Real Estate Investing Through Self-Directed Qualified Plan Retirement Accounts

     Those of us who own highly appreciated commercial and residential investment real estate assets are often reluctant to sell because of capital gains and depreciation recapture costs associated with the sale. But what other choice do we have? Is there another way to deal with the capital gains tax deficits that so many experience when they sell their real estate assets? The answer may lie in the Private Annuity Trust.

     This IRS-accepted capital gains tax deferral program could save you thousands of dollars and at the same time make a profit on the money you would have paid to Uncle Sam in the year of the sale. Obviously, this strategy is gaining popularity among those who have highly appreciated assets that are marked for sale. You, too, can take advantage of this program once you understand how it works. The process starts with a property owner, transferring ownership of the property to a dedicated family trust. Next, the trust "pays" the property owner (annuitant) for the property. The payment isn't in cash, but with a special payment contract called a "private annuity." The private annuity promises to make payments to the annuitant for the rest of his or her life. The trust then sells the property. There are zero taxes to the trust on the sale since the trust "purchased" the property in the form of a private annuity contract.

    Often annuitants will choose deferral of annuity payments because they have other income and don't need the payments right away. The tax code doesn't require payment of the capital gains until the annuity payments begin and the capital gains tax is paid to the IRS with an "easy installment plan" since only that portion of capital gains is due in proportion the number of years the annuitant is actuarially stated to live. For example, if the annuitant begins to receive annuity payments at age 65 and the actuarial tables state that they will live until they are 85 years of age, then the capital gains are broken up into 20 payments (one per year). There is no interest or penalty on these deferred payments of the tax. On top of that, the tax payments will be made with depreciated dollars. Yet the investment money in the trust could grow at a greater rate than that of inflation.

    Here's an example of how well this works. We start with a $1,000,000 property value. The annuitant's basis is $200,000, leaving a profit of $800,000. We are estimating combined federal and state capital gains taxes at $160,000, which is 20% of the profit. This leaves net cash of $840,000 in the direct sale vs. $1,000,000 in the annuity deferral sale. We are assuming the investment cash earns a conservative 6% before income taxes for the next 20 years. The age of the annuitant is 45 and he chooses to start his annuity payments at 65. Under the direct and taxed sale, the property owner receives annual payments of $277,300 vs. $330,119 under the annuity plan. This yields an estimated life payout of $5,546,000 under the taxed plan vs. $6,602,380 with the annuity strategy. That is an advantage of $1,056,380 to the annuitant! This advantage is due to the larger amount of net cash that was initially available to invest for the annuitant.

    As illustrated above, the Premier VI Private Annuity Trust has the ability to generate substantially more money over the long run than a direct and taxed sale. It is also superior to the charitable remainder trust and installment sales in many respects.

    For a FREE tax savings illustration on a commercial or investment property you own...