You have made some great investments in Real Estate or a Stock Portfolio. Congratulations! Now you are ready to retire on your gains. But wait. To benefit from your investment appreciation, you're going to have to sell some or all of those assets.
If you sell your investment property, you will need to pay capital gains tax to the Federal Government, State, and you will also pay recaptured depreciation. If you're in California, add another 3 1/3% in withholding. That's a huge chunk of change, and a big blow to your savings.
If you sell your stocks, you'll be giving up at least 15% to capital gains. There is also no guarantee that the long term capital gains rate will remain at 15% forever. It could increase down the road.
How can you start receiving income but not get hit with huge amounts of tax?
For real property, there is a 1031 exchange into a tenant in common property. This works well for younger investors that don't want to manage property anymore, but still enjoy the benefits of real estate ownership. This is a subject covered in many of my previous articles.
There is another powerful concept. It's called a Private Annuity Trust. These trusts have been around since 1930, but until the last few years have only been done for Estate Planning purposes. The Private Annuity Trust also works extremely well for Retirement Planning. It is fairly complex to set up and administrate, so many financial planners, real estate brokers, CPAs and Attorneys still don't know much about them.
The procedure is basically this.
1. A Private Annuity Trust is established. You, the seller becomes the annuitant.
2. A fair market appraisal is done to determine value.
3. The seller can negotiate a sale price at the appraised value.
4. The property is transferred to the trust and the trust is now the seller of the property and retains the proceeds.
5. The proceeds are invested by trustees (not the annuitant) and an arrangement is made to pay the annuitant (and perhaps their spouse) in monthly payments for the remainder of their lives. The capital gains tax is spread out over the course of your lifetime. If you pass away before your estimated average calculated life span, the remainder of the assets pass to the beneficiaries. The balance will be free of Estate Tax, Gift Tax, Generation skipping tax, and Transfer tax. Any capital gains tax still due will be paid before disbursement.
6. Other properties or stocks can be added to the trust at a later time, and recieve the same benefits.
As an example, let's say you have a million dollar gain on a property. You might very well owe 350K in taxes. With a Private Annuity Trust, all one million goes to work for you, and you can receive montyly income for the rest of your life. The exact amount is determined by your age and the time you choose to begin receiving your payments. You have the option to defer receiving payments until the age of 70 1/2. This allows the assets to grow tax deferred, and allows for greater income in the future.
These assets are removed from your estate, as the trust now owns them and the annuitant relinquishes control over how they are invested.
Setting up a Private Annuity Trust can definitely give a turbo boost to your retirement bottom line. Ask yourself, would you rather give a "gift" to the government in a big lump sum, or would you like to pay in small chunks and have the bulk of your profits working for you and earning compounded interest for years to come?
Find out if you qualify to save thousands in capital gains tax. Ask Paula a question and be on the next information packed teleconference. Sign up right now at http://www.savegainstax.com
Wednesday, October 12, 2005
Tuesday, October 11, 2005
Case Study #3 Split TIC and PAT
No two cases are ever quite the same. Some people I can help, and some people I truly can't. Half the fun is in decided who is who.
Take this case. It was a 67 year old lady, a widower. She does have children and grandchildren, but also has to look out for herself.
She has a primary residence, a rental condo and a second mountain home which has been rented for the last few years.
She has gotten to the point where she can use some extra income, and does not want the hassles of property management.
She purchased the mountain home in 1994 for 200K. It now is worth 790K. She owns it outright. She wants to sell, but found out she would owe 100K in capital gains tax. It's hard to give up that kind of money to Uncle Sam.
After going over her needs and options, the best choice for her will be to split the proceeds between a 1031 exchange into the tenant in common property and a private annuity trust.
Both will provide her a monthly income. She will being taking payments immediately from the PAT, and will slowly deplete that asset over time. The other half, she will also receive an income from (about 2K/mo) and that income will increase over time. She can later do another exchange and continue to increase her income. The TIC will pass to her heirs at the stepped up basis. She can always add that asset to the PAT at a later time, if the situation warranted it.
She is now very diversified, and she has a stable income which allows her to live very comfortably. Part of her assets are removed from her estate, so her heirs will not be faced with large amounts of estate taxes at her passing.
Bottom line, she has that 100K working in her favor for years to come.
Paula Straub
http://www.savegainstax.com
Take this case. It was a 67 year old lady, a widower. She does have children and grandchildren, but also has to look out for herself.
She has a primary residence, a rental condo and a second mountain home which has been rented for the last few years.
She has gotten to the point where she can use some extra income, and does not want the hassles of property management.
She purchased the mountain home in 1994 for 200K. It now is worth 790K. She owns it outright. She wants to sell, but found out she would owe 100K in capital gains tax. It's hard to give up that kind of money to Uncle Sam.
After going over her needs and options, the best choice for her will be to split the proceeds between a 1031 exchange into the tenant in common property and a private annuity trust.
Both will provide her a monthly income. She will being taking payments immediately from the PAT, and will slowly deplete that asset over time. The other half, she will also receive an income from (about 2K/mo) and that income will increase over time. She can later do another exchange and continue to increase her income. The TIC will pass to her heirs at the stepped up basis. She can always add that asset to the PAT at a later time, if the situation warranted it.
She is now very diversified, and she has a stable income which allows her to live very comfortably. Part of her assets are removed from her estate, so her heirs will not be faced with large amounts of estate taxes at her passing.
Bottom line, she has that 100K working in her favor for years to come.
Paula Straub
http://www.savegainstax.com
Case Study #3- Split TIC and PAT
No two cases are ever quite the same. Some people I can help, and some people I truly can't. Half the fun is in decided who is who.
Take this case. It was a 67 year old lady, a widower. She does have children and grandchildren, but also has to look out for herself.
She has a primary residence, a rental condo and a second mountain home which has been rented for the last few years.
She has gotten to the point where she can use some extra income, and does not want the hassles of property management.
She purchased the mountain home in 1994 for 200K. It now is worth 790K. She owns it outright. She wants to sell, but found out she would owe 100K in capital gains tax. It's hard to give up that kind of money to Uncle Sam.
After going over her needs and options, the best choice for her will be to split the proceeds between a 1031 exchange into the tenant in common property and a private annuity trust.
Both will provide her a monthly income. She will being taking payments immediately from the PAT, and will slowly deplete that asset over time. The other half, she will also receive an income from (about 2K/mo) and that income will increase over time. She can later do another exchange and continue to increase her income. The TIC will pass to her heirs at the stepped up basis. She can always add that asset to the PAT at a later time, if the situation warranted it.
She is now very diversified, and she has a stable income which allows her to live very comfortably. Part of her assets are removed from her estate, so her heirs will not be faced with large amounts of estate taxes at her passing.
Bottom line, she has that 100K working in her favor for years to come.
Paula Straub
http://www.savegainstax.com
Take this case. It was a 67 year old lady, a widower. She does have children and grandchildren, but also has to look out for herself.
She has a primary residence, a rental condo and a second mountain home which has been rented for the last few years.
She has gotten to the point where she can use some extra income, and does not want the hassles of property management.
She purchased the mountain home in 1994 for 200K. It now is worth 790K. She owns it outright. She wants to sell, but found out she would owe 100K in capital gains tax. It's hard to give up that kind of money to Uncle Sam.
After going over her needs and options, the best choice for her will be to split the proceeds between a 1031 exchange into the tenant in common property and a private annuity trust.
Both will provide her a monthly income. She will being taking payments immediately from the PAT, and will slowly deplete that asset over time. The other half, she will also receive an income from (about 2K/mo) and that income will increase over time. She can later do another exchange and continue to increase her income. The TIC will pass to her heirs at the stepped up basis. She can always add that asset to the PAT at a later time, if the situation warranted it.
She is now very diversified, and she has a stable income which allows her to live very comfortably. Part of her assets are removed from her estate, so her heirs will not be faced with large amounts of estate taxes at her passing.
Bottom line, she has that 100K working in her favor for years to come.
Paula Straub
http://www.savegainstax.com
Friday, October 07, 2005
Case Study #2 - Private Annuity Trust
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
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
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
Subscribe to:
Posts (Atom)