FLIP-CRUT Basics – Unmarketable Assets Defined

In a prior post, we discussed the FLIP-CRUT concept in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Standard Charitable Remainder Trust at a fixed percentage distribution.

We also discussed various Treasury Department definitions of Triggering Events, which are deemed not to be under the control of the Trustee or any other person.

One of the most common types of Triggering Events is the sale of Unmarketable Assets, such as the sale of a Personal Residence, other real or commercial property, securities or business holdings that are not publicly traded, and lack any formal marketplace to value and sell.

In Treasury Regulations §1.664-1(a)(7)(ii), the definition of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. For example, unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Using a FLIP-CRUT to Sell Appreciated Real Estate

Why this definition is important:

If you have a piece of real estate that is highly appreciated in value, and selling it outright would trigger substantial capital gains, a Charitable Remainder Trust is an excellent way to defer the tax on sale.

If you contribute the real property to a Charitable Remainder Trust after a binding commitment to sell exists, then the IRS will disallow the deduction based on the Step Transaction Doctrine.

However, placing real property in a Standard Charitable Remainder Trust – with its fixed annual commitment to pay the income to the Donor – may also not be feasible.

If the real property takes a longer time to sell (certainly more than a year) then a Standard Charitable Remainder Trust will not work.

This is why the Treasury Department’s inclusion of Real Property as not readily marketable is critical.  It allows you to contribute the asset immediately, take the appropriate deductions, and then convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to accomplish the annual payout requirements.

Therefore, the FLIP-CRUT is the preferred vehicle when selling appreciated assets that are not readily marketable, such as real estate.

Contact a Planned Giving Attorney with Ainer and Fraker 408-777-0776 right away to learn more about the incredibly powerful tax benefits of a FLIP-CRUT.

Planning on Selling Your Home?

San Jose Tax Lawyers

Each individual taxpayer, regardless of age, is allowed to exclude up to $250,000 of gain from the sale of their main home if certain requirements are met. A married couple that meets the requirements can exclude up to $500,000. To qualify for the exclusion, a taxpayer must own and live in the home as their main home for two of the prior five years immediately before the sale (under certain circumstances the five-year period is extended for military personnel and intelligence community employees). Short temporary absences, such as for vacation or other seasonal absence (even though accompanied with rental of the residence), are counted as periods of use.

If the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the two-year use test. Any gain in excess of the excludable amount is taxable.

If the home was previously used as a rental, second home, used by a relative, unoccupied, etc., and converted to the taxpayer’s primary residence, the gain must be allocated between gain attributable to non-qualified use after December 31, 2008 and home sale gain.  Non-qualified use is any use other than as a home between January 1, 2009 and the time it was converted to the taxpayer’s home.  Only home sale portion of the gain qualifies for $250,000/$500,000 gain exclusion.

The exclusion can be used over and over again, as long as two years have elapsed between sales and the taxpayer otherwise meets the ownership and use tests. If there is a loss from the sale of your home, that loss is not deductible. Even if the taxpayer doesn’t qualify for the full exclusion, he or she may still qualify for a partial exclusion if the home is sold due to a job-related move, health reasons, involuntary conversions, death, loss of employment, divorce, or other unforeseen circumstances. Also, in divorce situations where one spouse remains in the home for an extended period after the divorce, the spouse who no longer lives in the home may still qualify for the exclusion based on the other spouse’s use period. If claiming, or have previously claimed, a home office deduction for an office that is an integral part of your home, the IRS has taken a liberal approach and allows the gain from the office portion to also be excluded, except for home office depreciation claimed after May 6, 1997. That depreciation, to the extent of any home sale gain, is taxable at 25%. However, this liberal treatment is not extended to gain derived from a portion of the property that is separate from the dwelling and that was used for business. The exchange of a home can qualify for both the §121 home sale exclusion and §1031 like-kind exchange deferral treatment. This can occur where the property was used as a principal residence and a business consecutively (e.g., use as a principal residence followed by rental of the property) or concurrently (a portion of the home used as a principal residence and a portion used as a home office).

A beneficiary who inherits the residence of a decedent generally (except for decedents dying in 2010 where the executor opts to use a carryover basis regime) receives a step-up or step-down in basis based upon the value of the property at the date of death, and since it is inherited property, it is treated as held for long-term.  Generally, a beneficiary will sell the residence through a broker and will have substantial sales costs. These sales costs quite often translate into a loss on the sale (sales price – sales costs – inherited basis) if the beneficiary does not use the property for personal uses.

Assisting Your Child in Buying a Home

Oakland Tax Attorneys

If you are a parent who wants to assist your child in obtaining his or her first home, there are a number of ways you can help.

  1. Help with the down payment – Real estate lending laws generally will not allow the parents to loan the down payment on the home, since that is considered part of the debt. However, you can make an outright gift of the down payment. Just keep in mind that to avoid reducing your lifetime gift tax exclusion and filing a gift tax return, the gift cannot exceed the annual $13,000 gift tax exemption. If you are married, the limit could double to $26,000 since both you and your spouse are allowed a separate $13,000 exemption. If your child is married, the gift limit could double again to $52,000, since the annual exemption limit applies to each donee, not the donor.
  2. Buy the house in your name – Let your child make payments to you in order to buy the property. Over time, in most cases, the property will have appreciated enough in value to provide the necessary equity required for your child to obtain a favorable bank loan.
  3. Slowly gift the home to the child – If you are financially secure, you could purchase the home and then gift a portion of the property to your child each year. By making these gifts over a period of time, you are able to take advantage of the annual gift tax exemption rules.

Sometimes, an elderly parent will transfer the title to their home to their children. Although this might seem to be a good idea at the time, it generally is not for the following reasons:

  • If the home title is transferred to a child while the parent is still living, it constitutes a gift and a gift tax return will generally need to be filed.
  • The tax basis (point from where gain or loss is measured) will be the parent’s basis. Had the child, instead, inherited the home, the child’s basis would be the fair market value of the home at the parent’s date of death, which means the child would have no taxable gain if the home is immediately sold. On the other hand, if the home had been previously gifted to the child, the gain would be measured from the parent’s basis.

Is a Reverse Mortgage Right for You?

San Jose Tax Attorneys

In recent months, we have seen a growing number of celebrities on TV promoting reverse mortgages. In today’s economy, many retirees are faced with mounting debt and inadequate incomes. For many, their home is their most valuable, and perhaps only, asset, but it is also their home and they really don’t want to sell it.

An option is the “reverse mortgage,” which allows homeowners to borrow against the equity they have built up over the years. The loan is not due until the homeowner passes away or moves out of the home. If the homeowner dies, the heirs can pay off the debt by selling the house, and any remaining equity goes to them. If at that time the loan balance is equal to or more than the value of the home, the repayment amount is limited to the home’s worth.

To be eligible for this loan, the borrower must be at least 62 years of age and have equity in the home. The loan amount will depend on factors such as the borrower’s age, the value of the home, interest rates and the amount of equity built up. The borrower has the option of taking the loan as a lump sum, a line of credit or as fixed monthly payments. In addition, the money can be used for any purpose, without restrictions imposed.

Reverse mortgages are considered loan advances and not income, so the amount received is not taxable. The interest accrued on a reverse mortgage is not deductible until it is actually paid, which in most cases is when the loan is fully paid off. The interest deduction may also be limited by the general home mortgage deduction rules.

A reverse mortgage can help provide financial security to many seniors so that they can live a comfortable life. But individuals are cautioned to explore other alternatives as well before entering into a reverse mortgage. It may be a solution for some, but not necessarily a panacea for all. If you are struggling with your finances, carefully explore your options, including the possibility of a reverse mortgage.

Discarding Tax Records – The Big Problem

Bay Area Tax Lawyers – So what’s the problem with discarding old tax records?

The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

  • Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
  • Stock and mutual fund statements – Where you reinvest dividends. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale.
  • Tangible property purchase and improvement records – Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

Click the following link to find out more about Spring Cleaning for Your Taxes!

Next Steps My Company Defaults on a Business Loan?

Bay Area Tax Attorneys – In our previous blog post entitled, Have You Defaulted On a Business Loan, we discussed how defaulting on a business loan can affect the well-being of your company. To learn about strategies on what steps to take next and how to avoid a loan default, refer to the following:

Negotiate terms with your lender. If you default, you can try renegotiating the terms of your loan contract with your lender. While lenders may not always be willing to renegotiate, if you are successful you can minimize the damage to your business’s financial health. Ways to reduce the negative impacts of the loan default include:

 Changing the terms of payment, e.g., paying less per installment but for a longer period of time
• Paying less over more time with a higher interest rate
• Asking your lender to forgive a portion of your late payment and agree to pay on time in the future

Consider government debt relief options. There are some government-backed options for managing debt that you can consider, such as the American Recovery and Reinvestment Act (ARRA), ARC Loan Program. and SBA Loan Program. Read more about Managing Small Business Debt through Government Loans and Refinancing Lifelines here.

Cut costs. Minimize your expenses. Though this may not be an ideal situation, you can consider laying off part of your staff and downsizing your business, among others.

Sell business assets. Liquidating business assets or converting your assets into cash may temporarily help you pay off your loans until you can afford to pay your bills on time again.

Consult a lawyer. Consulting a lawyer about your options may also help you through the process. Learn how to find legal representation for your small business here.

What does this mean for the future of my business?

Difficulty finding new loans. After you default on one loan, it will make it much more difficult to find a new loan. If loans are the chief means of financing your business, then you will be running into some difficult hurdles. You may want to start looking into other methods of funding your business. Read more about alternative financing solutions in I Need Money- Where Do I Get It?

Bankruptcy. If your business cannot repay its loans, you may need to file for bankruptcy. Read more about filing for bankruptcy on our blog Bankruptcy Options for Small Business Owners.

What Can I Do to Avoid a Loan Default?

Of course, the best way to avoid defaulting is to pinpoint the pitfalls of bad loans and avoid them at all costs. To avoid loan defaults, business owners should remember the following best practices:

• Have a concrete payment plan before you decide to borrow
• Do not offer collateral and property in your contract that you cannot afford to lose
• Read the fine print and thoroughly understand the terms of the contract

Special Tax Treatment for Long-Term Gains

Saratoga Tax Lawyers  – Gains from the sale of capital assets such as stocks and other securities held over a year are referred to as long-term capital gains, while those held for shorter periods are called short-term. Long-term gains enjoy special tax treatment while short-term gains are taxed as ordinary income.

It is frequently asked if it is worth the risk holding a security long-term versus cashing in on short-term gain. Of course, no one has a crystal ball that can predict the future performance of a particular stock or the market in general, but we can provide some guidelines that will help you with your risk-reward analysis. The following chart illustrates the difference between short- and long-term capital gains rates and the net savings based on a taxpayer’s tax bracket. Keep in mind that your tax bracket is also a function of your total income including the capital gains. Therefore, the larger the gain, the greater the chance you will move into a higher tax bracket.

Tax Bracket
Net Long-Term Savings


* As part of the American Taxpayer Relief Act of 2012, a 39.6% tax bracket was added for higher income taxpayers along with a 20% tax on capital gains to the extent the taxpayer is in the 39.6% tax bracket.

As example, suppose you are in the 28% tax bracket and have a potential $10,000 capital gain. The tax for short-term gain is 28% or $2,800. On the other hand, if you held the asset for over a year, the gain would be taxed at 15% or $1,500. Your savings would be $1,300.

Now it is up to you to decide whether the savings of $1,300 is worth the risk of holding the stock until it qualifies as long-term.

IRS Phishing Scams

San Jose Tax Attorneys – You should know that the IRS does not initiate contact with any taxpayer via e-mail or social media to request personal or financial information. In order to avoid tax-season scammers, take note of the following:

  • The IRS never asks for detailed personal and financial information like PINs, passwords, or similar secret access information for credit cards, banks, or other financial accounts.
  • The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the site.
  • If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS, you should immediately contact this office before providing any information. You should do this whether you suspect the contact is legitimate or not. You can also contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you.
  • You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website for Reporting Phishing: to get details on how to report scams and helpful resources if you are the victim of a scam. You can report any bogus e-mails by forwarding a suspicious email to phishing@irs.gov.

Identity Theft is a Growing Problem – When a taxpayer’s ID has been stolen, the IRS will issue the individual a special number with which to file a return. The victim gets a new one each year for three years to provide time for the taxpayer to correct the ID theft damage. In 2012, the IRS issued 250,000 of these special numbers and for the 2013 filing season it issued 770,000—an increase of more than 300%. That is why it is so important for you to protect yourself from the nightmare of ID theft.

To learn more about how to protect yourself from ID theft, visit the following IRS webpages: Identity Protection Tips and Identity Protection Home Page.

ATTN: Bogus IRS Emails

Saratoga Tax Attorneys – Every tax-filing season, the scammers and ID thieves try to sucker people into providing personal and financial information through the use of phony e-mails.

The IRS receives thousands of reports every year from taxpayers who received emails out of the blue claiming to be from the IRS. Scammers use the IRS name or logo to make the message appear authentic in an effort to get you to respond and then to trick you into revealing your personal and financial information. The criminals use this information to commit identity theft or steal your money. It is a scam known as “phishing” and we do not want you to become a victim.

You should know that the IRS does not initiate contact with any taxpayer via e-mail or social media to request personal or financial information. DO NOT:

  • Reply to the message
  • Open any attachments (attachments may contain malicious code that will infect your computer)
  • Click on any links in a suspicious email or phishing website and enter your confidential information


Key IRS Forms

IRS Links Courtesy of Ainer & Fraker, LLP