Tax Services Orange County

Our Specialty Tax Services in Orange County, CA

In addition to the many international tax services we provide at Evolution Tax and Legal, our Orange County tax attorneys also provide the following services to our clients.

Orange County Specialty Tax Services

Life Insurance Settlement Review

Are you a business involved in the purchase of life insurance policies? Or are you an individual looking to sell your life insurance policy? Our life insurance settlement attorneys are well versed in the tax analysis and structuring of life insurance policy purchases and sales.

For policyholders, proceeds paid out on a life insurance policy because of the insured’s death are generally not taxable. However, if the life insurance policy is transferred to another person for cash or other property, the income is recognized by the person who sells their policy. While this is the general rule, there are exceptions for those who are terminally or chronically ill, or for those who sell to a viatical settlement provider.

There is a plethora of IRS guidance on the amount, character, and type of income that is recognized by the person selling their life insurance policy. The taxation of proceeds on the sale of a life insurance policy depends on the following:

  • Whether the policy is surrendered or sold
  • The amount of premiums paid on the policy
  • The policy’s historical cost of insurance
  • The historical and currently outstanding loans against your policy. This is a complex calculation and requires the review of a versed tax advisor to verify the tax results of a sale.

In addition to providing these services, we can help structure a sale of a policy in a manner that is tax-efficient for the policyholder receiving the proceeds on the sale.

On the other side of the transaction, the purchaser of a life insurance policy may be subject to tax when the insured passes and they are in receipt of the policy’s proceeds.

Generally, when a policy is transferred for money or other property, the purchaser must include insurance proceeds in their taxable income insofar those proceeds exceed the amount of the consideration paid for the policy. The consideration is the sum of the amount paid to the insured for their policy, plus the amount of premiums thereafter paid to keep the policy in effect. This set of consequences applies in the scenario that a policy is absolutely transferred to another policy—for example, a pledging of a life insurance policy does not result in these tax consequences. However, there are certain scenarios where the purchaser or recipient of the policy is not subject to recognizing income on the later payout of insurance proceeds. Generally, this is the case when there is a “basis” carry over to the purchase (i.e. such as a gift of the policy or transfers pursuant to a divorce settlement), or a transfer of the policy to the insured partner or partnership or corporation of which the insured is an offer or shareholder.

These exceptions allow for unique planning opportunities. If you are an individual or a business involved in the purchasing of life insurance policy, our attorneys can assist with the tax analysis of the insurance payout, as well as helping structure purchases or transfer to mitigate taxes due to the payout of the insurance policy.

Opportunity Zone Tax Attorney 

Opportunity Zones—probably the most used word of 2018 in terms of the real estate industry. Opportunity zone investing presents a very unique opportunity for investors, individuals, and businesses alike to defer paying tax on capital gains earned in a given year, by reinvesting such proceeds into government-designated census tracts.

Three Main Benefits of the Opportunity Zone Investment Strategy:

(1) First is the deferral of your capital gains that you timely reinvest into an “Opportunity Zone Fund” until the earlier of the time you sell your interest in such fund or December 31, 2026;

(2) Second is the ability to reduce the total amount of tax you will have to pay on the capital gains reinvested when they later become recognizable—this can be either a 10% or 15% reduction depending on your investment timing;

(3) Third, final, and most importantly is the opportunity to avoid paying tax on the appreciation of your initial investment into an “Opportunity Zone Fund”, so long as you hold onto your investment in the fund for 10 or more years.

Requirements of the Opportunity Zone Investment

While the benefits of this program are immense, the requirements to be eligible for the program’s benefits are nuanced and not well understood by non-tax accountants and attorneys.

First, it is a misnomer to think that you can swoop up a parcel of property or begin a small operating business in an opportunity zone and automatically qualify for the program’s benefits. That is very far from the truth. Opportunity zone investors must have a qualifying capital gain, of which they make a qualified reinvestment within 180-days of recognizing such gain. Additionally, the reinvestment must be into an “Opportunity Zone Fund”, which is a corporation or partnership that must meet a myriad of annual and semi-annual testing thresholds. 

The most important item for investors to glean from this short synopsis is that not all capital gains qualify for this treatment, the reinvestment must be timely (which is also subject to a number of exceptions), and you must truly be investing into a qualified “Opportunity Zone fund”, which requires due diligence on your part to ensure that it truly qualifies.

On the other side of this equation are the requirements imposed upon entities that wish to qualify as an “Opportunity Zone Fund”. These funds must meet three general requirements—

(1) The entity must be self-certified as qualifying as an “Opportunity Zone Fund” which requires the filing of Form 8996 with a timely filed tax return;

(2) The entity must be organized as a partnership or a corporation;

(3) At least 90% of the fund’s assets must be invested in “qualified opportunity zone property”.

The first two qualifications are rather self-explanatory, it is really the third that requires the most strategy and planning to meet. This 90% test is based upon a bi-annual test that averages the percentage of assets held by the fund as “qualified opportunity zone property”. The value of the assets for purposes of this 90% test can be based upon either the values provided by an audited financial statement or their tax cost basis.

Specialty Tax Services Orange County

What Is a “Qualified Opportunity Zone Property”

Well, it can be many things but includes the following:

  • The stock or ownership interests of a qualifying subsidiary or tangible property used in a trade (or business if it was acquired after 2017)
  • Its original use commenced with the fund or the fund “substantially improved” the property
  • The property was primarily located in a designated opportunity zone

Each of these items—qualifying subsidiary stock or ownership interest and qualifying tangible property—have their own myriad of qualifications and requirements that need to be met in order to qualify for purposes of the 90% asset test applicable to an “Opportunity Zone Fund”.

Our experienced attorneys at Evolution Tax and Legal are well versed in helping those interested in investing and taking advantage of the opportunity zone program. Our lawyers can review the capital gains you have received, determine whether they qualify or not for purposes of the program, and help with the due diligence of your fund of choice to ensure that you are placing your investment with a qualifying fund.

Additionally, our team has vast experience in structuring funds that would otherwise qualify as an “Opportunity Zone Fund” and take on investor dollars to reinvest into one of these qualifying areas. Please contact our team if you are interested in learning more about this “opportunity.”

1031 Tax Deferred Exchange

A 1031 exchange is a heavily utilized tax deferral technique. It allows individuals (or other qualifying entities) to reinvest capital gains derived on the sale of real property into other like-kind real property, such that no gain or loss will be recognized.

1031 Exchange Rules

This tax-deferral technique is better known as a “like-kind” exchange due to its requirements. The person selling their real estate must invest their proceeds into “like-kind” real estate used or held for investment or business purposes.

In order to take advantage of a 1031 deferral, the person selling the property must reinvest their proceeds from the sale of the first property into the “like-kind” second property within 180-days of closing on the first property’s sale. However, what is also uncommonly known is that the second, “like-kind” property (i.e. the replacement property) must be identified within 45-days of the close of the first property’s sale.

If the replacement property is not properly identified, then the benefits of the “like-kind” exchange are thrown out of the window, and the gain on the sale of the first property must be recognized.

In addition to the requirements above, a qualifying exchange accommodator must be used to facilitate the transaction. If not, the proceeds obtained by the seller for the first property will have to recognize gain and pay tax on the proceeds paid. The qualifying exchange accommodator is essentially a middleman who takes bare legal title to the property being sold prior to its sale. Upon sale, the proceeds are paid to the qualifying exchange accommodator, who then holds onto such proceeds and purchases the replacement property on behalf first property’s seller.

In addition to meeting the formalities above, there are nuances on the amount of gain deferred and/or recognized on the sale of the first property. Generally, if the seller is in receipt of any cash or other property besides the ultimate replacement property, they will have to recognize gain on the amount of cash or other non-qualifying property received in the transaction.

Additionally, if the seller takes on less debt on the replacement property than they were obligated to repay on the first property, the seller again will have to recognize gain on this difference because of the transaction.

Contact a 1031 Exchange Tax Attorney

To properly navigate these formal requirements and ensure that you will not recognize gain on a 1031 transaction, a tax professional should be consulted.

The experienced attorneys at Evolution Tax and Legal are well versed in structuring and reporting these transactions to the IRS and respective state taxing authorities. Our attorneys have aided clients in structuring and implementing 1031 exchanges for investors, businesses, and even in the context of liquidating estate distributions.

If you are interested in learning more about a 1031 exchange and how we can assist you to implement a qualifying transaction, contact the team at Evolution Tax and Legal for FREE consultation

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