Thursday June 4, 2026
Case of the Week
Exit Strategies for Real Estate Investors, Part 6
Case:
Karl was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl’s passion was real estate and he was very successful in his investments.
Karl continued to buy and sell real estate at the age of 85. His latest venture led him to a great investment property. It was a “fixer-upper” commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.
The condition of the building turned many buyers away. It was being sold “as-is” but Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.
After three months of hard work refurbishing the building, the place looked like new. In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building – a $2 million interest. This was no surprise to Karl. He knew the building was another great buy.
There was one downside to the idea of selling, however. Karl held the property only four months, which meant the gain from the sale would be taxed as short-term capital gain. In other words, his applicable tax rate would be 37%, not 23.8%. Karl cringed at the thought of paying this much tax to the government. At the same time, Karl knew the real estate market could change direction in the next year. Although Karl wanted the lower tax rate, he did not want to risk holding the property another eight months.
Question:
Karl wanted a zero tax sale exit strategy. In other words, he wanted to sell and pay no tax. Can Karl sell the building, bypass the tax on the sale of the property and receive cash?
Solution:
Based upon Karl’s situation and goals, a FLIP CRUT and partial sale would be an excellent option. Prior to any binding sale agreement, Karl could transfer an undivided interest in his property into the FLIP CRUT. In this case, the potential buyer merely expressed an interest in the property. Because there was no legally binding agreement between Karl and any buyer, there was no prearranged sale problem according to Karl’s counsel.
Once the undivided interest in the property was transferred into the FLIP CRUT, the trustee of the trust would list and sell the property. It would be advisable for them to handle the sale of Karl’s portion as well. (See GiftLaw Pro 4.7.5 for a full discussion on this issue.)
The CRUT would owe no taxes on the portion of the property it sells because the trust is exempt from income taxes. Accordingly, the FLIP CRUT would meet Karl’s first goal – avoiding an immediate tax hit. However, Karl would have taxable income from the sale of his portion of the property. Thus, the goal would be to use the FLIP CRUT charitable deduction to offset any taxable income from his sale of the property.
The key question for Karl was what percentage to transfer to the FLIP CRUT and what percentage to retain. Pursuant to Sec. 170(e), Karl would receive a charitable income tax deduction based upon the cost basis in the property, not its fair market value. Section 170(e) does not allow a donor to claim a charitable income tax deduction for a property’s non-long term gain element. In this case, all of the gain on the property would be short-term capital gain, so Sec. 170(e) would apply. The reduced deduction would ultimately affect the tax calculation.
Based upon these considerations, Karl decided to transfer 50% of his property into the FLIP CRUT and retain 50% of the property. Therefore, upon the sale of the property for $2,000,000, the trust received $1,000,000 and Karl received $1,000,000. Karl’s deduction was $480,906 and saved him about $168,317 in income taxes. The deduction was subject to the 50% AGI limitation since it was a basis deduction. But, given Karl’s expected AGI for this year, the limitation would not pose a problem.
Karl owed $138,750 in taxes as a result of the sale of his portion of the property. However, Karl’s $168,317 of tax savings from his charitable deduction helped offset his $138,750 capital gain tax liability. The zero tax sale plan clearly met all of Karl’s objectives. In the end, Karl walked away with $1,000,000 cash (recovering his initial investment), a $1,000,000 FLIP CRUT and no tax payment to the government. He thought, “Not bad for only four months’ work!”
Previous Articles
Exit Strategies for Real Estate Investors, Part 5
Exit Strategies for Real Estate Investors, Part 4
Exit Strategies for Real Estate Investors, Part 3
