For seniors who are inclined to charitable giving, the property tax deferment strategy may link with a donation strategy. The funds retained from property tax deferment could be donated to a charity, which would yield a tax refund of approximately 44 cents on the dollar. A further refinement would be to defer only the property taxes in excess of this tax saving. For instance, lets assume your property taxes are $5,000. A donation of this sum would create a tax saving of approximately $2,185, so you only defer $2,815.

A still further refinement would be to defer the property tax and make a donation to charity in kind (see related article). In summary, the law creates an incentive to do this and relieves from tax the entire capital gain that you would have had, had you sold the security first, and then donated the cash proceeds. Lets say that the $5,000 stock you donate had doubled over the years. The twin tax savings of the donation and the relief from capital gains tax would be $2,730, so you could, for instance, defer only the difference of $2,270.

One must not’t forget in this strategy that a deferred tax-plus-interest liability accrues to the estate. If done annually for, say, twenty years, the straight-donation strategy would accrue approximately $84,000 of deferred taxes and $24,000 of simple interest. The stock-donation strategy over twenty years would accrue approximately $68,000 plus $19,000 of simple interest. As mentioned above, the accretion of property value over 20 years likely would exceed this accumulated debt.

There is historical precedent to attaching a name to a strategy which consists of several steps, e.g. the “Smith Manoeuvers” re: mortgage deductibility. So, we propose to name this three-part strategy which links financial planning, tax planning and the public good after the family dog, ergo we introduce the “Tequila Manoeuvre”.

Article originally published: Oct 2007