By Chris Nolt
The IRC Section 1031 Exchange, the IRC Section 664 Charitable Remainder Trust and the IRC Section 121 Principal Residence Exclusion are powerful tools for families selling a farm or ranch. This article will illustrate how a family used these financial tools to save taxes on the sale of their ranch and to generate passive income for retirement.
Tom and Barb owned a ranch in central Wyoming. Their kids weren’t interested in taking over the business and Tom and Barb’s health was interfering with their ability to operate the ranch. After much emotional deliberation, they decided to sell.
The ranch sold for $4.5 million. Tom and Barb elected to use the 1031 Exchange and Charitable Remainder Trust to reduce the tax burden on the sale. With the help of their advisors, they implemented the following plan:
1031 Exchange
Tom and Barb exchanged $2 million of their land into an office building leased to the Social Security Administration. This property offered a ten-year lease with payments guaranteed by the U.S. government. The property offers a seven percent cash flow rate of return, providing Tom and Barb an income of $142,000 per year after all expenses, including property management.
Charitable Remainder Trust
$1.2 million of land, cattle, machinery and equipment was sold through a Charitable Remainder Trust (CRT). Using the CRT enabled Tom and Barb to invest the full $1.2 million proceeds, undiluted by tax. This money was invested in a portfolio of mutual funds inside the trust. Tom and Barb elected an annual payout of 6% from the trust providing them an annual income of approximately $70,0,00 per year.
Cash Proceeds
The charitable income tax deduction Tom and Barb received from donating their property to the CRT generated a large income tax deduction. They used this deduction to reduce taxes on cash they withdrew from the sale. The majority of this cash was invested in a mutual fund portfolio. From this portfolio they withdraw roughly $30,000 per year for living expenses.
Principal Residence Exclusion
Through the Principal Residence Exclusion, Tom and Barb were able to receive income tax-free proceeds from the sale of their home. They used this cash plus some extra savings to purchase a new home debt-free.
Annual Income
Office building $142,000
Charitable remainder trust $70,000
Mutual fund portfolio $30,000
Total $242,000
Through careful planning with the right team of advisors, Tom and Barb were able to substantially reduce the tax burden on the sale of their property and create a passive income that exceeded what they had been earning on their ranch.
Chris Nolt is the author of the book; Financial Strategies for Selling a Farm or Ranch and the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement. To order a copy of Chris’s book, call 800-517-1031 or go to Amazon.com. For more information, visit: www.solidrockproperty.com and www.solidrockwealth.com.
Chris will be presenting a free educational workshop on Financial Strategies for Selling a Farm or Ranch at the Desert Foothills Library in Cave Creek at 10:30 on March 12th. Attendees will receive a free copy of Chris’s book. For more information and to reserve a seat, call 480-681-0333.
(Picture of book)
