Private Annuity Trust vs. 1031 Exchange

By: Paula Straub

Real Estate Investors tend to be hard core. There is nothing like having your money invested in property you can touch, visit, renovate and watch gain in appreciation.

You may have heard the term "Swap till you drop". What this term means is that as an investor,you sell your real property and exchange it for another of  equal or greater value, and continue to do this until you die and leave the assets to your heirs. This does (under current tax law) allow you to avoid paying capital gains tax and recaptured depreciation forever. And, your heirs currently inherit it at the value at the date of your death. They do not pay capital gains tax and depreciation, except if they sell it over the value it was at death.

This is a good thing.

However, there is going to be a time to exit the real estate investment phase of your life.  Let me give a few examples of when this might be the case.

1.

You have accumulated a number of investment properties and reach a point in life you want less hands-on management responsibilities.

2. You want to slow down a bit during retirement and actually want to use some of the equity you have worked so hard to accumulate to improve your income and lifestyle.

3. The market conditions are ripe to sell, but purchasing another property of equal or greater value doesn't make sense.

4. Economic conditions warrant sale. Perhaps need for long term care for you or a member of your family.

5. Personal circumstances, such as need for additional income, debt payoff, tax consequences, property division, etc. warrant the need to sell.

6. You need to do some estate planning and need to remove some of your assets from your estate so your heirs won't have a huge estate tax obligation.

If any of these prevail, a Private Annuity Trust may be your best option. A PAT will allow you to spread out your capital gains tax burden over many years, and trigger what is effectively a 0% interest  long term loan from the government. How often do you get this kind of opportunity?

Part II will explain more of how a Private Annuity Trust can make a huge difference when any of the above circumstances might arise.

Finance
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