My clients in the San Francisco Bay Area often have highly appreciated assets — a residential home, investment real estate, stock in a privately owned company, a business, art collections, and so on. If they want to sell these assets, they pay capital gains taxes on the appreciation.
The capital gains tax rate is often believed to be lower than the taxes on earned income (i.e., employment income), but it can be much higher than one might expect, often approaching 35-40%. For instance, a California resident making $250K a year who sells an asset with $1.5M in gains will pay about $540K in capital gains taxes. Ouch. To add insult to injury, that $540K could have been invested at 5% and generated $27K a year. Over 10 years, that’s another $270K lost. Ouch again.
The tax code has long allowed investors to sell one investment and buy another like-kind investment and defer the capital gains taxes, but the tax code is getting stricter about what qualifies as a like-kind transaction and how much tax can be deferred. The bigger issue for my clients, though, tends to be a desire to get out of the investment and have access to the cash.
But it can be done. Investors can sell a highly appreciated asset, defer the capital gains tax, and earn money on all of the sale proceeds. To do this, investors sell their highly appreciated assets into a trust structure that allows them to defer the capital gains tax for their lifetimes and beyond, if they so choose. I am part of the Estate Planning Team, which provides this service through the Deferred Sales Trust™ strategy. If you would like to know more, please reach out to me and visit www.myept.com/jlanning. I look forward to hearing from you.
Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.