Assume that Ima owns some raw land that she holds for investment. She paid $20,000 for the land several years ago. She could sell it for $50,000 after all closing costs. She think that tract of land will likely see little additional appreciation. She would like to get rid of it, but Ima hates paying taxes. She does not want to pay any income tax on her $30,000 gain--not even at capital gains rates. Assume that her ordinary income is about $150,000 a year. Assume that she gives s good amount to charity, including her favorite charity Habitat for Humanity. Is there anything she can do to get rid of the land and avoid taxes on the capital gain? Yes, she has a few alternatives. She could engage in a like-kind exchange. She could trade her land for some other investment land. Her gain would not be recognized except to the extent of any property she receives other than the land--called "boot." She could exchange the land for stock in a corporation if the transfer meets the requirements of Section 351. She could transfer the land to a partnership in exchange for an interest in the partnership. She could build a house on the land. She could move into it and live there for at least two years. She could then sell it and have a tax-free gain up to $250,000 ($500,000 if she is married). She could give the land to a charity. Because it is property the sale of which would result in a long-term capital gain, she could deduct its value of $25,000 and NOT pay any taxes on the gain. In effect, she gets a deduction for which she has no basis. That does not happen very often. She could form a charitable remainder trust (a CRUT or a CRAT). She donates the property to the trust. She gets income from the trust for a term of years or for life. She does not pay any tax on the gain. She get a tax deduction now, but it is less than the value of the land. She has removed the land from her gross estate and from her probate estate. At the end of the term of years or upon her death, the charity receives the corpus from the trust. The CRUT or CRAT is a great tool for taxpayers with appreciated assets who like a charity. I have been working on Chapter 9. Tax Savings Prescriptions for Investors.
Posted on: Sun, 16 Jun 2013 05:46:56 +0000