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06-20-2020, 10:42 AM
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#21
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Recycles dryer sheets
Join Date: Apr 2016
Posts: 191
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Any well-diversified portfolio requires some exposure to alternative assets, defined as anything besides stocks and bonds. For me, real estate fills that niche, primarily because I understand it.
The government forces you to depreciate your property over the ownership term and will do it for you if you don't. If I had a choice, I wouldn't do it. Once sold, you can choose to pay tax on the depreciation, or find ways to avoid that. There's nothing noble or patriotic about paying more taxes than required by taking fair advantage of the tax code. We just experienced a 33% annual return after owning a property for 2.5 years. We looked at deferring cap gains and depreciation recapture through various means, but were concerned about the loss of liquidity required. So we are now waiting for our final tax liability number so we can pay the taxes on that gain. In this case, we're paying. In other cases we avoid paying. These are legal strategies, available to anyone, and only fools overpay their taxes out of some misguided sense of duty, or paying back favorable treatment. Taking depreciation deductions is not a favor the government does for you, it's their requirement.
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06-20-2020, 11:03 AM
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#22
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
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__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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06-20-2020, 11:23 AM
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#23
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 17,012
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Quote:
Originally Posted by calmloki
Quite aware that the real estate gave us tax advantaged phantom depreciation all those years. Also aware that residential rentals run as we did were perhaps a tad more work than putting cash into an index fund and leaving it there. Our real estate has profited us handsomely and we've no reason to run up the score. You will forgive me if I attempt to convert to a more passive investment in the safest most profitable and cost effective way. Giving up the annual rental income and substantial property appreciation is not easy. Lopping a big chunk of the value of the property off and tossing it to the taxing agencies, leaving 2/3 of the asset to try and generate value of is something that is difficult for me - in search of the optimal solution. That solution could be to just pay the taxes and move on. Or maybe there is a better way.
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It's true rentals are not simply gravy.
When we have to sell ours, I know I'm screwed especially due to the depreciation.
Many folks don't realize but say I'm in the 15% tax bracket and of course depreciate each year (required). Now after many years I go to sell, and find the accumulated depreciation of a few $100K added onto my normal income, means I pay 25% tax on the depreciated money that saved me 15%
Sort of morbid, but if I die suddenly, the rental step up basis will be a bright side
__________________
Fortune favors the prepared mind. ... Louis Pasteur
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06-20-2020, 11:25 AM
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#24
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Recycles dryer sheets
Join Date: Dec 2005
Posts: 317
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We sold a paid for Rental property 2 years ago for $680k that we owned for 15 years. We thought the taxes were going to be more than they ended up being. We paid around $108k for Fed and State taxes.
We have another paid for property that we've owned for 34 years. If we were to sell this the taxes would be considerably more due to more years of depreciation.
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06-20-2020, 11:30 AM
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#25
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Thinks s/he gets paid by the post
Join Date: Jun 2004
Location: W Wash
Posts: 1,644
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I just got a "mailer" from my university's Foundation. I have not dug into to this as yet but as I recall you can gift the property and receive an annuity back and a current deduction. The annuity I believe is taxable but you get some benefit from the deduction.
Perhaps call the Estate Management group at your favorite university and see if they offer an option more attractive than eating a big capital gains.
I will see if I can find the details from my university to provide more details.
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06-20-2020, 11:37 AM
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#26
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Thinks s/he gets paid by the post
Join Date: Jun 2004
Location: W Wash
Posts: 1,644
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Found it quicker than I thought--called a Deferred Charitable Gift Annuity
A deferred charitable gift annuity. Are you tired of the hassles of maintaining your property such as paying taxes, utilities and repair bills? Consider donating the property to WSU in exchange for reliable payments for life for you (and someone else, if you choose). When you arrange a charitable gift annuity, you receive a federal income tax charitable deduction in the year you set up the gift annuity when you itemize on your taxes. If you use appreciated real estate to make a gift, you can usually eliminate capital gains tax on a portion of the gift and spread the rest of the gain over your life expectancy. A gift of unmortgaged property to fund a deferred gift annuity is preferable and generates the greatest tax benefit.
]
https://giftplanning.wsu.edu/real-estate
The link above also has some other approaches for dealing with real estate appreciation
YMMV
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06-20-2020, 12:26 PM
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#27
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2007
Posts: 9,953
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Quote:
Originally Posted by ERD50
You had all those years of advantage from the depreciation. Those chickens have come home to roost. It's all part of the deal, and now you want out? -ERD50
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OP is trying to figure out the most tax advantaged way to legally keep all the money possible. . Is this the same forum that gives people dozen of pages of hints to artificially lower their income to get free/cheap ACA insurance?
I thought legally paying the minimum amount of tax possible is a basic concept around here?
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06-20-2020, 12:59 PM
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#28
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Full time employment: Posting here.
Join Date: May 2013
Posts: 609
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I sold both a vacation property and a rental house in the past two years and simply paid the tax. I always have Buffett’s advice in my head which is not to make investment decisions based on taxes. Clearly from a tax-saving perspective the least costly would likely be to keep the existing apartments, and if you don’t want to spend your time managing them, you can always hire a good property manager.
__________________
Saved 8 figures by my mid-40's as a professional bubble-spotter. Beware...the Fed creates bubble after bubble after bubble.
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06-20-2020, 01:08 PM
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#29
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2016
Location: Colorado
Posts: 8,971
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Quote:
Originally Posted by pb4uski
+1 I find it interesting that some of the rental property advocates on the forum rave about the depreciation tax benefits while often totally ignoring depreciation recapture when the property is sold... and if the tax tail wags the investment dog then they get locked into their holding until they pass and can get a stepped up basis.
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People need to remember that your tenant(s) paid the mortgage, the property tax and likely even more all those years too.
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06-20-2020, 01:29 PM
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#30
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Recycles dryer sheets
Join Date: Apr 2016
Posts: 191
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Quote:
Originally Posted by COcheesehead
People need to remember that your tenant(s) paid the mortgage, the property tax and likely even more all those years too.
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All profitable businesses rely on customers to pay all costs and as much profit as economics allow. At least three posters seem to be saying that's bad behavior which should be penalized by choosing the one course which will result in the highest tax being paid. But I hope I'm just imagining that, because that's not good business. Even charities manage to pay salaries and operating costs.
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06-20-2020, 02:06 PM
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#31
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2016
Location: Colorado
Posts: 8,971
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Quote:
Originally Posted by Bruceski44
All profitable businesses rely on customers to pay all costs and as much profit as economics allow. At least three posters seem to be saying that's bad behavior which should be penalized by choosing the one course which will result in the highest tax being paid. But I hope I'm just imagining that, because that's not good business. Even charities manage to pay salaries and operating costs.
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My point being, properly done, RE will result in taxation and the OP should pay at the lowest legal rate they can muster and be happy that they “won”. I know folks who didn’t have RE transactions turn out as well.
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06-20-2020, 02:09 PM
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#32
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Recycles dryer sheets
Join Date: Apr 2016
Posts: 191
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Quote:
Originally Posted by pb4uski
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This is how I see it:
Choice A results in no taxes being paid now via deferral of all cap gains and depreciation recapture taxes.
Choice B results in all taxes being paid upon sale.
Isn't Choice B overpaying by definition? I could be paying 0, but I choose not to. So I'm overpaying. As prescribed by the tax code, but more than 0.
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06-20-2020, 02:33 PM
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#33
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Location: St. Charles
Posts: 3,903
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Quote:
Originally Posted by Bruceski44
This is how I see it:
Choice A results in no taxes being paid now via deferral of all cap gains and depreciation recapture taxes.
Choice B results in all taxes being paid upon sale.
Isn't Choice B overpaying by definition? I could be paying 0, but I choose not to. So I'm overpaying. As prescribed by the tax code, but more than 0.
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First, I have never owned any investment RE, and don't plan to start now.
That said, how is this any different than an after tax brokerage account?
Choice A: If I never sell, heirs get step up basis. Tax man loses.
Choice B: If I sell, I pay taxes in what ever bracket I am in.
The fact that the gains have been augmented by depreciation (and lower taxes in the past) is immaterial on the tax side, but probably increased the overall return to OP.
The only difference I see is that OP needs to sell a large holding at one time, as opposed to selling some yearly. Well, that was the decision made when getting into RE.
I have no problem trying to find a way to legally pay the least amount of taxes. Heck, that is the basis for Roth conversions.
But at some point, if you need/want the cash, you need to pay up. It is called DEFERRED taxes for a reason.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
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06-20-2020, 02:43 PM
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#34
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
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Quote:
Originally Posted by Bruceski44
....At least three posters seem to be saying that's bad behavior which should be penalized by choosing the one course which will result in the highest tax being paid. ...
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I don't see that at all... I read every post and don't see one instance of posters suggesting any bad behavior.... not to mention three. It is what it is. OP has a choice to sell and pay the substantial tax or structure some other transaction like a 1031 or an installment sale or others to defer paying the tax.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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06-20-2020, 02:47 PM
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#35
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Recycles dryer sheets
Join Date: Apr 2016
Posts: 191
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Quote:
Originally Posted by CardsFan
But at some point, if you need/want the cash, you need to pay up. It is called DEFERRED taxes for a reason.
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OP never said he/she wanted cash. They said "We'd like to have some annual return and/or have the money grow."
Choice A is one of at least two methods to do that without paying any taxes now.
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06-20-2020, 02:49 PM
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#36
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
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Quote:
Originally Posted by Bruceski44
This is how I see it:
Choice A results in no taxes being paid now via deferral of all cap gains and depreciation recapture taxes.
Choice B results in all taxes being paid upon sale.
Isn't Choice B overpaying by definition? I could be paying 0, but I choose not to. So I'm overpaying. As prescribed by the tax code, but more than 0.
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Nah... not overpaying at all. Choice A is simply a decision to continue deferring the taxes that will ultimately be paid absent the owner's demise and a step-up in basis... nothing more and nothing less.
If the OP does a 1031 the deferred tax liability is still there... it has just been deferred further. But if you want to cash out.... coin of the realm... then the tax man cometh.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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06-20-2020, 02:50 PM
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#37
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2016
Location: Colorado
Posts: 8,971
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Quote:
Originally Posted by CardsFan
First, I have never owned any investment RE, and don't plan to start now.
The fact that the gains have been augmented by depreciation (and lower taxes in the past) is immaterial on the tax side, but probably increased the overall return to OP.
.
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It’s not really the same as selling a taxable investment in a brokerage account. The depreciation comes back to bite you in the arse when you sell.
Also if you are cash flow neutral on the property, you pay taxes on the K1’s though you really don’t have the cash in your pocket.
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06-20-2020, 02:59 PM
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#38
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,266
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Quote:
Originally Posted by Bruceski44
OP never said he/she wanted cash. They said "We'd like to have some annual return and/or have the money grow."
Choice A is one of at least two methods to do that without paying any taxes now.
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My sense is that the OP wants out of managing the property and doesn't want the hassles of hiring a manager.... wants a clean break and low maintenance that other asset classes provide.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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06-20-2020, 03:34 PM
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#39
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Location: St. Charles
Posts: 3,903
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Quote:
Originally Posted by COcheesehead
It’s not really the same as selling a taxable investment in a brokerage account. The depreciation comes back to bite you in the arse when you sell.
Also if you are cash flow neutral on the property, you pay taxes on the K1’s though you really don’t have the cash in your pocket.
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OK. I understand it is not he SAME, but it is pretty close. That depreciation saved a lot in taxes. So, now they need to be paid, kinda like a tIRA. Maybe a hybrid between tIRA and after tax.
Was the deferral worth it? Does OP ultimately have more money, after tax? I don't know. But it was an investment made, and now OP wants out (for whatever reason).
Again, if there are legal ways to reduce the tax burden (and satisfy the OP's desires), have at it.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
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06-20-2020, 06:10 PM
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#40
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Thinks s/he gets paid by the post
Join Date: May 2005
Location: Portland
Posts: 1,708
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I sold a duplex a few years ago. I'm not suited to landlording. One thing the sale did (recapture) was to push us into the AMT. At least that was my understanding. We had some business depreciation also. I had 1031 another property into the duplex. So there was about 10 years depreciation to recapture
I didn't realize that until time to do our tax return. ouchie...that one hurt.
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