• "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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Thursday February 22, 2018

Case of the Week

Exit Strategies for Real Estate Investors, Part 1

Case:

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 instantly 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 much 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, Karl did not want to risk holding the property another eight months.

Question:

Can Karl sell the building and bypass the tax on the sale of the property? Karl wants to reinvest the full sale proceeds in an income-producing investment. Is this possible?

Solution:

Based upon Karl's situation and goals, a FLIP CRUT would be an excellent option. Prior to any binding sale agreement, Karl could transfer his property into the FLIP CRUT. In this case, the potential buyer has merely expressed an interest in the property. Because there is no legally binding agreement between Karl and any buyer, there would be no prearranged sale problem.

Once the property is transferred into the FLIP CRUT, the trust would list and sell the property. Even if the property sold for $2 million, the trust would owe no taxes on the sale because the trust would be exempt from income taxes. Therefore, a FLIP CRUT would meet Karl's first goal — avoiding an immediate 40.8% bite out of his short-term capital gain.

Next, the trust would reinvest the full sales proceeds of $2 million (minus selling costs). Pursuant to Karl's goals, the trust would likely invest for income. It could invest in bonds, dividend paying stocks or even rental property. This would meet Karl's second goal.

So far, Karl is very pleased with the FLIP CRUT option. It looks like the perfect solution. However, there are two potential downsides to this plan. The two remaining issues are as follows:

1) What is the charitable income tax deduction for gifts of short-term capital gain property?
2) What are the tax characteristics of the FLIP CRUT payouts to Karl?

For a discussion of these two issues, see "Exit Strategies for Real Estate Investors, Part 2."

Published February 16, 2018
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Previous Articles

Dying to Deduct, Part 3

Dying to Deduct, Part 2

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Barbara Banker's LoBank Letter of Agreement

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