Situation

Larry (60) is a real estate investor in Dallas, Texas. He owns multiple rental and commercial properties around the Dallas area. He is looking to sell a few of his properties. Larry met with his real estate agent and financial planner to discuss selling the properties. They have estimated that selling the properties could take about six months. The appraisal returned an estimated value of $5,300,000 for all the buildings. Larry knows there will be a 20% federal capital gains tax, 5% state tax, and 3.8% net investment income tax. Larry’s financial planner has some positive news. There is a way for Larry to sell the properties that allows him to defer the capital gains tax liability permanently

Solution

Larry decides to participate in the capital gains deferral strategy. He can sell his properties and defer the $1,526,400 in capital gains taxes he would otherwise pay with a traditional sale structure. Larry sells his properties to an intermediary trust for $5,300,000. The trust gives Larry a promissory note for the $5,300,000. This promissory note outlines a structured payment plan that allows him to keep the sale’s principal in the trust.

Result

The trust captures the total principal amount of the sale, and Larry has avoided a tax liability of $1,526,400. Larry knows the trust will earn between 2% – 5%, and his distribution will be $106,000 – $265,000 annually. With the distributions, Lary believes he can avoid taking a distribution from the trust’s principal for many years, if ever. If Larry never receives a distribution from the trust’s principal, he will not have to pay capital gains tax on the principal. However, fi Larry eventually does need to have the principal distributed to him, he will only have to pay taxes on what is being distributed from the trust.