Need advice for use of property proceeds

[Carpediem]

We will be closing on the sale of one of our rental properties that will result in proceeds of around $100k. Of course cap gains and depreciation recapture taxes will need to be paid from that. We do not need immediate access to these funds so we'd like to invest them. We currently have 2 tIRAs and 2 Roth IRAs (mine and DW) at Vanguard but no other investment accounts. Our ages are 60 and 58 and we'll be retired within a year, two at most.

I've been thinking that I should open a VG brokerage account for this money and invest it in a mutual fund. But is that the "right" or "best" thing to do?

Being the financial lightweight that I am I thought I would ask y'all for your opinions, which I highly respect.

 

[OldShooter]

We will be closing on the sale of one of our rental properties that will result in proceeds of around $100k. Of course cap gains and depreciation recapture taxes will need to be paid from that. We do not need immediate access to these funds so we'd like to invest them. We currently have 2 tIRAs and 2 Roth IRAs (mine and DW) at Vanguard but no other investment accounts. Our ages are 60 and 58 and we'll be retired within a year, two at most.

I've been thinking that I should open a VG brokerage account for this money and invest it in a mutual fund. But is that the "right" or "best" thing to do?

Being the financial lightweight that I am I thought I would ask y'all for your opinions, which I highly respect.

That money is the same as any other money you may have, like your IRAs, and should be invested according to your asset allocation plan and your investment strategy. If these do not yet exist, that is where you should be concentrating.

There is a current thread here where the OP is asking for basic investment reading recommendations. That's probably a good place to start: http://www.early-retirement.org/forums/f28/starter-books-93976.html

 

[The Cosmic Avenger]

Well, first, if you're not maxing out your retirement contributions (don't forget the catch-up), I would advise that you use the proceeds to take advantage of the tax benefits of Roth IRAs and 401(k)s. Of course, you can't put that money in directly, but years ago I used an inheritance as spending money in order to take the sting out of increasing all our contributions to the maximum, and we never looked back.

If you are maxing out your contributions, then I would have said what OldShooter said, just stick with the same asset allocation as your retirement funds. That's the smart move.

Or, if you feel like that money is fairly insignificant compared to your retirement funds, maybe buy some individual stocks. That's what I did with some "found money" that I could live without. Some of my picks have done REALLY well, and some have cratered -- overall, I've made out much better than with the rest of my funds, but then I wouldn't want to expose the bulk of our retirement to that much risk.

 

[Offgrid Organic Farmer]

We will be closing on the sale of one of our rental properties that will result in proceeds of around $100k.

It is too late now, but consider if you have borrowed $100k against the property a year ago. Then sold it today with zero profit. You would still have the $100k, and it would not be taxed.

I did that one time.

 

[pb4uski]

^^^^ NO! Whether or not you have debt on the property has no bearing on computing the taxable gain or loss.... gain or loss is proceeds from sale (before any debt settlement) less basis and debt is neither one of those elements.

Perhaps you are confusing tax with tax withholding.... or up to some tax shenagians.

 

[pb4uski]

I would set up a taxable brokerage account at Vanguard. Then use that account for your international equities and domestic equities... in that order.

International equities will have some qualified dividends and some unqualified dividends and foreign taxes paid for which you can take the foreign tax credit.... any foreign tax credit in tax-deferred or tax-free accounts is never utilized and wasted. Domestic equity dividends get preferential rates as do long-term capital gains for all securities.

 

[Offgrid Organic Farmer]

^^^^ NO! Whether or not you have debt on the property has no bearing on computing the taxable gain or loss.... gain or loss is proceeds from sale (before any debt settlement) less basis and debt is neither one of those elements.

Perhaps you are confusing tax with tax withholding.... or up to some tax shenagians.

I refinanced an income property and used the cash to buy another property.

Then when we sold the income property its equity was gone, there was no profit to be taxed.

 

[audreyh1]

We will be closing on the sale of one of our rental properties that will result in proceeds of around $100k. Of course cap gains and depreciation recapture taxes will need to be paid from that. We do not need immediate access to these funds so we'd like to invest them. We currently have 2 tIRAs and 2 Roth IRAs (mine and DW) at Vanguard but no other investment accounts. Our ages are 60 and 58 and we'll be retired within a year, two at most.

I've been thinking that I should open a VG brokerage account for this money and invest it in a mutual fund. But is that the "right" or "best" thing to do?

Being the financial lightweight that I am I thought I would ask y'all for your opinions, which I highly respect.

Are these long term funds, to be used for retirement income? Then open a taxable brokerage account and buying mutual funds to complement the ones in your IRAs.

If you have some other shorter term goal for the funds, like buying another property in a few years, then you’ll want to invest the funds very conservatively.

 

[pb4uski]

I refinanced an income property and used the cash to buy another property.

Then when we sold the income property its equity was gone, there was no profit to be taxed.

You still don't get it.

The taxable gain is what you sold the property for less selling costs less basis. So for example, let's say that you sell a property for $200k, selling costs are $10k and your basis (depreciated cost) is $125k... your gain is $65k.

Same facts as above, but the property has a $100k mortgage... the gain is still $65k... same calculation.

The only difference is that in the first case at closing you receive $190k and in the second case at closing you receive $90k since $100k of the proceeds is used to pay of the mortgage.

 

[Offgrid Organic Farmer]

You still don't get it.

The taxable gain is what you sold the property for less selling costs less basis. So for example, let's say that you sell a property for $200k, selling costs are $10k and your basis (depreciated cost) is $125k... your gain is $65k.

Same facts as above, but the property has a $100k mortgage... the gain is still $65k... same calculation.

The only difference is that in the first case at closing you receive $190k and in the second case at closing you receive $90k since $100k is used to pay of the mortgage.

If you did it all on the same year, yes.

Spread it out, and, ... our accountant saw the maneuvers as separate and unrelated.

 

[pb4uski]

It doesn't matter when you take out the mortgage. Nor does it matter how you used the money from the mortgage if it was a cash out... it is still a $65k gain because nothing you did affects sales proceeds, sales costs or basis.

 

[The Cosmic Avenger]

The mortgage or equity has nothing to do with calculating the gains on a property, but it sounds like Offgrid Organic Farmer did a 1031 exchange. But that doesn't avoid tax on the proceeds, it just defers it, in essence by lowering the basis on the new property.

 

[pb4uski]

The mortgage or equity has nothing to do with calculating the gains on a property, but it sounds like Offgrid Organic Farmer did a 1031 exchange. But that doesn't avoid tax on the proceeds, it just defers it, in essence by lowering the basis on the new property.

That he did a 1031 may be possible but I have a lot of trouble fitting a 1031 into what he wrote:

I refinanced an income property and used the cash to buy another property.

Then when we sold the income property its equity was gone, there was no profit to be taxed.
------------------------
It is too late now, but consider if you have borrowed $100k against the property a year ago. Then sold it today with zero profit. You would still have the $100k, and it would not be taxed.

I did that one time.

Perhaps what he did was a cash out refinance of Property A... used the proceeds to buy Property B and then later a 1031 exchange of Property A for Property C.. that would defer the gain for Property A... but the financing has nothing to do with the deferral of the gain.

 

[Carpediem]

I would set up a taxable brokerage account at Vanguard. Then use that account for your international equities and domestic equities... in that order.

International equities will have some qualified dividends and some unqualified dividends and foreign taxes paid for which you can take the foreign tax credit.... any foreign tax credit in tax-deferred or tax-free accounts is never utilized and wasted. Domestic equity dividends get preferential rates as do long-term capital gains for all securities.

Thanks for this, pb4uski. Exactly the feedback/advice I was hoping for.

Are these long term funds, to be used for retirement income? Then open a taxable brokerage account and buying mutual funds to complement the ones in your IRAs.

If you have some other shorter term goal for the funds, like buying another property in a few years, then you’ll want to invest the funds very conservatively.

At this time the plan for the funds is long term - yes, retirement income. Thank you, audreyh1.

Follow up question - should my wife and I max out our Roth IRAs first with the proceeds? I'm guessing the answer is "absolutely" but thought I should ask.

 

[RenoJay]

To the original poster: may I ask why you chose to sell your rental property recently? I’m considering selling mine and am curious about your thought process.

 

[nash031]

I'm in the same boat, and would echo the recommendations above. We're going to net about $130K when all is said and done with our current sell/buy RE transaction. My plan is to "value cost average" that money into our taxable brokerage account (at Vanguard) over the course of the next year or so in accordance with our existing asset allocation. If the market dives during that time, I'll go all-in at some point, otherwise I'll hedge my bets.


Re: maxing out your Roth IRAs - yes. Do that first. Fill out your tax advantaged accounts before your taxable. That's basically always true with a few exceptions.

 

[Onward]

I would defer cap-gains tax and depreciation recapture by doing a 1031 exchange into a Delaware Statutory Trust.

 

[audreyh1]

Thanks for this, pb4uski. Exactly the feedback/advice I was hoping for.



At this time the plan for the funds is long term - yes, retirement income. Thank you, audreyh1.

Follow up question - should my wife and I max out our Roth IRAs first with the proceeds? I'm guessing the answer is "absolutely" but thought I should ask.

I’m not sure what the rules are for funding Roth IRAs other than it has to be earned income, and there is an annual income limit as well.

If you are working, then you can fund up to $6500 per person if over 50, I think, assuming you earned that much. The income limit for being able to contribute to a Roth is $199K MFJ.

 

[pb4uski]

I would defer cap-gains tax and depreciation recapture by doing a 1031 exchange into a Delaware Statutory Trust.

Interesting idea, but all that does is transfer that wealth from one non-liquid investment to another... when you sell your shares in the trust the taxes become due.... if you want cash you need to pay the piper.

 

[Stormy Kromer]

I was in the same situation 10 years ago. To answer the OP question directly here's what I did.

40% went to Vanguard Balanced Fund
60% went to Vanguard Total Stock Market Fund

This combo has beat the socks off of the managed portfolio I have with a FP, not even close.

I plan on using these funds in about 8 years and will leave them be. I'll simply sell off some of each to keep the 40/60 allocation. I'll also have a year or two of living expense in cash.

I really think it can be that simple.

Good luck to you.

 

[Carpediem]

To the original poster: may I ask why you chose to sell your rental property recently? I’m considering selling mine and am curious about your thought process.

We own 2 beach rental condos and decided to sell our first one because (1) expenses are increasing (including HOA dues) and the rental rates are not keeping up so it's now a break even game, and (2) I wanted to simplify things as I head into retirement, which is anywhere from 9 months to 2 years away.

We bought it in 2014 for $125k and we close this week at $198k so it's been good to us financially.

Good luck with whatever you decide to do with yours.

 

[Carpediem]

I would defer cap-gains tax and depreciation recapture by doing a 1031 exchange into a Delaware Statutory Trust.

We looked long and hard into doing a 1031 exchange but decided against it. Nothing really fits our situation so we'll pay our taxes and move on.

I was in the same situation 10 years ago. To answer the OP question directly here's what I did.

40% went to Vanguard Balanced Fund
60% went to Vanguard Total Stock Market Fund

This combo has beat the socks off of the managed portfolio I have with a FP, not even close.

I plan on using these funds in about 8 years and will leave them be. I'll simply sell off some of each to keep the 40/60 allocation. I'll also have a year or two of living expense in cash.

I really think it can be that simple.

Good luck to you.

Thank you very much for this! I was hoping to see some recommendations like this. Appreciate it.