Private annuity funds help property owners defer capital gains taxes and depreciation recovery costs. The owner transfers ownership to a trust and receives annuity payments for life, while the proceeds from the sale are invested by the trustee. The owner is taxed only on the annuity payments received, making it a smart choice for retirement.
A private annuity fund is a capital gains deferral program that helps with high capital gains and depreciation recovery costs. Such a plan is beneficial for the owner of a commercial or residential property who does not immediately need the money from the sale. With many people facing high taxes on highly prized property, a private annuity fund offers an option to save money.
In a private annuity relationship, the owner “sells” the property to a trust by transferring ownership prior to the actual sale of the property. The “payment” of the trustee is in the form of a private annuity contract. This contract is established to make a predetermined number of payments for a specific pre-calculated amount for the remainder of the owner’s life. The annuity payment is calculated with a formula using the proceeds from the sale, the age of the owner, and the interest rate set by the IRS.
Proceeds from the sale of the property are held in the private annuity fund and can be invested by the trustee. Payments can only be made to the owner for the predetermined and agreed amount. Any income that the private annuity trusts must be kept for the beneficiaries of the trust.
The owner is taxed only on the annuity payments when they are received, rather than on the total sum at the time of sale. Payments don’t have to start right away, making the private annuity a smart choice for retirement. As long as payments start at age 70, the owner can enjoy tax benefits.
The private annuity trust program makes it easy for owners to take advantage of its benefits. The sale property can be any commercial or residential property – even a primary residence or a rental property. One stipulation is that the seller and the administrator cannot be the same person. The designated trustee can be any relative, including an adult child – as long as he or she is not a dependent.
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