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Selling Your Highly Appreciated Personal Residence: A Case Study

Reef Point LLC · November 9, 2021 ·

Selling Your Highly Appreciated Personal Residence- A Case Study | Reef Point LLC

Are you feeling trapped in your personal residence that has substantially appreciated in value since you bought it years ago? Would you like to sell it, but fear facing a crushing capital gains tax liability?

Let’s see how the use of a Deferred Sales Trust (DST) can allow you to sell without paying ANY capital gains tax.

Assumptions

  • For purposes of this case study, assume the following:
  • You own a home in Southern California that you’d love to sell.
  • You’re a divorced homeowner with grown children.
  • You own your home yourself.
  • You have lived in your home for the past 20 years.
  • You have paid off the mortgage on your home.
  • Your original basis in the home was $1 million.
  • Your sale proceeds, after paying all commissions and closing costs, will amount to $15 million.
  • You can avail yourself of the $250,000 exclusion provided by Section 121 of the Internal Revenue Code since you have resided in your home for two of the last five years.
  • Your adjusted basis is, therefore, $1,250,000.

Results

Under these circumstances, your taxable gain if you sell will amount to $13,750,000. You consequently will pay the following taxes:

  • Federal capital gains tax: $2,750,000 at today’s rate of 20%
  • California capital gains tax: $1,828,750 at today’s rate of 13.3%
  • Medicare tax: $522,500 at today’s rate of 3.8%

All together, your tax bite will be $5,101,250, a full 37.1% of your sale proceeds. This leaves you with $8,648,750 to invest, take as retirement income, help your grown children start businesses, or do anything else you wish with it.

Worse yet, if Congress passes President Biden’s American Families Plan, the Federal capital gains rate will rise to 39.6% if you earn $1 million or more annually, raising that portion of your taxes to $5,445,000 and your overall tax to $7,796,250 a whopping 56.7% of your sale proceeds. This leaves you with only $5,953,750 to do as you please.

Either way, it’s no wonder you feel trapped in your home. Financially, you are.

The DST Solution

If you sell your home to a Deferred Sales Trust (DST), however, instead of directly to your intended buyer, you pay no tax whatsoever. Why? Because the DST is a unique tax deferral strategy allowed by Section 453 of the Internal Revenue Code, the installment sale provision.

What do you receive from the DST in exchange? A secured installment sale contract, i.e., promissory note, that guarantees your receipt of a fixed monthly amount for the life of the trust, generally 20 years or less. The way a DST works is that your Independent Certified DST Trustee immediately sells your home to your intended buyer for the same amount as you sold it to the DST. He then begins investing the proceeds into whatever “prudent investments” you desire and making the specified monthly payments to you. You pay capital gains tax only on whatever portion, if any, of your payment represents a gain on your original home investment.

To find out more about how the DST can benefit you, contact Reef Point today.

Deferred Sales Trust Capital Gains, Capital Gains Taxes, Deferred Sales Trust, DST, Exit Strategy, Real Estate, Tax Strategy

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Reef Point LLC was founded by Gregory H. Reese who is one of only 13 Trustees in the US for Deferred Sales Trusts.

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As an authorized and approved Trustee for the Deferred Sales Trust and Member of the Estate Planning Team (EPT), Reef Point, LLC promotes the use of the Deferred Sales Trust™ or other estate planning techniques and is not responsible for recommendations made by other members of the Estate Planning Team, including the Deferred Sales Trust or other tax, legal or estate planning strategies.

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