Exiting Rental Real Estate business

[ArkTinkerer]

We have rental properties--paid off units in an LLC and some we owe on outside the LLC. I'm in a long term outlook kind of mood today. I am curious what mechanisms people have used to exit the rental property business here? Main paths I can think of:

1. Sell and take the tax hit. This is now more expensive than before because that year will probably kill any ACA subsidy as well as the tax hit.
2. Sell but owner finance. Spreads the income out. Might keep us in the ACA. Has added risk of default and getting a house back in poor shape needing an influx of cash.
3. Some sort of like-in-kind exchange that gets us out of active management. Partnership in an apartment complex or retail property for example. Has partner risks as well as a learning curve as we have done only single family properties so far.
4. ? Something I haven't thought of...

 

[SVHoper]

4. Die and let estate benefit from stepped up basis... that is truly my ideal exit strategy. Combo of kids and property manager can takeover if/when I don't want to continue to manage.

5. I may consider 1031 exchange to a Triple Net property (or apartment you already described) if I find I need more income. I believe the management can be very light and the leases long for NNN. However, I still need to learn a lot more as I have never felt sufficiently confident to buy commercial.

 

[papadad111]

If any properties are held within an IRA you would avoid the tax and cap gains hit. So. Moving properties to an IRA could be one smart move over time.

You could also Gift appreciated properties over time to kids.

 

[clifp]

I think the 1031 is worth exploring, but I've never done it and only understand the basic.

If you have long term tenants, giving them a lease option I think would be an attractive options

As far as paying taxes go. You'll take a hit for a year or so, but once the units are fully or nearly fully depreciated I got to believe you'll paying less taxes investing the money in a tax efficient index fund than the rentals.

 

[ArkTinkerer]

Its going to be a while before we make any changes but real estate has been a long term investment and getting out will be a long term task as well.

Most people I know who do real estate either take the tax hit and bail or plan on keeping them until they die and pass the stepped up value to their heirs.

Only other option I know of, and I'm not in the financial condition to do it--at least not yet!--is to donate some of the properties and take the tax deduction for the stepped up value to offset the taxes on other units you sell. It doesn't increase the funds you get to keep but it does redirect the outgoing funds to causes you care about more than the state and local governments.

 

[InTheSticks]

I plan on sell and owner finance. I know I run the risk of default. We live in a small college town and I have already been approached by a buyer that wants a right of first refusal. We have not children. And the payments plus 401k/IRA and SS will fund retirement.

I plan on doing this after my wife is of medicare age and the ACA subsidies would not be significant.

Fingers crossed that it works.

 

[calmloki]

Selling and taking the tax hit: have done that a number of times and on a fairly depreciated out place about 25% of the sale price goes to someone else, if not more. 6% commission, cost of closing, repairs/concessions, DEPRECIATION RECAPTURE, state and federal taxes.... So where can you put 3/4 of the value of the rental and make as much money?

Sell but carry the contract. We have done this and I like it. Much to be said for a check that shows up every month and a set interest rate that can easily be double PenFed's CD rate. Use an escrow company to collect the payments and figure the interest and hold your signed transfer of title on satisfaction of contract (on the off chance you kick off). My sister sold a place for almost no down payment - dumb - and got it back after 4-5 years and was singing the blues. Nutty - the place was in much better shape, she had collected payments for years, she could sell it again for more money... she just didn't want to deal with it again.

Best of all is to kick off and transfer title at the stepped up basis to your heirs.


We did one 1031 - didn't care for it as it just kicked the can down the road tax-wise. Using the 1031 to change the character of your rental (intensive management small apartment to commercial) could be a good idea, but I'm in SVHoper's camp: know nothing about renting to a business.

Another option is to gift the property now and have that gift count toward your lifetime gift exclusion (something like 5.4M). Downsides are that you must gift the entirety (forget the gotcha here), the giftee gets the place at the fair value you assign, any depreciation you have left transfers to the giftee, and that transferred depreciation is the starting depreciable amount for the giftee, which means they are taxed annually on pretty much all the rental profit without sheltering the depreciable amount. We went this route last year with a place - wanted to give a boost to someone in their early 40s rather than many decades from now. Having the place now gives him an income stream and a place he can borrow against or sell - could be fuel for a real estate empire.

 

[gauss]

If any properties are held within an IRA you would avoid the tax and cap gains hit. So. Moving properties to an IRA could be one smart move over time.

You could also Gift appreciated properties over time to kids.

Okay, I'll bite on this one.

It is not obvious to me, without researching it, of how you could move non-retirement property valued at more than ~$6,000 into an IRA.

Are there special provisions in the tax code for RE investors?


Thanks
-gauss

 

[ArkTinkerer]

Okay, I'll bite on this one.

It is not obvious to me, without researching it, of how you could move non-retirement property valued at more than ~$6,000 into an IRA.

Are there special provisions in the tax code for RE investors?


Thanks
-gauss

I could see how that might be done if you put it in corporate form and somehow tranfered shares? I think you would have to put cash into the IRA and then have it buy the shares since I don't think you can move shares or physical assets (gold/silver) into (or out of) an IRA. Does anyone know of a mechanism that would work here?

 

[bld999]

"self Directed Iras"

An example here:

How To Invest Your IRA In Real Estate And Alternative Assets - Forbes

 

[SumDay]

2. Sell but owner finance. Spreads the income out. Might keep us in the ACA. Has added risk of default and getting a house back in poor shape needing an influx of cash.

I'm a broken record on this, I know, but I'll share anyway. I don't have answers, just sharing experiences. My parents did this, and after a year or two, they'd approach the renters and ask if they wanted to own this wonderful [-]dump[/-] home that they'd grown to love. These monthly payments were their retirement plan, with no worries about maintenance, repair, taxes or insurance.

This worked pretty well, but luckily (for them) they died in 2008, right at the beginning of the financial meltdown. I now own 50% fewer promissory notes than I did in 2008. Abandonments and foreclosures = getting houses back in poor shape. I sold them for far less than the mortgage had been worth, but was glad to get rid of them. Fixing them up simply wasn't worth it. I let some other investors have their turn at this endeavor.

Paying property taxes and maintaining insurance on these homes seems to be optional for these people, not to mention making mortage payments on time.

Rule #1: If you love your children, you won't leave them real estate.
Rule #2: A home without equity is just a rental with debt. ~Josh Rosner

Good luck. I do know my real estate agent friends are telling me there are investors bothering them daily, looking for properties. I hope it works out for you.

 

[gauss]

"self Directed Iras"

An example here:

How To Invest Your IRA In Real Estate And Alternative Assets - Forbes

Okay thanks. So you would use cash (or something similar in the IRA) to "purchase" the real estate via a self-directed IRA custodian.

 

[sunsnow]

How about do a 1031 to a house you want to live in, then transfer ownership to yourself and live in it for five years as your primary residence? Maybe those with more knowledge can comment as to whether this would work.

 

[ArkTinkerer]

"self Directed Iras"

An example here:

How To Invest Your IRA In Real Estate And Alternative Assets - Forbes

This says the IRA can own the property but transfering it into the IRA is a problem.

"Avoid self-dealing
This is a legal principle that prevents IRA owners from making investments (or loans) that benefit themselves or certain family members, even indirectly. It also bars mingling of your IRA and nonretirement funds. Run afoul of the self-dealing rules and your entire IRA could be immediately taxed."

Also and IRA cannot buy stock in an S corp. I will ask the accountant next time I get a chance but I think that is very unlikely you can't transfer real estate you currently own into the IRA.

 

[bld999]

This says the IRA can own the property but transfering it into the IRA is a problem.

"Avoid self-dealing
This is a legal principle that prevents IRA owners from making investments (or loans) that benefit themselves or certain family members, even indirectly. It also bars mingling of your IRA and nonretirement funds. Run afoul of the self-dealing rules and your entire IRA could be immediately taxed."

Also and IRA cannot buy stock in an S corp. I will ask the accountant next time I get a chance but I think that is very unlikely you can't transfer real estate you currently own into the IRA.

Ah, you are correct. If it's already owned, you can't do it. Bummer...

 

[ArkTinkerer]

Also and IRA cannot buy stock in an S corp. I will ask the accountant next time I get a chance but I think that is very unlikely you can't transfer real estate you currently own into the IRA.

...very unlikely you CAN transfer real estate you currently own into the IRA.

Unintended double negative!

 

[Fishingmn]

4. Die and let estate benefit from stepped up basis... that is truly my ideal exit strategy. Combo of kids and property manager can takeover if/when I don't want to continue to manage.

5. I may consider 1031 exchange to a Triple Net property (or apartment you already described) if I find I need more income. I believe the management can be very light and the leases long for NNN. However, I still need to learn a lot more as I have never felt sufficiently confident to buy commercial.

These are really the only options I'm considering in the future.

When you combine the cost of the tax on appreciated basis with the 25% depreciation recapture tax I can't ever see a time that it will be worthwhile to sell unless I do a 1031. Redid the estate plan a few months ago to make sure that the properties don't go through probate and get a stepped up basis for my wife or kids once I die (they are all in my name).

 

[dtbach]

I'm a broken record on this, I know, but I'll share anyway. I don't have answers, just sharing experiences. My parents did this, and after a year or two, they'd approach the renters and ask if they wanted to own this wonderful [-]dump[/-] home that they'd grown to love. These monthly payments were their retirement plan, with no worries about maintenance, repair, taxes or insurance.

This worked pretty well, but luckily (for them) they died in 2008, right at the beginning of the financial meltdown. I now own 50% fewer promissory notes than I did in 2008. Abandonments and foreclosures = getting houses back in poor shape. I sold them for far less than the mortgage had been worth, but was glad to get rid of them. Fixing them up simply wasn't worth it. I let some other investors have their turn at this endeavor.

Paying property taxes and maintaining insurance on these homes seems to be optional for these people, not to mention making mortage payments on time.

Rule #1: If you love your children, you won't leave them real estate.
Rule #2: A home without equity is just a rental with debt. ~Josh Rosner

Good luck. I do know my real estate agent friends are telling me there are investors bothering them daily, looking for properties. I hope it works out for you.

+1 Pretty much my experience with rental property. I'll take dividends from stock anyday before I piss away my time with renters.

 

[catman2020]

+1. Recently exited a commercial property. Took the tax hit. Two things I learned from this experience. 1) owning real estate is a job not just an investment. If you like doing it or successfully delegating it then it works in retirement. 2) From my experience the market for cash flowing properties is very strong with lots of folks wanting in because of/to avoid the paltry bond returns. If you want out now is probably a good time. I realize many on this forum swear by real estate and I think that is great and envy their cash flow . It's just not for me.


Sent from my iPad using Early Retirement Forum

 

[ArkTinkerer]

+ 1) owning real estate is a job not just an investment. If you like doing it or successfully delegating it then it works in retirement.

Much of my early retirement plans involve travel. It is not being close enough to deal with the emergencies that is the issue. Later, assuming I settle back down, I think they would be ideal again. Getting in and out is expensive though. I have heard horror stories about management companies but maybe I need to invest more time into seeking out someone I can trust.