Mr. Hobbs’ Flip Unitrust Solution

To avoid paying capital gains tax, Mr. Hobbs donates the property into a flip unitrust with a 7% payout rate. After paying selling expenses, the unitrust would have net sale proceeds of about $874,000.

Beginning in January of the year following the year in which the property is sold, Mr. Hobbs will receive income of about $61,000; significantly more than if he had sold the property himself. Income in following years will reflect asset value increases or decreases.

Mr. Hobbs’ Deduction In addition to avoiding capital gain tax, Mr. Hobbs is entitled to an income tax charitable deduction equal to about $350,000 (about 40% of the value of the building). If he is unable to claim the entire deduction in the year of the gift, the unused portion of the deduction may be carried forward for up to five additional years.

Mr. Hobbs’ Legacy Once Mr. Hobbs dies, the assets remaining in the trust will be distributed to the College and used in accordance with his wishes, creating a legacy of support that will benefit CMC students for generations to come.

Keep Some Cash - Give a Partial Gift of Real Estate

Mr. Hobbs wants to retain as much cash as possible without having to pay capital gains tax.

To accomplish this, he transfers a partial interest in the property valued at $600,000 into a unitrust, while retaining an interest in the property valued at $350,000. When Mr. Hobbs and the Unitrust jointly sell the property, Mr. Hobbs will incur a capital gain tax liability of about $65,000 on the sale of his interest in the property.

His gift to the unitrust, however, entitles him to a charitable income deduction of about $250,000. In his tax bracket, he saves about $80,000 in income taxes. The $150,000 tax savings in excess of the tax liability he keeps. Plus, after paying his share of the selling expenses (about $28,000) , the sale of his interest in the property will yield him cash in hand of about $322,000 . Total cash in hand, then, is about $337,000: a shrinkage of only 4%.

In addition, the charitable unitrust is funded with net sales proceeds of $552,000, and will pay him about $38,640 (7%) beginning in January of the year following the year in which the property is sold.