Capital Gain Deferral and Mitigation Attorney

Capital Gain Deferral and Mitigation Attorney and CPA

All taxpayers, whether in the US or abroad, need to understand the capital gain deferral and mitigation strategies available to them and their businesses. Without this, taxpayers can be stuck ‘holding the bag’ of excess capital gains that could otherwise be avoided and/or mitigated. This is true whether you are based in the US or abroad.

Our team of international business and tax lawyers is well versed in facilitating capital gain deferral and mitigation strategies for taxpayers located in and outside the United States. Below are just some of the strategies we help our clients utilize and implement.

Our Capital Gain Deferral and Mitigation Services

‘Like-Kind’ and 1031 Exchanges

A “like-kind” exchange provides an exception from the general rule requiring the current recognition of gain or loss realized upon the sale or exchange of real property. Most real estate investors, owners, and operators are familiar with this provision, but do not appreciate the complexity of properly implementing such a capital gain deferral device. If not properly executed, taxpayers hoping to have deferred capital gain will be otherwise stuck with reporting and paying tax on the full capital gain with no way out.

If correctly executed, no gain or loss is recognized if real property held for business or investment purposes is exchanged solely for real property of a like-kind to be held either for business or investment purposes. This tax break, however, is not permanent. The gain is deferred until the property acquires as a result of this exchange is disposed of in a subsequent transaction. This deferred gain represents only a potential tax, which may be avoided altogether, for example, if the exchange property passes through an estate and its basis is stepped up to its date of death value.

Our team of international tax lawyers and CPAs have helped both individuals and real estate funds alike take proper advantage of this provision without fail.

Structured Installment Sales

A “structured installment sale” helps defer capital gains on the sale of assets and businesses with the ability to customize structured sales cash flow. Most times, sellers expect that they will have to receive the full proceeds from the sale of their business and/or property up front. If done in this manner, sellers will be hit with the full brunt of the gain and required to report and pay tax on such gain in full. However, this can be avoided by using the structured installment sale technique.

Essentially, the “structured installment sale” is a slight offshoot of a normal installment sale. In a normal installment sale, a seller of a business and/or other property sells to a buyer in exchange for a “note” in which the proceeds are paid to the seller for a number of years. Under a traditional installment sale, the seller is not required to recognize gain on the sale of the property until they receive proceeds from the buyer on an annual basis. Once received, the seller will require their proportionate gain that is applicable to the payment received each year.

A structured installment sale provides the seller an option in the case, if the seller does not want to take back a note from the buyer for one reason or another and would like the full proceeds of the sale of their business or asset upfront. In a structured installment sale, the buyer still agrees to an installment sale, the obligation of which is assigned to a 3rd party intermediary. In this case, the buyer provides the 3rd party with the full sale proceeds, and the 3rd party thereafter becomes responsible for making the agreed upon ‘installment payments’ thereafter. The 3rd party, while on the hook for the installment payments, invests the sale proceeds obtained from the buyer on behalf of a seller.

Deferred Sales Trust

The deferred sales trust is a derivate of an installment agreement which allows a taxpayer to defer recognizing and paying taxes on money they haven’t yet received from a sale of a business or property. The idea behind a deferred sales trust is to sell the business or asset in question to an intermediary trust on an installment note. The trust then sells the business or asset to the ultimate buyer, and the sale proceeds are placed in the trust without paying taxes on the capital gains until they are distributed.

The intermediary trust is allowed to invest the sale proceeds while in control of them on behalf of the seller. This allows the seller to (1) defer recognizing capital gain on the sale of the business and/or asset until they are distributed form the trust to the seller; and (2) generate a return on their sale proceeds by investing them within the trust.

This is a complicated tax deferral transaction the requirements of which must be strictly met. If not, the IRS can deem the seller to be in receipt of all such sale proceeds and require the seller to recognize the totality of the gain they sought to defer.

Our team of international business and tax attorneys and CPAs has guided many taxpayers through the effective use of a deferred sales trust to defer capital gains.

Delaware Statutory Trust

The Delaware Statutory Trust is a strategy that makes use of a “like-kind” exchange (e.g. a 1031 exchange) that allows the owner of real property to reinvest their proceeds from the sale into a sanctioned investment vehicle managed by a third party. The purpose of this transaction is to take advantage of the capital gain deferral offered as part of the “like-kind” exchange, get rid of their requirement to be the manager of a piece of rental property, and still generate passive income through their ownership of other real property in a syndicated manner.

If correctly executed, no gain or loss is recognized when the gain from a sale of real property timely invested into a qualifying Delaware statutory trust. This tax break, however, is not permanent. The gain is deferred until the interest held in the Delaware Statutory Trust is disposed of. This deferred gain represents only a potential tax, which may be avoided altogether, for example, if the interest held in the Delaware Statutory Trust passes through an estate and its basis is stepped up to its date of death value.

Exclusion of Gain on Sale of Primary Residence

Most individuals purchase a home for several reasons, one of which is to obtain a return on their investment through the appreciation of the home’s value. However, what most individuals don’t expect is that they will have to pay capital gains tax on the subsequent sale of their property should they decide to move or think they can live off of the proceeds from eh sale of their home in retirement.

However, all is not lost so long as the individual lives in their home as their primary residence for 2 of the prior 5 years. There are certain exceptions to this capital gain exclusion, however, the amount eligible for exclusion is $250,000 for single filers, $500,000 for married filers.

Make sure to contact our team of international business and tax lawyers and CPAs to determine that you qualify for this exclusion prior to selling your home.