A Strategy to Avoid Capital Gains Taxes

A Strategy to Avoid Capital Gains Taxes

By the time they approach retirement, many people have acquired assets that have increased in value over time. In addition to accumulating the typical assets, such as securities and mutual funds, people often own real estate. After decades, the real estate has typically increased in value significantly. Therefore, selling the real estate results in a capital gains tax, which reduces the value of the proceeds.

If you find yourself facing this tax trap, whether it be with your office building, other real estate or some other appreciated asset, we have a suggestion for you. Consider making a charitable gift of the property. You may be surprised by all the benefits!

Outright Gift
You can contribute the appreciated property outright to St. John's University. This avoids a capital gains tax on the transfer, because the recipient of the property is a charitable organization. Therefore, we receive the full value of the asset, undiminished by taxes. (Very important: The charitable gift to us should be made before any party attempts to sell the property. If a sale takes place when you still own the property, you will pay the capital gains tax.)

Generally, as an individual, you're able to deduct the full fair market value of the gift up to 30 percent of your adjusted gross income in the year the gift is made. If the gift exceeds that amount, you may carry forward the excess deduction for up to five additional years.

Example: Dr. Jensen owns property valued at $250,000. The amount she paid for the property long ago was $15,000. She donates the property to a charitable organization, which sells it for its fair market value and uses the proceeds to further its work. No taxes are paid on the $235,000 gain in value. Dr. Jensen receives an income tax charitable deduction of $250,000. If her adjusted gross income at the time of the gift is $200,000, she is able to claim 30 percent, or $60,000, in the year of the gift. In the 5 years following, she can continue to claim the excess.

Charitable Remainder Unitrust
This type of trust is an ideal option when you want to receive an income from the asset. By giving the real estate to a charitable trust, you avoid up-front capital gains taxes. Then when the trustee sells the property (tax-free), the proceeds can be used to provide you with a lifetime income.

Upon the eventual sale of the property, the proceeds received by the trust are invested, producing a stream of income (usually equal to the stated percentage of the trust's value) for your lifetime and perhaps that of your spouse or another beneficiary.

In addition to the income, you also receive an income tax deduction based on what the charitable organization will receive someday. This amount depends on the age of the income beneficiary and the amount of the selected income, but often is approximately 30 percent to 40 percent of the gift's value.

A charitable remainder unitrust funded with real estate must pay the property taxes and other costs. Because the trust cannot borrow money, the donor should be prepared to add sufficient cash or marketable securities to the trust in order to meet expenses such as real estate taxes, insurance and maintenance costs until the property is sold. These additions to the trust are also deductible gifts.

Gift Calculator Calculate how a charitable remainder annuity trust can benefit you.


Gift Calculator Calculate how a charitable remainder unitrust can benefit you.


Find Out More
Please check with St. John's University before making any gifts of this type. Contact Susan Damiani at 718-990-7562, or via e-mail at damianis@stjohns.edu, for more information.

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