#485 10 Capital Gains Tax Strategies that Keep More Money in Your Pocket

In this episode of the Main Street Business Podcast, host Mark J Kohler unpacks and breaks down the best ways to tackle Capital Gains tax. He maps out ten helpful strategies that can give you the edge you need to offset Capital Gains and save thousands of dollars.

Here's what you can expect:

• An in-depth view of ten powerful strategies aimed at navigating capital gains tax, typically kept behind a paywall, now accessible for all.
• Valuable insights usually reserved for the wealthy elite.
• A clearer perspective of CRT, 1031 Exchange, Opportunity Zones, Installment Sales, and more, to help you take on capital gains tax with confidence.
• Secrets to managing professionals effectively for optimal results and substantial savings.
• More practical applications that can be used to mitigate capital gains tax burdens effectively.
• A better understanding of how these strategies can benefit small and large businesses, as well as individuals.

If you’ve been looking for a compass to help you navigate the complex Capital Gains landscape, this is one episode you don’t want to miss. Whether you’re managing a small business, big business, or just yourself, these strategies give you the tools you need for achieving the best results.

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Transcript

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Welcome to Capital Gain strategies that only the rich know about. In this video, I am going to walk you through ten strategies that you can use to tackle capital gains tax. Now, this information is usually behind a massive paywall that only the wealthy can afford. More specifically, I'm going to explain how these ten strategies may actually avoid, delay, offset, or eliminate cap gains taxes altogether. In fact, last week I just helped a client wrap up the deal of saving over $700,000 in capital gains tax for 2023 and pay zero in tax. Now, don't think this doesn't apply to you. This can apply to a small business, big business, or no business at all. If you don't start applying these strategies immediately, you're going to be leaving a lot of money on the table. And this is information you may only learn from technically trained accountants or lawyers who some may say are very expensive but are working in the trenches daily to help their clients better understand how to tackle the capital gains tax and which strategies actually work. And today, I'm here to guide you through these strategies. I am that guy. I am a CPA attorney, bestselling author, and a partner in a law firm for over 20 years, helping clients tackle these and many other tax issues, saving them thousands and thousands of dollars. First, let's talk about two strategies to avoid capital gains tax. Number one, the charitable remainder trust, or CRT. Now, there's a lot of variations of the CRT, and it can get complicated really quickly. But let me give you an example here on the whiteboard of how the CRT generally works. And we like the crut or the charitable remainder unitrust. So let's start with the crut. So here is how the crut would work. First, you start with a highly appreciated asset. Now, let's say this property is worth $1.1 million, but you bought it for $100,000, and you are now facing a $1 million gain. Now, if you were to just pay capital gains taxes, the highest rate would be 23.8%. That's the 20% rate plus ACA or the Affordable Cares act. Now, you add state onto that of even California at 13.3, this could get as high as 37%, but it's going to range between 15% to 37%. So here you would be paying tax of $370,000 in capital gains tax. So what do we do? So step one is you create a trust. A CRT or a crut. Step two, you donate the property to the trust. Step two. Step three, we are going to sell the property to a party that would like it and that $1 million and after sales cost, maybe it would be around $100,000 as well. You're going to have this million dollars sitting in the trust, and you didn't pay any tax to get it there. You've avoided the capital gains tax. Now, what's next with this crut? You're going to design a unitrust payment that's based on your sex or gender and age. So if I'm a 55 year old guy, I might have a unit trust rate of 10%. So for the rest of my life, this unitrust payment is going to come back to me of 10% based on the value of the trust each year. So that would be $100,000, hypothetically. Now, your goal is to then go out and invest this money inside the trust. There's some prohibited transactions on how involved you can be in that process, and there's so many different options, but you're going to try to build up the value of this trust. So you get 10% of the value each year. Now, when you receive this money, you will pay tax on that. But there's a couple of other cool points. When you've donated this property to the crUt, now, you're going to get a tax deduction because it's going to go to charity ultimately. So that tax deduction is usually going to be around 10% of the value. So you're going to get $100,000 tax deduction. Meanwhile, at the very end of the day, that trust is going to pay out in 20 years or the end of your life, whichever's longer, the remaining value to charity. Some people may even combine a payment that builds in a life insurance policy called an irrevocable life insurance trust for the family who receives that amount tax free. That, my friends, is a basic example of the CRT. Again, they can vary widely in design, and it's going to also be impacted by the amount of capital gain you're trying to avoid and what your goals are. But there's some pros and cons to the CRT. But, my friends, that is option one. Number two is the DST, or deferred sales trust. Now, not to be confused with a monetized installment sale, which the IRS hate and is on the IRS dirty dozen, but with a deferred sales trust, it's kind of like the CRT, but different in this structure, basically the same asset, whether it's a business or property or stock or crypto. Who knows what this appreciated gain that you're trying to avoid. You're going to have the trust sell the asset, and this trust is going to create an installment sale with you so that this trust pays out money to you over time and you can control the amount. And there's no one you're waiting on or worried about that may not pay. So it's very controlled and you're going to pay tax as you receive the money. Now, the beauty of the DST is that there's no charity at the end of the day, that gets what's left in the trust that can go to family. The drawback is the cost to structure this. It's going to be 1% of the total sales price of the appreciated asset and about a half a percent per year to maintain it. Now, these, again, have to be tailored to the taxpayer in the right situation that are trying to reach specific goals. But the DST is a strategy for the super wealthy that could be available for you. Now, those two strategies were about avoiding capital gains tax. Let's talk about delaying capital gains tax. Number three, the 1031 exchange. Now, this only works for real estate, but is very common in delaying the tax that could occur on the sale of an investment property, real estate of any type, raw land, duplex, fourplex, commercial building, and buying another piece of real estate. So you delay ever paying the tax, sometimes until you pass away and there's no tax at all to your family because of stepped up basis. Now, let me show you what the 1031 looks like on paper. Now, with the 1031 exchange, again, you start with a taxpayer that has a big capital gain they're looking down the barrel at. So let's go with the same $1.1 million property, $100,000 basis, $1 million gain. So what the taxpayer does is say, well, I want to sell this, not pay the tax, but buy more real estate. So what we do is, with this taxpayer, they're going to sell the property to a buyer that wants it. So this property is going to go in and out of what we call a Qi or a qualified intermediary. Think of it like a escrow. Now, this buyer is going to pay for the property, but you don't want their property. So there's not a direct exchange. The money that they pay, this 1.1 million after sales cost, it could be a million dollars, is going to sit in that Qi until you find the property you want for the exchange. So that's why it's called a delayed exchange. And so whatever's left is going to go over here to the seller that's going to sell you the replacement property, and this replacement property will end up in your hands after closing as the taxpayer. So you end up paying zero tax and end up with a new property. And, of course, there's some rules to play with. You have 45 days to identify what you're going to do and 180 days to close or 135 days after the identification period. But you might sell one property and buy three. You could sell three properties and buy one. You could do a reverse exchange and buy the property you want and have the QI hold the title until you sell your current property. So it's called a reverse exchange. There's so many different options, but the 1031 leads the way with the delay of paying capital gains. Number four, opportunity zones. Now, this one's kind of interesting because you can start with something that's not real estate, like stock or crypto or a business, and you're going to have a big capital gain, but you're willing to put it into real estate. You may be selling real estate, but the end goal here is you're going to take this capital gain and put it into an opportunity zone area or a property that qualifies as an opportunity zone property. So if I have a gain of a million dollars and I'm willing to take that million and put it into an opportunity zone fund or a specific property that qualifies, I do not pay the tax under current legislation until the spring of 2027. Now, there's some legislation in Congress right now to extend that out further because this law has kind of been evolving. But the first benefit of the opportunity zone is you delay again, you don't pay any tax until the spring of 2027. The second benefit is once you pay that tax and you hold the property at least ten years, you never pay capital gains again on that property that you just bought. So you'll pay tax on the one you sold or the capital gain you have from the sale of stock. But you deploy it into this opportunity zone property, delay the pay of the tax, and then eliminate the future capital gain that property may create for you. Number five is the good old tried and true installment sale. This installment sale method has been around for years and allows a taxpayer selling a second home, maybe their own personal home, that's above the sale of home exemption or even a business or some sort of asset. Again, that has got this appreciated gain and a buyer wants to buy it and you're willing to carry the paper. So you're going to act like the bank and sell this appreciated asset to a buyer and get paid over time. Now, for some people are like, that's the last thing I want. I want my money up front. Well, you're going to pay all the tax up front. So the installment sale allows you to spread out the gain over time, and you're going to have, you better have a lien or a first trust deed or some sort of security against the asset you sold. So if they default, you get the asset back. Some people are like, man, I can't wait till this buyer defaults so I can get my property back and keep all the money they already paid me. All sorts of strategies there. But the installment sale is also very common because the wealthy say, you know what, I'm willing to receive the money over time and therefore allow me to pay the tax over time at a lower rate or have access to the money in the right method to save money and save taxes. So very common. And it's a great strategy to delay the payment of capital gains tax. Now, let's talk about offsetting capital gains tax. This is something the wealthy always do as well. If I can't delay it, avoid it or eliminate it, let me get a write off somewhere else and offset it. And if we can make a smart decision that is making us money to offset a tax over here, that's a win. Conversely, if you're just throwing good money at bad just to get a write off, that's not smart. We want to invest money or spend it wisely and get a tax benefit on the other side as well. That's called offsetting capital gains tax. So, number six, and leading off the strategies offsetting capital gains tax, is their real estate professional status very common. You may see a couple where one spouse qualifies as a real estate professional, or a single individual that qualifies. And because of their status as a real estate professional, they can buy long term real estate and do a depreciation strategy called cost segregation or getting bonus depreciation and writing off that real estate in a more accelerated way. And so if I can buy a rental property as a real estate professional and accelerate the depreciation, I can end up with a 5100 thousand dollars or more in tax write offs and use that write off over here to offset against a sale of a business crypto stock. Any sort of capital gain could be offset with a depreciation write off if I'm a real estate professional. Number seven is the short term rental loophole, another real estate strategy, but it doesn't require being a real estate professional. Now, if I can go buy a property that could create great cash flow and make a smart investment decision, still doing some depreciation and cost seg or bonus depreciation and offset a capital gain, I'm in the money. Now, there's three rules to qualify for this short term rental loophole. First, I've got to put in at least 100 hours of material participation and more time than anyone else involved in the year I acquire the property. Number two, I have to show that the average rental stay throughout the year is less than seven days. And third, I cannot put in substantial services where it ends up almost looking like a bed and breakfast or a hotel. If I can meet those three rules, I can now go buy real estate, put it in a short term rental strategy like Airbnb or VRBO, get a massive write off and offset capital gains from even a roth conversion or the sale of a property. Number eight is the self rental real estate loophole. Another one that we can use real estate making a wise investment decision to offset other capital gains from another area on our tax return. Now here's how this works. If you are a small business owner and you'renting from someone else a commercial space, a condo warehouse, or any sort of just office building space, if you can buy your own building to rent it back to yourself, you don't have to be a real estate professional. So it's another exception for the person that owns 100% of the business and 100% of the property that you rent to yourself. If you have two partners here and two partners there, and they're all the same, you qualify. But it has to be a self rental that meets these tests and it allows you to go do cost, sag and depreciation and create a massive write off that you can use against other income, including a capital gain. Number nine is the IDC, or intangible drilling cost deduction. Very common for the wealthy to offset capital gains is to create a write off, investing in oil and gas drilling. Now this is a pretty cool strategy because again, you want to deploy your money to create cash flow, but also write offs to use against that other capital gain. Now here's how this works with the IDC. A taxpayer may go invest in this partnership to do drilling for oil or gas. When you do that, you get three distinct benefits. Number one, you get to write off the drilling costs. Some of those are again through bonus. Others are just because it's an operational asset expense. So I'm going to be able to write those off and use that loss against other gains. Meanwhile, this oil and gas investment is going to create royalties, it's going to create income. And with the IDC, the first 15% of income generated from one of these drilling projects is tax free. The third benefit is you're investing in a real oil and gas project, a rig, if you will. And I'm not paying tax on the first 15% of income. I got a kick butt write off on my entire investment. And then finally, that project is resellable. It's an asset that's going to grow in and of itself. Very, very common people get a complete write off for their investment, or creating cash flow and sell it for the same price they bought it. That, my friends, is the IDC. Now, finally, in the category offsetting capital gains by creating a tax deduction in another area of our tax return is the solar investment tax credit. There's no phase out, and you can use this as an investor to get a 30% tax credit for the investment in a solar credit project. Meanwhile, from a business standpoint, you can create cash flow for the rent of these solar panels, and you can also depreciate them through, again, bonus depreciation. So we have many investors that are investing in solar renting to someone that doesn't have the money to buy solar panels, but you're creating some nominal rent, depreciation, write offs and a tax credit. Now, these have to be crafted very carefully, and you're going to work with professionals to do that. But again, this is something only the wealthy know up until now, because now you know it, too. Now, I started by saying there were ten strategies, and I also pointed out that were going to eliminate capital gains altogether. Well, that brings us to my bonus number eleven, the Roth IRA. So, here's how the Roth IRA strategy works. What we would want to do, and I call this the trifecta, is that you're going to have your day job over here, your side hustle, LLC or your small business s corporation, and you've got some asset you've maybe sold over here that's got a gain, and you're also paying taxes over here on the money you're making. Well, we don't want to pay capital gain. So here's the Roth IRA strategy. Instead of you as an individual taking your money and investing it into projects, whether real estate or some sort of asset, and when you sell it, you're going to pay capital gain. Let's avoid it altogether by you first funding your Roth IRA or Roth. Four hundred and one K and when you have these assets or buckets, you don't have to invest in Wall street. You can take a Roth IRA or a Roth 401K, form an LLC and invest in real estate, crypto, or even stocks. You get to invest in even businesses. And when you sell these assets, you will pay no tax because you're investing in a Roth IRA or a Roth 401K. This is what the wealthy do. They move their money as fast as they can into a Roth position and invest from there and never even have to worry about capital gains tax. This is what Peter Thiel did in his investment in Paypal and Facebook. He took his Roth IRA and invested and now it's reported that it's worth over $4 billion and he'll never pay tax on it. And people, he started with a Roth IRA that had $5,000 in it, just like you and me. So by moving your money slowly but surely to these other structures, the Roth IRA and Roth 401K, you can eliminate capital gains tax altogether. I want to say thank you for being here and learning some strategies that will help you better manage your professionals. And you don't have to know everything or be an expert, but you have to captain your ship, people. It's not that hard. You can learn these basics that are going to save you thousands. Now that you're aware of these strategies to beat capital gains, it's time to take it to the next level. I've got a video down below, please click that's had millions of views on how to take those savings and build massive wealth. Also, many of you would benefit from a consultation with a real tax lawyer helping main street business owners all over America in an affordable, understandable experience. Please check out my law firm, KQS lawyers and make an appointment on Zoom. Or you can meet with a lawyer that will help you reach your financial dreams. And finally, any of you that are an accountant, an enrolled agent, CPA, attorney, or just a business owner that wants to go the next level with these strategies, please check out my main street tax pro certification where I take you through over 75 strategies and teach you ways to better build your american dream and make millions.