What Are the Trust Capital Gains Loopholes in Real Estate?

If you own valuable real estate holdings, you could be concerned about the impact that capital gains taxes can have on your wealth — particularly if you plan to pass your property on to loved ones after your death. Fortunately, you can use certain trusts to benefit from specific tax rules, such as the stepped-up basis provision, which helps manage or minimize capital gains taxes upon the sale of property. With the right legal strategy in place, you can preserve more of your family’s wealth over the generations.

How 453 Trusts Can Help Defer or Reduce Capital Gains Tax

One way to reduce the capital gains tax burden associated with the sale of a property is through a 453 trust. A properly structured 453 trust leverages tax rules that allow an owner to spread capital gains tax liability over multiple years. First, the owner transfers a property to a deferred sales trust in exchange for an installment contract that confers a right to payment from the sale proceeds. Next, the trust sells the property to a bona fide purchaser and holds or reinvests the sale proceeds. The former property owner then owes capital gains tax only on the sale proceeds they receive from the trust.

Real Estate Trust Loopholes for Investors vs. Homeowners

Real estate investors or homeowners can use specific strategies to minimize capital gains taxes on a property they leave to beneficiaries. One approach is the stepped-up basis loophole. When beneficiaries inherit property passed through a trust, the beneficiaries inherit it with a “basis” equivalent to the fair-market value of the property on the date of the owner’s death instead of the original purchase price. This means that if the real estate is sold soon after it is inherited, the capital gains tax may be substantially reduced, preserving your family’s wealth.

Take this example: James acquires a property worth $1 million and later places it into a trust, designating his child, Gloria, as the remainder beneficiary. When James passes away and Gloria inherits the property through the trust, Gloria’s basis in the property becomes the fair market value on the date of inheritance, rather than James’s original basis of $1 million.

Types of Trusts Used for Capital Gains Planning

There are several types of trusts that property owners can use to manage capital gains taxes for their heirs and beneficiaries. For example, a property owner may place the property they wish to leave to their loved ones in a life trust, which allows them to continue living in or using the property during their lifetime and then transfer ownership to beneficiaries after their death. Alternatively, a deferred sales trust can manage the capital gains tax liability associated with the sale of a property by spreading the tax bill over a multi-year period.

Contact Us to Learn How Trust Provisions Can Reduce Your Capital Gains

Are you interested in utilizing a 453 trust to minimize capital gains taxes and leave more wealth for your loved ones? Contact 453 Trust Powered by Pennington Law to learn more about mitigating tax liabilities from your real estate.

Our law firm serves clients nationwide and is ready to speak with you today. Contact us today for a free consultation.