Your Money At Work: March

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Creative Ways to Realize Real Estate Appreciation

By Betsy Hartwell

With real estate values skyrocketing in the Sacramento region, most owners and investors have dramatically increased their wealth — at least on paper. But the true test of how much they’ll make is based on how much of their gain they’ll keep after paying taxes. With recent double-digit appreciation, many owners would like to sell their properties and actually realize their profit. But knowing that capital gains taxes could devour up to 44.3 percent of their gain, they’re reluctant to sell. In some cases, the taxes are significantly more than the original purchase price of the property! 
    “Investing in real estate can be one of the best ways to build wealth”, notes Dan Ahmad, president of Roseville’s Quantum Advisors, “but it can be a very inefficient way to distribute wealth because there’s no exit strategy for liquidating real estate that doesn’t involve taxation. The more of your appreciation you lose to taxes, the fewer assets you have working to provide financial resources for the future. It’s important to know all your options before you pay unnecessary taxes.”
    Investors have traditionally utilized 1031 tax-free exchanges to eliminate taxes with the purchase of a “like kind” property, to avoid a taxable event.  Section 1031 of the IRS code is very strict about time frames and types of property, and many investors have found 1031 exchanges very challenging — properties to exchange into can be difficult, if not impossible, to locate and obtain.

Alternative to the 1031 Exchange
A Private Annuity Trust (PAT) is a special type of sale that allows you to pay capital gains taxes over your lifetime, rather than all in the year of sale. It also allows you to receive lifetime income whenever you decide to initiate the income flow, with flexibility in how the trust is invested, protection from lawsuits and creditors, the ability to borrow from the trust and the ability to pass the assets to your estate, tax free.  Whether your assets consist of property, a business, stocks or even artwork, the PAT is an effective tax and financial-planning tool that allows you to retain more of your asset’s full value, without unnecessary taxation. 
    “Private Annuity Trusts have great benefits for tax-conscious business owners who are liquidating their equity,” says Jim Files, consultant in Fair Oaks for Vercor M&A Advisors, and Granite Bay author of “What Business Owners Don’t Know About Selling Their Business.”
Continued...

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