We are advising our Los Gatos clients interested in selling their home to consult a with our Estate Planning specialist to better understand the Capital Gains taxes that their sales transaction will generate. Â With a combined Federal, State and High-Income Earner tax, these Los Gatos home owners are looking at a huge tax bill which could be about 30%. Â One alternative to defer your Capital Gains tax on the Los Gatos home sale is Deferred Sales Trust. Â Â
The process starts with initial due diligence to see if a Deferred Sales Trust can accomplish your goals. Â If the transaction is viable,Â the Trust and property owner will negotiate the terms with regards to to the assets. Â Then the property owner (â€œSeller/Taxpayerâ€ hereby referenced as "seller"), sells the assets to a dedicated trust (the â€œTrustâ€)Â that is set up specifically for this Se and theÂ contemplated transaction.
Next, the Trustee (must be DST Trained and Approved) ofÂ the trust pays the Seller the property. The payment isnâ€™t in cash, but with a special payment contract called an â€œinstallment sales contractâ€. It is strictlyÂ a private arrangement between the trust and the Seller/Â Taxpayer. Â The term of payments are established in advanceÂ and pursuant to the sale contract negotiated by andÂ between the Seller and the Trustee. Â The payments may begin immediately or they may beÂ deferred for some period of months or years. Â The Trust then sells the property. There are generallyÂ minimal Capital Gains Taxes due from the Trust on the saleÂ since the Trust often purchases the property for a price andÂ value similar to what it may get sold to a third party Buyer. Â
The Seller isÂ not taxed on the saleÂ since he has not yetÂ received any cash for the sale. Often Seller will chooseÂ deferral because theyÂ have other incomeÂ and donâ€™t need theÂ payments rightÂ away. Of course, theÂ payments may beginÂ immediately since deferral is strictly anÂ option. Â It is importantÂ to understand thatÂ payment of the capital gain tax to the IRS is done with anÂ â€œeasy installment planâ€ as the Seller receives theÂ payments. Part of the payment received is tax free returnÂ of basis, part is return of gain which is taxed at capital gain rates, and part is interest. Â
In addition, the tax paymentsÂ will be made with depreciated dollars which will cost less due to the impact of inflation. Â IfÂ invested properly, the money in the trust could potentiallyÂ grow at a greater rate than that of inflation and even theÂ distribution rate and ensures the necessary liquidity to payÂ back the note due to the Seller. Â (The interest rateÂ in the note to you is dictated by the IRS to be a fair and armâ€™s length or competitive rate, i.e., 6% to 8%.) But if you have taken acceleratedÂ depreciation in excess over straight line, this amount can no be deferred. Â
Contact us if you need to talk to our Estate Planning team.