How Homeowners Can Minimize Capital Gains Taxes Part 2

Introduction

Most Homeowners have heard of the deduction you can take when selling your primary residence. This deduction is called the 121Exemption.

Did you know there are three other different tax minimization solutions for reducing, deferring, or completely eliminating the tax bill on the sale of a Primary Residence or Second Home?

In this series of posts we will discuss the three Homeowner Tax Minimization Options available to you in three separate blog posts. The second category is the Deferred Sales Trust with many investment options to choose from.

Category 2: Deferred Sales Trust

The Deferred Sales Trust is our most powerful tax minimization option for the sale of real estate, businesses, stocks, bonds, crypto, cars, artwork, or almost anything with a capital gain.

What is a Deferred Sales Trust?

The Deferred Sales Trust combines IRC 453 of the US tax code with trust law to create an installment sale to a trust. This proprietary legal structure can defer all capital gains for a set time or indefinitely, while providing an agreed upon income stream.

Therefore, the Deferred Sales Trust is a legal contract between the seller (the noteholder) and a third-party trustee (the Trustee) in which the seller (you) sells a primary residence, second home, investment property, business, stocks, crypto, or almost any appreciated asset that has a capital gain in exchange for a promissory note.

The trust funds are deposited in a custodial account and invested as per the terms of the note and an accompanying Investment Plan Summary or IPS.

Unlike other trusts or charitable solutions, the money in this trust is your money. You can demand it at any time, but any money exiting the trust will pay taxes .Similar to an IRA, any money in the trust can grow tax free.

How Money Is Invested?

The Deferred Sales Trust is very flexible. The terms of the note can be changed, unlike other tax minimization options. Income can be taken each year or partially/fully deferred without taxation(specific rules apply).

The trust can invest in almost anything a real person can including securities, notes, and alternatives. In addition, the note holder can direct the trust to invest in investment property or business controlled by the note holder (specific rules apply).

We have summarized the investment strategy categories below. You will be able to choose a specific strategy from these options.

1.    Cash Out Strategies

If your goal is to cash out, you need a way to protect yourself from paying 25% to 50% or more in capital gains taxes and still make investments with good returns and liquidity.

Now you can legally defer the capital gains taxes on up to 100% of your transaction’s proceeds and generate a dependable income stream for retirement, investment, charity, or whatever you desire.

You can start taking income immediately or defer payments or ramp up the income anyway you like. The key to tax deferral is to not change the note terms or payment amounts more than once per year.

2.    Vulture Fund Strategies

If you’re a real estate investor, you’ve probably ran into the situation where now is a great time to sell but a bad time to buy. This makes traditional tax deferral methods like the 1031 Exchange a problem.

The 1031 Exchange requires a real estate investor to identify their potential replacement property in 45 days and close the purchase transaction in 180 days or pay the tax.

This means you only have 180 days to find and close on the right property. This restriction can be problematic if inventories are low or your deal falls through (15% of 1031 Exchanges fail).

Now you’re stuck with either paying 25% to 50% of your hard earned money in taxes or buying a sub-optimal property at too high a price or in a bad location.

Wouldn’t it be wonderful if you could sell your property now, defer the capital gains taxes owed, and earn income from your money while you wait for the right opportunity to present itself?

With our Vulture Fund Strategy, you’ll have tax deferred cash available to buy that new opportunity on your timeline, pay no tax on the purchase capital, and still earn income off any money not used.

*** Key Point ***This strategy also allows you to reset the depreciation schedule since the cash from the Deferred Sales Trust is not encumbered by the rules of a 1031 Exchange.

3.    Downsizing Strategies

Let’s say you have a Primary Residence in California and want to move to Georgia to be closer to friends and family. You own a home worth $1.5 Million with a $500,000 basis and no debt.

We can secure a loan on a $500,000 basis so you immediately get $500k in tax free cash and go buy your new home in GA. In the meantime, we sell your home in CA, we pay off the loan in escrow and the remaining $1 Million dollars goes into a Deferred Sales Trust with a 6% note rate. You now earn $60,000 more per year living in your paid off home in GA.

4.    Estate Planning and Legacy Building Strategies

Let’s say you’re primary residence is worth a lot of money and you already have a second home you plan on moving into. You want to create an income stream so you can slow down, but your wife wants to save the money to leave a legacy for your children or charity. What can you do?

With the Deferred Sales Trust, you can do both. You can have an income stream and a legacy you can pass on to your heirs or charity. This is just one of the many scenarios that are possible.

You can structure the trust to exist outside of your estate (specific rules apply). If your trust is over $10 million, we have a number of options and can apply special rules that will super charge your trust’s growth while eliminating Estate taxes for your heirs.

5.      Alternative Lifestyles

Let’s say you have a Primary Residence worth about $1.5 million and want to buy an investment property in another state and make it your primary residence later. In the meantime, you also want to buy a motorhome and travel around the US for a few years. You also need a source of income during those traveling years.

With the Deferred Sales Trust, you can do it all. Step #1) Take the basis from your home to buy the motor home. Step #2) Sell your home, pay off the loan in escrow and split the remainder. Use part to invest in an investment property and pay no tax on the investment. Use the rest of the money on income producing investments. Step #3) Have fun traveling the country while the trust pays you income. Step #4) Notify the tenants when you are ready to move into the investment property and move in.

This is just one of many options possible by leveraging the flexibility a Deferred Sales Trust offers.

Summary,

In the hands of an expert, the Deferred Sales Trust is a powerful tool to leverage when making real estate investment, estate planning, cash out, or exit decisions.

These are complex strategies and should be explored with the help of an expert who places your best interests first. Let’s face it, if someone has one or two options, they are not a tax strategist. They are a salesman trying to sell you their product.

We have over 40 tax minimization options on our platform. We are nationwide educators and keynote speakers on Tax Minimization. We are also real estate investors, business owners, homeowners, and high income earners. We use the strategies were commend!

Once you pick the strategy that is right for you, we connect you with our network of vetted providers that are “best in class” in the industry. How do we know that? We use them ourselves. You can work with one of them or someone else. It is entirely up to you.

I hope you found this document informative. We have more detailed content and videos on this tax strategy at DeferTax University. Click hereto learn more.

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