Trusts Defer Capital Gains Made During Housing Boom

Trusts Defer Capital Gains Made During Housing Boom

The soaring Las Vegas real estate prices of the past few years are helping to feed the popularity of a complex tax-savings technique called a "private annuity trust."

The strategy is being promoted as a way for real estate investors to defer hefty capital-gains taxes on the sale of highly appreciated assets -- especially real estate -- and save on estate taxes, while also generating a stream of income.

The trusts are being widely marketed not just by tax lawyers and accountants, but also by investment advisers and insurance agents -- who may also stand to gain big fees by managing trust investments -- and Las Vegas real estate brokers, who hope that the strategy might help clinch Las Vegas property sales and attract real estate listings.

In a private annuity trust, you essentially exchange appreciated assets for fixed annuity payments, which spreads out your capital-gains taxes over many years. The transactions are being pitched to everyone from owners of a primary or secondary residence that has risen dramatically in value to owners of numerous investment properties.

Proponents of private annuity trusts, for their part, say the transaction, when done correctly, is a perfectly acceptable tax-savings technique that can defer capital-gains taxes for years and minimize estate taxes.

The National Association of Financial and Estate Planning, or NAFEP, a big provider of private annuity trusts, says that business has doubled every year since 2003 and is continuing to grow this year. The strategy is "becoming more mainstream and more people and attorneys are becoming more comfortable with it," says Roy Barker, director of operations at NAFEP, which is based in Salt Lake City.

Private annuity trusts can cost anywhere from about $3,000 to well over $10,000 to set up, plus additional administration and investment fees that can run upwards of 1% of trust assets. Because of these costs, the strategy makes the most sense for people who have at least $200,000 of capital gains to defer, as well as people who might be subject to the estate tax. (The current federal estate-tax exemption is $2 million per person or $4 million per married couple.)

Private annuity trusts are complicated, involving lots of convoluted steps and tax rules. In a typical arrangement, you sell appreciated assets -- residential or Las Vegas commercial real estate, artwork, securities, even closely held businesses -- to a trust, in exchange for a series of fixed annuity payments that last for the rest of your life. The trust then goes ahead and sells the appreciated asset to an end buyer. The cash proceeds are invested by the trust, and are used to fund your annuity payments.

By selling the Las Vegas real estate in exchange for an annuity, you avoid paying the upfront capital gains that you would have owed if you had simply sold the asset outright. Instead, you are taxed on the annuity payments when they come out of the trust, which spreads out the taxes over a longer period of time. What's more, you can defer receiving the annuity payments for years, thereby further postponing your tax payments.

The strategy also has estate-planning benefits. When you die, the annuity payments stop and whatever is left over in the trust is considered out of your estate and isn't subject to estate taxes. The annuity payments you receive during your lifetime are considered part of your estate unless you spend down the money.

The annuity is termed a "private annuity" because it is a special payment contract between you and the trust, as opposed to a commercial annuity issued by an insurance company. The amount of the annuity payments stays fixed over your lifetime and is determined by a formula that's set by the IRS, based on factors that include your age, the Las Vegas real estate sale price and an IRS-determined interest rate. The older you are -- or the longer you defer the annuity -- the bigger the payments will be.

Source: The Wall Street Journal Online

Selling, buying or refinancing a piece of Las Vegas Real Estate today? Visit Fine Homes Real Estate for more information and VIP representation by a Las Vegas Luxury Real Estate REALTOR for investment Las Vegas Real Estate, 1031 exchange, condos such as Trump, MGM Residences, Cosmopolitan, Turnberry, Allure, Panorama Tower, The Signature, W Residences, RED Rock Residences, commercial, residential and Las Vegas land.

Trusts defer capital gains made during housing boom.