1031 versus CRTs. When to Recommend for Appreciated Real Assets Presented by: Martin Gates Peter S. Myers. Presentation Outline. Definition of a CRT Definition of a 1031 Real Estate Exchange Compare and Contrast Client 1: Mr. and Mrs. Phil & Ann Throp
When to Recommend for
Appreciated Real Assets
Peter S. Myers
Asset placed in Trust
The transaction is a gift to the end Beneficiary, subject to the retained right to payments for a number of years.
Charity (can be DAF)
“No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment purposes if such property is exchanged solely for property of like-kind, which is to be held for productive use in trade or business or for investment purposes”
Section 1031 defers taxes…. Does not forgive them
Internal Revenue Service Code Section 1031:
What “Tax” is Deferred by 1031?
Step One: CalculateAdjusted Basis
Original Purchase Price $300,000
Add Capital Improvements 50,000
Minus Depreciation (150,000)
EqualsAdjusted Basis $200,000
Step Two: CalculateCapital Gain
FMV or Sales Price $950,000
Minus Adjusted Basis (200,000)
Minus Cost of Sale (50,000)
EqualsCapital Gain $700,000
Step Three:Calculate Tax
Capital Gain Tax Rate 15%
Recapture Rate 25%
State Tax Rate 0-9%
Total Tax $142,500 to $205,500
($512,852, $487,631, $463,651, $440,850 and so forth)
1- assumes closing costs of $292,500
Growth & Income
The family is actually $418K better off by deploying a CRT strategy. How can this be?
How much better off will the family be investing a little income in an ILIT!?
Growth & Income
What good is a CRT?
Any tax paying entity is entitled to the benefits of Section 1031. Corporations, Partnerships, Individuals, Limited Liability Companies,
Trusts can take advantage of Section 1031. Even foreigners who own property in the U.S. can use the Section 1031 exception to their benefit.
In a 1031 real property exchange, the exchanger may exchange real property for any other real property located in the United States or its possessions, if the replacement property is held for productive use in a trade or business or for investment.
Analysis:There is no “boot” which results in no (taxable) gain.
180 days (total)
Tenant-in-Common Propertyoffers individual investors access to commercial properties typically reserved for REITS, Pension Funds & Insurance Companies
Fractionalized Ownership – “Tenant-in-Common”
*1946 Supreme Court Case – SEC v. W.J. Howey Co. - 1946