How To Defer Real Estate Taxes

Wealth Strategies

Arthur Jensen CPA is President of Wealth Strategies, a unit of The Warner Companies. He specializes in advanced tax, financial and estate planning. His background includes 20 years experience with large international accounting firms including KPMG Peat Marwick and Deloitte & Touche. He is a past president of the Baltimore Association of Tax Counsel, a past Chairman of the Chesapeake Tax Conference, and past Co-Chairman of the Advanced Tax Institute.

There are many ways to avoid or delay paying taxes when selling real estate. Some of the methods outlined here are well known; others are likely unfamiliar to most owners and their professional advisors. Some can be implemented with ease; others require substantial and careful construction but the benefits may outweigh the costs.

Some real estate gains (recapture of depreciation) are subject to 25% tax rates, and some are taxed at 15%. Depending on the property's location, the state may apply income taxes too. If the seller is a regular C corporation, ordinary tax rates apply as capital gain rates are inapplicable.

Some methods worth discussing with your professional advisor include:

Section 1031 Like Kind Exchange – a swap of similar type real estate as sanctioned by Code Section 1031. Some companies act as facilitators for this tax deferred result.

Contribution of Property to a Charitable Remainder Trust or other similar charitable trust. This reduces the tax but causes at least 10% of the present value to go to charitable purposes.

Installment Sale of Property to purchaser will delay taxation over the payment period. This can be structured with some buyers.

Installment Sale of Property to a Financial Intermediary. Various financial reasons exist to suggest involving a third party to secure safer factors in an installment program that might not exist with some buyers.

Partial Sale/Partial Other Consideration Combination Plan. Some types of consideration can be utilized that provide continued deferred income recognition that may be superior to the standard installment reporting, that includes life insurance and it’s tax advantages.

Private Annuity Sale of Property that provides installment sale like reporting but also has estate planning components available and avoids problem of Income in Respect of a Decedent (IRD).

Family Endowment Plan – Another partial gift to charity arrangement that allows the sale to have tax-free advantages accorded to charity sellers.

Captive Small Insurance Company – This special type Code sanctioned entity is exempted from taxation on investment income. The pre-sale transfer with carryover basis allows such an entity to enjoy and bestow tax free effects.

ESOP Owned S Corporations can enjoy 100% relief from current taxation of income, including capital gains. If this entity is available, the gains can be secured without current taxes. This is much more involved but the results can be achieved.

Family Limited Partnerships can used to create continued control while providing for income shifting and utilize charitable and other tax advantaged partners, including partners in a lower tax bracket.

Combination Plans – Any and all of the above can be used partially and collectively, depending on results desired.

Other Proprietary Plans are available depending on the facts and circumstances of the taxpayers involved.

In preparation for the sale of real estate at a gain, depending on the tax potential present, the owner may be well served to thoroughly consider the opportunity to reduce taxes and thereby preserve the investment assets.