To get around a provision in the new tax law limiting federal deductions for state and local taxes to $10,000, investors in states like New York are turning to Alaska.
Property owners have been establishing LLCs in no-tax states like Alaska or Delaware to get around the cap, according to Bloomberg. They then transfer parts of that LLC into several non-grantor trusts, which are treated as independent taxpayers. Each trust can take the $10,000 deduction for state and local taxes.
Investors should remember that they cannot control or benefit from money put in the trust, and they need to include assets that will generate enough money to balance out the $10,000 deduction, such as a vacation home that generates rental income.
Additionally, if a home in the non-grantor trust gets sold, the trust has to pay taxes on the sale. People who put their New York homes in the trust could trigger the 1 percent mansion tax in the state.
The trusts also might not work for borrowers with large mortgages or taxpayers with a primary residence in Florida due to rules regarding the state’s homestead exemption.
However, estate planning lawyer Martin Shenkman said that overall, the strategy should be fairly effective.
“This new tax law has made planning more granular,” he said. “But for a fairly large number of taxpayers, this is doable.” [Bloomberg] – Eddie Small