 Jim and Jane Doe (Both 65 Years Old) have owned an apartment complex in Central Florida for 20 years. They purchased the complex for $3,500,000.00. They have listed the property for $11 million.
They have no debt on the property. They have depreciated $2,000,000 over that last 20 years. In a typical situation, the couple would have to recapture the depreciation in the year of the sale and pay capital gains on the growth.
The property currently generates a net monthly income for the Doe’s of approximately $50,000. They work full – time and have four part time employees. The income is reported as ordinary for tax purposes.
How can the Doe Family Defer and Reduce Their Taxes?
The Doe’s have contacted the professionals at the Structured Sales Group to analyze their situation and create an alternative plan. The main goals of the sale are as follows:
- Maintain a similar stream of income.
- Create a comprehensive plan that allows more of their assets to transfer to their two children and the American Cancer Society.
The plan to the right was created to meet their goals. It will decrease both their current and future tax liability.
At the time of the sale, the Doe’s have decided to use a Structured Installment Sale to help defer the capital gains tax and guarantee their income for life. They will split the gross sales amount between cash and the installment sale. They will immediately use a portion of the cash to create and emergency account and establish a Charitable Remainder Trust and Irrevocable Life Insurance Trusts.
Structured Installment Sale
$7,500,000.00 has been deferred into an ensured installment sale creating a monthly payment of $42,926.78 guaranteed for the life of Jim and Jane or a minimum of 180 payments.
Summary of the Plan
The Doe’s have been able to defer the majority of their capital gains tax and create a matching income stream. They have created a large charitable trust which will help offset their taxes due in the current and future calendar year and create an income stream to cover the life insurance cost. The life insurance trust will own an $8,000,000 policy which will go to the children of the Doe’s when they pass tax – free. The remaining balance in the Charitable Remainder Trust will pass to the American Cancer Society.
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| Breakdown of the proceeds: |
$400,000.00
in cash set aside as an emergency fund
$500,000.00
has been set aside to pay for the current year taxes due.
$100,000.00
has been placed inside and Irrevocable Life Insurance Trust which owns an $8,000,000.00 policy.
$2,000,000.00
has been placed inside a Charitable Remainder Trust. The Trust will distribute 5% annually to the Does. This will continue to fund the Irrevocable Life Insurance Trust. |
| Breakdown |
Gross Amount |
Type of Tax |
Typical Tax % |
$ Amount Due |
Net to Seller |
| Adjusted Cost Basis |
$1,500,000 |
Return of Principal |
0.00% |
$0.00 |
$1,500,500 |
| Recapture |
$2,000,000 |
1250 Recapture |
25.00% |
$500,000 |
$1,500,000 |
| Capital Gain |
$7,500,000 |
Federal Florida |
15.00%
0.00% |
$1,125,000
$0.00 |
$6,375,000
$0.00 |
| TOTALS |
$11,000,000 |
Varies |
Varies |
$297,500 |
$9,375,000 |
The net to seller is now part of the estate. It will be fully includable in the estate and subject to the State and Federal Estate Taxes due in the year of their death. State and Federal Estate and Inheritance taxes vary by State and the year of the death. The tax rate is typically between 0 and 50%. |
