The past several years have been very profitable for many real estate investors. But the market is changing and it may be time for many investors to be on the lookout for a new strategy. For those who own rentals, the trend was to buy a rental property, see it appreciate, and buy another rental property using a 1031 tax-deferred exchange to eliminate current capital gains taxes on the profits.

However, there simply aren’t as many solid investment properties available in today’s real estate market. The sharp increase in real estate prices hasn’t remained in balance with rental income. If you’re thinking about selling your investment properties now, you probably are concerned about the large tax bill you’ll face.

Low net rent income, demanding tenants, and a large amount of equity at risk have caused almost all real estate owners to consider selling their real estate. But there are countless investors who feel they are “stuck” with property right now that they’d rather sell. Many are hesitant to reinvest in a new 1031 exchange property because of low rental rates, but are unwilling to cash out on the property out of fear of paying hefty capital gains taxes. The good news is that for many owners and investors, the Private Annuity Trust offers a way to defer paying capital gains taxes, create a lifetime income and protect your assets as well.

With the Private Annuity Trust, real estate investors have a safe and legal way to exit from the labor of property management, the aggravation of dealing with tenants, and the anxiety of wondering how property values will fare in the current real estate market. With the Trust, there’s no pressure to reinvest right away to avoid paying capital gains. Instead investors can avoid making hasty decisions, feel out the market, and decide whether or not they even want to stay in real estate.

How the Private Annuity Trust defers capital gains taxes

Before the sale of the property is final, the property is transferred into the Private Annuity Trust. When the property is ultimately sold, the Trust can begin providing a lifetime stream of income, with taxes deferred over the seller’s lifetime. The Trust assets are protected from creditors and lawsuits, and the assets in the Trust can eventually pass to the seller’s beneficiaries without worry about the current 46% estate tax rate.

Many investors are concerned that due to significant property appreciation over the last several years, they are now too heavily invested in real estate. They just want to sell some of their assets and place their money into a more diversified, completely protected, lower maintenance investment vehicle with predictable cash flow. At the same time, they don’t want to fork over up to 30% of their investment profits in the form of capital gains tax payments if they don’t find a suitable investment in time.

The current Internal Revenue codes and strategic implementation of Private Annuity Trusts make avoiding this predicament a reality. Payments from the trust don’t need to begin right away-not until age 70 ½. If no money is paid from the trust, taxes are further deferred until the payments actually are received. The money can sit and accumulate interest until the seller needs the income.

If you began investing in real estate because of the freedom to earn on your own terms, you may be wondering why you now feel stymied by tax codes, volatile markets, and aggravating property management responsibilities. Perhaps its time to take back the control you deserve over your real estate investment career and begin investing on your own terms. If you’re ready to take back the reins on your investment vision, talk to a professional today to explore how Private Annuity Trusts may benefit your particular situation.

Thinking of selling your business? If you have planned it correctly, most of your transaction proceeds should be long term capital gains. Given the current political climate and the upcoming change in the White House, capital gains taxes will come under attack. If you are a business owner and are thinking of selling your business within the next 5 years, you may want to move up your exit timeframe says Dave Kauppi, President of MidMarket Capital, a Merger and Acquisition Advisor.

The reduced 15% tax rate on capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. In 2011 these reduced tax rates will revert to the rates in effect before 2003, which were generally 20%.

Kauppi believes that with the AMT currently targeted for elimination, the $23 billion will be made up by raising taxes elsewhere, and I believe this “owner of capital” tax is the most vunerable for increase. I expect that the long term capital gain tax rate will be moved to an upper limit of 25% by mid 2009 for the high end income bracket.

Translation, the business seller is going to take a big hit on his after tax proceeds if his business sale is concluded after July 1, 2009. Let’s look at a quick example. A 63 year old man started his business 25 years ago and he sells it for $5 million. All his equipment has depreciated so his basis is approximately $0. Under current tax laws he would have a $5 million capital gain from the sale of his business. His after tax proceeds would total $4,250,000.

If he sells after July 1, 2009, and the tax laws change as I am predicting. The same sale would net him $3,750,000. He lost $500,000 because of this change. If you wait until the actual change is voted into law, there will be a rush to the exits causing an unusually high number of business to be for sale. That would further reduce proceeds for the seller because of supply and demand pressures.

The most important tax issue, however, for the business seller continues to be the corporate structure (C Corp, S Corp, or LLC) and whether the business sale is an asset sale or a stock sale. First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10-year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.

Here is what happens when there is an asset sale of a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a second time at their long term capital gains rate.

Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.

This anticipated change to the capital gains tax rates will certainly add to the complexity of selling a business. I can not stress how important a factor taxes will be in your successful business exit. Here is my summary checklist:

Tax Consideration Checklist

Get Good Advice on Original Corporate Structure

If C Corp - Retain Ownership of all Appreciating Assets Outside Corporation - ie Real Estate, Patents, Franchise Rights: avoid double taxation

Look at Deal Economics First, Taxes Second

Make Sure Your Transaction Support Team has Deal Experience

Before You Go To Market, Work With Your Team to Understand Deal Structure vs After Tax Proceeds

You Have the Right to Pursue the Minimum Payment of Taxes - Exercise Your Rights

It Is Never as Effective as an Afterthought

The Pros Can Match Your Desired Outcomes With the Right Tools

Be agressive in your tax positioning of your sale, both with the buyer in your negotiations and with your filing with the IRS. The give and take on deal structure with the buyer is just one of the many factors that you will negotiate along with total purchase price and cash at close.

Over the past several years, many people have made big profits in the real estate boom-at least on paper, before calculating the capital gains tax owed. Now that the real estate market is leveling off, and even predicted to dip, many property owners are beginning to realize that once taxes are paid, the remaining balance is far less than they anticipated.

However, with strategic implementation of a powerful, tax-efficient selling resource, there is finally a way to sell real estate, including both primary residences and investment properties, and not pay exorbitant capital gains on real estate. The solution is called a Private Annuity Trust, an investment strategy that allows you to not only defer capital gains taxes, but to protect your remaining assets via a trust, transfer wealth to beneficiaries without taxation, and create a lifetime of income from the value in your property.

How a Private Annuity Trust Works

When an individual sells a property, he or she is responsible for paying the capital gains tax on the sale within a number of months. However, the rules are different for a Private Annuity Trust.

By transferring title of your property into a Private Annuity Trust, and having the Private Annuity Trust sell the property to the new buyer, you receive a contract that will pay you lifetime income and are thus able to defer up to 100% of your large capital gain over your entire lifetime.

Through the trust, the capital gains tax is deferred until the time that payments are made to you. Because the Trust issues a regular stream of payments over your entire lifetime, the taxes owed are also divvied up and paid in small increments over time. Additionally, the money in the trust is invested in a conservative, diversified portfolio until the moment it is paid out.

How is the Private Annuity Trust Different from a 1031 Tax-Free Real Estate Exchange?

With a 1031, you must buy another “like-kind” investment property in order to avoid paying capital gains tax. You must name the new property you plan to buy in 45 days, and the new property must cost at least as much as what you sold the old property for. If you choose not to reinvest, the government expects you to hand over the capital gains tax and depreciation recapture tax immediately; meaning you’ll be hit hard right when you’re ready to finally reap the fruits of your real estate investments.

There are plenty of heart wrenching stories about real estate investors who banked their entire lives on retiring with the profits from their investments, only to find that they would not be able to live the lifestyle they envisioned after the taxes were paid.

On the other hand, with the Private Annuity Trust, properties are sold through the trust and capital gains on real estate are deferred. You can use your lifetime income stream to fund your retirement, invest in another property on your own timeline, or use them any other way that you see fit, all while Trust assets have the opportunity to grow, are protected from creditors and lawsuit judgements, and taxes are deferred.

If you’ve spent your valuable time researching investments, fixing up properties, and managing the stress of the real estate game, you certainly don’t want to lose almost a third of your profits to the federal and state government. You’ve most likely planned your future, your goals, and your dreams around the money you thought you’d have when you sold your properties and losing a chunk of it can be depressing, to say the least.

If you’ve been putting off selling your assets in an effort to avoid paying capital gains on property tax, you owe it to yourself to talk to a professional about a Private Annuity Trust and see how this strategy may work with your particular situation.