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Real Estate Taxes

Would you like to sell your property at the high prices in the market today, but are hesitant because you’re worried about having to pay the capital gains taxes?  Well, through the use of the latest and most sophisticated methods available, you may now be able to sell and defer the taxes over your lifetime.


A new method that is gaining acceptance is called a “private annuity trust”.  Don’t get this confused with an annuity that might be sold through an insurance company.  This is a completely private arrangement that might be set up to include only you, your spouse, and your beneficiaries – usually children or other family members.


You set up one of these trusts prior to actually selling the property, although you might already have a buyer standing in the wings and ready to perform.  You then transfer the property to the trust – your escrow agent can handle this transaction – and name an “independent” trustee to manage the trust.  The trustees can actually be your adult children that are the eventual beneficiaries of your estate.  The new trustee then handles the sale of the property to the buyer – maybe the one you already identified.  The trust now has cash in it instead of the property, and the new buyer has the property.


The nature of these trusts is such that you do not have to pay any capital gains tax at the time of the sale.  Also, because of the values used in the transfer from you to the trust, and from the trust to the ultimate buyer, the trust does not experience a profit, so the trust does not have a gain to pay tax on.  Instead, you will pay the tax as you receive payments from the trust – the “annuity” – for the rest of your life.  Through IRS and congressional rules, the amount of each payment is determined right at the beginning, and that amount is paid to you regularly for the rest of your life from the trust.  Part of the payment you receive is the capital gain you earned on the property, so you will pay the capital gains tax spread out over your life expectancy.  This might amount to dozens of years into the future.


The main advantage of this trust is that you will have the entire amount of your sale – net of any costs of sale – available for the trustee to invest to produce the return required to make the lifetime payments to you.  The pool of funds is not depleted by taxation right up-front as in a cash sale.


The advantage of this type of sale over an installment sale is that there is no worry that the full amount will not be realized through failure of the buyer to make the necessary future payments.  The buyer pays the entire amount right up-front.  Of course, if the money in the trust from the sale is not invested wisely, you could come up short if the funds dry up before you receive the full amount in future payments.


Another advantage is that you may choose to postpone receipt of any payments from the trust for a period of time, depending on your present age.  That means that no taxes will be due until you actually begin receiving payments – maybe several years out into the future.


In addition, whatever funds are remaining in the trust when you, and your spouse, pass away, will be paid out to the trust beneficiaries – probably your children – without any further taxation as part of your estate.  The proceeds they receive will not be counted as a part of your taxable estate on which they might have to pay estate or inheritance taxes.


Bill Locklin is a Certified Financial Planner that specializes in converting accumulated assets into lifetime retirement income. He can be reached at 951.676.2010 or by  E-mail.


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