How would you like to be able to sell appreciated real estate without paying a dime in capital gains tax? In fact, you do not have to purchase replacement real estate with the sale proceeds and all of the future gains from your new investment will be tax FREE. (If you think this is an IRA or a qualified retirement plan you are wrong.) Even better, rather than paying any tax you will actually receive an income tax deduction. Does it sound to good to be true? It is too good and it is true. The strategy I am alluding to is a Charitable Remainder Trust, “CRT”. If you have never heard of this tool count yourself among the vast majority of real estate investors whose local professionals only know of 1031 tax deferral strategies for real estate investments. Tax deferral is great, but TAX FREE is sooooo much better.
A CRT is a specific type of trust specifically authorized under federal tax law. Like all trusts, a CRT has four players; the grantor (the person who contributes assets to the trust, a trustee (the person who controls the assets held within the trust), an income beneficiary (the person or persons entitled to the income generated by the trust), and the remainder beneficiary(ies) (the person or in this instance, the charitable organizations entitled to receive the trust assets when the income beneficiary dies or after a set term of years). Alright, if I threw you a curve with the last party to the trust, i.e., the remainder beneficiary being a charity, then it should shed some light on how this type of trust received its name. Unlike a living trust that distributes it assets to family members when you pass away, a CRT must distribute any undistributed assets to one or more charities of your choosing (more on how your kids can benefit from this payout later).
If you are inclined to stop reading now because you are of the opinion that charity starts at home then you are missing out on one of the greatest tax benefits still available under the tax code. Believe me when I write you want the charitable beneficiary. It is the requirement you name a charitable beneficiary that will produce phenomenal tax planning opportunities. Consider the following benefits:
- When you transfer an asset into the trust you will receive an immediate income tax deduction for 10% of the assets value;
- Appreciated assets contributed to the trust can be disposed of tax free;
- All future gains generated inside of the trust are tax free to the trust; and
- All the income generated by these assets when paid out
Consider Robert who is looking to sell a commercial property he has owned for many years. After consulting with his tax preparer Robert was given the following numbers regarding the tax consequences of this sale:
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Clint Coons is a licensed attorney, active real estate investor, successful entrepreneur, and published author who specializes in asset protection and business planning. Clint shares his knowledge and strategies at seminars nationwide with real estate investors, stock traders, and small business owners. He is nationally recognized for his ability to take complicated laws or structures and explain them in crystal clear form. He helps his client’s protect their investments through his innovative and dynamic approach to asset management.