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Many
real estate investors believe they are stuck with the following two options. 1.
Sell the property and pay a hefty capital gains tax, or 2. Do a 1031 tax deferred
exchange thereby selling a smaller building and buying a more expensive one. Real
estate values have soared. With the higher valuations come new and expensive tax
implications. Capital gains taxes, depreciation recapture taxes, state taxes,
estate taxes and loss of deductions all threaten to take up to 75% of your gains.
Sellers are now routinely facing huge gains of $1 million, $5 million or more,
resulting in tax bills in the hundreds of thousands and even millions of dollars.
There
are many reasons investors are selling their real estate. They may want to exit
the everyday headaches and management involved in real estate. Many people feel
that the real estate bubble may be ready to burst and don't want to see their
gains disappear. Others may have a buyer for their property but cannot find a
suitable property to 1031 exchange into. But it always comes back toc.
HOW
DO I SELL MY PROPERTY AND NOT PAY THOSE TAXES? Investors
have traditionally used a variety of methods to try to limit or defer the tax
consequences. Installment sales and Charitable Remainder Trusts (CRT) have been
the more publicized methods in the past.
In an installment sale, what
if the buyer defaults on his contract? You might have to take back a neglected
property and sell it in a depressed market, possibly turning a profit into a loss.
The depreciation recapture tax is also due up front in an installment sale. That's
money out of your pocket right away. And if you were to pass away before the installments
were completed then the value of the remaining portion is included back into your
estate for the dreaded estate tax (also known as the "death tax").
A
CRT is another planning strategy used to eliminate capital gains taxes on the
sale of an appreciated asset. However, in a CRT the assets are donated to a charity
upon creating the CRT. That's not yours anymore even though you can get income
from it. And eventually it will be left to charity instead of your heirs. So,
unless you have a significant charitable intent, a CRT is not the right strategy.
Then What Else Can I Do?
Since the 1980's, tax professionals
have increasingly turned to a little known strategy using certain kind of Irrevocable
Trust combined with a Private Annuity contract. When this type of trust is used
in conjunction with a private annuity, you can:
1) Defer capital gains taxes
2)
Eliminate estate taxes
3) Provide asset protection for everything titled in
the trust name
4) Receive income payments
Following is more detailed
list of the benefits: -Pay
No Capital Gains Taxes upon Time of Sale
-Pay No Depreciation Recapture Taxes
upon Time of Sale
-Pay No State Taxes upon Time of Sale
-Eliminates Estate
Taxes due upon Taxpayer's Death
-Creates an Income Stream for Life or Joint
Lives
-Eliminates the Headaches Involved with Property Management
-A "1031"
Alternative Strategy
-Maximizes Medicaid Benefits by Protecting Family Assets
from Recovery of past Nursing Home Expenditures
-Provides Asset Protection
in Case of Legal Disputes
-Avoids Expenses, Delays, and Publicity of Probate
Think
of that, if you are 60 years old and owe $1,000,000 in combined taxes at the time
of sale, you may now be able to defer that until you are age 75 and then receive
payments over approximately another 15 years!! No interest or penalties accrue
on the $1,000,000 tax you owe and it is free to potentially double or even triple
in value by investing wisely before Uncle Sam asks for 1 cent of it. In effect
you have used the IRS's money to pay for the IRS's tax bill.
But that's
not all. In 2006, $2,000,000 of a decedent's estate is sheltered from the estate
tax ($4,000,000 for a couple if titled correctly). Any amount over this is subject
to the estate tax (otherwise known as the "death tax"). This tax can
quickly reach up to 50% of your taxable estate! If you use the trust structured
correctly in conjunction with a private annuity, there is no estate tax or probate
costs!! Assume
your net worth is $10,000,000, you are married and have a marital deduction bypass
living trust. If you both passed away in 2006, anything over $4,000,000 might
be taxed up to 50%. Your estate (your children and your beneficiaries) might owe
up to $3,000,000 in estate taxes!! This tax can be avoided by proper estate planning.
If you own any
type of appreciated asset and are thinking about selling them, I urge you to call
me to make an appointment and come in and see me, or make a reservation to come
to one of my up-coming seminars. No obligation whatsoever! But I will probably
able to hand you the key that will solve your problem. Call me 310-800-6333, or
e-mail me to ytaguchi@scfsecurities.com.  | |
