Capital Gains Tax Preventing You From Selling?
Local Financial Expert Has Innovative Way to Defer Taxes
By Jim Evans

Cy Roseman

Like most California property owners, Ramona residents have seen their homes, ranches and investment properties appreciate substantially.

On paper, of course, appreciation is a positive result of real estate investment, but trying to sell it and take advantage of the equity growth can result in substantial capital gains tax and/or depreciation recapture costs associated with a sale.

Even after the $250,000 exemption, the tax bite can still be considerable.

Not surprising, many property owners hang on to their properties to avoid paying the capital gains.

However, there may be another option, according to Cy Roseman, president of Ramona Family Legacies and Wealth Management, a division of BridgeWest Financial & Insurance Services Inc.

A Private Annuity Trust or PAT might be the answer, Roseman explained.

For those with a potential capital gains tax liability, a desire for a steady income or tax deferral, and a willingness to diversify beyond real estate, a PAT can be a viable alternative to the more familiar installment sale or 1031 exchange, he said.

The PAT is not new - the program has been accepted by the IRS since 1954 - but has grown to become one of the most popular exit strategies in recent years for sellers wanting to cash out of hot real estate markets such as San Diego.

So what is a PAT?

In short, a PAT is a program designed to defer capital gains tax at the time of sale whereby the property owner (annuitant) transfers ownership of the property to a PAT (a dedicated family trust), and the trust "pays" the annuitant for the property under a special contract between the trust and the annuitant called a "private life annuity."

"The trust then sells the property," explained Roseman, "but the trust incurs no tax liability because it purchased the property in the form of a private annuity contract."

The annuitant only pays tax on the income received each year from the trust, but there is no interest or penalty on these deferred tax payments.

And tax payments are made with depreciated dollars while the investment money in the trust could conceivably grow at a rate exceeding inflation.

Payments under the annuity can begin immediately or deferred until age 70 1/2.

Roseman is a Certified Financial Planner (CFP) Accredited Investment Fiduciary (AIF) and a Certified Estate Advisor (CEA) who works closely with the National Association of Financial and Estate Planning (NAFEP) and has offices in Ramona and Honolulu.

For more information, call Ramona Family Legacies & Wealth Management at 760-787-9800.