Free Guide to 1031 Exchanges

Private Annuity Trusts: An Alternative to 1031 Exchanges

Both Private Annuity Trusts and 1031 Tax Deferred Exchanges allow property owners to defer paying capital gains taxes on the sale of their property. There are several differences between them including the types of properties that can be sold and the stipulations for the proceeds of the sale. There are also advantages to both of them, and it's important to consider both options before making a decision as to which is the best for you.

Those who have been thinking of conducting a 1031 Tax Deferred Exchange when selling an investment property may also want to consider a Private Annuity Trust. Both Private Annuity Trusts and 1031 Exchanges can help you defer capital gains taxes on the sale of a business or investment property, but there are different advantages and disadvantages to using each of them.

In the case of a 1031 Tax Deferred Exchange, an investor is selling one property and than reinvesting the proceeds from that sale into one or more new investment properties. A neutral third party, known as a qualified intermediary, holds the proceeds of the sale and handles the paperwork and other details involved in a 1031 Tax Deferred Exchange. The investor thus defers paying capital gains taxes by reinvesting the income from the sale of one property into another investment property.

A Private Annuity Trust works a little differently. In the case of a Private Annuity Trust, the owner of a property transfers ownership of the property over to a trust. The trust, in turn, gives the owner a payment contract. This payment contract, known as a private annuity, stipulates that the trust will make regular payments to the owner over the course of his or her life. The Private Annuity Trust can than sell the property for cash. There are several other differences between a 1031 Tax Deferred Exchange and a Private Annuity Trust, as well.

When you take advantage of the IRS code pertaining to 1031 Tax Deferred Exchanges, you must use the proceeds of the sale of one property to purchase one or more new investment properties. This is not the case when dealing with a Private Annuity Trust. You are deferring capital gains taxes when you use a Private Annuity Trust, but you are not obligated to purchase another investment property. In fact, a Private Annuity Trust is often used when an investor no longer wants to reinvest income from one property into another. Investors often use the funds from a Private Annuity Trust as retirement income.

A second difference between a 1031 Exchange and a Private Annuity Trusts is that a Private Annuity Trust can be used when selling a primary residence. A 1031 Exchange only allows for the exchange of one investment or business property for another "like-kind" property. "Like-kind" refers to properties that can be purchased as a replacement for the initial investment property. "Like-kind" properties must be similar to the property being sold, in that they must only be used for business or investment purposes. Therefore, if a person is planning on selling a piece of real estate that he or she used as a primary residence, than a Private Annuity Trust may be the best way to go.

Most people who are about to sell a property, whether it is an investment property, a business or their home, would like to walk away with more money in their pocket. Both a Private Annuity Trust and a 1031 Tax Deferred Exchange can help save you money by deferring capital gains taxes. There are several benefits to both, and it is worthwhile to research both options before making a decision on which one is the right one for you.