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Real Estate Front Lines

By Leila S. Mortaz | Real Estate Pro in Los Gatos, CA

How to defer the 30% Capital Gains tax on your Los Gatos sale!?

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.  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%.  One alternative to defer your Capital Gains tax on the Los Gatos home sale is Deferred Sales Trust.   

The process starts with initial due diligence to see if a Deferred Sales Trust can accomplish your goals.  If the transaction is viable, the Trust and property owner will negotiate the terms with regards to to the assets.   Then the property owner (“Seller/Taxpayer” hereby referenced as "seller"), sells the assets to a dedicated trust (the “Trust”) that is set up specifically for this Se and the contemplated transaction.

Next, the Trustee (must be DST Trained and Approved) of the trust pays the Seller the property. The payment isn’t in cash, but with a special payment contract called an “installment sales contract”. It is strictly a private arrangement between the trust and the Seller/ Taxpayer.  The term of payments are established in advance and pursuant to the sale contract negotiated by and between the Seller and the Trustee.  The payments may begin immediately or they may be deferred for some period of months or years.  The Trust then sells the property. There are generally minimal Capital Gains Taxes due from the Trust on the sale since the Trust often purchases the property for a price and value similar to what it may get sold to a third party Buyer.  

The Seller is not taxed on the sale since he has not yet received any cash for the sale. Often Seller will choose deferral because they have other income and don’t need the payments right away. Of course, the payments may begin immediately since deferral is strictly an option.  It is important to understand that payment of the capital gain tax to the IRS is done with an “easy installment plan” as the Seller receives the payments. Part of the payment received is tax free return of basis, part is return of gain which is taxed at capital gain rates, and part is interest.  

In addition, the tax payments will be made with depreciated dollars which will cost less due to the impact of inflation.   If invested properly, the money in the trust could potentially grow at a greater rate than that of inflation and even the distribution rate and ensures the necessary liquidity to pay back the note due to the Seller.  (The interest rate in the note to you is dictated by the IRS to be a fair and arm’s length or competitive rate, i.e., 6% to 8%.) But if you have taken accelerated depreciation in excess over straight line, this amount can no be deferred.  

Contact us if you need to talk to our Estate Planning team.

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