Owners of apartments, rental homes and commercial property have several ways to avoid gains tax when selling property.
Technique #1 – Exchange it
If the property is real estate, you can "exchange" it for real estate that is more desirable, without paying gain tax. For example, if you have raw land worth $500,000 (the land pays you no income), you can trade this equity for an apartment building or a retail store or any other income producing real estate. Another example is an apartment owner who no longer wants to deal with tenants. He can exchange that property for a business location, such as a McDonald’s with a triple net lease. McDonald’s pays all expenses and forwards the owner a monthly rent check making for a hassle-free investment. Such sales and repurchases, when done properly, are called "exchanges" by IRS and are tax free. You then hold the new asset until death (or trade it again) and avoid capital gains tax.
Technique #2 – Capital Gain Bypass Trust
You can place the assets in a capital gain bypass trust, also known as a charitable trust because you must leave at least 10% of the balance to charity. This type of trust is tax exempt so the trust can sell your assets and pay no capital gains tax. The trust then reinvests this money however you like, into bonds for example if you desire income or stocks if you want growth. You can receive all of the income and gains for life (and even for the lives of your children).
You avoid the capital gains tax and you also get a tax deduction when you first place the asset in the trust. Additionally, the asset is out of your estate and will reduce your estate taxes. At the end of your life, the asset goes to your favorite charities or schools.
What about your children? Simple – you establish a wealth replacement trust with some of the income you are receiving from your capital gains bypass trust. In the wealth replacement trust you get a life insurance policy. At your death, the children receive the same amount from the life policy that they would have received if they had inherited the asset you put into the trust. Everyone wins. This is a very popular technique and is widely used by real estate owners and people with large stock market gains.
Want to know about 2 other alternatives? Check off on the coupon for our letter