8A — November 23 - December 13, 2018 — Professional Services — M id A tlantic

Real Estate Journal

C apital G ains T ax D eferral

hy can’t you con- vince your client to list their property By Mike Martinelli, Estate Planning Team Why you can’t get your prospect to list that property (and what you can do about it) W City even has a City tax that can further exacerbate the capital gains tax liability.

or $450,000.00 as a married couple, your federal rate is now 20% up from 15% - a 5% increase. • If you have income or capi- tal gain over $200,000.00 as an individual, or $250,000.00 as a married couple, you will now have to pay an additional tax of 3.8% for the Obama Health Care tax obligation. • If you live in a State with a high State Capital Gains tax like California, New York or Illinois, for example, you could pay substantially more in state capital gains taxes. New York

transaction will require that prospect to reinvest in replace- ment real estate in a very short period of time. In fact, when engaging in a 1031 Exchange, they must identify their re- placement real estate within a strictly enforced time period of 45 days from the date of their relinquished property closing or lose the opportunity for tax deferral under Section 1031. Reinvesting in real estate under these conditions, and paying inflated acquisition prices for their replacement property, could be counterin- tuitive to your prospect’s goals and, therefore, even a 1031 Exchange may not be an at- tractive or useful solution for them. Well, a better solution for them may be the Deferred Sales Trust ™ . The Deferred Sales Trust ™ is the core service of the Estate Planning Team. It has become a popular strategy for defer- ring capital gains taxes upon the sale of real estate and businesses and other highly appreciated assets. Like a 1031 Exchange, the DST can be used to defer capital gains taxes on real estate but, unlike a 1031 Exchange, it does not require that the taxpayer reinvest in Like-kind property, thereby providing a much broader va- riety of potential investment options and the opportunity for diversification of assets. Moreover, the DST can be used to defer capital gains taxes on other high value assets such as a taxpayer’s business, including goodwill, which is typically not appropriate for 1031 Exchange treatment. Here’s a simplified explana- tion of how the DST works: The client sells their asset to a third-party trust in a seller financed transaction (in whole or in part) under IRC Section 453. In return, the taxpayer receives an installment note with a specified rate of return. The trust then sells the asset at the new basis (established under the sale to the trust) to the third-party buyer (whom you, the real estate broker, locate). The result is that the taxpayer’s capital gain taxes are deferred under the install- ment sale rules and the relin- quished property is sold from the trust, leaving the pre-tax proceeds to be invested within the trust in a manner that will secure the note principal and support the agreed upon rate continued on page 14A

now is the time to sell because the real estate market has ap- preciated so rapidly in recent years and the future is uncer- tain. Everything points to sell- ing yet they won’t do it. Why? Well, the problem may very well be that they actually want to sell but are concerned about substantial Capital Gains Tax- es draining a large portion of their sales proceeds and deplet- ing their wealth. CONSIDER THE TAX IM- PLICATIONS… • As of 2013, if you have income or capital gain over $425,000.00 as an individual,

w i t h y o u ? Y o u k n o w the one. The h i gh l y ap - p r e c i a t e d p r o p e r t y that they’ve own e d f o r years , and that’s been

It is conceivable that your prospect could end up paying a third or more of their capital gains (the amounts over their adjusted basis) in capital gains taxes. So, you might say the solu- tion for somebody who wants to sell is a 1031 exchange. But the very reason they may want to sell is their current ability to secure what they perceive to be an attractive price in an appre- ciated real estate market. But, by definition, a 1031 exchange

Mike Martinelli

fully depreciated. You’ve told them about all of the great resources you have to market that property and secure the best price for them, and that


Involved in a failed 1031 exchange? Contact: 610-238-9900 mmartinelli@myept.com

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