Mar 31, 2017
By Rick Law, Estate, Asset & Retirement Tax Attorney at Law Elder Law in Western Chicagoland.
It’s a statement I used to hear all too regularly at the height of the recession. Clients coming into my office would lament, “We have lost so much in our mutual funds that I should just sell EVERYTHING and start over.” I would ask, “How do you know that you have a taxable loss?” Typically, the answer was something along the lines of, “Everybody knows that the whole market is down by at least 40%! That’s how I know.”
The markets are arguably in a better place than even a couple years ago, but still, many people are panicking and making the same big mistakes in dealing with investment losses. The two main errors made are:
The loss our client feels is what I call the “the quarterly statement loss,” but it is not usually the same as a taxable loss. If you ignore Mr. Taxman’s rules, you could wind up compounding your losses. The way to compute a taxable loss is to look up what you originally paid for an asset and compare that purchase price to the current sale price. Let’s say that your rental property would sell today for $200,000, but in 2015, it would have sold for $300,000. What kind of a loss have you suffered? Does the tax-man think that you have a loss? The answer is, no!
If you bought your investment real estate at $300,000 in 2014, and in 2016 you sell at $200,000, then Mr. Taxman will agree that you have a long-term capital loss of $100,000 (please assume that we are ignoring depreciation and other adjustments).
But, if you are like most of my clients, you may have purchased the asset a long time ago at a price that is lower than today’s sale price. If you sell today, you may have a significant tax bill, even though you feel like you have ‘suffered’ a loss of value.
For example, if you bought the rental property in 1975 for $50,000, the actual gain or loss will be computed from the original sales price (less any depreciation that you took as a deduction on an annual basis) compared to the current sales price. So, if you sell that property now, you will be looking at a significant taxable gain.
It’s critical that you remember that money in your IRA represents deferred wages. No matter when or how the money comes out of your IRA, it will be treated as if you are now receiving those wages. You pay the income tax rate to the federal and state government. The government never allows you to treat IRA withdrawals as a tax loss.
If you’re ready to start getting your estate in order and secure your assets for the “worst-case” scenario, please give our office a call at 800-310-3100. Your first consultation is absolutely free. We’ll let you know what steps you need to take, right now, to protect yourself and your family. Call now.
Rick L. Law, Attorney, Estate Planner for Retirees.
Rick was named the #1 Illinois elder law estate planning attorney by Leading Lawyer Magazine. He has been quoted in the Wall Street Journal, AARP Magazine, TheStreet.com, and numerous newspapers and articles. Rick is the lead attorney for Law Elder Law, LLP, focusing in Estate Planning, Guardianship, and Nursing Home Solutions. His goal is to give retirees an informed edge when it comes to dealing with an uncertain future. Get flexible retirement strategies that work during good times and bad, plus information on how you can save your home and assets from being used to pay for long term care. Call 800-310-3100 for your free consultation now!
My wife and I had our first child three years ago. That’s when we decided to set up a trust, should anything happen to either of us. We reached out to Zach Hesselbaum to help us out. He was very thorough and professional throughout the whole process. Zach went above and beyond to make sure that we understood every detail of setting it up and he did an excellent job. We recently had our second child a few months ago. With the new baby, he helped us make the necessary revisions to the trust. Zach made this process great for us! I would definitely recommend using him for any of your estate planning needs!
Tom G., Naperville, IL