Time is of the essence. Save tax by selling sooner than
later. In this episode, I'm going to address the question "How can I avoid paying capital
gains tax on sale of real estate?" Get ready. You probably need to do this sooner than you
think.
Hi, I'm Doug Andrew and I've helped people optimize their financial assets, minimize taxes,
for more than 4 and a half decades. And so, I want to help you understand really how to avoid
as much unnecessary tax as possible. I'm a red-blooded American. I think we should all pay
our fair share of tax. But I've always felt like the capital gain tax is one of the most unfair
taxes they've ever come up with. Why? It's because when you buy an asset, let's say, it's stocks and
later on, those stocks appreciate in value and you sell them for a higher price. That's called a
capital gain if you've held on to that asset for longer than a year. If you buy a rental property
--a home or a duplex or apartments or a strip mall or whatever you're buying. And then later on,
10 years, 15, 20 years down the road, you sell it. You have to pay tax on what
it is sold for over and above what you paid for it less any depreciation you took on the real estate.
It's a killer. Do you know that most of that gain is just inflation? That's why I think it's unfair.
You're having to pay tax or being penalized for the cost of living going up because if
a piece of real estate appreciates and doubles in value every 10 to 15 years which is sort of
the national average. Most of that appreciation was just the cost of living. Inflation. And so,
you're being penalized or taxed for inflation. And so, I think it's unfair. But
you know what? Government revenuers, they're always there with their handout. Whenever
there's a financial transaction where they can get a piece of it if you can't tell. So, that's what a
capital gain tax is. And there's some advantages that we've had throughout the years. But these
are about to be taken away, I feel based upon political agendas that have been expressed. So,
before I share with you a smarter way to deal with the long-term capital gains tax,
let me inform you how most people try to save on long-term capital gains tax. See, for years,
government sometimes gives us a different or a lower tax rate on long-term capital gains.
Generally, if we have republicans in congress or the executive branch, they believe in lowering
taxes. And so, oftimes, you'll see that the long-term capital gain tax would be
maybe zero if you're in the lower income tax brackets. And then 15% and maybe top out at 20%.
Under the Trump administration, that's what they were limited at is 20%.
Because Trump didn't believe that people should be you know charged the regular ordinary
income tax rate up to 40%. Because when you sell something and you experience a gain,
that adds to your income that you're on your tax return. Did you know that?
I sold a commercial building here in the last year and a half. And the capital gain all showed up on
my tax return as a huge amount of income that forced me into the highest tax bracket. And so,
under the Trump administration, he thought it was unfair for anybody to pay more than 20%
because about Obamacare, there's an additional 3.8% sur tax. And then several states have a
state tax for capital gains. So, I was paying 28.3% on the long-term capital gain. A lot of
money. It was a couple of hundred thousand dollars in capital gain tax. So, what do most people do?
They get convinced to buy a light property and sell their piece of real estate (let's say) and
do a 1031 exchange and they're inheriting a new headache oftimes. And so, that's how most people
deal with it. They keep putting it off. And keep putting it off and defer, defer, defer. And so,
you don't have to pay the capital gain. Well, get ready because I'm going to share with you next
why that's probably going away. 1031 exchanges are probably going out the window. And also,
when we usually have democrat-controlled congresses and also in the executive branch,
one of their favorite places to raise taxes is to take the capital gain tax rate up to 40% or
more because it turns into ordinary income tax rates instead of a special tax rate. So,
I mentioned that uh oftimes depending upon who's in control in congress or the executive branch,
the capital gain tax rates vary from being lower or maybe even non-existent
to being as high as just ordinary income tax rates. Well, that's what is about to happen.
It looks like under a biden administration. At the recording of this episode,
we've just gotten through the elections of the year 2020. Now, under a joe biden administration,
he has already announced during his campaign that he needs to raise almost a trillion
dollars or more for this initiative, this initiative. And then there's a lot of really
expensive initiatives like medicare for all or free college tuition that are going to
cost in the next 10 years 100 trillion dollars. Well, folks, if you divide 100 trillion by 10
years, that's 10 trillion a year which is double what the IRS collects in taxes. And they still
have a 5 trillion budget even without having to pay for those kinds of initiatives. So,
where's the money going to come from? Well, Mr. Biden says, "I want to change the capital gain
tax rate back to ordinary income tax rates." So, when the question is asked, "What should I do?
How can I avoid paying tax?" Well, maybe you can't avoid paying the long-term capital gain
tax but you could pay half of what it will likely be if you keep postponing.
Because under the trump tax cuts, the long-term capital gain rates topped out at 20%.
And then there was 3.8% for the Obamacare as I said. Well, Biden wants to take that up to 39.6%
which is the ordinary income tax rate. So, that's nearly double. If you want to save tax, it may
behoove you to sell and pay the capital gain rates sooner than later because you may get away with
paying half the tax that you will pay if he passes that initiative. The second thing that's going to
take a capital gain tax rates through the roof, they're going to be sky high is because he wants
to do away with a step up and basis on long-term capital gains. What's that? See, for years, if
you continue to buy like properties, if you sell a property for example that's highly appreciated and
you buy a like property, maybe you're inheriting a new headache. But people do 1031 exchanges, why?
Because you put off. You postpone paying the capital gain tax if you buy a like property.
But sometimes people just, "Oh, golly. I'm tired of managing it but they're trying to avoid the
capital gain tax." If you keep it or you do 1031 exchanges, tax-free exchanges until you pass away,
your heirs, your children get to inherit it with a step-up in basis. Meaning they will only have
to pay a capital gains tax on what they sell it for over and above what it was worth when they
inherited it. So, if you bought a rental duplex for 250,000 and you depreciated it down to the
value of the land when you bought it at 50,000. And in the meantime, that doubled to 500,000
and then doubled again to a million, you leave it behind your children, they don't have to pay
the capital gain from 50,000 up to a million. They get a step-up in basis. That's going to go away,
it sounds like. Joe Biden wants to get rid of the step-up and basis. Meaning, anybody who
inherits a highly appreciated property, stocks or real estate will have to pay a huge capital gain
at double the rates. Usually at least 40% because your capital gain is added into your income.
And you will have to pay it on the entire gain back to the basis what your parents bought it for
whoever originally purchased the property. This is going to take capital gain taxes through the roof.
The best way to avoid that is sell. Sell, sell. Get the taxes over and done
with sooner than later. But where should you put the money? I'll tell you next.
So, if you're a little bit foggy about, "Golly, this makes sense, I think", Let me share a
couple of examples to help you understand how by selling a piece of highly appreciated real estate.
And then taking the proceeds and putting it into a max funded indexed universal life insurance
contract what I call the Laser Fund can oftentimes generate as much or more income or cash flow
than owning the piece of property and continuing to be a landlord with the headaches of
taking out the trash of evicting tenants fixing toilets and so forth. Now, if you like to do that,
I would recommend that you go ahead and pay the capital gain tax. You could do a 1031 exchange
into like properties. But I just don't know if that's the smartest thing to do right now.
So, you could buy additional properties. For example, we have a client who owned a home in Palo
Alto, California. And you know, when they first built that home, I think it cost like $230,000
and this is where they raise their children and then you know, 3 and a half decades later,
this house is worth 4.8 million. Well, if you sell that house, you're going to have to pay
a capital gain unless you buy a house of equal or greater value. Well, they didn't want to do that.
This was their retirement and they could do some 1031 exchanges. So, they did that with some of the
equity but they also built a retirement home in a different state for about $800,000 which was twice
the size of the 4.8 million dollar home in Palo Alto. Not only that, prior to selling that house,
they were renting it out for 10 grand a month and they thought that was pretty good. If you
do the math, 10,000 a month is 120,000 a year divided into an asset appraised for 4.8 million.
That's pathetic. That's about a 2.5 annual rate of return. So, they took some of that and did
1031 exchanges and hired a management company. And they quadrupled the cash flow because they were
able to buy 5 bedroom homes in Memphis, Tennessee that are worth 300,000 and rent for one percent
of that, 3 grand a month. And so they did that but they were also able to take money and keep it
liquid and safe in a Laser Fund earning rates of return averaging 8 to 10 percent tax-free. Folks,
you can dramatically increase your net spendable income by combining these strategies together. I
had a 76-year-old gentleman who owned 2 apartment complexes and he just thought, "You know what?
I'm going to hang on to these. This is my kid's inheritance." Well, when we gathered his children
together, I said, "I want you to shoot straight with your father. What are you going to do with
these 2 big apartment complexes as soon as he's six feet under?" They hesitated and said, "Dad,
we don't want to hurt your feelings but we hate these. On the way home from the funeral,
we're going to put up the for sale signs." I said, "Why do you want to leave behind these apartment
complexes? They are not interested in them?" I said, "Children, what if he were to sell those,
just pay the capital gain, take the net and put it into a max funded portfolio
of laser funds and it would generate as much or more cash flow than the rental income
and you don't have to have the headaches of being a landlord anymore. But now when he passes away,
in about 3 weeks, you'll get 6 and a half million tax-free instead of 4 million dollars worth of
apartment complexes you got to deal with and figure out how to sell." What do you think they
opted for? We'll take the 6 and a half million tax-free. See, he didn't know what he didn't know.
If this has intrigued you and you want to learn more about what to do with money if you have to
sell a property pay the capital gains tax? I would explore a laser fund. Here's how you can claim
your free copy of my most recent 300-page best-selling book called The Laser Fund.
So, how can you learn more? If this has piqued interest,
I would love to gift you a free copy of my most recent best-selling, 300-page book The Laser Fund
which is actually 2 books in 1. This book here is about 200 pages comprised of 14 chapters with all
kinds of charts and graphs and explanations of how to diversify and create the foundation for a
tax-free retirement. Now, if you learn more right brain with stories and examples, you flip the book
over and read this one. This is about 100 pages, 12 chapters with 62 chicken soup for the financial
soul stories like the one I just told you. If you like to use your whole brain, I would recommend
you read both books. But it's 300 pages. This has been flying off of our warehouse shelves. I'll
tell you what. I will pay for the book. You go to laserfund, LASERfund.com. It's on the screen here.
And claim your free copy. You contribute a nominal amount towards the shipping and handling.
I'll cover the rest of that cost and I will send out a book to you. There's also options
there for you to listen and learn and watch and learn. But here's to your brighter future.