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Crowd Funding: The Rules of the Game

Imagine that you need to raise $100,000 for your business. With limited options, you seek the internet as source of funds. You place a campaign on a third party website that allows you to reach infinite amounts of people, who may want to donate to your cause in exchange for different types of creative gifts you offer in return. A California based company, Pebble Technology did just that and surpassed its $100k goal to set an incredible record of securing over $10 million dollars in just thirty days! Granted, this is probably the highest campaign to date; however, it begs the questions: How did they do it and what are the rules of the game?

Well, as most entrepreneurs know, access to capital has been increasingly difficult for small businesses, which in turn affects jobs, tax revenues, and a host of related areas.  Fortunately, on April 5, 2012, the Jumpstart Our Business Startups Act (JOBS) was signed into law, allowing crowd funding to exist as a way to infuse much needed capital into the business sector.  Crowd funding is a way for the "crowds" to invest online in ventures of their choosing in exchange for equity.  Currently this does not comport with securities laws; however, the Securities and Exchange Commission (SEC) is actively setting forth rules that implement the JOBS Act provisions on crowd funding, so that the balance between access to capital and reduction/prevention of fraud can effectively be balanced.  One of the key issues relates to third party websites that serve as a conduit between the entrepreneur and the investor. These portals are the subject of debate in terms of how their role will be shaped to effectuate that balance of providing access to capital and protecting from investor fraud.  While sites currently exist under the donative (gift) model, where causes, business, and various projects have sought funds in exchange for gifts, this area of business and law is about to propel to new levels, particularly once the SEC and FINRA (Financial Industry Regulatory Authority) rules are established.

Property Tax Relief for Seniors

A wise man once said, “the only two things certain in life are death and taxes.” Although we have very little control over when the first occurs, many of us go to great lengths to try to minimize the “ouch” factor of the second. When my parents turned 70, they felt the 3,000 square foot home they lived in for over 30 years was way too much for them. They knew they could sell their home for a lot of money and buy a smaller home very easily. However, my parents were worried about paying a much higher annual property tax bill year after year, since they believed that their new property tax would be based on the price they paid for another home.  Luckily, I found two constitutional amendments passed by California voters that provide property tax relief if you are 55 years and older.  If you live in a “principal residence” in California for at least 5 years, are 55 years or older, buy a replacement property of “equal or similar value” within 2 years of the sale of your principal residence, and timely file a form BOE-60-AH with the County Assessor’s Office you may be able to transfer the tax basis from the home you sell to your new home.  There are certain conditions that must be met to be eligible. My parents sold their home and bought a newer smaller home, with less maintenance, for about the same price.  As a bonus, they were able to transfer the property tax base of $3,000 a year from the home they sold to their new home, saving them approximately $7,000 per year.  Without the exemption, my parents’ property taxes would have increased to approximately $10,000 per year.

Tuition and Medical Expenses Gifts Aren’t Taxable

It’s been said, “It is better to give then to receive.” I think we can all agree it is much better to receive without worrying about paying taxes.  Under current federal law, most individuals can receive annual gifts of up to $13,000 without being subjected to a federal gift tax. This amount is set to increase to $14,000 in 2013.  While many may know about the $13,000 gift-tax exclusion amount, many may not know that there are two exceptions that provide for greater gifting opportunities without taxation.  One is when the gift is for tuition and the other is when the gift is for medical expenses.  Any amount paid for someone else’s tuition directly to a “qualifying” educational institution is excluded from the gift tax calculation.  “Qualifying” educational organizations include those where their primary function is formal instruction.  The organization must maintain a regular faculty and curriculum with students that attend where the educational activities are conducted.  Also, if the organization has non-educational activities, these must be incidental to the educational programs. A comprehensive definition of “qualified” medical expenses can be found in Internal Revenue Code Section 213, but includes payments for medical insurance and long-term care services such as cost of nursing homes or assisted living facilities, if provided by a licensed health care provider.  However, it should be noted that “qualified” medical expenses do not include cosmetic surgery, unless to correct a birth defect or disfigurement.

*This does not constitute tax or legal advise. Please contact your tax professional to make sure any such "gifts" qualify.
How Should You Take Title to Your Home?

We are often asked by clients “How should I take Title to My Home?”  It is important to make sure you have titled your home and any other real property correctly to insure that your real property passes to your heirs.  There are 3 common ways people hold title to their homes:

Joint tenancy: If real property is held in a joint tenancy, the owner who dies first does not control what happens to the property after his death.  A house will pass to the surviving joint tenant outright and the surviving joint tenant has discretion and control to leave the asset to whoever she wants.  And if the property is in the surviving joint tenant’s individual name at the time of her death, the property will need to go through probate before it is finally distributed.  Further, under current law, the surviving joint tenant only receives a one-half step-up in basis on the property and may end up paying capital gain on one-half of the property after the first joint tenant’s death.

Community Property with Rights of Survivorship: Holding title as community property with rights of survivorship will take care of the capital gains issue.  However, like a joint tenancy property, he who dies last wins!  In other words, the property will pass outright to the surviving spouse, who can then distribute the property as she sees fit and may disregard the deceased spouse’s wishes.  Further, if the property is still in the surviving spouse’s name on her death, then the property will need to be probated.

Revocable Living Trust: Property titled in a revocable living trust will avoid the probate process.  Further, both spouses will have input into how the property passes.  Finally, if the transfer of the property to the Trust is done correctly, the surviving spouse will avoid paying capital gains on sale of the property.