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Business Briefs

Real Estate & 1031 Exchange

Donald Trump has done well investing in real estate, which is the focus of this article. Not Donald Trump, but on real estate as an investment and what to do when you want to get out?A client of mine has done well in the real estate rental business with 16 single-family homes and a couple of duplexes. At age 66, he is not ready to slow down and enjoys the steady stream of income he receives from his holdings. I have asked him if he ever tires of the work and thinks about retiring while maintaining that steady stream of income. His answer has been in flux for a year until he called and asked about the tax consequences of getting out of his real estate investments.There are several things he can do:

  • Sell the properties and pay the capital gains tax at 15 percent, the depreciation recapture tax at 25 percent plus the 4.63 percent state tax
  • A 1031 Exchange, where he can sell his property and buy like properties at equal or greater value in a short time frame and stay in the real estate investment business, which does not suit him
  • A Charitable Remainder Trust (ChRT), where he would gift the proceeds of the sale to charity, and the charities would receive the proceeds after his death. During his lifetime, he would receive an income stream that was negotiated with the charitable organizations, and his beneficiaries would receive nothing except the benefit of knowing that the money went to a good
  • A Private Annuity Trust (PAT) that would allow him to move the real estate property to a trust and in return he would receive an income stream based on the IRS Mortality Tables. His beneficiaries would receive dollars gifted into a separate part of the trust upon his death. The taxes would be deferred until the income stream began, which could be years away.
In both the Charitable Remainder Trust and the Private Annuity Trust, the value of the real estate has been removed from his taxable estate and would not be subject to federal or state estate/gift taxes, sometimes referred to as “Death Taxes.” The “sell and pay the taxes” scenario as well as the “1031 Exchange” would keep the real estate or the dollars in the estate for estate tax purposes.If my client were married, the income stream from the ChRT and the PAT would be set up so that the surviving spouse would continue to receive the income stream for the rest of his or her life.What counts is what you want to have happen with your real estate investments and the taxation that may accompany the sale of those properties.Gordon Williams, an estate planning attorney in Colorado Springs states, “These concepts are very advanced. The need for a knowledgeable professional is self evident, as the ramifications for poor implementation are very costly.”Seek a knowledgeable professional before selling, exchanging or using a trust to defer taxes. The right advisor could save you money!Donnell Services, LLC719-886-3377Registered RepresentativeSecurities America, Inc.Member NASD, SIPCFor more information, visit www.alexdonnell1.sarep.comDonnell Services, LLC and Securities America, Inc. are independent companies.

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