Tax Advantaged Exit Strategies

[William Englehart]

If you are an investor who is looking to "cash out" of one or more of your real estate investments but concerned about the tax impact of realizing capital gains from highly appreciated and/or depreciated assets, I may have a solution for you.  This is not a strategy for the primary residence of individuals as they would utilize the $250K/$500k Section 121 exclusion nor investors who plan to reinvest the proceeds into another property as you would simply use the 1031 exchange for that purpose.  

If you are a realtor with a potential sale held up because the owner is reluctant to sell the property due to capital gains tax implications, this strategy will help resolve the seller's issue with selling the property now.  You can secure more sales with this strategy.

Send me a note if you have a situation you believe to be a fit for this and I'll see if there is a good fit.

[Dave Foster]

@Tandi H., Every scenario pencils out a little differently but in a CRT in exchange for a life time of cash flow and no tax in your lifetime you are giving up the asset and any future (remaining) value.  Because you are doing this to a charitable organization the tax dissappears.  

If you sell the property without a 1031 then you get cash and can reinvest it for life time cash flows (minus the deferred tax).  The tax goes away because you pay it.  And the asset changes from real estate to cash.

If you hold the property in whatever form and then will it to your heirs you still get the cash flow for life.  The asset goes to your heirs and the tax disappears in the estate.

So if you compare those three scenarios you'll find that the difference between 1 and 2 is that you basically end up the same place (minus getting to use the deferred tax dollars for income) except that the charitable organization gets the asset at the end.  So you save in tax but lose the asset and remaining value.  I'm a big believer if you have a cause that's dear to you.  But to simply give up an asset to save tax that you wouldn't necessarily have to pay anyway seems shortsighted.

This is where scenario 3 comes into play.

Your exit strategies are pretty spot on.  i am a believer in the first and that's how I act.  My kids tell me they'll pick out a nice nursing home for me as long as I stick to the plan.

Vacation home - don't  discount this as frivolous.  When you do this you can later convert it into a retirement primary residence and take a least a prorated share of the profit tax free when you sell it.  So it won't be totally tax free but it will generate some tax free profit.

Installment sale - Yes a good plan but depreciation recapture all in year of the sale.  So if you have a highly depreciated property it can be not such a good deal.

Sell and pay the tax - Why ever would you do such a heartless thing :)

Reverse mortgages - I don't think so in investment.  And they're one of the biggest insurance scams of all time.  You lose the asset and unless you beat their actuary tables (yeah like that will happen) you get a fraction of the value.  Not me.