Did You Know? Commonly Asked Tax Questions

First of all, you may be thinking, “Why would you ever want to do that?” Sometimes in transactions (such as a merger or acquisition), it is desirable to have management exchange otherwise vested equity for equity that vests over time in order to retain the key individuals. Aside from the obvious business considerations, the first thought that would likely occur to the holder of the equity is that this arrangement would convert the capital gain inherent in the equity to
Continue Reading Did you know you can impose vesting restrictions on otherwise fully vested equity without losing the beneficial capital gains treatment?

We are all familiar with common business structure in which the operating business is owned by the individual(s) through one entity, the real estate is owned by the same individual(s) through a separate entity and the operating business pays rent to the real estate entity. This is a great method of protecting the value of the real estate from the operating risks of the business. It does however create a self-rental situation under the Internal Revenue Code.

Under the self-rental
Continue Reading Did you know under the ‘self-rental’ rule, income from rental activity is deemed active income and losses are deemed passive?

You’re probably familiar with rep and warranty insurance in M&A transactions, but did you
know that you can get insurance against an undesired tax result in a transaction?

Tax insurance can apply to almost any transaction where there is a “known” tax question, but the result is uncertain. Tax insurance can cover a number of circumstances, including:

  • Issues that arise during diligence in an M&A transaction and as a “known” issue,
    are no longer covered by reps/warranties insurance (e.g., failure

Continue Reading Did you know you can buy tax insurance for transactions?

The IRS, in recent guidance, concluded that the “rents” from many short-term rental arrangements are subject to U.S. self-employment taxes (“SE Tax”). In this guidance, the IRS ruled that a taxpayer was subject to SE Tax in the following situation.

The taxpayer (i) purchased real estate located near a beach, (ii) rented it to third parties., (iii) average rental was less than seven days; and (iv) materially participated in the rental activity (i.e., it was not operated by a management
Continue Reading Did know you may be able to reduce self-employment tax on short-term rental income?

As noted in a prior “Did You Know”, investing in real estate through a self-directed IRA can be a great strategy for increasing returns on that financial resource. However, IRAs, which are generally not taxed, are subject to income tax known as UBIT (unrelated business income tax) on certain types of income from real estate investments. The tax is imposed at the highest marginal rate (37%).

One way to reduce UBIT liability in a self-directed IRA is to invest through
Continue Reading Did you know you can avoid UBIT on self-directed IRA investments by investing through a blocker?

The recent U.S. Supreme Court ruling in Bittner v. United States (No. 21-1195 (U.S. Feb. 28, 2023)) significantly impacts U.S. taxpayers with “undisclosed” offshore bank and other financial accounts. Under the Bank Secrecy Act (the “BSA”), U.S. persons that own interests in (or have certain authority with respect to) foreign bank or financial accounts with a balance in excess of $10,000 at any time during the year generally must disclose the existence and balance of such accounts to the U.S.
Continue Reading Did you know a recent Supreme Court ruling dramatically reduced penalties for non-willful failures to report foreign bank accounts?

Taxpayers may take a charitable income tax deduction when they place a conservation easement on their property for the benefit of a charity. The amount of the deduction is equal to the excess of the value of the land without the easement (at its highest and best use) over the value of the land with the easement. A conservation easement is a legal agreement between a landowner and a charity or governmental entity that permanently limits the uses of the
Continue Reading Did you know a charity that receives a donation of a conservation easement could be liable for prohibited tax shelter penalties under recently proposed regulations?

The purchase price on an acquisition of the stock or assets of a business often includes an “earn out” component. Under the earn out, additional installments of purchase price are paid if the business achieves certain agreed upon metrics. Earn outs may be paid in either cash or stock. Whenever a payment on a sale transaction is to be received in the future, a portion of that payment is taxable as interest. The buyer and the seller may have explicitly
Continue Reading Did you know you can avoid converting capital gain to interest income on a stock earn out?

The pandemic has created the opportunity for people to work remotely and 10,000 baby boomers retired each day in 2022. It is not uncommon for people to become “digital nomads” and travel around the country or internationally in an RV or from one Airbnb to another. Many people may see this as an opportunity to reduce or eliminate their Minnesota income tax liability. (Minnesota was ranked 5th highest for state incom tax by Wallethub in 2021).

Under Minnesota law, once
Continue Reading Did you know in order to change your tax residency from Minnesota you need to stop someplace else for a while?

The tremendous appreciation in real estate values and rents over the last five years or so has made real estate investments much more popular to the general investing public. Promoters of real estate investment partnerships often advise potential investors that they can make such investments through their self-directed IRAs. While this allows individuals to tap these financial resources, it is important to be aware that such investments could give rise to taxable income to the IRA.

IRAs, which are generally
Continue Reading Did you know investing in real estate through your self-directed IRA could result in taxable income?