Real Estate Update

John Lane asked:








There are times when a property owner is unable to pay the obligation in property tax. When this happen, a property owner becomes a delinquent taxpayer and a governing authority is in charge of collecting the taxes. However, if the authority is not able to collect the required property taxes, they will opt to take the final step to collect the taxes. The public tax lien auction is the final step that will take the delinquent properties to be sold. Tax lien auction is an auction ordered by the court depending on the nature of sales in the form of tax lien certificates or tax deed sales.  Tax lien auction in the form of tax lien certificate entails selling of certificates to assert the total sum of taxes as well as the administrative interests and charges.

The required property tax will be achieved through a tax lien auction and the delinquent properties are offered in the amount due for the taxes, interests and fees. Tax lien auction is an open sale that is why participants may tender their bids over and under the amount required for the tax of delinquent properties. The drawback is that the buyer will not be able to recover or refund the overbid.

Purchasing a tax lien certificate during a tax lien auction will require the buyer to pay against the required property taxes incurred by the delinquent taxpayer. However, the delinquent taxpayer along with the interest charges will pay the amount back to you that are about 16-18%.  This kind of auction allows the buyer the possibility to acquire the property in case of fail to repay by the delinquent taxpayer. In addition, the buyer can also obtain higher percentage of interest when repayment is made.

A referee appointed by the court conducts the tax lien auction. As the tax lien auction starts the referee announces the terms of sale and the required amount of bidder’s deposit. Just like any procurement bidding process, the prospective buyer or bidder is required to pay 10 percent of the bid amount in form of certified check payable to the referee.  The delinquent properties sold in a tax lien auction are sold where is and as is. This means that a bidder has no right to investigate the property prior to the auction schedule as well as inspect the interior of the property. Although the property is deemed tax lien foreclosure, it is not allowed to enter the property and do some inspection. This may seem that your bid is in uncertainty because whatever the condition of the property you are not allowed to investigate and inspect.

There are many tax lien listings offered by different websites that allows the prohibition of keying the data for the buyer or bidder. This will also let the buyer to choose the right lists that qualifies to the criteria.

Ajay Albertson asked:




A 1031 exchange is a tactic used by real estate investors to indefinitely defer tax liability on a property’s sale. This is achieved by giving the rights to a property one would like to sell to an intermediary, who holds on to the funds gained from the sale of the relinquished property and uses them to buy a replacement property that complies with the rules set out in Section 1031 .

While the present popularity of the 1031 could lead you to believe that it only recently came on the scene, this is untrue. Actually, the history of the 1031 extends all the way back to 1921, although at its conception, it was quite a bit different than what we today think of as an exchange. Section 1031 really came into its own in the 1970s, which saw a host of significant modifications in the manner that exchanges were regulated. These modifications paved the way to a farther-reaching conception of the process and also generated greater interest among property investors.

The indefinite capital gains deferral an exchange grants to the taxpayer may, at first, seem to be a sort of gift from the US government, however it is, in reality, closer to an interest-free loan, because there is an expectation that the investor will “repay” the extra funds gained from the deferral by paying capital gains taxes upon the eventual sale of a replacement property. In addition, this interest free loan may be kept indefinitely; an investor can choose to conduct any number of exchanges before ultimately deciding to sell outright, at which point capital gains taxes must be paid.

The 1031 exists as a mutually advantageous agreement between investors and the U.S. government, providing a benefit for the U.S. economy as well as the individual taxpayer. By viewing the transfer of value in an exchange as representing a continuation of a preexisting investment rather than as a separate transaction liable for taxation, taxpayers are given the opportunity to move their funds to the most profitable possible investments, which, in turn, boosts the economy by bolstering job growth.

Like anything else, the 1031 exchange has its detractors. Some advocates of change in Section 1031 will argue that the tax free profit gained by to the taxpayer in a 1031 lends them an unreasonable advantage. Another frequent concern is that the strict time limits attached to some aspects of the exchange procedure may engender a frantic rate of buying, resulting in an increase in the cost of replacement properties. These complaints, however, are only loosely based in reality, and the odds that the 1031 exchange procedure will see noteworthy changes in the near future are quite slim. In general, most will agree that Section 1031 is greatly helpful to all parties involved, allowing taxpayers increased profits on the sale of property while also encouraging job growth and consequently promoting the greater good of the country as a whole. There is little doubt that the 1031 will be a mainstay of the property investment business for years to come.

Jake Trump asked:








There are services offered by many reliable websites one is the government tax liens. This kind of service gives the buyer a chance to claim for money that is higher than the other government tax liens. It is being secured by the real state as well as the mortgages. The government tax liens list provided gives the buyer the capability to filter and sort the list suitable for your own criteria. The list spares you from visiting a courthouse that is a requirement in processing the required tax.

Every government or state requires every property owner to pay property taxes. The tax is computed based on the value of the property owned. Government tax is also known as real state taxes. More often than not, some property owners were unable to comply with the obligation of paying property tax. Such situation will put the property into a delinquent position. Appropriate government authority is in charge for collecting unpaid property taxes if the property delinquency is established. Thus, tax auction or tax sale is conducted to achieve the collection.

Each government has a separate set of laws governing collection of delinquent taxes. The local government most often is in charge of collecting these taxes because it is used for government projects and other improvement. Great deals can be found at government tax sales especially if the property is foreclosure. However, you must keep in mind these delinquent properties may need some fixing.  Often times, buyers get the good value for money in purchasing delinquent properties. If you want to buy a property in this market you must understand the circumstances. You must be well informed and prepared to find the best bargain.

Just like the tax lien auction, government tax liens are categorized as tax lien certificates and tax deed sales. Under tax lien, the buyer purchases the rights to the tax lien. In this instance, the homeowner owes you the money but there is no transfer of the property yet during the auction. Nevertheless, the delinquent taxpayer is required to pay you back the amount of the lien as well as the charges and interest. The deed of the delinquent property can only be awarded to the new owner of certificate just in case the delinquent owner fails to pay within the given period.

On the other hand, a buyer actually purchases the rights to the properties once you have entered in tax deed sales and eventually ownership is awarded to the buyer. The minimum bid is computed on the total sum of delinquent tax liable and the administrative interest and charges incurred. The highest bidder is awarded the deed of the property outright during the auction. However, there are also some rules to be followed regarding the restrictions on possession.

Engaging in government tax liens requires a buyer to be armed with more knowledge. You should look for information regarding the properties you identified to purchase without inspecting the interior of the property. Check for the market value of the property so that you will know if it is worth your money.

Kim Finley asked:




Important Things to Know When Filing a Tax Extension Form 4868

Are you one of the millions of taxpayers who have not yet filed a tax return? Do you wish you had more time? The April 15th deadline is right around the corner but there is an easy way for you to get an extension of time for filing your tax return.

Filing a Tax Extension Form 4868 with the IRS will automatically give you until October 15th to file your tax return. For US citizens and alien residents abroad, you will need to file IRS Form 2350.

This is great for taxpayers who have complex tax situations or for those who are still waiting for all of their tax statements. The deadline to submit Automatic Extension Form 4868 is April 15th.

Please note, extension Form 4868 will not grant you more time to pay taxes owed. If you owe money on your tax return, the balance is still due on April 15th. The IRS will calculate penalties and interest on any outstanding balance if you do not pay in full by April 15th.  

In cases where a taxpayer does not file a past due return and does not contact the IRS, a substitute return will be prepared by the IRS based on information received from other sources. This may overstate your tax liability because this substitute return will not include any additional exemptions or expenses you may be entitled to. Bottom line: You will still need to pay any taxes owed by April 15th to avoid any penalties and interest.

Where can you go to file Form 4868? The easiest way would be to use an online tax software provider to prepare and submit the Form 4868 electronically.  There are some sites, such as www.esmarttax.com, that will allow you to e-file the Form 4868 for free.  There is a free version of the eSmartTax.com online tax software that you can use to estimate if you owe any taxes. You will also be given the option of paying any estimated taxes owed using direct debit from your bank account. The e-file method of submitting your Form 4868 and any necessary tax payment will avoid the risk of loss or theft in the mail.

Visit www.esmarttax.com or www.irs.gov to learn more about how you can easily file an Automatic Extension Form 4868.

Harris R. Sherline asked:




With the due date for filing individual income tax returns having recently passed, this seems like a good time to reflect on the annual ritual of self-flagellation that Americans are forced to endure at this time of the year.  The April deadline has become a sort of rite of passage for citizenship, although as things stand today almost half of all workers don’t pay any income tax at all.

Following are some random facts (in no particular order) about our income tax laws, who pays and who doesn’t, and the impacts our system of taxation has on the nation’s productivity.



When the 16th Amendment to the Constitution established the federal income tax in 1913, the intent was to tax only the very rich.  Rates began at 1% and increased to 7% for taxpayers with income in excess of $500,000.  Less than 1% of the population paid any income tax at all, compared with almost 50% of taxpayers paying as much as 35% of their taxable income today.

The top 5% of wage earners pay over 50% of total individual income taxes, while the top 10% pay almost 66%, and the top 50% pay approximately 97%.  Translation: Just half of all taxpayers pay almost 100% (96.54%) of all income taxes, while almost 50% pay no income taxes at all.

The Internal Revenue Service (IRS) has approximately 115,000 employees (FTEs or full-time equivalents), and a total budget of $11.6 billion.

Estimates of unreported commercial activity in the U.S. amount to as much as one trillion dollars a year, and the IRS Oversight Board report for fiscal 2007 notes that the tax gap, “the difference between what is owed and what is collected…is estimated at $345 billion of lost revenue annually.”  Question: If it’s an underground economy, how does the IRS know how much income is not reported?

The Cato Institute reported that businesses and individuals now waste over 6.4 billion hours on federal tax compliance activities each year, which the Tax Foundation estimated amounted to $265.1 billion in 2005.  That’s equivalent to over three million people working full time, just to deal with tax compliance.  This amounted to a 22% tax compliance surcharge on the total amount collected through the tax system.

In the 1920s the federal tax code was comprised of about 40 pages of rules. Today, according to the Virginia Chapter of NRSTA (Interesting Tax Facts), the tax code, regulations and IRS rulings now require over 66,000 pages to document. Between 1986 and 1996, there were over 5,000 changes in the tax code. In 1996 alone over 700 pages of tax law changes and regulations were adopted by the IRS.

When the General Electric Co. filed the corporation’s tax return electronically, it took 24,000 pages to document.  The Associated Press (June 1, 2006) noted, “If GE had sent paper forms, the return would have staked up eight feet high…”

In 1993, the General Accounting Office (GAO) audited the IRS for the first time in its history and found widespread evidence of financial malfeasance and gross negligence, including the fact that the agency was not able to account for 64% of its congressional appropriation.

The Alternative Minimum Tax (AMT) “was created in 1969 to target 21 – yes, 21 – millionaires who had managed to avoid paying any taxes at all.” (Wall Street Journal, April 14, 2007).  “This year more than three million taxpayers will be hit by the Alternative Minimum Tax on the(ir) 2006 income.  But next year (2007) that number could rise to 23 million…”

The federal income tax, currently as high as 35% of taxable income, is increased by as much as 11% in state and local income taxes, plus another 6.20% and 1.45% in social security and Medicare taxes, which makes the total tax burden for some taxpayers almost 54%, not including excise, sales and property taxes, along with a host of other taxes, assessments and fees to numerous to mention.  Medieval serfs were required to give only one-third of their production to the lord of the manor, and they were considered slaves.

Households in the lowest 20% of income received about $8.21 in federal, state and local government spending for every dollar of taxes paid (in 2004), while those in the top 20% received only 41 cents in benefits. (Tax Foundation Working Paper No. 1, March 2007).

Our tax laws have become so complex and contradictory that no one, not even the most brilliant tax professionals, including IRS experts, fully understand them.



 

It’s worth noting, I think, that when I started practicing public accounting in the early 1960s, the filing deadline was March 15, not April 15, and only one 90-day extension was permitted.  Today, the first filing date is April 15, and it is possible to obtain a six-month extension – to October 15 – all because of the increased difficulty of obtaining the necessary information and the complexity of preparing and filing tax returns.

Many societies view taxation as a contest between tax collectors and citizens, with payment or avoiding payment of taxes as the prize.  But we are different we are told, because Americans voluntarily, that is, willingly, file tax returns and pay their taxes.

Baloney! If that’s true, why do we hear so much about taxes not being paid by people who work or do business in the “underground economy”?  Would you file a tax return if you were not afraid of the consequences of not filing?

Putting aside the government’s hype and PR initiatives, the reason our income tax system is so successful is FEAR.  Fear of being audited, fear of being assessed, fear of tactics employed to collect unpaid taxes, fear of intrusion into our personal affairs, fear of not being able to defend ourselves against the unlimited power of government in general and the IRS in particular.

I believe the IRS has carefully cultivated this image over a period of many years.  Who can say that they don’t have a sudden, albeit perhaps brief, fearful reaction when they find a letter or notice from the IRS in their mail?  I know I do, and I’m a retired CPA.  I don’t want to hear from them, ever!  When I do get some sort of communication from my friendly tax agency (federal or state), I just know it’s going to cost me time, money and aggravation.  Perhaps you’ve noticed over the years that around tax time it’s common to see a spate of media stories about prosecutions for tax fraud.  In my opinion, that’s no accident.

One of Ronald Reagan’s many sage observations, “The taxpayer: That’s someone who works for the federal government but doesn’t have to take the civil service examination,” seems to sum up the situation rather neatly.  For my part, I believe Americans are over-taxed and under served by their government, while our politicians are constantly looking for ways to impose new taxes under the radar of public scrutiny and awareness.  Will it ever end?  Probably not, until we have taxed ourselves into near or complete oblivion.

© 2008 Harris R. Sherline, All Rights Reserved

NOTE: Read more of Harris Sherline’s commentaries on his blog at “opinionfest.com.”