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| Estate planning question |
| Posted by: FLR |
| Date: July 21, 2005 01:16:46 PM |
| I own a number of rental properties. I'd like to cash out of them, but the potential income taxes are horrendous. Any ideas on how to avoid or at least reduce the tax liability? |
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| Re: Estate planning question |
| Posted by: Ed |
| Date: July 21, 2005 11:05:48 PM |
| One way to minimize the tax hit is to move into the units. Live there for two years and then you can shelter 250,000 (if single) or 500k (if married and both of you live there, title, etc.) of the gain from Federal taxes. Just keep moving every two years and selling and you can shelter those gains repeatidly. See the specific rules, but the general rule is that you must move into the units and live there for at least 24 months to avoid paying tax on the gains. You will still have to pay taxes to the extent of depreciation, but you have that no matter (unless you do a 1031 exchange, but that doesn't allow you to cash out). |
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| Re: Estate planning question |
| Posted by: REL |
| Date: July 22, 2005 12:04:23 AM |
| While Ed's suggestion may work for a single-family home, it will only cover the one unit lived in for a multi-family prpperty, and won't solve the problem for multiple properties.
There is a solution you might want to consider that can cover any number of properties and has no limit regarding the amount that can be sheltered. This is the Charitable Trust.
Utilizing this vehicle, a charitable trust is set up, the rental property is transferred to the trust, sold tax-free, the proceeds are invested for a good return, and the trust thereafter makes hassle-free payments back to the landlord for as long as the landlord and his or her spouse are alive. The landlord decides what size monthly payment to withdraw, but the IRS does have some rules.
In theory, they want you to withdraw no less than 5% annually, but they also don’t want you to withdraw so much that they believe there will be less than 10% left for charity as a gift (for example, on a $100,000 property, the IRS wants at least $10,000 left for charity).
In practice, landlords are able to select IRS approved trust payout rates that range from 5% up to 12%, depending upon their age when they establish the trust. Therefore, the trust payments from a $100,000 trust could range from $416 to $1,000 monthly, at the landlord’s discretion. For a $1,000,000 trust, payments could range from $4,160 to $10,000 per month.
Most people would agree that, given a choice between paying up to the significant taxes today or giving 10% to their favorite charities at death, the charitable option makes more sense. It’s much better than depositing after-tax sales proceeds in the bank at a 3% return.
The disadvantages of the charitable trust are that (1) it does not provide a lump sum amount at the time of sale and (2) it can reduce the amount that ends up in the landlord's estate for his heirs, the amount depending on how long the landlord lives. At one extreme, an early death benefits the charity and results in little or nothing going into the estate. At the other extreme, a long life can result in a large amount going into the estate if the landlord had chosen to save rather than spend the monthly payments. Of course, if the landlord blows the after-tax proceeds of a normal sale, nothing ends up in his estate either. |
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