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AD VALOREM TAXES & CAPITAL GAINS | Tax Avoidance Strategies
Property taxes in Texas are some of the highest in the nation due in part to the state not having a sales tax yet only a small percentage of homeowners have proper exemptions and protest their property taxes. “Ad valorem” is a Latin term translating to “according to value.” Property taxes are ad valorem taxes in that they’re based on the value of the property. Capital gains taxes are taxes levied on profits when an asset is sold. A winning strategy is to have the correct exemptions in place together with annual protest to limit annual assessments plus qualify under the appropriate IRS code to avoiding paying income tax on gains.
CHOICE OF ENTITY | Legal Entity Strategies
According to a recent bar presentation and reported elsewhere, a new lawsuit is filed every 1.3 seconds equating to millions of lawsuits so having the right asset protections is critical. Choice of entity should be based on the circumstances and desires of the parties as there is not a one size fits all approach. A winning strategy is to maintain homestead protections where possible and balance tax considerations with liability protections. There may also be circumstances where multiple entities are the best approach.
PRIVACY IS AN IMPORTANT FACTOR. Texas is a non-disclosure state meaning property owners cannot be compelled to disclose the sales prices of their properties. There are additional privacy protections to be explored:
- Anonymity trusts for homestead property. To remain anonymous (and have an “anonymity trust”) and being that the trustee is deeded the property, clever attorneys can create two deeds at closing, one correctly to the trustee for the trust which doesn’t get filed (a “drawer deed”) and another just to the trust that gets filed into the county records. Deeds don’t have to be filed to be valid so if there’s later an issue and someone points out that it’s not deeded correctly, there is the drawer deed. Another alternative is using a third-party trustee with language in the trust agreement for the trustee to be able to remove the third-party and maintain control.
- Double entity formation for investment property. LLCs are the most popular of the corporate entities, in general and also for real estate holdings. An annual information statement is required showing all member managers’ information (unless using a third-party, and company agreement allowing members to remove to remain in control), which makes double entity style of formation advantageous where an LLC owns and manages the front-facing LLC, with the second entity formed and maintained in another state without that requirement or if a trust is utilized.
- Statutory privacy for certain individuals’ home addresses based on vocation. Certain individuals may also file for privacy with the appraisal district under Texas Tax Code Sec. 25.025 [“Confidentiality of Certain Home Address Information”] which applies to a host of current and former law enforcement, community supervision and corrections workers, protective services caseworkers and investigators, attorneys, state and federal judges and related employees, members of the armed forces who served in combat areas, elected public officers, and firefighters and emergency medical services personnel. [See form here]
- Non-Disclosure Agreements & “And/Or Assigns” Language. The above methods handle anonymity after rather than during the transaction. A Non-Disclosure Agreement (or “NDA”) may be used to protect identities, price, and terms from disclosure to third parties before, during and after the transaction is over as an additional layer of privacy. Another mechanism is to utilize contract assignments where the contract is initially placed in the name of an attorney (or sometimes trusted broker) with “and/or assigns” language for transfer to a private entity or trust prior to closing.
