If you are planning on selling your Los Gatos house in 2013 and your net proceeds will exceed $500,000 then you need to explore ALL your option to avoid paying a lump sum Capital Gains tax to IRS to the tune of 15%!! But you could be paying more since 15% only applies to the Federal Tax rate and does not include California. Let’s explore how IRS will computer your Taxes.
Capital Gains Taxes are calculated by subtracting what your Cost Basis for your home Home/Building from the Net Sales proceeds. The rate for Long Term Capital Gains if you held your home for 1 year or longer is 15% for Federal Taxes and 9.3% for California making your total tax liability as high as 25%!! a 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 real relief could come in the form on Deferred Sales Trusts where you will only pay capital gains taxes on the proceeds you receive from the trust as cash payments. And the rest of your net proceed from your sale can be invested in Annuities, Mutual Funds or other investment vehicles which are ideal for Baby Boomers who want to sell their homes for cash and retire.
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.