Don’t Sell What You Don’t Plan To Keep. Wait! What?

It sounds counterintuitive. If you don’t want to keep something, why not sell it?

Let’s say you are planning to sell highly appreciated real estate. First, make a list of what you plan to do with the proceeds of the sale.

Sample List:

• Reinvest a portion of the proceeds

• Pay off debt

• Take a vacation

• Make gifts to family members

• Make gifts to charitable organizations

• Pay capital gains tax on the profit

Based on the sample list, it’s obvious you will need to keep that portion of the real estate sale proceeds to pay off debt, take a vacation, and pay capital gains taxes on the profit.

Did we forget anything? What about the gifts to family members and the gifts to charitable organizations? In many situations, other family members may be in lower tax brackets than you are in. And, charitable organizations are tax-exempt. Wouldn’t it be tax-wise to let them report that portion of the real estate sale proceeds that you didn’t plan to keep?

How can this be done? Here is an example. The real estate may already be held in an LLC, or it can be transferred to a new LLC. You can be the LLC managing member and give LLC membership interests to your children and to a charitable organization, like the ACF Donor Advised Fund, that can benefit the charities that you want to give to. Next, you as the LLC manager sell the real estate, and the proceeds pass to all the LLC members according to the LLC membership interests that they own.

But did we forget about the portion of the proceeds that you want to reinvest? If you plan to reinvest the proceeds to receive investment income, and not touch the principal, you may want to consider transferring an LLC membership interest equal to that portion to an ACF Pooled Income Fund.

The sale proceeds received by the ACF Pooled Income Fund avoids all capital gains tax, and you receive a generous charitable deduction. The sale proceeds are invested by ACF with your investment advisor and the investment income is paid to you and your beneficiaries for their lifetimes. Afterwards, the remaining assets in the Pooled Income Fund pass to your ACF Donor Advised Fund to support the charities of your choosing.

While it may sound counterintuitive, it could be tax-wise to not sell what you don’t plan to keep.

Dan Rice