Capital Gains Taxes – How much will you owe when you sell your house!?

With the 2013 increase of  Capital Gains Tax rates; Deferred Sales Trusts have become an effective tool for Financial Planners to help their clients defer, delay and some times avoid Capital Gains Taxes.   In this post we wanted to high light the benefits of holding your Real Estate Assets in a Deferred Sales Trust which ideal for cases where you are anticipating a huge gain and want to avoid Capital Gains taxes.

Your Capital Gains is calculated by subtracting what you paid for the Home or Building  from the Net Sales price.  The rate for Long Term Capital Gains if you held your home for 1 year or longer is 20% for Federal Taxes and 9.3% for California making your total tax liability near 30%!   Compounding the problem is that if you took depreciation as part of your typical deductions during your holding period, that amount would increase your Tax Liability as well.  

The relief comes with tax exemption of $250,000 for husband and wife in the sale of their primary residence.  But if you have gains above $500,000 you would be subject to 25% taxes on the balance which would take huge bite if you were planning on those funds for retirement or future investments.

But if you set up a Deferred Sales Trust, then as the “seller’, the ownership of the property is transferred to a dedicated trust set up  to manage the sales transaction.   Since the are no funds exchanged during this transfer of assets, it is not considered a taxable transaction.   The  Trust then sets up special payments as part of “installment Sales Contract”.   These payments could begin immediately after the sale of the assets or deferred (hence the name) for some period of months or years.    Once the Asset is sold, there are ZERO Capital Gain taxes due on the Trust since the Trust purchase the property for the SAME price that it sold it to the 3rd party.    The owner therefore is subject to ONLY subject to Capital Gains taxes on the amount they immediately receive from the final sale to the 3rd party.  

The future payments are made to IRS as part of an easy installment plan and since these payments are made with depreciated dollars, the owners end up paying much less in taxes that they would have if they sold without the use of a trust.

That’s why it is wise to investigate using a Deferred Sales Trust when you are considering selling large pieces of property.   We can schedule a FREE one hour consulting with an Estate Planning attorney who can explain your option.   We will also give you a Free Appraisal Report on your home’s value in Today’s market which will be used by the Estate Attorney to determine your Capital Gains Taxes when you sell your house!

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