• "I am deeply grateful to the Masonic Village's employees, and will never be able to express my gratitude to all of them." — Catherine L.

  • "I liked my Masonic Charity Foundation charitable gift annuity so much, I opened three more. Why? I might be old-fashioned, but the scriptures have taught me the virtue of looking out for others. Knowing that the funds left in my gift annuities will care for the Masonic Village residents makes me feel wonderful." — Dorothy B.

  • "I am writing to tell you, from the bottom of my heart, just how wonderful the last two years of my mother's life were, thanks to all of you at the Masonic Village at Burlington." — Carol O.

  • "It's not just the Masonic Village's beautiful facilities and the many services that are offered to the residents – most of all, it's the employees. They are personally dedicated it seems to each and every individual here." — Catherine L.

  • "We are equally grateful for the 'loving arms of hospice' that were wrapped around our family in our hour of need." — M.W.

  • "When we decided to come to the Masonic Village at Burlington, we knew it was going to be a very big change in our lives. When we came here, we were very pleased that it was not difficult. We would recommend the Masonic Village highly to a friend." — Joseph and Bertha B.

  • "There is simply no way to express the depth of gratitude I feel for the Masonic Village at Burlington – thank you!" — Jim C.

  • "We know first-hand how very special Acacia Hospice's caregivers are, and we thank every single one of them from the bottom of our hearts." — J.M.

  • "It is with a grateful heart that we extend to you our deepest gratitude for the loving care that Acacia Hospice afforded our beloved Aunt." — M.W.

  • "It has been a source of tremendous relief that my parents were in such caring and professional hands during the final years of their lives." — Jim C.

  • "It takes a very special person to do the job Acacia Hospice's caregivers do every day. We would like you to know we think you have an incredible group of 'Angels.'" — J.M

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Saturday April 20, 2019

Case of the Week

Exit Strategies for Real Estate Investors, Part 2


Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.

Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.

The condition of the building turned many buyers away. It was being sold "as-is," but Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and hired contractors to refurbish the place.

After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building, bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building — a $2 million interest! This was no surprise to Karl. He knew the building was another great buy.

There was one downside to the idea of selling, however. Karl held the property only four months which meant the gain from the sale would be short-term capital gain. In other words, the applicable tax rate would be 40.8%, not 23.8%. Karl cringed at the thought of paying a large part of his gain to the government. At the same time, Karl knew the real estate market could change directions in the next year. So, although Karl wanted the 23.8% tax rate, he did not want to risk holding the property another eight months.

After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. It looked like the perfect solution. However, there were still two potential downsides to this plan.


What are the charitable income tax deduction rules for gifts of short-term capital gain property? If Karl moves forward with this plan, how would the FLIP CRUT payouts be taxed?


First, pursuant to IRC Section 170(e), Karl would receive a charitable income tax deduction based upon the cost basis in the property rather than its fair market value. Section 170(e) does not allow a donor to claim a charitable income tax deduction for a property's ordinary income element.

In this case, a fair market value calculation on $2 million would produce a tax deduction of $1,360,000. However, due to the short-term capital gain on the property, Karl would instead use $1,250,000 for the calculation. As a result, his tax deduction would be about $900,000. This first bit of "bad news" does not concern Karl whatsoever. Given his estimated AGI over the next several years, he would not have been able to deduct the full $1,360,000 anyway. On the upside, Karl would be able to deduct the full $900,000 over the next six years. With estimated AGI of $350,000 each year, Karl could deduct up to 50% of his AGI each year or $175,000. The 50% AGI limit applies in this case, not the 30% AGI limit, because Karl's tax deduction would be based on cost basis only.

Next, Karl discovered that the short-term capital gain of $750,000 from the sale of the property might be distributed to him over time. While it was true the FLIP CRUT would not owe any tax, the trust would report the $750,000 of short-term capital gain in tier two pursuant to the four-tier accounting rules. Therefore, it is possible that Karl's future trust payouts would be characterized as short-term capital gain.

Again, Karl was not dissuaded with this information. First, as someone accustomed to lease income, Karl assumed most of his trust payouts would be ordinary income. So, this was not bad news. Second, given the benefit of the 23.8% tax rate on qualified dividends, the trust would be invested heavily in dividend-paying stocks. As a result of this investment choice, 23.8% type tier-one income would flow out prior to any 40.8% type tier-two short-term capital gain. This would diminish the amount of tier-two income short-term capital gain realized over Karl's life.

In the end, the positives clearly outweighed the negatives. Karl moved confidently forward and wrote another happy ending to another successful investment outing.

Published April 19, 2019
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Previous Articles

Exit Strategies for Real Estate Investors, Part 1

Dying to Deduct, Part 3

Dying to Deduct, Part 2

Dying to Deduct, Part 1

Living on the Edge, Part 6