Tax Savvy Alternative To A 1031 Exchange

Cynthia Hizami
Jewish National Fund USA


If you have been investing in the real estate market in California, congratulations on making well informed financial decisions. Now that the real estate market is changing, there has been an increased interest in learning about the best way to sell some properties. As with all successful investments, however, the art of disposing of it correctly takes almost as much effort and thought as making the investment in the first place. With every successful investment your silent partner and favorite Uncle Sam comes looking for his portion of your good fortune.  For this reason, how you dispose of real estate can make a huge difference in the ultimate success of the investment because of taxes which are due on sale, and estate taxes which can still take up to 40% on estates over a certain amount.

One typical solution is to swap one investment property for another which allows capital gains taxes to be deferred, commonly referred to as a 1031 exchange.  What if you no longer want the headache of being a landlord, but still need an income.  An innovative solution is to create a Charitable Remainder Trust, which can save thousands in taxes, avoid capital gains taxes, provide you and/or loved ones with income, pass more of the estate to heirs tax-free, and provide vital support to a public charity such as Jewish National Fund.

Consider the example presented by David and Lisa.  They purchased an apartment building 15 years ago, and after all these years they are ready to sell. They bought the property for $300,000, but it is now worth close to $1,000,000. If they sell it themselves there will be nearly $167,000 in taxes due when federal capital gains taxes are calculated.

Instead, David and Lisa could choose to donate the building to a Charitable Remainder Trust. They then avoid the capital gains tax owed at the time of the sale, receive a charitable tax deduction, plus they will receive an income stream from the Trust every year for the rest of their lives.  By naming their favorite charity as the remainder beneficiary of the Trust they also get to ultimately support a cause they love.

This simple solution achieves a variety of favorable results. David and Lisa will receive an annual income equal to 6% of the fair market value of the trust assets every year, about $60,000. They will avoid the capital gains taxes due on the sale saving them almost $167,000. They also will receive an immediate income tax deduction of close to $376,000 saving them about $140,000 in income taxes. This also removes the property from their estate, potentially saving them $400,000 in estate tax. Finally, David and Lisa’s gift will leave a lasting legacy.

David and Lisa were concerned that by giving such a large amount to charity they were disinheriting their children. To answer this question, it was demonstrated that they could purchase life insurance on their joint lives with a portion of the tax savings or the income that the trust was paying, which would guarantee their children could receive the value of the gift free of estate and income tax.

Jewish National Fund USA is a national public charity serving to ensure a strong, secure, and prosperous future for the land and people of Israel. If you would like further information or an illustration on how this idea could work for you, please contact Cynthia Hizami, Esq., 888-563-2008, Visit us at