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Many high-net-worth families hold some of their wealth in investment real estate, which they may eventually sell in order to cash out growth and reinvest wealth into new opportunities or a more diversified portfolio. However, selling investment real estate can have a range of implications that families should know before taking action.
How Can Trusts Be Used to Manage Proceeds From Investment Property Sales?
Various types of trusts can help manage proceeds from the sale of investment real estate, including deferred sales trusts, charitable trusts, and family trusts. These fiduciary arrangements may protect sale proceeds from creditors, manage the tax implications from the sale, and allow families to reinvest their wealth to diversify their portfolio or generate income streams.
Legal Considerations Every High-Net-Worth Real Estate Investor Should Know Before Selling Investment Property
Selling investment property may come with various legal considerations, such as:
- Capital gains taxes
- Net investment income tax
- Estate plan implications
- Asset protection strategies to preserve sale proceeds
Strategies for Using Investment Property Sales to Build Generational Wealth
High-net-worth families may have several ways to manage the tax consequences of a sale and preserve more of their family wealth. Common strategies include:
- 1031 exchanges – Owners of investment or business property can sell real estate through a 1031 exchange, which allows an owner to defer capital gains taxes on the like-kind property by reinvesting the sale proceeds in another real estate asset of equal or greater value.
- Installment sales – IRC Section 453 also allows a property owner to defer payment of capital gains taxes on a real estate sale by structuring the transaction as an installment sale. Under these terms, the buyer pays the purchase price in installments, and the seller pays capital gains tax only on payments received in a tax year.
- Deferred sales trusts (DSTs) – DSTs also leverage the taxation method under IRC 453 to manage tax payments from the sale of real estate while also facilitating reinvestment of sale proceeds.
Common Mistakes High-Net-Worth Families Make and How to Avoid Them
Some of the errors that high-net-worth real estate investors make when selling investment real estate include:
- Failing to plan for capital gains taxes – High-net-worth families and investors may face a federal long-term capital gains tax rate of up to 20 percent, plus potentially the 3.8 percent Net Investment Income Tax (NIIT). State taxes may also apply.
- Overlooking tax management solutions – Property owners often fail to consider the full range of legal strategies for managing capital gains taxes from real estate sales, such as deferred sales trusts, installment sales, and 1031 exchanges. Don’t choose one without investigating all possible options.
- Neglecting tax-loss harvesting – Investors may have other assets that have losses, which they can sell to offset capital gains from other real estate sales and potentially reduce their overall tax bill.
- Failure to ensure adequate liquidity: Property owners sometimes fail to maintain sufficient cash on hand to cover taxes due from the sale of real estate, including capital gains and NIIT obligations.
Contact Us Today to Start Planning Your High-Value Property Sale
Is your family thinking about selling income-generating or investment property? Before choosing an investment strategy, it’s important to understand the pros and cons of using trusts for real estate sales for your family. Contact 453 Trust Powered by Pennington Law today for a free consultation with an experienced attorney. Our law firm regularly assists high-net-worth clients in determining strategies to protect assets and generate income while minimizing their tax burden.
