I was left scratching my head while reading Seth Pearson’s article “Guarding The Castle,” October 2005 about minimizing the tax consequences of selling real estate. As far as I am aware of, you cannot save taxes on the sale of a personal residence simply by putting the proceeds into a private annuity. Any of the gain in excess of the $250,000/$500,000 exclusion would be taxable. If there is an exception to this rule or a way to avoid taxation by placing the proceeds into a private annuity, I would like to learn more about it.
Larry Behage, CFP
H&R Block Financial Advisors
San Jose, California
Let me use an example of the most recent private annuity our office helped implement. A client owned a house worth $2.5 million. His cost was about $600,000. Before the sale, he transferred half of the house to the children in return for a private annuity payment for life. The property was then sold. The half of the house retained by the client had a $300,000 cost basis, and he and his wife used their $500,000 exclusion, so they paid taxes on $450,000. The children didn’t have a tax on the sale of their half because of the nature of the private annuity. As the client receives the annuity payment, they will pay taxes over their lifetime.
The book I mentioned in the article and the Wall Street Journal Real Estate web site are excellent sources of additional information on the private annuity.
Seth M. Pearson, CFP
Certified Financial Planner