HOW THE ESCROW RECOVERY PROGRAM WORKS
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The Escrow Recovery Program is a patent pending proprietary process. The authority for our program can be found in the Internal Revenue Code at Section 351. This type of property transfer is a much-preferred alternative to the cumbersome and limited 1031 exchange.
In the 351-transfer (exchange) process, a property owner transfers his/her property to a C-Corporation in exchange for the stock of that corporation. When the transfer is accomplished, the "basis" in the property that was exchanged for the stock, becomes the "value" (basis) of the stock the property owner received in exchange for his/her property.
The 351-transfer process allows homeowners and real estate investors to defer (and possible eliminate) the total tax liability on the sale of real estate and/or a commercial property by reinvesting the gain through a specially created Nevada C-Corporation.
In a "nutshell" when a client uses the 351 exchange strategy employed by Priority Services Group, the money received from a sale of a piece of property does not necessarily need to be reinvested in real estate (a requirement in 1031 exchanges), and unlike 1031 exchanges, the money a client receives from the sale can be spent on ANYTHING that could be classified as ordinary and/or necessary for the operation of a real estate business. This includes things like employee benefit plans (for the client), vehicles, and health insurance, retirement plans, travel and of course, to buy more real estate, which will now be classified as INVENTORY, not a capital asset (hence, capital gains taxes will not apply when the "inventory" is sold).
Further, under 1031 rules, should the client take money from the sale/exchange of a property to pay for these "ordinary business expenses" he/she would be required to pay taxes on the gross amount taken to pay for these items (in AFTER TAX dollars). This is not the case with the Escrow Recovery Program. In the Escrow Recovery plan, our clients use BEFORE TAX dollars to pay for these items and pay taxes ONLY on the money left over at the end of the year.
Lastly, with the Escrow Recovery Program our clients have no restrictions such as "like-kind" or types of property that won't qualify, as is the case with 1031 exchanges. Additionally, the Escrow Recovery Program will ELIMINATE all IRS dealer status issues as well, and unlike the Escrow Recovery Program, 1031 exchanges will NOT provide any asset protection from predatory attorneys.
SO, IT ALL COMES DOWN TO THIS FINAL NOTE: Use a 1031 exchange and defer your taxes until they move you into the highest tax bracket so you can pay the maximum in taxes OR use the Escrow Recovery Program and ELIMINATE the capital gains, self-employment and state income taxes as well as deferring and possibly eliminating federal taxes right from the get go.
Read on for what's included in the Escrow Recovery Program
The Escrow Recovery Program is unique in that Priority Services Group provides each program participant with a FREE Nevada corporation (valued at over $3,000.00) and transfers the participant's property into the name of that corporation under IRC Code Section 351 - Non-Recognition Of Gain Or Loss. Then when the property is sold, the corporation sells it not the program participant (See the overview on this in this Proposal, The Technical Side Of The Revolution Brief or IRS Code Section 351).
The Corporation Includes:
- NV Secretary of State articles of incorporation
- NV Secretary of State initial list of officers
- NV Secretary of State incorporation expedite service (if needed)
- Corporation records book
- Corporation IRS EIN number Corporate compliance CD (includes manuals, minutes & contracts)
- Corporation address in Nevada for first year
- Bank introduction to Wells Fargo Bank in Nevada (for the required corporate bank account in NV)
- Enrollment in the "Priority Services "Mentoring" Program (training & consultation detailing how best to utilize your new corporation to your advantage and not the IRS).
By selling a property titled in the name of this corporation, the program participants eliminate state and self-employment taxes immediately (See the overview on this in this Proposal or IRS Code Section 1402 and/or IRS Publication 533). In addition, the corporation pays no capital gains tax because it is IN the real estate business and the income derived from the sale is considered "ordinary income" to the corporation (The authority for this can be found by reviewing the information concerning Ordinary Or Capital Gain Or Loss in IRS Publication 544, also see the overview on this in this Proposal). Additionally, the federal taxes can be written down to almost nothing because of the many "write offs" that are available to the C-Corporation but not to an individual, an LLC or even an S-Corporation (The authority for this can be found by reviewing the information concerning Business Expenses in IRS Publication 535, also see the overview on this in this Proposal).
NOTE: Should the corporation not have enough "write-offs" to be able to eliminate its taxable income, the corporation would be required to pay taxes ONLY on the NET amount remaining in the company bank account at the end of the tax year (if any). At the end of the year, should the corporation not "spend" all its income and providing the remaining NET taxable amount did NOT exceed $50,000, the corporation would be taxed at 15%.
To facilitate a smooth transaction, you and Priority Services Group will enter into an agreement wherein you will retain the total amount of the proceeds derived from the sale of the property less the flat fee that Priority Services Group will receive for providing its services.
NOTE: The service fees charged by Priority Services Group will not be paid out of your "profits" from the sale of your property or from you. Priority Services Group fees are derived from the "savings" that Priority Services Group will help you realize and are paid directly out of the escrow.
LASTLY, simultaneously with Priority Services Group being paid its fee from the escrow, Priority Services Group will transfer the corporation records book, original corporate documentation, and all of the corporate stock to you without further cost, as well as enrolling you into the "Priority Service "Mentoring" Program. In that way, you will be able to quickly learn how to profitably utilize your new corporation.
All in all, it is expected that you should be able to retain at least 45% more of the money that you would have realized from the sale had it been sold in your personal name, the name of an LLC or even if the property was sold in the name of an S-Corporation.
WHAT YOU NEED TO KNOW ABOUT
YOUR CAPITAL GAINS TAXES
LONG TERM RATES: Currently, capital gains may be taxed at 5 percent and 15 percent or a combination of rates (These rates are scheduled to end on Dec. 31, 2010). These tax levels are known as "long-term" capital gains and apply to property that you hold for not less than 366 days (more than one year).
NOTE: In actuality, it is a taxpayer's income level, how long the property was owned, and the usage of the property, (personal residence, vacation home, rental, or fully commercial) that generally determines which capital gains rate is owed. If your profit pushes you into a higher bracket, you could possibly be taxed at a combination of rates.
And you could face other taxes that most people are unaware of such as personal "ordinary income tax" (depending upon the type of property you sell and how long you have owned the property) PLUS, self employment and or "dealer status" taxes if the IRS determines that you are in "the business" of buying, holding, renting or otherwise selling real estate.
SHORT TERM RATES: each of the rates state above are the "long-term" capital gains rates. In most cases, that means you have to hold a property for more than a year before you sell it. If you cash it in sooner, you'll be taxed at the "short-term" rate, which is the same as your ordinary income tax level, which could be as high as 35 percent.
WRITING OFF REAL ESTATE LOSES
An individual (or a "pass-through" entity such as a partnership or LLC) who is engaged in the business of selling real estate may only "write-off" 25% of any losses they may incur under IRS passive loss rules, while 100% of any losses can be "written off" by a C-Corporation engaged in the real estate business.
RECAPTURE OF DEPRECIATION
Recapture of Depreciation applies to part of the gain from selling real estate that you have previously depreciated. Basically, the IRS will first recapture some of the tax breaks you've been getting via depreciation by taxing the depreciation at a flat tax rate of 25 percent. You'll have to use Schedule D to figure your gain (and tax rate) for this property, known as Section 1250 property. More details on this type of holding and its taxation are available in chapter three of IRS Publication 544, Sales and other Dispositions of Property & Publication 946.
SELF-EMPLOYMENT TAXES
SSA Publication No. 05-10022, January 2007, ICN 454900
Most people who pay into Social Security work for an employer. Their employer deducts Social Security taxes from their paycheck, matches that contribution and sends taxes to the IRS and reports wages to Social Security. But self-employed people must report their earnings and pay their taxes directly to IRS.
You ARE self-employed if you operate a trade, business or profession as a livelihood or in good faith to make a profit, either by yourself or as a partner in a partnership or an LLC. If your net earnings are $400 or more in a year, you MUST report your earnings on Schedule SE in addition to the other tax forms you must file. The Self-Employment tax rate for 2007 is 15.3 percent on your income up to $97,500. (See IRS Code Section 1402 and/or IRS Publication 533).
Publication 533 states that you are self-employed and must pay self employment taxes if:
You Are A Sole Proprietor Or A Partner: You are a sole proprietor if you own an unincorporated business by yourself or owned by a husband and wife (as a sole proprietor, partnership or an LLC).
Real Estate Rent: Rental income from real estate is NOT included in earnings subject to SE tax UNLESS You provide services for your tenants (such as you personally managing your properties) or You are a real estate dealer.
NOTE: ONLY corporations can be exempt from self-employment taxes. Technically, all partners/members, not just "managing" partners/members in partnerships and LLCs MUST pay Self-Employment taxes. Should a husband and wife be "in business" together (individually receive income from their business) they both MUST pay Self-Employment taxes on their individual income.
IRS REAL ESTATE DEALER STATUS
A Real Estate Dealer Is Defined As: "An individual (or a "pass-through" entity such as a partnership or LLC) who is engaged in the business of selling real estate with a view to the gains and profits that may be derived from such sales.
Real property will not be deemed a capital asset if it is "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" under Sec. 1221 (a) (1) (hereinafter described as being "for sale"); thus, gains or losses on real property held for sale will be ordinary in character. If the property is not deemed for sale, the gains or losses will be capital (or, in the case of depreciable rental property, a Sec. 1231 gain or loss).
By contrast, dealers can offset their losses against ordinary income with fewer restrictions than capital losses. Also, property held for sale is not subject to Sec. 163(d)'s "investment interest" limits; under Sec. 163 (d)(5), only property held for investment is subject to Sec. 163(d).
BY SELLING YOUR PROPERTY THROUGH A NV "C"-CORP.
AFTER ALL THE SMOKE & MIRRORS IS CULLED FROM THE ISSUE THE ABSOLUTE BEST WAY TO SELL REAL ESTATE IS IN THE NAME OF A NEVADA "C"-CORPORATION
Contrary to conventional thinking, the tried and true Nevada "C"-Corporation will afford you exceptional "write off" capabilities, maximum asset protection and absolute flexibility while at the same time dramatically reducing the taxes associated with holding and selling real estate.
Further, when faced with taxable income, "C"-Corporations have a lower federal tax rate at all levels of income up to $250,000.00 when compared to the tax rates for the same level of "TAXABLE" income for individuals LLCs or "S"-Corps.
NOTE: Individuals receive income, pay taxes and then buy things with the "after tax" money. Conversely, "C"-Corporations receive income, buy things with "pre-tax" dollars and then pay taxes on any money left over.
RECAP COMPARISON OF WHO PAYS WHAT TAXES
OTHER "C"-CORP TAX ISSUES WORTHY OF MENTION
Corporate Capital Gains: C-Corporations (in the real estate business) are NOT subject to any capital gains tax liability from the sale of real estate. Instead, corporate gains are included with the rest of the corporate income and therefore become part of the ordinary income of the corporation. Further, the IRS Code makes no distinction between short or long term gains either (The authority for this can be found by reviewing the information concerning Ordinary Or Capital Gain Or Loss in IRS Publication 544).
IRS Dealer Tax Status And Self-Employment Taxes: Interestingly, unlike individuals or LLCs, "C"-Corporations are NOT subject to dealer status issues or self-employment tax.
Double Taxation: Tax planners continue to spread fear concerning the potential for double taxation with C-Corporations. Double taxation comes into play where after-tax earnings of a C-Corporation are distributed to shareholders as non-deductible dividends. This is rarely a problem in small corporations (with earnings under 5 million) and/or non-publicly traded corporations because there is so many legitimate ways to pull money out of the C corp in a manner that is deductible, and thus only taxed once.
Some of these are:
- Compensation Plans
- Interest Payments (includes for loans you might make to your entity)
- Lease Payments (includes vehicles, equipment, planes and real estate)
- Retirement Plans (for you and your family)
- Benefit Plans (including Life and Health Insurance)
- Non-Taxable Reimbursements to you for personal funds you expended on behalf of your C-corporation.
IRS TAX ISSUES WORTHY OF MENTION
NON-RECOGNITION OF GAIN OR LOSS (IRC CODE SECTION 351)
IRC Code §351 Transfers-Non-recognition Of Gain Or Loss: "No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation.
For a more complete understanding of this matter, please review "The Technical Side Of The Revolution" and/or review IRS Code Section 351.
ORDINARY OR CAPITAL GAIN OR LOSS (IRS PUBLICATION 544)
INTRODUCTION: You must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). You must do this to figure your net capital gain or loss.
CAPITAL GAIN OR LOSS
Generally, you will have a capital gain or loss if you sell or exchange a capital asset. You also may have a capital gain if your section 1231 transactions result in a net gain.
SECTION 1231 TRANSACTIONS: Section 1231 transactions are sales and exchanges of property held longer than 1 year and either used in a trade or business or held for the production of rents or royalties.
CAPITAL ASSETS: Almost everything you own and use for personal purposes or investment is a capital asset. For exceptions, see Non-capital Assets, later. The following items are examples of capital assets.
- Stocks and bonds.
- A home owned and occupied by you and your family.
- Household furnishings.
- A car used for pleasure or commuting.
PERSONAL-USE PROPERTY: Property held for personal use is a capital asset. Gain from a sale or exchange of that property is a capital gain. Loss from the sale or exchange of that property is not deductible. You can deduct a loss relating to personal-use property only if it results from a casualty or theft.
INVESTMENT PROPERTY: Investment property (such as stocks and bonds) is a capital asset, and a gain or loss from its sale or exchange is a capital gain or loss. This treatment does not apply to property used to produce rental income. (See Business assets, under Non-capital Assets).
NON-CAPITAL ASSETS
A non-capital asset is property that is not a capital asset. The following kinds of property are not capital assets.
Property (including real estate) held mainly for sale to customers or property that will physically become part of merchandise for sale. This includes stock in trade, inventory, and other property you hold mainly for sale in your trade or business.
Accounts or notes receivable acquired in the ordinary course of a trade or business for services rendered or from the sale of any properties described in (1).
Depreciable property used in your trade or business or as rental property (including section 197 intangibles defined later), even if the property is fully depreciated (or amortized).
Real property (including real estate) used in your trade or business or as rental property, even if the property is fully depreciated.
Property held mainly for sale. Stock in trade, inventory, and other property you hold mainly for sale in your trade or business are not capital assets. (see IRS Publication 538 for the tax considerations relating to inventories).
Business assets. Real property and depreciable property used in your trade or business or as rental property are not capital assets.
BUSINESS EXPENSES (IRS PUBLICATION 535)
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
WHAT CAN BE DEDUCTED: To be deductible, a business expense must be: Both ordinary and necessary: An ordinary expense is one that is common and accepted in your trade or business.A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. (NOTE, emphasis is mine not the IRS)
