A Publication of WTVP

In today’s era of uncertain markets, skyrocketing real estate values and high property taxes, many older investors are facing tough choices about whether or not to downsize from the home they may have lived in for many years. Maybe it makes sense to give it away.

Charitable Remainder Trusts (CRTs) have become popular among investors who wish to dispose of highly appreciated assets while avoiding the capital gains tax. Why would you want to give your home away?

With a CRT, you are allowed to “donate” your investment assets (primary residences, vacation homes, rental property, stocks or even cash) to a trust. In return, you don’t have to pay capital gains tax on the sale of assets. In fact, you receive a tax deduction for some of the value of the donated property. Further, you will be able to draw income from the assets in the CRT. You also may be able to add your children as income beneficiaries, depending on their ages. Upon the death of all income beneficiaries, all remaining assets of the trust will transfer to the charities you designated.

As an example, suppose you purchased a waterfront home in South Tampa, Florida, 30 years ago for $25,000, and it is now worth $1 million. Now a 68-year-old retiree, you would like to downsize. If you sell this home, your taxes would be $108,750 ($975,000 gain less $250,000 exemption times 15% capital gains tax).

If you opt instead to gift your home to a CRT and name yourself as the trustee, you would defer the capital gains tax of $108,750. Further, you would enjoy a current income tax deduction of $340,887 subject to certain limitations based on your adjusted gross income. You can then draw an income of $65,000 per year for the rest of your life. (If you want to continue this income stream for the remainder of your children’s lives, the amount would be less.)

Finally, upon your death, your designated charity would receive the remaining value of the assets in the trust. This works with virtually any highly appreciated assets: your primary residence, vacation home, art collection or stock portfolio. This type of planning best serves people who have a strong desire to create a charitable legacy during their lifetimes.

Before you act, be sure to consult your financial advisor to determine if this type of gifting strategy is right for you. IBI