Usually, for appreciated real estate, I find the 1031 Exchange into a Tenant in Common Property carries the most advantages. But, there are some cases where the Private Annuity Trust is the way to go.
Ken and Nancy sold their apartment complex a year ago and purchased another. At that time, they paid no capital gains tax because they did a 1031 exchange for like kind property.
Ken began having health problems, and no longer wanted the management hassles of running a complex. Ken and Nancy have other real estate and didn't want to do another 1031 exchange. Since they need to slow down and enjoy life more, they wanted a larger income. They have no heirs.
Ken and Nancy formed a Private Annuity Trust and had transferred the complex into the trust after they'd found a buyer. The trust sold the property, and both Ken and Nancy will be receiving an income from that property for the rest of their lives. They will be paying small amounts of capital gains from each payment over the years, but most of that money (1 million dollars)will be working for them for years to come. They pay no penalties or extra interest, so the gains paid out over time are only the ones realized at the time of sale. Any monies left in the trust at their death will go to their favorite charity. If they'd had heirs, this money would have passed to them free of estate tax, gift tax, generation skipping tax, and transfer tax.
Ken can take it easy and hopefully live a less stressful and pleasant life. Nancy is grateful to have a steady income, a good portion of which is tax free, as it is a return of basis.
In this case, the Private Annuity Trust was the perfect solution.
Stayed tuned for the next case study coming soon.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
Friday, October 07, 2005
Monday, October 03, 2005
Case Study #1 1031/TIC exchange success
I've decided to start posting some case studies where clients have successfully saved thousands in capital gains tax. Hopefully, one of these will hit home and be similar enough to your situation so that you can save plenty yourself.
The names have been changed to protect client confidentiality.
Mary had 3 rental properties that she purchased many years ago. They weren't in the best locations and had become negative cash flows. She was having to put in several hundred dollars of her own money each month to cover costs.
Mary had had trouble with renters trashing the property and not paying rent on time. She had thought a lot about selling, but didn't want to see about one third of her gains disappear.
One day unexpectedly, Mary lost her job. She got behind in bills. She knew she had to do something fast. Mary found out about the 1031 exchange into a tenant in common property. It meant she could get an income, still own property, but not have the property management hassles. She sold one property below market value as a cash sale, because she needed money fast. With her equity of 200K she exchanged for a TIC. The entire process took only a few weeks. She began receiving $1000.00/mo.
Mary was able to sell the other two properties at market rate. The additional 400K equity brings in another $2000.00/mo. A good portion of that is non-taxable income. Mary has all of her capital gains working for her. She paid no capital gains tax or recaptured depreciation.
Mary is actually bringing home more money now than she did from her job. She is taking her time and deciding what she really wants to do with the rest of her life. She has enough passive income to cover her personal expenses. She still is a real estate owner, and her assets will continue to appreciate over time. So will her income.
Mary is extremely happy and grateful. Her life has changed permanently for the better.
If Mary's situation is similar to your own, perhaps now is the time for you to look into a 1031 exchange into a tenant in common property. I can help you determine if this is a good choice.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
The names have been changed to protect client confidentiality.
Mary had 3 rental properties that she purchased many years ago. They weren't in the best locations and had become negative cash flows. She was having to put in several hundred dollars of her own money each month to cover costs.
Mary had had trouble with renters trashing the property and not paying rent on time. She had thought a lot about selling, but didn't want to see about one third of her gains disappear.
One day unexpectedly, Mary lost her job. She got behind in bills. She knew she had to do something fast. Mary found out about the 1031 exchange into a tenant in common property. It meant she could get an income, still own property, but not have the property management hassles. She sold one property below market value as a cash sale, because she needed money fast. With her equity of 200K she exchanged for a TIC. The entire process took only a few weeks. She began receiving $1000.00/mo.
Mary was able to sell the other two properties at market rate. The additional 400K equity brings in another $2000.00/mo. A good portion of that is non-taxable income. Mary has all of her capital gains working for her. She paid no capital gains tax or recaptured depreciation.
Mary is actually bringing home more money now than she did from her job. She is taking her time and deciding what she really wants to do with the rest of her life. She has enough passive income to cover her personal expenses. She still is a real estate owner, and her assets will continue to appreciate over time. So will her income.
Mary is extremely happy and grateful. Her life has changed permanently for the better.
If Mary's situation is similar to your own, perhaps now is the time for you to look into a 1031 exchange into a tenant in common property. I can help you determine if this is a good choice.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
Monday, September 26, 2005
Private Annuity Trust or Charitable Remainder Trust?
I have found there are more people (even professionals) who know more about Charitable Remainder Trusts than Private Annuity Trusts.
So why one vs. another?
It really depends on your need for your money or income. Both defer or eliminate capital gains tax. But do you want the use of all your money during your lifetime, or will just the interest that the money makes suffice? Do you want to leave a legacy to your heirs or your favorite Charity?
The best time to create either option is when you have a highly appreciated asset such as real estate. If you sell outright, you will lose a great portion of your appreciation to capital gains tax. Maybe up to one third.
A Charitable Remainder Trust will provide the following:
1. You will pass your asset capital gains free to your favorite charity.
2. You can get whatever gains the trust makes during your lifetime as payments.
3. If you are healthy, the trust can purchase a life insurance policy on you which will pay your beneficiary a tax free benefit to replace the money going to charity instead of your heirs.
4. A good choice if you want to separate assets from your estate and you don't need the money from the asset.
A Private Annuity Trust will provide the following:
1. You will defer capital gains tax over the rest of your life and pay in smaller installments once you begin receiving payments.
2. You can defer taking income until age 70 1/2. This will allow your gains to work for you over time while continuing the deferral of taxes.
3. It will provide you with a larger income during retirement.
4. Your beneficiaries will receive any funds remaining in your trust free of estate tax, transfer tax, gift tax, and generation skipping tax.
5. You can still list a charity as beneficiary if you wish.
Both are powerful concepts. Which one is best depends on your own personal needs.
If you would like help deciding which is a better fit, give me a call or send me an email.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
(760)917-0858
So why one vs. another?
It really depends on your need for your money or income. Both defer or eliminate capital gains tax. But do you want the use of all your money during your lifetime, or will just the interest that the money makes suffice? Do you want to leave a legacy to your heirs or your favorite Charity?
The best time to create either option is when you have a highly appreciated asset such as real estate. If you sell outright, you will lose a great portion of your appreciation to capital gains tax. Maybe up to one third.
A Charitable Remainder Trust will provide the following:
1. You will pass your asset capital gains free to your favorite charity.
2. You can get whatever gains the trust makes during your lifetime as payments.
3. If you are healthy, the trust can purchase a life insurance policy on you which will pay your beneficiary a tax free benefit to replace the money going to charity instead of your heirs.
4. A good choice if you want to separate assets from your estate and you don't need the money from the asset.
A Private Annuity Trust will provide the following:
1. You will defer capital gains tax over the rest of your life and pay in smaller installments once you begin receiving payments.
2. You can defer taking income until age 70 1/2. This will allow your gains to work for you over time while continuing the deferral of taxes.
3. It will provide you with a larger income during retirement.
4. Your beneficiaries will receive any funds remaining in your trust free of estate tax, transfer tax, gift tax, and generation skipping tax.
5. You can still list a charity as beneficiary if you wish.
Both are powerful concepts. Which one is best depends on your own personal needs.
If you would like help deciding which is a better fit, give me a call or send me an email.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
(760)917-0858
Tuesday, September 20, 2005
Private Annuity Trusts
In most cases, a 1031 exchange into a tenant in common property benefits an investment property owner in many ways.
1. Provides an income stream
2. Defers all capital gains taxes
3. Relieves the seller of property management headaches
4. Gives benefits of real estate ownership (appreciation)
5. Passes asset to heirs capital gains tax free
6. Retain control of asset
However, there is another vehicle that can be just as powerful under the right circumstances. This is a Private Annuity Trust.
If the owner has a very highly appreciated property, is close to or in retirement, and needs a higher income, or just needs to separate some property from his/her estate, this may be the key.
A PAT (Private Annuity Trust) can be established, the property transferred to the trust, the trust sells the property, and the cash from sale is now put into an "annuity" and the seller becomes the annuitant. The annuitant will get payments from the trust over his life time and perhaps the lifetime of his spouse. He will pay capital gains tax spread out over a number of years, but gets to benefit from the compounded growth of all of his asset over time. He may defer receiving payments until age 70 1/2 if he so desires. Any assets remaining at death do pass to his beneficiaries after all the remainder of taxes due are paid by the trust.
Appreciated stocks can also be placed in a PAT and the capital gains spread out over years. Additional assets can be placed in the trust at later times.
I will be blogging more on specific cases where either the 1031/TIC or PAT benefits a client the most. Both are very powerful and superior retirement planning concepts.
Paula Straub
askpaula@savegainstax.com
1. Provides an income stream
2. Defers all capital gains taxes
3. Relieves the seller of property management headaches
4. Gives benefits of real estate ownership (appreciation)
5. Passes asset to heirs capital gains tax free
6. Retain control of asset
However, there is another vehicle that can be just as powerful under the right circumstances. This is a Private Annuity Trust.
If the owner has a very highly appreciated property, is close to or in retirement, and needs a higher income, or just needs to separate some property from his/her estate, this may be the key.
A PAT (Private Annuity Trust) can be established, the property transferred to the trust, the trust sells the property, and the cash from sale is now put into an "annuity" and the seller becomes the annuitant. The annuitant will get payments from the trust over his life time and perhaps the lifetime of his spouse. He will pay capital gains tax spread out over a number of years, but gets to benefit from the compounded growth of all of his asset over time. He may defer receiving payments until age 70 1/2 if he so desires. Any assets remaining at death do pass to his beneficiaries after all the remainder of taxes due are paid by the trust.
Appreciated stocks can also be placed in a PAT and the capital gains spread out over years. Additional assets can be placed in the trust at later times.
I will be blogging more on specific cases where either the 1031/TIC or PAT benefits a client the most. Both are very powerful and superior retirement planning concepts.
Paula Straub
askpaula@savegainstax.com
Monday, September 12, 2005
Need More Income from your Investment Property?
The goal of every real estate investor is to see their property appreciate in value and to have it generate a positive cash flow. The appreciation normally takes care of itself if the property is of good quality, in a good location, and is held over a long enough period of time. Just like the stock market, real estate has proven to go up way more than it goes down over time.
The positive cash flow component is not always a given though. Ask any seasoned investor, and unless the property is owned free and clear, there have probably been times when he's had to dip into his own pocket to pay for some aspect of his rental. Who hasn't seen a raise in homeowner's fees, property taxes, an outlay of cash for a new roof, plumbing, paint, carpet, appliances, or a length of time supporting it between tenants.
So, what if you're nearing retirement age and see the need for increased and steady income? You may even look forward to taking a permanent break from the "joys" of hands-on property management. We all deserve to reap the rewards of our labors, right?
Basically, to meet these goals, one can do one of two things.
1. Sell the property, pay all the capital gains taxes, recaptured depreciation, etc. and pocket what is left. To receive an income, one would have to either live off whatever interest/gains your proceeds produced, or begin depleting your funds to provide you with the amount of monthly income you deem necessary. Depending on your age and financial needs and whether or not you desire to leave as large a legacy as possible, this approach may or may not work for you.
2. Employ a strategy that will defer the payment of any tax or depreciation. Let all of your gains continue to work for you throughout the course of your retirement and into the next generation. Yet, you will still get a significant and partially tax deductible monthly income.
What strategy is #2? If your property is over a million and you are not a young retiree, you might consider a Private Annuity Trust. You will get monthly income for the rest of your life, but you will be depleting your asset and only spreading out the repayment of capital gains tax over a longer period of time. That is a simplification of a complex agreement, but that is the gist.
A better option may be a 1031 exchange into a tenant in common (TIC), Basically, you exchange your property for a deeded partial interest in a grade A commercial property. You sign a contract with a property management company, and in turn receive a monthly income (typically 6-7% of your total equity). You never have to deplete your asset, and it can pass to your heirs at the stepped up basis.
The 1031/TIC exchange is a fairly new concept, sanctioned by the IRS in 2002. It is projected that the influx of property assets into this type of exchange will be close to 5 Billion dollars in 2005. That's a lot of equity. Why not let your equity continue to work for you instead of parting with a lot of profits that would take you years to replace.
Sign up now to learn the secrets of deferring capital gains tax indefinitely. Visit the link http://www.savegainstax.com
The positive cash flow component is not always a given though. Ask any seasoned investor, and unless the property is owned free and clear, there have probably been times when he's had to dip into his own pocket to pay for some aspect of his rental. Who hasn't seen a raise in homeowner's fees, property taxes, an outlay of cash for a new roof, plumbing, paint, carpet, appliances, or a length of time supporting it between tenants.
So, what if you're nearing retirement age and see the need for increased and steady income? You may even look forward to taking a permanent break from the "joys" of hands-on property management. We all deserve to reap the rewards of our labors, right?
Basically, to meet these goals, one can do one of two things.
1. Sell the property, pay all the capital gains taxes, recaptured depreciation, etc. and pocket what is left. To receive an income, one would have to either live off whatever interest/gains your proceeds produced, or begin depleting your funds to provide you with the amount of monthly income you deem necessary. Depending on your age and financial needs and whether or not you desire to leave as large a legacy as possible, this approach may or may not work for you.
2. Employ a strategy that will defer the payment of any tax or depreciation. Let all of your gains continue to work for you throughout the course of your retirement and into the next generation. Yet, you will still get a significant and partially tax deductible monthly income.
What strategy is #2? If your property is over a million and you are not a young retiree, you might consider a Private Annuity Trust. You will get monthly income for the rest of your life, but you will be depleting your asset and only spreading out the repayment of capital gains tax over a longer period of time. That is a simplification of a complex agreement, but that is the gist.
A better option may be a 1031 exchange into a tenant in common (TIC), Basically, you exchange your property for a deeded partial interest in a grade A commercial property. You sign a contract with a property management company, and in turn receive a monthly income (typically 6-7% of your total equity). You never have to deplete your asset, and it can pass to your heirs at the stepped up basis.
The 1031/TIC exchange is a fairly new concept, sanctioned by the IRS in 2002. It is projected that the influx of property assets into this type of exchange will be close to 5 Billion dollars in 2005. That's a lot of equity. Why not let your equity continue to work for you instead of parting with a lot of profits that would take you years to replace.
Sign up now to learn the secrets of deferring capital gains tax indefinitely. Visit the link http://www.savegainstax.com
Friday, September 09, 2005
You can't usually have everything, right?
As I meet with clients on a daily basis, it's clear that just about everyone wants to get the highest return on investments, have no risk, pay as little as possible for insurance premiums-but have maximum coverage, retire early and live in the home of their dreams.
When I ask what they will give up to obtain these things, they would prefer not to give up anything. If only life worked that way!
It's clear that in today's world we are more of a society that feels entitled. Work ethic, personal sacrifice, and plain old hard labor are harder to find than in years past.
Don't get me wrong, a lot of people work and work and never seem to get ahead. It's the ones with good jobs, lots of toys and no savings that are in for a rude awaking as they approach their retirement years.
With all the recent tradgedies in the gulf coast, we would all do well to think about the important things. Family, friends, personal abilities. We each may be faced with starting from scratch and rebuilding our lives from the ground up, with or without our loved ones.
I still believe what you put out is what is returned to you in due time. So, next time you think you are "entitled" to something, ask yourself why. You may be surprised when you can't come up with a good answer.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
When I ask what they will give up to obtain these things, they would prefer not to give up anything. If only life worked that way!
It's clear that in today's world we are more of a society that feels entitled. Work ethic, personal sacrifice, and plain old hard labor are harder to find than in years past.
Don't get me wrong, a lot of people work and work and never seem to get ahead. It's the ones with good jobs, lots of toys and no savings that are in for a rude awaking as they approach their retirement years.
With all the recent tradgedies in the gulf coast, we would all do well to think about the important things. Family, friends, personal abilities. We each may be faced with starting from scratch and rebuilding our lives from the ground up, with or without our loved ones.
I still believe what you put out is what is returned to you in due time. So, next time you think you are "entitled" to something, ask yourself why. You may be surprised when you can't come up with a good answer.
Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com
Monday, August 29, 2005
5 Options when selling Investment Property
So you want to sell your rental property. Do you know what your options are? You do have several. The crux is, how much of your gains do you actually want to keep?
Option 1: Sell your property and pay Capital Gains Tax, Recaptured Depreciation, and if in California, another 3.3% franchise fee to be held for a year.
Result: Lose the most money overall
Option 2: Sell your property and do a 1031 exchange into a equal or greater value property. Defer Capital Gains and recaptured depreciation.
Result: Usually higher property taxes, a new mortgage and the same property management problems.
Option 3: Set up a Charitable Remainder Trust. Put your property in the trust and have the trust sell the property. Pay no capital gains tax.
Result: Lose control of your asset. Receive income from the gains on the principle during your lifetime. On your death, the principle goes to the charity of your choice. Great if you have no heirs and don't need more income than the interest on the principle provides.
Option 4: Set up a Private Annuity Trust. Put your property in the trust and have the trust sell the asset. Spread out the capital gains over a period where you take equal payments for your lifetime.
Result: Lose control of your asset. Trustee will invest. You can defer taking income and let principle grow for a period of time. Your heirs can receive the remainder of the asset on your death.
Option 5: Do a 1031 exchange into a tenant in common property. Defer all capital gains tax and recaptured depreciation.
Result: Receive contractual monthly income. Have no property management headaches. Receive all appreciation on your share of grade A commercial building. Exchange in the future for another property. On your death, the asset passes to your heirs at stepped up basis under current tax law. No capital gains due. No recaptured depreciation. No depletion of asset.
Obviously, these options have been simplified for this article, but you get the gist.
Which option would be your choice?
Sign up right now for a free teleconference and learn more about which is most beneficial for you.
Visit http://www.savegainstax.com and register for the next call.
Or
email Paula at askpaula@savegainstax.com and ask any questions you may have.
Option 1: Sell your property and pay Capital Gains Tax, Recaptured Depreciation, and if in California, another 3.3% franchise fee to be held for a year.
Result: Lose the most money overall
Option 2: Sell your property and do a 1031 exchange into a equal or greater value property. Defer Capital Gains and recaptured depreciation.
Result: Usually higher property taxes, a new mortgage and the same property management problems.
Option 3: Set up a Charitable Remainder Trust. Put your property in the trust and have the trust sell the property. Pay no capital gains tax.
Result: Lose control of your asset. Receive income from the gains on the principle during your lifetime. On your death, the principle goes to the charity of your choice. Great if you have no heirs and don't need more income than the interest on the principle provides.
Option 4: Set up a Private Annuity Trust. Put your property in the trust and have the trust sell the asset. Spread out the capital gains over a period where you take equal payments for your lifetime.
Result: Lose control of your asset. Trustee will invest. You can defer taking income and let principle grow for a period of time. Your heirs can receive the remainder of the asset on your death.
Option 5: Do a 1031 exchange into a tenant in common property. Defer all capital gains tax and recaptured depreciation.
Result: Receive contractual monthly income. Have no property management headaches. Receive all appreciation on your share of grade A commercial building. Exchange in the future for another property. On your death, the asset passes to your heirs at stepped up basis under current tax law. No capital gains due. No recaptured depreciation. No depletion of asset.
Obviously, these options have been simplified for this article, but you get the gist.
Which option would be your choice?
Sign up right now for a free teleconference and learn more about which is most beneficial for you.
Visit http://www.savegainstax.com and register for the next call.
Or
email Paula at askpaula@savegainstax.com and ask any questions you may have.
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