As real estate investors build their portfolios through 1031 Exchanges over the years, a common question emerges: what happens when it’s time to exit? Whether you’re in your 60s, 70s, or beyond, the burdens of property maintenance and tenant management often prompt a desire to sell. However, selling investment properties outright can trigger significant capital gains tax liabilities, potentially diminishing the wealth you’ve worked hard to create.
Fortunately, there are sophisticated strategies to ease this financial transition, preserve wealth, and even benefit charitable causes. In this article, we introduce planning expert Lon Dufek (CFP®, CPA) and Equity Advantage’s Tina Colson-Jones, who shed light on one of the most effective tools for this purpose: the Charitable Remainder Trust (CRT). We’ll explore how CRTs work, their benefits, and how they can complement your 1031 Exchange exit strategy.
Understanding the Challenge: Exiting Real Estate Investments
1031 Exchanges are a powerful mechanism that allows investors to defer capital gains taxes by swapping one investment property for another “like-kind” property. This strategy can be utilized repeatedly, enabling investors to build substantial real estate portfolios over time without immediate tax consequences.
However, as investors age, the appeal of continuous property management declines. Dealing with property maintenance, tenant issues, and the day-to-day responsibilities of real estate ownership can become overwhelming. At some point, many investors look to sell their properties and “cash out.”
But selling a property outright means realizing capital gains, which can result in a significant tax bill. This is where charitable remainder trusts enter the picture as an innovative exit strategy that can reduce tax exposure, provide income, and support charitable giving.
What Is a Charitable Remainder Trust (CRT)?
According to Lon Dufek and Tina Colson-Jones, a Charitable Remainder Trust is a legal entity into which a donor transfers assets such as cash, securities, real estate, or other properties. In return, the donor receives income from the trust for life or a fixed term of years. When the income period ends—either upon the donor’s death or the expiration of the term—the remaining assets in the trust pass to one or more charities of the donor’s choice.
This structure offers a unique blend of benefits:
- Income Stream: The donor receives steady income during their lifetime or a specified term.
- Tax Advantages: By transferring appreciated property into the CRT, the donor can avoid immediate capital gains taxes on the sale of those assets.
- Charitable Giving: The remainder benefits charitable organizations, reflecting the donor’s philanthropic goals.
How CRTs Complement 1031 Exchanges
While 1031 Exchanges allow for deferral of capital gains taxes by reinvesting proceeds into new properties, they do not eliminate the tax liability. Eventually, when an investor decides to exit the marketplace, the deferred taxes become due.
CRT planning offers a strategic alternative for investors ready to transition out of real estate holdings. Here’s how:
- Transfer Property into a CRT: Instead of selling a property outright, the investor transfers it into a CRT. This action removes the asset from the investor’s personal estate.
- Sale Without Immediate Capital Gains Tax: The CRT sells the property, and because the trust is tax-exempt, no capital gains tax is paid on the sale.
- Income to Donor: The CRT pays the donor income over their lifetime or for a set term.
- Charitable Benefit: After the income period, the remaining assets go to charity.
This approach allows investors to unlock the value of appreciated real estate without the immediate tax hit, maintain an income stream during retirement years, and support causes they care about.
Key Benefits of Using a CRT in Your Exit Strategy
Lon and Tina emphasize several compelling advantages of incorporating CRTs into your real estate exit planning:
- Capital Gains Tax Deferral: Selling property through a CRT avoids triggering capital gains taxes at the time of sale.
- Income Generation: The CRT provides a reliable income stream, which can be particularly valuable in retirement.
- Estate Tax Reduction: By removing assets from the estate, CRTs can reduce estate tax exposure.
- Philanthropic Impact: Investors can support charities and causes important to them, creating a lasting legacy.
- Flexibility in Charitable Choices: Donors may designate one or multiple charitable beneficiaries according to their wishes.
Who Should Consider a CRT?
While CRTs are powerful, they are not suitable for every investor. Tina Colson-Jones advises that ideal candidates for CRTs include:
- Investors looking to exit their real estate holdings but who want to avoid the capital gains tax burden.
- Those seeking to generate income during retirement from their appreciated assets.
- Individuals interested in charitable giving as part of their legacy planning.
- Investors who have exhausted their ability to defer taxes through 1031 Exchanges or who want an alternative exit strategy.
Steps to Implement a CRT Exit Strategy
Implementing a CRT as part of your real estate exit plan requires careful coordination and professional guidance. Here is a high-level overview of the process:
- Consultation with Experts: Engage with tax advisors, estate planners, and real estate professionals—like Lon Dufek (CFP®, CPA) and Tina Colson-Jones at Equity Advantage—to assess your unique situation and goals.
- Establish the Charitable Remainder Trust: Work with legal counsel to set up the trust, specifying the income term, payout rates, and charitable beneficiaries.
- Transfer Assets: Transfer your appreciated property or other assets into the CRT.
- Trust Sells Assets: The CRT sells the property without incurring immediate capital gains tax.
- Receive Income: Begin receiving income payments per the trust terms.
- Charitable Distribution: Upon termination of the trust, remaining assets are distributed to the designated charities.
Combining CRTs with Other Exit Strategies
While CRTs are highly effective, they can be part of a broader exit planning toolbox. For example, some investors may combine CRTs with final 1031 Exchanges, estate tax planning, or gifting strategies to optimize their financial outcomes and philanthropic goals.
Equity Advantage’s team encourages investors to think holistically about their exit plans, considering how CRTs can fit into and enhance their overall wealth management and legacy objectives.
A Smart Exit with Purpose and Tax Efficiency
Exiting a real estate investment portfolio after years of growth can be daunting, especially when facing capital gains taxes and the realities of property management in retirement. However, charitable remainder trusts offer a compelling strategy to convert appreciated assets into income, reduce tax liabilities, and support meaningful causes.
With expert guidance from professionals like Lon Dufek (CFP®, CPA) and Tina Colson-Jones of Equity Advantage 1031 Exchange, investors can craft tailored exit strategies that align with their financial goals and philanthropic values. As you plan your real estate exit in 2025 and beyond, consider whether a CRT might be the key to unlocking a tax-efficient, purposeful transition.
For more information, reach out to Equity Advantage 1031 Exchange and explore how charitable remainder trusts and other strategies can help you exit real estate on your terms.
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