Alternitve
To 1031
A
Way Out
Those who own highly appreciated commercial and residential
investment real estate assets are often reluctant to sell
because of capital gains and depreciation recapture costs
associated with the sale. But what other choice do They
have? Is there another way to deal with the capital gains
tax deficits that so many experience when they sell their
real estate assets? The answer may lie in the Private
Annuity Trust.
This IRS-accepted capital gains tax deferral program could
save you thousands of dollars and at the same time make
a profit on the money you would have paid to Uncle Sam
in the year of the sale. Obviously, this strategy is gaining
popularity among those who have highly appreciated assets
that are marked for sale. You, too, can take advantage
of this program once you understand how it works.
The
process starts with a property owner, transferring ownership
of the property to a dedicated family trust. Next, the
trust "pays" the property owner (annuitant)
for the property. The payment isn't in cash, but with
a special payment contract called a "private annuity."
The private annuity promises to make payments to the annuitant
for the rest of his or her life. The trust then sells
the property. There are zero taxes to the trust on the
sale since the trust "purchased" the property
in the form of a private annuity contract.
Often annuitants will choose deferral of annuity payments
because they have other income and don't need the payments
right away. The tax code doesn't require payment of the
capital gains until the annuity payments begin and the
capital gains tax is paid to the IRS with an "easy
installment plan" since only that portion of capital
gains is due in proportion the number of years the annuitant
is actuarially stated to live. For example, if the annuitant
begins to receive annuity payments at age 65 and the actuarial
tables state that they will live until they are 85 years
of age, then the capital gains are broken up into 20 payments
(one per year). There is no interest or penalty on these
deferred payments of the tax. On top of that, the tax
payments will be made with depreciated dollars. Yet the
investment money in the trust could grow at a greater
rate than that of inflation.
Here's an example of how well this works. We start with
a $1,000,000 property value. The annuitant's basis is
$200,000, leaving a profit of $800,000. We are estimating
combined federal and state capital gains taxes at $160,000,
which is 20% of the profit. This leaves net cash of $840,000
in the direct sale vs. $1,000,000 in the annuity deferral
sale. We are assuming the investment cash earns a conservative
6% before income taxes for the next 20 years. The age
of the annuitant is 45 and he chooses to start his annuity
payments at 65. Under the direct and taxed sale, the property
owner receives annual payments of $277,300 vs. $330,119
under the annuity plan. This yields an estimated life
payout of $5,546,000 under the taxed plan vs. $6,602,380
with the annuity strategy. That is an advantage of $1,056,380
to the annuitant! This advantage is due to the larger
amount of net cash that was initially available to invest
for the annuitant.
As illustrated above, the Premier VI Private Annuity Trust
has the ability to generate substantially more money over
the long run than a direct and taxed sale. It is also
superior to the charitable remainder trust and installment
sales in many respects.
For additional information visit
http://www.mypatplan.com/samerica |
