ago the Internal Revenue Service proposed a one-year holding period before investment property could be converted, sold or transferred. Congress never adopted this proposal, so therefore no definitive holding period exists currently. However, this should not be interpreted as an unwritten approval to convert investment property at any time. Because the one-year period clearly reflects the intent of the IRS, most tax practitioners advise their clients to hold property at least one year before converting it into a personal residence.

Remember, intent is very important. It should be your intention at the time of acquisition to hold the property for its productive use in a trade or business or for its investment potential.

Involuntary Conversion

What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or eminent domain action?

Involuntary conversion is addressed within Section 1033 of the Internal Revenue Code. If your property is converted involuntarily, the time frame for reinvestment is extended to 24 months from the end of the tax year in which the property was converted. You may also apply for a 12-month reinvestment extension.

Facilitators and Intermediaries

Is there a difference between facilitators?

Most definitely. As in any professional discipline, the capability of facilitators will vary based upon their exchange knowledge, experience and real estate and/or tax familiarity.

Facilitators and Fees

Should fees be a factor in selecting a facilitator?

Yes. However, they should be considered only after first determining each facilitator’s ability to complete a qualifying transaction. This can be accomplished by researching their reputation, knowledge and level of experience.

Personal Residence Exchanges

Do the exchange rules differ between investment properties and personal residences? If I sell my personal residence, what is the time frame in which I must reinvest in another home and what must I spend on the new residence to defer gain taxes?

The rules for personal residence rollovers were formerly found in Section 1034 of the Internal Revenue Code. You may remember that those rules dictated that you had to reinvest the proceeds from the sale of your personal residence within 24 months before or after the sale, and you had to acquire a property which reflected a value equal to or greater than the value of the residence sold. These rules were discontinued with the passage of the 1997 Tax Reform Act. Currently, if a personal residence is sold, provided that residence was occupied by the taxpayer for at least two of the last five years, up to $250,000 (single) and $500,000 (married) of capital gain is exempt from taxation.

Exchanging and Improvements

May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?

Although the attempt to move equity from one investment property to another is a key element of tax deferred exchanging, you may not exchange into property you already own.

Related Parties

May I exchange into a property that is being sold by a relative?

Yes. However, any exchange between related parties requires a two-year holding period for both parties.

Partnership or Partial Interests

If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?

Yes. Partial interests qualify for exchanging within the scope of Section 1031. However, if your interest is not in the property but actually an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excepted from Section 1031. But don’t be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.

Another caveat. Those individuals or groups owning partnership interests, who desire to complete an exchange and have for tax purposes made an election under IRC Section 761(a), can qualify for deferred gain treatment under Section 1031. This can be a tricky issue! See elsewhere in this publication for more information. Then, only undertake this election with proper tax counsel and only with the election by all partners!

Reverse Exchanges

Are reverse exchanges considered legal?

Although reverse exchanges were deliberately omitted from Section 1031, they can still be accomplished with the aid of an experienced intermediary. Since reverses are considered an aggressive form of exchanging, your intermediary and tax advisor should assist you with exchange and tax planning based upon successful reverse exchange case law.

The Taxation Section of the American Bar Association has submitted suggested guidelines for the IRS in evaluating reverse exchanges and issuing new regulations. Although it is unknown when the IRS will make a definitive reverse exchange ruling, one is expected in the future.

Identification

Why are the identification rules so time restrictive? Is there any flexibility within them?

The current identification rules represent a compromise which was proposed by the IRS and adopted in 1984. Prior to that time there were no time-related guidelines. The current 45-day provision was created to eliminate questions about the time period for identification and there is absolutely no flexibility written into the rule and no extensions are available.

In a delayed exchange, is there any limit to property value when identifying by using the 200% rule?

Yes. Although you may identify any three properties of any value under the three property rule, when using the 200% rule there is a restriction. It is when identifying four or more properties, the total aggregate value of the properties identified must not exceed more than 200% of the value of the relinquished property.

An additional exception exists for those whose identification does not qualify under the three property or two hundred percent rules. The 95% exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired totals at least 95% of the properties identified.

Should identifications be made to the intermediary or to an attorney or escrow or title company?

Identifications may be made to any party listed above. However, many times the escrow holder is not equipped to receive your identification if they have not yet opened an escrow. Therefore it is easier and safer to identify through the intermediary, provided the identification is postmarked or received within the 45-day identification period.