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Real Opportunities with Real Estate

Learn about leveraging Charitable Remainder Trusts to increase income, avoid taxes, and simplify life with real estate investments. Case studies show how to benefit from tax deductions and lifetime income while supporting charitable causes.

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Real Opportunities with Real Estate

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  1. Real Opportunities with Real Estate K. Gene Christian, Principal Charitable Estate Planning Northwest

  2. What is a Charitable Remainder Trust? “…the only planning tool in the tax code that allows people, who have ‘charitable receptivity’ four favorable tax outcomes by virtue of one financial transaction…”

  3. Charitable Receptivity Americans 20% 60% 20% Pure Charitable Intent No Charity Charitable Receptivity

  4. Role of Advisors... 78% of people who create charitable life income arrangements do so at the prompting of personal advisors. 78% Source: Planned Giving Today, May, 2002

  5. Challenge • Own Property • Increased Value, Low Return • Desire More Income • Capital Gain Tax Problem How to increase income without taxes?

  6. Solution Consider a Charitable Trust! • Bypass Capital Gain Tax • Increase Income • Charitable Deduction • Tax-free Growth Inside Trust

  7. Roberts Case Profile John and Marilyn • Ages 76 and 75 • Own 8-plex valued at $530,000 • Depreciated Basis - $27,000 • Mortgage Balance - $230,000 (new debt) • Primary Goal - Simplify Life • Secondary Goal - Avoid Gain Tax • Husband has Onset of Dementia

  8. Outright Sale Analysis Roberts’ 8-plex Sales Price $530,000 Capital Gain - Depreciation Recapture Tax <$135,000> Net Proceeds After Tax $395,000 Pay Off Mortgage <$230,000> Net Proceeds to Invest $165,000 Annual Income @ 7% $11,550

  9. …and pays off mortgage through escrow Roberts’ 8-plex $530,000 Step one Hospital purchases 43% interest for $230,000... Step two Roberts put 57% ($300,000) in a CRAT Step three CRAT/Hospital sell 100% of 8-plex to new buyer

  10. Annuity Trust John Roberts - Age 76 Marilyn Roberts - Age 75 7% Annuity Trust Property $300,000 Principal $300,000 Charity $476,000 Two Lives Bypass of gain Annual income Trust yield 9%. After two lives, trust to charity saves $71,000. from trust $21,000. Deduct $106,000.

  11. Sale & CRAT Summary Roberts’ 8-plex Income Tax Deduction $106,000 Tax Savings $37,000 Capital Gain Taxes on Sale of 43% Interest $62,000 Out of Pocket Cost <$25,000> Annual Cash Flow from CRAT $21,000 Projected Lifetime Income (16.1 years) $338,000 Ultimate Gift to Charity $476,000

  12. CRAT BenefitsPrepared for John & Marilyn Roberts • Increased Annual Income $9,500 • Reduction in Taxes $110,000 • Gift to Charity $476,000

  13. Questions or Comments??

  14. Chambers Case Profile George and Betty • Ages 80 and 74 • Retired Nursery Farm Owners - 9 acres • Three Adult Children - Doing Well • Property Purchased 31 Years Ago for $100K • Current Value - $2.2M • Primary Goal - Simplify Life • Secondary Goal - Avoid Gain Tax

  15. Charitable Plan Nursery Charitable Trust George and Betty Home & 1 Acre 8 Acres

  16. Option A: Part Sale/Part CRT Sell house and portion of land outright to maximize the exclusion allowance with the balance to a CRT. The simplest way would be for the Chambers to use their exclusion amount on a primary residence of $500,000 and then place the remaining portion in a CRT for sale.

  17. Option A: Part Sale/Part CRT CHAMBERS PROPERTY $2,200,000 Sell 77% through a CRT Keep 23% by deed $500,000 sell outright $1,700,000 CRT (7% payout) >All capital gain is avoided >$707,000 in tax deduction may save $220,000 in taxes over 6 years >1st year income - $119,000 >No tax - exclusion allowance

  18. Sale & CRT Benefits Prepared For George and Betty Chambers • Capital Gain Taxes If Sold $422,000 • Capital Gain Taxes - Sale/CRT $0 • Cash to Donors $500,000 • Income Tax Deduction $707,000 • CRT Annual Income $119,000 • CRT Lifetime Income $2.1 Million

  19. Option B: ‘Wash Out’ Tax Plan The slightly more complex approach would be to sell the house and a portion of the land outright to maximize the exclusion allowance - including another 27% of the property - place the balance in a CRT.

  20. Option B: ‘Wash Out’ Tax Plan CHAMBERS PROPERTY $2,200,000 Keep 50% by deed Sell 50% through a CRT $500,000 sell outright $600,000 more sold outright $1,100,000 CRT (7% payout) >All capital gain is avoided >Generates a tax deduction of $458,000 >Potential tax savings of $155,000 >1st year income - $77,000 >Generates $573,000 in capital gain to report >Tax owing of approximately $149,000 • No tax - • exclusion allowance

  21. Questions or Comments??

  22. Questions to Ask Yourselves... • Do you have a client who is interested is selling • real estate, but is hesitant because of capital • gains taxes? • Do you know someone who would like to unlock • the income potential of their real property? • Does a client have a taxable estate and has real • estate holdings?

  23. Questions to Ask Yourselves... • Are you acquainted with someone who is “land • rich and cash poor?” • Is there someone you know who owns a business, • is considering a sale and the business holds real • property?

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