When I talked to one our neihbors Gil he told me that one Realtor had told him that he would owe about $160,000 in taxes when he sold his Los Gatos house.  He is not alone since some Los Gatos home owners who have huge appreciation trapped in their home are reluctant to sell their home.  

The Long Term Capital Gains has increased to 20% for Federal Taxes and 9.3% for California making your total tax liability as high as 25%.  And since the sale can easily results in an Adjusted Gross Income of $200,000 or more, these home owners will be subject to the latest present from California which is the 3.8% tax on high income earners.   That adds up to 28.8% so far.  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.  

These home owners will get some relief from tax exemption of $250,000 for Couples filing jointly in sale of their primary residence.   But if you have gains above $500,000 it could get ugly as you can see from the table below where you will be required to cut a $323,100 check to IRS at the end of 2013.  

Tax Source Precentage Net Gain ($500k) Net Gain ($1,000k)
Federal 20% $100,000 $200,0000
California 9.3% $46,500 $93,000
CA High Income Tax 3.8% $19,000 $38,000
Totals 33.1% $165,000 $331,000

But there is a way out of this capital gains mess!   And hopes comes in the form of Deferred Sale Trust where 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 Los Gatos 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.

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.

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