California High Speed Rail: How to Defer Paying Income Tax on the Sale of Your Property

The senior tax partner here at FLGZ, Bob Fishman, recently finished writing an article on the tax aspects of having your real property condemned by the High Speed Rail Authority to make room for California's impending high speed rail line. 

Most landowners are unaware that such sales (and sales to third parties under threat of condemnation) have serious tax implications.  First, the gain on the sale will be taxable to the landowner unless proper planning is done.  Similar to section 1031 like-kind exchanges, section 1033 of the IRC code allows landowners who have property sold in a government taking to defer the recognition of the gain if they purchase similar property.  However, there are elections and procedures that must be made under strict IRS time-tables.

If any landowner has received notice from the Rail Authority that their property is in the proposed rail path then they should consult a tax attorney and begin devising a game plan as how to best proceed.  It is imperative to realize that both pre- and post-condemnation tax planning that will need to be done to ensure that the gain is properly deferred. 

This is particularly true for landowners (and their attorneys) who are going to challenge and litigate over the "price" of the property.  While landowners should ensure that they get a fair price for their property, they and their attorneys should consult with a tax attorney to ensure that no election and other deadlines are missed. 

Mr. Fishman's article is scheduled to be published in the California Tax Lawyer magazine.  In addition, there are 40 detailed examples reference in the article that go through various permutations to demonstrate some of the nuances of section 1033.  A link to the 40 examples can be found here. 

Obama's Proposed Budget: Making the Death Tax More Deadly

So much for the "permanent" tax law changes that were just enacted a few months ago.  President Obama's new budget now includes an increase in the estate tax along with other measures to make it more difficult for families with larger estates to pass assets onto their children.

In January, the President and Republicans agreed to tax estates at 40% with an exemption of $5 million per person (indexed for inflation).  Obama's budget, however, proposes to raise the top rate to 45% and reduce the exemption to $3.5 million.  This new exemption level would not be indexed for inflation which means that over time, smaller estates would begin to be hit with an estate tax.

In addition, the budget makes proposed changes to utilizing short-term GRATs as well as making gifts of family limited partnerships--techniques which have been used for years to minimize estate and gift taxes. 

Income Earned by Tribal Members on Reservations Now CA Tax-Exempt

The Franchise Tax Board has recently announced that tribal members who live on reservations and who receive income from reservation sources are not subject to California state income tax on that income.  This position came as a response to several recent court cases where courts had to determine whether "reservation source income" should be interpreted broadly as income earned by a tribal member living and working on the reservation or more narrowly limited to income earned on the reservation and paid only by the tribe.

Thus, if a tribal member lives and works on the reservation, income earned by the tribal member, whether paid by the tribe or any other third party, is California tax-exempt. 

If tribal members have been paying California taxes on this income, they are entitled to refunds going back approximately four years.  

Why Mark Zuckerberg May Never Pay Taxes Again: Buy, Borrow & Die

CNN op-ed:  Zuck Never Has to Pay Taxes Again, by Edward J. McCaffery (USC):

So, you think you have it bad this tax season. Have you heard that Facebook founder Mark Zuckerberg will pay between $1 billion and $2 billion in taxes? That sounds like a tough pill for anyone to swallow.

But it is premature to start a pity party for Zuckerberg. The twenty-something billionaire reaped large financial gains from exercising the stock options that triggered his tax bill, and he has benefited from favorable tax rules along the way. Even better, Zuckerberg will survive his encounter with the tax man in a position to never have to pay taxes again for the rest of his life. ...

The truly rich do not have to pay any tax once they have their fortunes in hand. They can follow the simple tax planning advice to buy/borrow/die: Buy assets that appreciate in value without producing cash (like shares of Internet stocks), borrow to finance lifestyle, and die to pass on a "stepped up" basis to heirs wherein the tax gain miraculously disappears.

Zuckerberg now has $11 billion or more with which to play this game. He can live off money borrowed against that huge sum (rest assured, he can get good interest rates), never having to sell any asset at a gain, and never having to get an "ordinary" salary again.

(Hat tip: Tax Prof Blog)

The Unflappable Iron Lady

In honor of Margaret Thatcher's life I have attached a short clip of a British House of Commons debate with the Iron Lady taking on any who wished to step into the ring with her.  Too bad we don't have any similar forum here in the U.S.

California Has A Negative Net Worth in the "Hundreds" of Billions of Dollars

The Sacramento Bee has a headline that reads: "State auditor: California's net worth at negative $127.2 billion".

As troubling as that headline is, the most startling material is buried in the last paragraph of the article:

The list of long-term obligations did not include the much-disputed unfunded liabilities for state employees' future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care. The Governmental Accounting Standards Board and Moody's, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California's, it could push its negative net worth down by several hundred billion dollars.