Author: Leon Clinton

Are you 72 or older? If so, you must take a required minimum distribution (RMD) from your traditional IRA, SEP-IRA, or SIMPLE IRA by the end of the year.

If you turn 72 this year, you can wait until April 1 of next year to take your first RMD—but you’ll also have to take your second RMD by the end of that year.

Your RMD is a percentage of the total value of your retirement accounts based on your age and life expectancy. The older you are, the more you must distribute. But here’s the kicker: your RMD must be based on the value of your retirement accounts as of the end of the prior year—December 31, 2021, in the case of 2022 RMDs. So you may have a high RMD due this year even though the value of your retirement portfolio has declined, perhaps substantially.

If your retirement accounts consist primarily of stocks, bonds, or other securities, you don’t have to sell them at their current depressed levels and distribute the cash to yourself to fulfill your RMD. There’s another option: do an in-kind distribution.

With an in-kind RMD, you transfer stock, bonds, mutual funds, or other securities directly from your IRA to a taxable account, such as a brokerage account. No selling is involved. The amount of your RMD is the fair market value of the stock or other securities at the time of the transfer.

Furthermore, you still have to pay income tax on the distribution at ordinary income rates. To avoid selling any part of the stock or other securities you’ve transferred, you’ll have to come up with the cash to pay the tax from another source, such as a regular bank account.

With an in-kind distribution, not only do you avoid selling stocks in a down market, but the transfer may also reduce the taxes due on any future appreciation when you eventually do sell. This is because when you do an in-kind RMD, it resets the basis of the assets involved to their fair market value at the time of the transfer.

If you later sell, you pay tax only on the amount gained over your new basis. And such sales out of a taxable account generally are taxed at capital gains rates, not ordinary income rates.

If an in-kind distribution sounds attractive, act quickly so the transaction is completed by year-end.

If you have any questions about in-kind RMDs, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 28, 2022

Crowdfunding is a national and international phenomenon. Over $17 billion is raised yearly in North America through world-famous websites such as GoFundMe and Kickstarter.

All this crowdfunding activity leads to an obvious question: Is the money raised this way taxable income for the recipients?

You might be surprised to learn that the courts and the IRS have provided almost no guidance on this issue. The authorities have largely left it up to taxpayers to figure it out by applying general tax principles.

Under general tax principles, all income you receive is taxable unless an exception in the tax law makes it tax-free. Some exceptions apply to some types of crowdfunding.

There are four main types of crowdfunding:

1. Donation-based
2. Rewards-based
3. Debt-based
4. Equity-based

Donation-based crowdfunding is the best-known and largest type. Individuals use crowdfunding sites such as GoFundMe to solicit donations for themselves or others. Donations can be solicited for any purpose but typically involve raising money for medical expenses, youth sports, or education costs.

With this crowdfunding model, donors do not receive any goods or services in return for their money. As a result, the donations ordinarily qualify as tax-free gifts.

Donors get no charitable deduction for money they give to individuals through crowdfunding websites, even if the recipients are needy. But donations from these websites made directly to Section 501(c)(3) tax-qualified charities are deductible.

Rewards-based crowdfunding is used by businesses to raise money. Contributors receive products or services from the business in return for their money. The best-known websites for rewards-based crowdfunding are Kickstarter and Indiegogo.

The expenses incurred to undertake the crowdfunding campaign, including crowdfunding website fees and the cost of rewards, would be deductible business expenses. The money received this way is ordinarily taxable income to the business. It is clearly not a gift if the contributors receive something of value in return for their money.

With debt-based crowdfunding, also called peer-to-peer lending, businesses raise money through specialized websites that provide loans financed by the general public. Loans that have to be paid back are not taxable income.

Equity-based crowdfunding enables businesses to sell shares or other securities to investors through the internet. Funds raised by issuing securities to investors are not taxable income for the business. But to prevent fraud and other abuses, companies that use equity crowdfunding must comply with federal and state securities laws.

If you have any questions about crowdfunding, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 19, 2022

Have you sold, or are you planning to sell commercial or rental property?

To avoid immediately paying capital gains tax on your profit, you have options:

• Deferring the capital gains tax using a Section 1031 exchange
• Deferring the capital gains tax using a qualified opportunity zone fund

With a Section 1031 exchange, you sell your property and invest all the proceeds in

another like-kind replacement property of equal or greater value.

With a qualified opportunity fund, you don’t acquire another property. Instead, you invest in a corporation, partnership, or LLC that pools money from investors to invest in property in areas designated by the government as qualified opportunity zones. Most qualified opportunity funds invest in real estate.

Which is better? It depends on your goals. There is no one right answer for everybody.

A Section 1031 exchange is preferable to a qualified opportunity fund investment if your goal is to hold the replacement property until death, when your estate will transfer it to your heirs. They’ll get the property with a basis stepped up to current market value, and then they can sell the property immediately, likely tax-free.

In contrast, your investment in a qualified opportunity fund requires that you pay your deferred capital gains tax with your 2026 tax return. That’s the bad news (only four years of tax deferral).

The good news: if you hold the qualified opportunity fund for 10 years or more, there’s zero tax on the appreciation.

In contrast, if you sell your Section 1031 replacement property, you pay capital gains tax on the difference between the original property’s basis and the replacement property’s sale amount.

And if you’re looking to avoid the headaches and responsibilities that come with ownership of commercial or rental property, the qualified opportunity fund does that for you.

If you’re looking for liquidity, the qualified opportunity fund gives you that because you need to invest only the capital gains to defer the taxes. With the 1031 exchange, you must invest the entire sales proceeds in the replacement property to avoid any capital gains tax.

Of course, you want your investment to perform. Make sure to do your due diligence, whatever your choice.

If you want to discuss Section 1031 exchanges or opportunity funds, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 9, 2022