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We all want to sell without paying capital gains tax. The most obvious way is a 1031 exchange. Many owners are doing tax-free exchanges into other buildings
or triple net lease property. Some are leaving the state because of rent control and are tired of dealing with tenants. If you don’t want to get into triple net leases or acquire another property it is possible to sell without capital gains tax.

Federal and state capital gains tax will be about 30% combined. So, after paying the taxes only 70% of the value can be reinvested and earning income. Then if you must pay inheritance tax, your heirs will receive significantly less. With some advanced planning, 100% of you net value can be earning income and paying you a larger monthly annuity.

There are several approaches to this transaction such as Charitable Gift Annuities (CGA). Since the property is sold without income tax, the full sales price is earning income. Some of the larger charities and universities are willing to accept an asset and give you an agreed value which is a little lower than the true fair market value. However, with careful planning and choosing the right charity, it is possible to have the charity sell your property in a coordinated transaction and you get an annuity on the full sales price less standard sales costs.

The annuity income can be payable for you and your spouse’s entire life. Generally, the annuity rate is significantly higher than at the bank. I have seen rates between 4-7% depending on your age and other considerations. You can also choose to be paid a specific number of years up to 20.

Your heirs can be protected using life insurance. The life insurance proceeds can pass to the heirs free of inheritance tax. Generally, the extra income generated by the annuity trust is sufficient to pay the insurance premiums. You will also receive a substantial charitable income tax deduction which can be used to offset up to 50% of your adjusted gross income over a six-year period. Capital gains and inheritance tax are eliminated

There are a few nuances to be mindful of before entering the transaction. First, do not accept an offer to sell before agreeing with a charity the terms of the transaction. Second, choose a charity that will work with you and your advocate to negotiate the right type of transaction and trust. Third, it is important to agree on the rate of return and length of annuity. Forth, it is best to establish how the property will be marketed if the charity will not be keeping it. Also, the value your property needs to be reasonably established before the transaction.

Some charities are too small and unsophisticated to enter this arrangement. Other larger Universities and charities will take the property but are only willing to pay a small percentage on the annuity.

It is important to have a knowledgeable advocate to independently guide the process and get you the best terms and annuity rate. Then the property can be sold in consultation with you, so you understand the value of your annuity. I have assisted many owners avoid tax with gift annuities with different charities.

The use of Planned Giving can offer many financial, tax and estate planning opportunities in addition to the comforting thought that the assets will be used to benefit a worthy organization. This is just a brief overview of charitable gift annuities. As they say, “the devil is in the details”. I have a saying that the IRS is a large partner in everything that we own or earn. My strategy is to keep them a “Silent Partner”. It is not always what you earn but what you get to keep after taxes. Similarly, it is not how much you own but how much you can pass to your heirs or charities.

Feel free to call me for more information on how a planned sale and life annuity can be beneficial to you.