Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Real estate escape question
Old 02-03-2007, 01:42 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2007
Posts: 82
Real estate escape question

Well, I just came across a grand idea. Someone tell me if it has holes:

I own rental real estate, and want to get out. So Plan A is to time my retirement with the expiration of the 0% capital gains tax rates in 2008. I would retire no later than Spring of 2008 (probably March 16, the day after bonus checks are cut ), such that my 2008 income keeps me in the 15% tax bracket, and then I sell all my real estate and pay the 0% capital gains tax rate instead of 15% I would otherwise pay. I've tried to remain clear on how this works, although I know it is easy to trip up. I don't think I'll have any recapture issues since I have only been using 27.5 year straight line depreciation on all my real estate.

15% of my real estate gains would be somewhere around $15,000 - $20,000, enough to be motivated by this plan. Unless the gain itself is counted in determining my tax bracket. I am not clear on that.

My plan B (if plan A feels too aggressive) would wait until Spring 2009 or 2010, sell the real estate, and pay tax at the 5% tax rate.

I just heard today that my condo association may take a vote to disallow renters, so I may be forced to sell that one regardless of Plan A or B.



__________________

__________________
queeneev is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Real estate escape question
Old 02-03-2007, 01:51 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,018
Re: Real estate escape question

Why do you want to get out of rental real estate? Hassle, liquidity, or other reasons?
__________________

__________________
Meadbh is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 01:54 PM   #3
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Real estate escape question

Non-sequitur: why is thread a sticky?

(This question will seem even stranger after it's fixed.)
__________________
wabmester is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 02:02 PM   #4
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Re: Real estate escape question

Quote:
Originally Posted by queeneev
Well, I just came across a grand idea. Someone tell me if it has holes:
Some questions:

1) Is there a chance your bonus will be larger than expected, and will nudge you into the next bracket above 15%? (assuming taxes aren't raised between now and 2008 - another possibility, although probably unlikely at this date and time).
h
2) What is the probability of the price for your property dropping between now and 2008/2009? Just as with stocks, you can end up saving $10 in taxes by delaying a sale, but wind up losing $100 in dealing with a lower selling price by delaying the sale.

3)I presume that all of the real estate in question consists of condo(s)? Do you have long-term leases in place, or are you 95% certain you will maintain 100% occupancy? Just a few month's vacancy can start to dig into your calculations.

4) What will you reinvest the funds in? Hoping to get into CDs? Equities? Other real estate? Have you looked at doing a 1031 exchange to defer your capital gains? Any chance of moving into your condo to declare it your personal residence and shielding $250k of gain with it as your personal residence?

5) Is it just one property? Or can you hedge yourself by selling one property in 2008 and one in 2009?
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 02:03 PM   #5
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Real estate escape question

Quote:
Originally Posted by wab
Non-sequitur: why is thread a sticky?
Either some board default after I moved it, or moderator error.

Quote:
Originally Posted by wab
(This question will seem even stranger after it's fixed.)
Considering the source, no one will be surprised!
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 03:05 PM   #6
Recycles dryer sheets
 
Join Date: Feb 2007
Posts: 82
Re: Real estate escape question

Mead: hassle? yes; liquidity? yes; unknown markets and recessions and the implications for rentals? yes; everything article of clothing I own has paint on it? yes; simplifying my life? YESSS!

to answer Moore's questions:

1) Probably not. That's a tough call though. It may be close. Worth keeping my eye on.

2) Real estate prices have dropped some here in the last 9 months. I wish I could predict future trends. In today's market, I am assuming minimal growth, hoping no big drops. If drops occur, I may just ride it out and forego selling (except the condo).

3) I only have 1 condo, and 4 apartment units. Vacancies typically are filled in 2 months or less. I am at the low end of rents, so I get a lot of interest. But the downside is lower quality tenants, higher turnover.

4) Not willing to do a 1031. I've thought about moving into the condo, but that is a remote option. I def. need to invest in some conservative instruments to balance things out. Putting $100,000 in liquid accounts and some CD's is not off the table.


5) My properties are titled in 4 peices. So I do have options.

I appreciate the questions, they are ALL things I have thought about a great deal. The part about knowing how much vacancy I will have, where the market is going, are all crystal ball things. You (or at least I) can go nuts trying to predict where you will end up. I run numbers many times over. I would not take an action simply to save taxes if it costs me in some other way. But saving taxes is a great thing to aim for!

I wish I had a legal brain. Another option is (somehow?) handing over the condo to my son, through some type of gifting, seller financing, etc. I don't want to get hit with a gift tax, and I don't want to give him the whole thing, and I don't want his wife to walk away with half the equity if they ever divorce and don't have kids (not to sound greedy, but I look after my own...I do love my DIL a great deal). Put it in some kind of a trust? I know there are tax issues here out the wazzoo. I should get a book and read up on it, eh?

thanks for visiting my head.

I didn't realize I had so much to think about!

__________________
queeneev is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 03:38 PM   #7
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Re: Real estate escape question

Quote:
Originally Posted by queeneev
Mead: hassle? yes; liquidity? yes; unknown markets and recessions and the implications for rentals? yes; everything article of clothing I own has paint on it? yes; simplifying my life? YESSS!
vs
Quote:
Originally Posted by queeneev
Q:What is the probability of the price for your property dropping between now and 2008/2009?
A: Real estate prices have dropped some here in the last 9 months. I wish I could predict future trends. In today's market, I am assuming minimal growth, hoping no big drops. If drops occur, I may just ride it out and forego selling (except the condo)
Well, if your selling price drops 15%-25%, is having to hold onto it and re-renting it out (with a 1-2 month vacancy between renters) worth the hassle of getting more paint on your clothes?

Also, ask yourself this: if you're willing to sell the condo/apartments now, pay the current tax rates and walk away with the money, is the uncertainty of possibly having to hold onto the real estate and deal with more tenants/etc. worth the possible savings in taxes (which may or may not apply with a small chance of changes in the tax structure)? You mention that you don't want to consider a 1031 - presumably because you want out of real estate - so how long would you be willing to hold onto your portfolio if prices drop another 15-25% (or more)?

Since you said you have 4 titles on your properties - and are even considering involving your son in them, why not sell your son one title per year (or sell him just one or two titles, and sell the others to other people)? To try and avoid potential divorce/etc. issues in the future, how about if you did a seller-financed, interest-only 30-year mortgage? That way, by having it be interest-only, he never builds up equity in the units through his payments to you - it will only come from price appreciation. If the worst happens (and he gets divorced), he could 'focus on other priorities' and let the real estate fall a little into...shall we say, "disarray"...and drop the property value a little bit (and leaving it's market value depressed). Also, if he is nearing divorce, he could borrow additional money from you, secured by any equity remaining in the property, and then use the money for whatever. Another thing to consider: some states allow someone to keep inherited/gifted property and not let it become part of the marital estate - unless it's comingled.

Another mortgage option that is used by the public is some sort of interest-only hybrid where you pay whatever you want to (for a certain number of years). The obvious problem with the average Joe is that they don't even pay the interest-only part, and they really get upside down on their house mortgage. But, if used between you and your sensible son, it could have value in preventing any equity build-up going to your DIL in a potential divorce.

Don't worry about planning for the worst. It's great to have a good relationship with your spouse, and I hope they never head in the 'bad' direction...but it's great to have a mother like you that thinks ahead and is planned for nearly every contingency.
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 04:42 PM   #8
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 166
Re: Real estate escape question

Queen eev,

Not to throw a wrench into this, but we have sort of been discussing this issue on another thread and how the AMT tax kicks in on other income over and above the cap gains. I don't have time to find it right now - sorry - I am on my way out the door to w*rk (ugh!). Anyway, it may mess up your plans. :P

Jane
__________________
Of all the things I've lost, I miss my mind the most!
Jane_Doe is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 04:43 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jun 2005
Posts: 1,152
Re: Real estate escape question

Quote:
and then I sell all my real estate and pay the 0% capital gains tax rate instead of 15% I would otherwise pay
The 0% cap gains rate only applies for the portion of your cap gains above your ordinary income up to the top of the 15% ordinary income bracket. The rate is only dropping from 5% to 0%.

So if you make zero ordinary income and you are single, the maximum you are saving is around $2000. More likely, with some ordinary income, your savings will be less than $1000.

You will still pay the full 15% on the portion of gains above the top of the 15% bracket in 2008/9/10.

It does not make sense to worry about the difference between 5% and 0% in the scheme of things in your situation.

Kramer
__________________
kramer is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 07:09 PM   #10
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 1,012
Re: Real estate escape question

So you don't want to pay taxes on the sale of your RE? If it is F&C you could create a CRT, put the RE in it, and then sell the RE. Doing this can potentially set up quite an income machine which, depending on how you set up the CRT, you can control.
__________________
jdw_fire is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 07:37 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Re: Real estate escape question

Queeneev - I think this is the thread JaneDoe was referring too:
http://early-retirement.org/forums/i...?topic=11926.0

I'm right there witcha in the desire to divest and avoid as many taxes as possible. Rental market is pretty strong here - had 6 vacancies but 7 to clean and prepare at the beginning of the month - one tenant moved from a 1 bdrm to a 2 bdrm so we had an extra apartment to ready. 3 are contract & cash-in-hand filled, 1 is promised to a god-daughter getting out of bootcamp, 2 are clean and vacant, though one needs a pipe nipple replaced. Not bad for the third of the month! On the other hand, it's been a bit on the busy side....

EDIT: Repair link
__________________
calmloki is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 08:35 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Re: Real estate escape question

Quote:
Originally Posted by jdw_fire
So you don't want to pay taxes on the sale of your RE? If it is F&C you could create a CRT, put the RE in it, and then sell the RE. Doing this can potentially set up quite an income machine which, depending on how you set up the CRT, you can control.
CRT? From my sonar days that's a cathode ray tube, which doesn't really make sense - some sort of a trust?
__________________
calmloki is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 09:39 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 1,012
Re: Real estate escape question

Quote:
Originally Posted by calmloki
CRT?
Charitable Remainder Trust
__________________
jdw_fire is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 09:46 PM   #14
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,617
Re: Real estate escape question

Quote:
Originally Posted by queeneev
I wish I had a legal brain. Another option is (somehow?) handing over the condo to my son, through some type of gifting, seller financing, etc. I don't want to get hit with a gift tax, and I don't want to give him the whole thing, and I don't want his wife to walk away with half the equity if they ever divorce and don't have kids (not to sound greedy, but I look after my own...I do love my DIL a great deal). Put it in some kind of a trust? I know there are tax issues here out the wazzoo. I should get a book and read up on it, eh?
If you gift the condo to him and it's titled in his name, that provides some measure of protection in divorce. Maybe that works even in community-property states, but a lawyer would be able to structure the title transfer to deal with those concerns.

You wouldn't actually pay a tax on the transfer. There'd be some paperwork to reflect that you'd passed a gift over the annual limit of $12K/person but it's just deducted from your estate-tax exemption. There are other ways to transfer the title over years instead of in one fell swoop, and those will also reduce the effect on the estate-tax exemption.

So you don't necessarily need to have a legal brain, just a foundation in the vocabulary and the services of a good lawyer.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Real estate escape question
Old 02-03-2007, 11:15 PM   #15
Recycles dryer sheets
 
Join Date: Apr 2005
Posts: 166
Re: Real estate escape question

Thanks for putting in the link for me, CalmLoki!

__________________
Of all the things I've lost, I miss my mind the most!
Jane_Doe is offline   Reply With Quote
Re: Real estate escape question
Old 02-04-2007, 01:02 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Re: Real estate escape question

and thanks to:
Last Edit: February 03, 2007, 07:43:23 PM by REWahoo!
for fixing my gibberish link!
__________________
calmloki is offline   Reply With Quote
Re: Real estate escape question
Old 02-04-2007, 10:26 AM   #17
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: Real estate escape question

If you have capital assets like real estate that you are planning to sell anyway, there is some sense in doing so in the next few years. Under the current tax code, which of course can get changed at any time, the favorable capital gains rates expire after 2010. I would not worry so much about getting the benefit of 0% vs. 5% vs. 15%. As Kramer mentioned, you only get the 5% or 0% rate until all your income, including the capital gains, puts you at the 25% tax bracket. After that point the gains are taxed at 15%. Others mentioned the fact that large capital gains may cause you to pay a big tax under AMT on your other income. So there is no free lunch. Nevertheless, I still think it makes sense to sell over the next three years when we know the rates are at lows that we might not see again, if you plan on selling anyway.

Another option is to defer the gains through a 1031 exchange into like kind investment property. However, the gains are only defered and once you sell you will have to pay the tax and who knows at what rate.
__________________

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Real estate as an investment wzd FIRE and Money 46 09-30-2008 12:04 PM
Long-term returns from real estate wabmester FIRE and Money 56 11-20-2006 02:38 PM
Poll: Where'd you put the cash from your real estate sale? wabmester FIRE and Money 19 04-23-2006 07:52 PM
Is it really worth buying a real estate? GTM Other topics 48 01-03-2005 04:25 PM

 

 
All times are GMT -6. The time now is 02:28 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.