Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.

Karl Hendricks has a home that he bought for $400,000 many years ago. It has appreciated to $1 million. Karl is now age 85 and would like to sell the home and buy a $400,000 condo in a nearby retirement community. He would like to sell with no tax, but an outright sale would require paying tax because the gain recognition is more than his $250,000 principal home sale exclusion.

Question:

Is there an attractive way for Karl to sell without tax and be able to purchase a retirement condo?

Solution:

Karl visited with Jane Planner from his favorite charity. She explained that he could retain a value of $380,000 and transfer the balance of his home into a charitable remainder trust. The estimated costs of sale for the million-dollar home would be $50,000. After the sale of both his retained portion and the part owned by the unitrust, the costs will be prorated between the cash amount and the trust.

Because under Section 4941 Self–Dealing rules you cannot live in your unitrust, Karl moved into temporary housing. He transferred 60% of the home into a one life 5% unitrust. The 40% of the home was transferred to favorite charity as trustee of a revocable trust. Because favorite charity then owned 60% as trustee of the unitrust and 40% as trustee of the revocable trust, the sale process was simplified.

Fortunately, the housing market in that area was strong and favorite charity soon had three offers. It sold the property for $1 million, less $50,000 of sale costs.

Karl was delighted. He received cash of $380,000 and the charitable trust value was $570,000. Both numbers reflected the prorated amount of the $50,000 in sale costs. Karl bypassed $330,000 of gain on the trust, saving him $78,540. His trust produced a charitable tax deduction of $448,548. This deduction saves approximately $156,992.

The net to Karl with the cash and tax savings from the charitable deduction was $536,992. The reason that the benefit was so large is that the prorated basis plus his $250,000 principal home sale exclusion enabled him to receive the $380,000 without any tax. The $448,000 deduction was an appreciated–type deduction, His deduction limit for that type of charitable gift is 30% of his adjusted gross income and he reported his charitable deduction over the next four years.

Karl was able to buy his retirement condo for $400,000 and received a substantial income from the charitable trust for his lifetime.