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Shelter Income From Taxes
Tax-Free Home Sales
John relishes the thought of buying a motor home and traveling around the country after he retires. If the motor home has a kitchen and bathroom facilities, then he may be entitled to deduct any interest attributed to the purchase of the motor home. The IRS may consider it as a primary or second residence for which mortgage interest is deductible, assuming that you itemize your deductions. I certainly recommend that you talk with your tax adviser about this possibility.
If John sells his primary residence either to provide additional assets to fund his retirement or because he is going to travel, he will probably realize a rather large capital gain. Good news! The Taxpayer Relief Act of 1997 made it unnecessary for taxpayers to report a gain of up to $500,000 for married tax filers ($250,000 for singles) from the sale of their primary residence. The tax savings offered by this legislative change is tremendous.
Gifting Your Home to a Charitable Trust
There is a unique approach to selling your home if you are also charitably inclined that would also help to reduce your estate taxes. It works like this: You would have your attorney create a charitable trust to which you would gift your home. You would actually have a deed prepared that transferred ownership of the home to the trust. The trust would then be responsible for selling it. The trust document would provide that you are entitled to an income from the trust for the rest of your life and upon your death, the remaining proceeds would be distributed to the charities you choose.
Making this gift to a charitable trust helps you in the following ways:
- You are entitled to a charitable deduction on your income taxes. The deduction is less than the full value of your home because the charity does not receive the property until after you die. To the extent that the deduction exceeds what you can actually use, you may carry the deduction forward for five years.
- The charitable trust does not have to pay capital gains on the sale of the property.
- You would not have to pay federal estate taxes on any property in the trust at your death.
This plan can work very well for virtually any of your appreciated assets if you are interested in leaving a legacy to charitable organizations. Keep in mind, however, that you cannot change your mind and take back your assets later.
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