This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

As financial advisors, when your clients plan to sell a business or real estate, you need to think of yourself as an expert archer, carefully selecting the right "arrows" from your quiver of tax strategies to ensure tax efficiency. With the right approach, you can help clients minimize taxes and potentially maximize financial returns from their sale.

The holiday season brings more social events, and it is an excellent opportunity to get in front of large AUM opportunities as you meet new prospects and catch up with existing clients. If one of them mentions selling a business or real estate and expresses concerns about taxes, introducing these tax-efficiency strategies can potentially win new business.

The article outlines seven tax strategies with an eighth bonus strategy at the end. These are the arrows in your quiver you can use when guiding clients through the sale of a business or real estate. Each strategy offers unique tax advantages and can help strengthen your relationship with clients and their CPAs, opening doors to future referrals and potential business growth.

Arrow No. 1: Intermediated Installment Sale

The Intermediated Installment Sale is an advanced tax strategy that allows clients to defer capital gains taxes while earning a return on the tax that would otherwise be paid to the IRS. Often referred to as the Installment Sale Method, it has its statutory basis under IRC 453. The legal theory is that a trust is used as an intermediary, mitigating the risk of your client holding a note from the buyer.

Potential Benefits of the Intermediated Installment Sale:

1. Tax Deferral: Allow your client or prospect to defer the taxes for up to 20 years.
   
2. Returns Arbitrage: Clients could earn a return on deferred taxes not paid to the IRS, which may provide additional income over time.
   
3. Income Replacement: Replace income lost from the asset's sale.
   
4. Inflation Advantage: Use inflation to your advantage.

Remember, at Dunham Trust Company, you manage the assets. Please note that Dunham Trust Company can assist in understanding the risks involved - including sequence risk, possibly paying the tax at a higher capital gains rate, and legislative and IRS uncertainty.

Arrow No. 2: Charitable Remainder Trust (CRT)

A Charitable Remainder Trust allows clients to donate their assets to a charitable trust, providing tax benefits while seeking to secure an income stream and a charitable gift.

Key Benefits of a CRT:

1. Potential to Reduce Capital Gains: Clients eliminate the capital gains tax at the point of sale.
   
2. Income Replacement: Can create an income stream to replace income lost from the sale of the asset.
   
3. Return on Deferred Taxes: Potentially earn a return on the taxes you did not give the IRS at the point of sale
   
   
4. Immediate Tax Deduction: Receive a tax deduction in the year the trust is funded.
   
5. May Retain Up to 90% of the Asset’s Value: Clients can receive up to 90% of the asset back during their lifetime.
   
6. Estate Tax Reduction: Remove the assets from your client’s estate.
   
7. Charitable Contributions: Support a Donor-Advised Fund (DAF) or charity of choice.

Dunham offers illustrations and can help establish a CRT while advisors retain control of managing the assets​​.

Arrow No. 3: Donor-Advised Fund (DAF)

A Donor-Advised Fund allows charitably inclined clients to maximize their tax deductions by "bunching" multiple years of donations into one year.

For example, let us hypothetically assume your client typically contributes $50,000 annually to various charities and sells their asset for $5 million. They can fund a DAF with $500,000, equivalent to ten years of charitable giving. This creates an immediate tax deduction, helping offset the sales tax burden.

Dunham can help you illustrate this benefit. Remember, you remain the advisor for the Dunham Donor-Advised Fund ​​account.

Arrow No. 4: Qualified Opportunity Zone (QOZ)

Please note this arrow is not offered through Dunham or Dunham Trust Company. You must verify with your Broker/Dealer if this arrow is available to you.

Investing in Qualified Opportunity Zones can provide potentially significant tax incentives for clients selling assets with capital gains while contributing to economically distressed communities' development.

Potential Benefits of QOZ Investments:

1. Deferral of Capital Gains: Capital gains tax on the sale of assets can be deferred until December 31, 2026, if reinvested in a QOZ.
   
2. Reduction of Capital Gains: If the QOZ investment is held for at least five years, investors can exclude 10% of the deferred gain. If held for seven years, 15% of the gain can be excluded.
   
3. Tax-Free Growth: If the investment in the QOZ is held for more than ten years, any additional gains on the QOZ investment itself can be excluded from capital gains taxes.

Arrow No. 5: Delaware Statutory Trusts (DSTs)

Please note this arrow is not offered through Dunham or Dunham Trust Company. You must verify with your Broker/Dealer if this arrow is available to you.

Delaware Statutory Trusts can be particularly beneficial for clients looking to diversify their real estate investments while potentially deferring taxes through a 1031 exchange. DSTs allow clients to invest passively in large-scale real estate properties that can make them ideal for those who want exposure to real estate without the burden of direct property management.

Potential Benefits of DSTs:

1. Fractional Ownership: Allows passive investment in large real estate properties.
   
2. Tax Deferral: Potentially defer capital gains taxes through a 1031 exchange.
   
3. Diversification: Can spread investments across multiple properties and locations.
   
4. Potential for Passive Income: DSTs may generate passive income streams, allowing clients to benefit from real estate income without active involvement in property management.

Arrow No. 6: Investments in Oil and Gas Exploration

Please note this arrow is not offered through Dunham or Dunham Trust Company. You must verify with your Broker/Dealer if this arrow is available to you.

If your broker/dealer provides this arrow, investing in oil and gas exploration offers substantial tax advantages, particularly in high-income years. Depending on the nature of the deal, clients can generally deduct up to 90% of the investment, making it an attractive option for those facing a large tax bill.

Arrow No. 7: Pay the Tax

While not always the most tax-efficient option, sometimes clients prefer to pay the tax and move on with their lives. Paying the tax outright remains an option for those who do not want to use more complex tax-efficient strategies.

By walking clients through all the available options, you can demonstrate your expertise and position yourself as their go-to advisor, whether they choose a tax strategy or prefer simplicity​​.

Bonus Arrow No. 8: Pre-Sale Trust Strategies

Proactive planning well before selling the asset that could reap potentially significant benefits for clients who plan to sell their business or real estate in the coming years. Dunham Trust Company can help you explore different trust strategies that have the potential to offer substantial benefits:

• Early implementation: Establish trusts well before the sale to maximize potential tax benefits.
  
• Potential income tax reduction: In states with income and capital gains tax, there could be a reduction in your annual tax bill.
  
• Estate tax mitigation: Properly structured trusts can remove assets from the taxable estate, potentially reducing future estate taxes.
  
• Gift value discounting: Some trust structures allow for discounting the value of the gifted asset, effectively stretching the lifetime gift tax exemption further.
  
• Enhanced capital gains tax flexibility: Certain trust arrangements may offer opportunities to reduce or defer more capital gains when the asset is ultimately sold.
  
• Strategic Planning: By addressing these issues early, you demonstrate forward-thinking financial planning to your clients, prospects, and their CPAs.
  
  
  

Closing Thoughts

Understanding and mastering these seven tax strategies (and the bonus eighth strategy) positions you as a key resource for clients seeking to sell business or real estate. You show your value as a financial advisor beyond investment management by offering comprehensive guidance and collaborating with CPAs and tax professionals.

For illustrations or help with any of the strategies available through Dunham, consult the Dunham Business Development Team at (858) 964 -0500 and always recommend that clients seek advice from qualified tax and legal professionals before implementing these strategies.

Disclosure:

Charitable Remainder Trust

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Dunham Associates & Investment Counsel, Inc. (“Dunham”) cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The trust is subject to the published fee schedule at the time the trust is established.

Income tax consequences for the donor can be complex, depending on the individual situation. All or some of the income from the trust may be taxed at ordinary income rates, but part may be taxed at lower capital gains tax rates, or may even be tax-free, for some years.

Donor Advised Fund

Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. The prospectus contains this and other information. Please read the prospectus carefully before investing or sending money.

A donor advised fund is a separately identified account that is maintained and operated by a section 501(c)(3) organization, and is not a registered investment company.

Contributions to a Donor-Advised Fund are irrevocable contributions. Individuals considering a contribution to a Donor-Advised Fund should consult their legal and tax advisors regarding deductions, based on their personal considerations.

Administrative services fees and other fees may apply. There may be additional fees charged by the Financial Advisor that is separate from the administrative and impact investment fees.

The tax information provided is general and educational in nature, and should not be construed as legal or tax advice. Dunham does not provide legal or tax advice. Content provided relates to taxation at the federal level only. Charitable deductions at the federal level are available only if you itemize deductions. Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Always consult an attorney or tax professional regarding your specific legal or tax situation.

We encourage you to seek from qualified professionals regarding all, personal finance issues.

Trust strategies offered through Dunham Trust Company, a Nevada Trust Company. Dunham & Associates Investment Counsel, Inc., an affiliated entity of Dunham Trust Company, offers the Dunham Donor Advised Fund. For more information about the Dunham Donor Advised Fund, please visit https://www.dunham.com/FA/Pages/DAF .

Rules and regulations regarding tax deductions for charitable giving vary at the state level, and laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy or completeness of the information provided. Dunham Trust Company cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Although the trust itself is a tax-exempt entity, the trust income distributed to beneficiaries is taxable, according to terms dictated by the U.S. Internal Revenue Code and accompanying U.S. Treasury regulations.

Intermediated Installment Sale

This information presented may be used to promote a transaction nor idea and should not be construed as legal, and/ or tax advisor. This document is provided for informational purposes only.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

We encourage you to seek advice from qualified professionals regarding all personal finance issues.

Risks associated with an intermediated installment sale: One of the primary uncertainties as to whether or not a client should consider an Intermediated Installment Sale or other similar tax strategies is that current tax rates are subject to change at any time and no one can predict with certainty what Congress or the IRS may do or that IRS will not challenge the strategy in the future.

Dunham Trust Company does not guarantee the completion of the installment note as investments will be subject to market conditions. Information and hypothetical case studies are made available to you for hypothetical illustrative e purposes only and are not intended to provide investment or tax advice. We cannot and do not guarantee that your objectives will be achieved.

Delaware Statutory Trusts

General real estate and market risks apply to 1031 Exchange DST. There can be no assurance that a property will perform as projected and Delaware Statutory Trust are subject to economic volatility, tenants not paying their rent timely, and other traditional risks of owning, selling, and operating real estate.

DSTs are sophisticated investments and to invest in one you must be an accredited investor as defined by the SEC.

Delaware Statutory Trusts are structured according to the Revenue Ruling 2004-86. It is possible the IRS would rule unfavorably on a 1031 Exchange DST offering and this could result in immediate tax liability.

Delaware Statutory Trusts typically require a minimum investment of $100,000, and an investor can acquire or exchange into ownership in one or multiple DSTs. DST real estate is generally held for 3 to 10 years. Upon the sale of the property, the investors receive all sales proceeds, including gains from potential appreciation, which can then be exchanged again to continue deferring tax.

A Delaware Statutory Trust interest is an illiquid investment and there is no current active secondary market for selling your interest.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc. Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company.