Paying Capital Gains in Real Estate

Let's start this out by learning what a capital gain is. A capital gain is considered the difference between what you paid for your investment and what you received as a return on that same investment.

The United States government already offers many homeowners all kinds of tax breaks. The biggest ones are the property tax deductions and the mortgage interest. Now if you're a home seller you also have a great advantage. You won't owe the government anything off the sale of your home. The way it works is like this. When you decide to sell your home and your single you can make up to a $250,000 profit and not have to worry about paying any capital gain taxes. What's even better is if you're married you can make up to $500,000 in profit and not owe a dime. Many home sellers are shocked by this huge break. You can utilize this new law an unlimited number of times. There are still some requirements that need to be met. The first requirement is the home has to be your principal residence. It doesn't apply to investment housing. You also must live in the home for at least two out of the five years prior to the sale of it.

The first step in the calculation of capital gains in Canada is you need to determine whether or not the property sold was capital property and then determine if the proceeds of this sale exceed the total sum of the adjusted cost base. Adjusted cost base along with the expenses that were incurred at the time of the sale. Claiming any type of reserve or any kind of capital gains deduction could have an affect on your capital gain reporting as well as your capital gain tax amount. If the payment will be received over several years claiming a reserve will allow you to report any capital gains from only the portion of the proceeds of the disposition you had received during that year. The lifetime total exemption for any person is $250,000. This isn't too bad especially if you made a small investment.

Avoid Paying Capital Gains Until The Ripe Old Age of 70

How, you might ask, can I avoid paying capital gains taxes until the ripe old age of 70? Well, this tool, which has been around since the 1950's, is shockingly unknown to the vast majority of Americans. Sadly, who knows how many millions of dollars have been paid in capital gains taxes that could have been used toward retirement, college education, medical expenses, or even a trip around the world.

The Private Annuity Trust, (or PAT for short) is an IRS-authorized program outlined under Section 72 of the Internal Revenue Code, which allows a seller of property to defer capital gains taxes at the time of the sale. There is no maximum to the size of the transaction and the PAT can be used on any kind of real estate transaction, whether it is your primary residence, a vacation home, or a commercial and retail developments.

Here's a brief outline of how it works:

Let's say you sell your home for $500,000. The property owner (known as the "Annuitant") transfers ownership of the property to the PAT. Then, the Trust "pays" the Annuitant for the property with a special payment contract call a "private annuity." The form of payment is a life annuity. Then, the trust sells the property to the buyer, getting cash for the property.

A private annuity is similar to an installment sale. However, in this case, the private annuity promises to make payments to the Annuitant for the rest of his life. For example, if the value of the property is $500,000, then the face value of the annuity is also $500,000.

The Annuitant is not taxed on the sale since he has not yet received any cash for the sale. In fact, if the Annuitant has other income or doesn't need the annuity payments, he or she can choose to defer the payments until the age of 70. Of course, he or she can also choose to start the payments immediately. However, the payments must begin by the age of 70. As each payment is made to the Annuitant, the calculated installment of the capital gains is paid.

This tax-deferral strategy has many investment and financial options, so it is important to have a very knowledgeable and experienced financial and estate planner who can explain the process thoroughly and will make sure you don't miss any crucial steps. It is also important that you have a real estate agent who is knowledgeable in this area and who can also help make sure the transactions goes as smooth as possible. It is also important for you to have an understanding of this strategy and you must know the Pros and Cons before getting involved. But remember, it's just another option.

Strategies to Avoid Paying Capital Gains Taxes

A successful self directed investor which has made gains during the year should strategically plan against paying capital gains taxes. Understanding the mechanics of the capital gains tax itself is very important. Following is the way capital gains tax is calculated and what my policy is to keep the share that the tax man is supposed to get. 
 
Capital gains is the difference between the book value and the market value at the time you have disposed of an asset. For example, if you paid $10.00 per share and you purchased 1000 shares the book value would be $10,000.00. If the share value increases to $15.00 per share and you sell your 1000 share position, the (market value) or sale price is $15,000.00. Using these values, your capital gain would be the increase in value between the $10,000.00 purchase price and the sale price of $15,000.00 which is $5,000.00. The capital gain tax applies in the following manner, the first half of the gain ($2,500.00) is free of taxation and the capital gain tax is payable on the ($2,500.00) remaining half. The actual amount payable is figured according to your present income bracket for that calendar year.
 
Now this is how I save paying tax on the remaining $2,500.00. I immediately transfer the funds into my retirement savings plan (RSP) and defer the tax until retirement. Now I not only get to keep the full $5,000.00 but I have generated a tax deferral at tax time. I may have even generated a tax refund when filing my income tax return. Depending on how much time the funds remain in my RSP it may multiply over and over again.
 
There are many ways to defer paying capital gains taxes but this is just one of my strategies. Plan ahead and generate a larger RSP portfolio and pay less tax.

The 1031 Exchange Alternative - How to Sell Commercial Real Estate Without Paying Capital Gains Tax

When it comes to tax planning, eliminating the capital gains and depreciation recapture taxes on the sale of appreciated commercial real estate is a hot topic. In fact, there are countless numbers of would be sellers who don't because of this. Many would be sellers simply want out of the real estate - they're tired of landlording, fixing toilets, and never ending maintenance and management. They would like to sell, reinvest elsewhere and simply receive a check, spending their time doing what they like. Unfortunately, the only way to get out of real estate without losing control of the "asset" is to sell it outright-and pay the tax. You could implement a property exchange (1031) directed by a Qualified Intermediary, but the key word here is "exchange"- you've simply traded one for the other. You're still in real estate.

Other sellers may want to buy more real estate, but don't want the restrictions and rigid timeframes of a 1031 Exchange. What can you do? Is there any other way to get out without paying these taxes? The answer may lie in the use of a specialized trust, designed in accordance with strict IRS guidelines and a private letter ruling. It can be used as a tax deferral tool and as a 1031 Exchange alternative.

This tax deferral tool could, if implemented, save you tens of thousands of dollars in taxes that you would have otherwise voluntarily paid to Uncle Sam. These are dollars that you can use to generate a higher income and to potentially profit from. It's as if Uncle Sam let you keep the tax dollars, invest them somewhere, and use the income they generate for you. It really is like "free" money. As a result, it comes as no surprise that this strategy is gaining popularity among owners of highly appreciated commercial real estate who have properties marked for sale. With a better understanding of the process, you too can take advantage of this program.

The process begins when an owner of commercial property sells it to a special trust owned by a third party company. Then, the trust sells the property to a buyer. There are no taxes to the trust because the trust "purchased" the property from you for what it sold it for. At the completion of the sale, the money from the buyer is now in the trust. At this point, the trust begins to "pay" you. This payment isn't is a lump sum, but a payment contract, referred to as an "installment contract". This contract is similar to that of an Installment Sale, but without the restrictions and with many added benefits. This contract promises to make payments to you over a pre-specified period of time.

You can choose when and how payments are to be made. You may not need the income right away-or ever. It's up to you. The tax code requires the payment of tax to the IRS only when you begin to take installment payments. Therefore, tax is paid incrementally. It is paid in proportion to the number of years in your "installment plan". In the case of a 1031 exchange, money for a new purchase can be acquired anytime from the sale of the old property and use of this trust without paying taxes, thereby eliminating the restrictions and rigid timeframes of the 1031 Exchange. Either way, your equity is no longer "tax trapped".

This special type of trust gives you the potential to generate much more money over the long run than you would with the taxes lost in a direct sale.

This may be the most suitable or appropriate tax strategy depending on your circumstances. Contact the author for a complimentary tax analysis and to discuss your specific circumstances and goals.