Deferring taxes if 1031 doesn't work

[DJ Brooks]

I have a tax question. I have a financial advisor friend who said he can defer taxes (similar to 1031) from real estate proceeds into a charitable remainder trust or CRT. First, does anyone know if that is true? Now if it is true, my 2nd question is this: Can partial proceeds be used in a 1031 tax exchange and the remaining fund the CRT? For example, say I am going to 1031 exchange 200k into 2 properties to defer my taxes, each being 100k of proceeds, but then 1 sale fell out last minute. Then instead of paying capital gains tax on the remaining 100k, I'd roll it into a CRT in order to defer taxes. Has anyone heard of this being done? Or does anyone have knowledge on why this wouldn't work? Please advise. Thanks for reading! 

[Bill Brandt]

1) with a CRT you are giving the money away. Irrevocably. So do you want to give that money away?

2) lets use your 1031 exchange example. You’re selling one property for $200k that you paid $50k for. You buy 1 x $100k property but not the other. So you give $100k away to a charity and you have a $50k cost basis on the remaining property. (Mostly what I’m doing here is confirming you know at you have to spend all the sales proceeds, not just the profits, since you stated such low numbers.) then you would owe no taxes, but you have given away half your money. 

3) the good news is you gave the charity $100k not $100k minus taxes. The bad news this might/probably had to be done at the time you sold the property? It’s certainly not going to make your 1031 valid.

You’re probably going to need a charity you want to give the $100k to, a good cpa and a great 1031 QI. @Dave Foster have you ever combined a 1031 with a CRT? Anyone else want to weigh in?

[Sean Ross]

Quote from @Bill Brandt:

1) with a CRT you are giving the money away. Irrevocably. So do you want to give that money away?

2) lets use your 1031 exchange example. You’re selling one property for $200k that you paid $50k for. You buy 1 x $100k property but not the other. So you give $100k away to a charity and you have a $50k cost basis on the remaining property. (Mostly what I’m doing here is confirming you know at you have to spend all the sales proceeds, not just the profits, since you stated such low numbers.) then you would owe no taxes, but you have given away half your money. 

3) the good news is you gave the charity $100k not $100k minus taxes. The bad news this might/probably had to be done at the time you sold the property? It’s certainly not going to make your 1031 valid.

You’re probably going to need a charity you want to give the $100k to, a good cpa and a great 1031 QI. @Dave Foster have you ever combined a 1031 with a CRT? Anyone else want to weigh in?

We see CRTs as an end game for some investors who have already competed one or several 1031s. 

Basically, the charitable remainder trust is, as Bill pointed out, irrevocable, and will pay you an income over your lifetime and distribute the remaining funds to whichever charity you like upon death. Using a 1031 exchange property to fund a charitable remainder trust will let you keep deferring capital gains (as no tax will be due on the sale of the property by the trust) since it's a charitable entity. Rather, you'll receive an income for life and then a charitable deduction in the amount of the expected remaining balance given to the trust. 

If you are OK not leaving the balance left over to your family, This is a very good tax efficient option that can aid a cause you care about. 

[DJ Brooks]

Quote from @Sean Ross:

Quote from @Bill Brandt:

1) with a CRT you are giving the money away. Irrevocably. So do you want to give that money away?

2) lets use your 1031 exchange example. You’re selling one property for $200k that you paid $50k for. You buy 1 x $100k property but not the other. So you give $100k away to a charity and you have a $50k cost basis on the remaining property. (Mostly what I’m doing here is confirming you know at you have to spend all the sales proceeds, not just the profits, since you stated such low numbers.) then you would owe no taxes, but you have given away half your money. 

3) the good news is you gave the charity $100k not $100k minus taxes. The bad news this might/probably had to be done at the time you sold the property? It’s certainly not going to make your 1031 valid.

You’re probably going to need a charity you want to give the $100k to, a good cpa and a great 1031 QI. @Dave Foster have you ever combined a 1031 with a CRT? Anyone else want to weigh in?

We see CRTs as an end game for some investors who have already competed one or several 1031s. 

Basically, the charitable remainder trust is, as Bill pointed out, irrevocable, and will pay you an income over your lifetime and distribute the remaining funds to whichever charity you like upon death. Using a 1031 exchange property to fund a charitable remainder trust will let you keep deferring capital gains (as no tax will be due on the sale of the property by the trust) since it's a charitable entity. Rather, you'll receive an income for life and then a charitable deduction in the amount of the expected remaining balance given to the trust. 

If you are OK not leaving the balance left over to your family, This is a very good tax efficient option that can aid a cause you care about. 

 Great answer, thanks for the reply! 

[DJ Brooks]

Quote from @Bill Brandt:

1) with a CRT you are giving the money away. Irrevocably. So do you want to give that money away?

2) lets use your 1031 exchange example. You’re selling one property for $200k that you paid $50k for. You buy 1 x $100k property but not the other. So you give $100k away to a charity and you have a $50k cost basis on the remaining property. (Mostly what I’m doing here is confirming you know at you have to spend all the sales proceeds, not just the profits, since you stated such low numbers.) then you would owe no taxes, but you have given away half your money. 

3) the good news is you gave the charity $100k not $100k minus taxes. The bad news this might/probably had to be done at the time you sold the property? It’s certainly not going to make your 1031 valid.

You’re probably going to need a charity you want to give the $100k to, a good cpa and a great 1031 QI. @Dave Foster have you ever combined a 1031 with a CRT? Anyone else want to weigh in?

 Yea, I might want to get more versed in 1031 tax exchanges. I have yet to do one but I have a lot of investors looking to them this year. I would like to know some extra strategies while they prepare to do so. Thanks for the reply! 

[Dave Foster]

@DJ Brooks, Your sale (with the one failed purchase) would cause a gain to be recognized.  It is possible that a donation into a charitable trust of the boot proceeds (the recognized gain) could offset.  But I'm not familiar with a charitable remainder trust being set up with cash.  

What is more common is that our clients will have a back up purchase like a Delaware Statutory Trust identified to buy into if one of their purchases fails.  This still lets you defer the tax.  And it keeps all the money for you plus the option to 1031 back out when that is sold.  You keep the property instead of the charity.  and still defer the tax.

[DJ Brooks]

Quote from @Dave Foster:

@DJ Brooks, Your sale (with the one failed purchase) would cause a gain to be recognized.  It is possible that a donation into a charitable trust of the boot proceeds (the recognized gain) could offset.  But I'm not familiar with a charitable remainder trust being set up with cash.  

What is more common is that our clients will have a back up purchase like a Delaware Statutory Trust identified to buy into if one of their purchases fails.  This still lets you defer the tax.  And it keeps all the money for you plus the option to 1031 back out when that is sold.  You keep the property instead of the charity.  and still defer the tax.

 Thats an interesting concept. I've never heard or a statutory trust. I'm curious on how that would work. Would the trust need to already have a property into it? Or would you be able to use a property that is already yours? haha. Either way, deferring taxes for the sake of growth and keeping more money is the play i'm trying to plan for. Thanks for the info. I'm going to go down the rabbit hole on that one haha

[Dave Foster]

@DJ Brooks,  My sentiments exactly :). A CRT is great if you have a charity you really want to support.  But a CRT simply to lower your tax bill will still end up with the bulk of the benefit going to the charity not you.

These trusts are basically large properties in all different sectors that are owned in a trust structure originating in ...wait for it...Delaware.  Hence the name Delaware Statutory Trust.  The only magic is that in 2004 the IRS formally made ownership of a membership interest in a Delaware Statutory Trust the same thing as owning the real estate itself.  So it qualifies for 1031 treatment.  You're a fractional and passive owner of a large commercial asset.  

I just sent you a colleague request if you'd like to discuss further.