You bought a home 10 years ago for 200K. With the recent appreciation of real estate in many states your home is now worth 1 million dollars. Sounds too good to be true? Welcome to California.
Now you have a million dollar residence, but if you sell, even if you're married and qualify for a 500K personal exclusion, you will still owe capital gains tax on 300K dollars. It's not unlikely that in Califoria that would amount to about 70K.
Let's say you are retired. How long would it take you to replace 70K in savings? Or, what if your spouse passed away a couple of years ago? Now you only have a 250K exclusion. So, you owe capital gains tax on 550K. That may be 126K out the door. That hurts.
A private annuity trust may help take the sting out of that tax bill. If a trust is created and the trust sells your home, you can spread out that 70K or 126K tax obligation out over the rest of your life. That means that money is working for you to make more money instead of passing directly to Uncle Sam in one huge lump sum.
In return, you begin receiving monthly payments. You have the option to use those payments to pay for a new mortgage on another residence, or on rent on someone else's investment. No more property taxes, repairs, insurance, etc. You have the proceeds to supplement your pension, social security, or other retirement plan.
It may or may not be the best solution in your particular situation, but wouldn't it be worth looking into before writing that 70K or 126K check? You decide.
Paula Straub
askpaula@savegainstax.com
