Selling real property can be bittersweet: You are bidding farewell to one chapter and reaping the benefits of your hard work to fund the next. Unfortunately, you may also be facing a sizeable tax bill.

The Capital Gains Problem

The capital gains exclusion applies only to primary residences and is capped at $250,000 for single persons or $500,000 for a married couple — an amount that may only cover a fraction of the gains from your sale. For rental properties and vacation homes, your gain is usually fully taxable, often at federal rates of 15%–20%, in addition to state taxes and the 3.8% net investment income surtax for higher earners. On a $500,000 gain, that can mean $100,000 or more going directly to the IRS. 

The Smarter Solution

A charitable remainder unitrust (CRUT) is a tax-exempt trust into which you can transfer both liquid and illiquid assets, in this case, the property itself before you sell. The trust sells the asset without paying upfront capital gains tax, reinvests the full proceeds and pays you a percentage of the trust’s value each year for life or for a fixed term of up to 20 years. By establishing a CRUT, you can transform an illiquid asset into a diversified income stream, reduce capital gains liability and take a sizeable tax deduction.

How a Pomona Plan CRUT Works

Consider Carol, age 70, who purchased a summer home in 1995 for $100,000. Although she has paid off her mortgage, the upkeep has become a burden, and she is ready to sell the property for $600,000 — a gain of $500,000. Selling outright could trigger more than $100,000 in combined federal and state capital gains taxes. By transferring the property to a Pomona Plan CRUT before the sale, Carol can: 

• Sell her house at full market value, pay no upfront capital gains tax and reinvest the full proceeds from the sale in the trust,
• Receive a 5% payout of $30,000 in her first year of income, a figure that can increase if the CRUT investments grow and
• Take an immediate charitable deduction of approximately $299,430 in the year she establishes the CRUT, a deduction she can carry over as needed for up to five years.

We have extensive experience guiding Pomona Plan participants through real property gifts and CRUT arrangements. To learn more about transferring real estate into a CRUT, contact the Pomona Plan team at (800) 761-9899 or pomonaplan@pomona.edu.