What to do with taxable million $ ??

[kevdude]

We sold a fourplex last year that we owned since 2002 and had about a $550k gain prior to depreciation recapture (Seattle area) and decided to just pay the tax. Well, will pay it in a couple of weeks anyway. Total will be about $140k. A big chunk out of our $640k net cash, but feel fortunate to have made that amount, plus all the cash flow we received from the property.

In the next year or so we will most likely sell the rest, which will net us about $2.3MM after taxes. The tax hit on that will be about $450k. Another big hit, but I think I will be OK paying it.

I'm not that familiar with DST's, other than it seems like you're fee'd to death. If that's the case, I doubt I would go that route. Same with investing with syndicators, who seem to disappear when the RE market turns leaving their investors SOL. At least that's what happened during the great recession from my perspective, which was as a commercial real estate lender and investor so very well connected with the market.

I almost sold one small apartment building on an installment sale a couple of years ago, but the initial tax hit pretty much ate up the cash down payment I would have received. Of course, I would have received the monthly cash flow (theoretically), but I actually wanted to use the cash. Once I realized the tax hit, I bailed on the sale, which was just in the negotiation phase.

[corn18]

This thread reminds me of folks that complain that they have to pay $500k of income taxes. I was very happy that I had to pay $500k of income tax last year. I do find every way possible to minimize my income taxes, though, which is what the OP is trying to do. But when you are paying that much in income tax, you are pocketing a lot in your bank account. First world problems, right?

[calmloki]

Quote:

Originally Posted by corn18 This thread reminds me of folks that complain that they have to pay $500k of income taxes. I was very happy that I had to pay $500k of income tax last year. I do find every way possible to minimize my income taxes, though, which is what the OP is trying to do. But when you are paying that much in income tax, you are pocketing a lot in your bank account. First world problems, right?

Reminds me of an Andy Capp L'il Abner cartoon where Abner was mighty pleased and filled with patriotic pride to be paying his taxes - the more he paid the more American he felt. Think General Bullmoose (What's good for General Bullmoose is good for America!) didn't have the same feeling of joy.

For sure a first world problem I'm pleased to have, but it's in my nature to try and reduce problems before dealing with them.

[corn18]

Quote:

Originally Posted by calmloki Reminds me of an Andy Capp L'il Abner cartoon where Abner was mighty pleased and filled with patriotic pride to be paying his taxes - the more he paid the more American he felt. Think General Bullmoose (What's good for General Bullmoose is good for America!) didn't have the same feeling of joy. For sure a first world problem I'm pleased to have, but it's in my nature to try and reduce problems before dealing with them.

I just read my reply again and wanted to apologize. I would not lump you into the group complaining about taxes at all. Sorry if it came across that way. Like all good ER members, you are trying to maximize wealth by minimizing taxes.

If I were in your shoes, I would try to find a way to put the property somewhere where I could sell it, pay no taxes and have the proceeds sitting there in a foundation that I manage for charitable/philanthropy. I have no clue how to do that, but now I could deduct it from current taxes and pay no taxes on the gains. Win Win.

[calmloki]

Didn't even begin to take offence - your words were just fine. Should take a lesson from you though - hope board members will please excuse any perceived saltiness in my replies. Kinda focusing on this subject as real estate has been our primary support for many years and will be for our retirement. Exiting is acceptance of ending what I - we - do. It is hard to investigate as the financial gets all tangled with reduced physical and mental/emotional hardiness and the awareness that those abilities are shrinking with each year. Don't know where to find or how to vet expert guidance on optimal divestment for our situation - so am here looking for other's experiences. I do appreciate the thought and time people have put into their replies - this board has my gratitude. Thank you all.

[ERD50]

Quote:

Originally Posted by ivinsfan Quote: Originally Posted by ERD50 View Post 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 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?

Sure. I'm just pointing out that the tax advantage was already received, which was sort of skimmed over in the earlier posts.

This is pretty similar to trad-IRA's for many of us. We got a tax advantage at the time, but it could actually backfire on us with RMDs, and if one spouse passes, going from Joint to Single tax rates makes it worse.

So sure, we look for legal ways to reduce our taxes (Roth conversions, etc), but in the end, it is what it is. There's two sides to the coin. I kinda got the impression that it sounded a bit like "OMG, I have all these taxes!", w/o the acknowledgment that a tax savings was already booked.

-ERD50

[IncomeEngines]

Calmloki - you may want to look into or get feedback on:

Deferred Sales Trust - also referred to as DST but nothing like the Delaware Statutory Trust. Brett Swarts (Google Him, lots of podcast post) is one of the Trustee's with the most online content about this strategy. It's a Deferral on carry back schedule with a Trust involved.

Monetized Installment Sale MIS) - intermediary holds sale proceeds in escrow which secures interest only loan (they advertise 30 years) for 90% of sale value - so they advertise.

Lots of moving parts on both and depends on knowing - for your situation - exactly what you want to accomplish that will determine the moving parts. The least moving part is the biggest tax, as you know, paid immediately, and then inversely down from there. By all means seek council from a "Tax Attorney" (not a CPA, no offense) on your particular desires and execution options.

There may be others ways but, I believe, at this point, your left with either of 6:

Sell and Pay
1031
Delaware Statutory Trust
Opportunity Zone investing
Deferred Sales Trust
Monetized Installment Sale

[imnontrad]

I think a CPA may be able to help a little.
Who are you planning to will these assets to?

If to charity, how about donating some of the properties now? This year is a great tax break for donations.

If to an individual, then maybe get a property management company to manage them for you, ou enjoy life with the income and the person who inherits gets the stepped up basis when they are willed the properties.

[Gary 1958]

My parents were in the same boat. They sold properties on land contracts and spaced the balloon payments out so the taxes didn't kill them. Worse part of a land contract is if the owner defaults you get the property back and get to keep all they money they already paid.

Once the actual deal started to take place they were pleasantly surprised at how low the capital gains were.

That was in Michigan and I'm not sure if each State handles these types of sales differently or if they are based on the national tax laws.

[samcat]

Quote:

Originally Posted by nwsteve 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

Does the charity then sell the property and take the proceeds, kind of like a car donation?

[Dakotah]

Have you considered giving a portion away as a charitable remainder trust.
There are tax benefits and a guaranteed income stream for your lifetime.
With no kids to worry about you could pick a charitable cause you feel strongly about and greatly help their cause.

[imnontrad]

Quote:

Originally Posted by Gary 1958 That was in Michigan and I'm not sure if each State handles these types of sales differently

I think the capital gains would be paid to the state where the property is located. If not, it would be a great idea to move to a state without income tax on earnings or cap gains before selling property.

[levindb]

I do not know if this can be done, but can you sell 8 units one year and the other eight the next year? Even doing it December and January might be a better tax solution depending on your other income for the year.

[DenverCraig]

We'd been landlords for almost 15 years. We'd bought a house, paid it off, cash-flowed positive. About 8 months ago we realized a) the market was hot and b) we are VERY close to FIRE. So let's see if we can get rid of this thing. We calculated the taxes we'd have to pay and it was not insignificant. We looked at as many alternatives as we could think of but our thinking always came around to the fact that you can defer the taxes but avoiding them entirely would be non-trivial and non-trivial is non-attractive to us.

We sold the house for what we were asking, got the cash, paid the taxes (or will shortly) and we walked away with money to bridge us till 59 1/2 (ie we can start drawing off 401Ks if needed). Couldn't be happier.

Sell the property, pay the taxes, go play golf.

[yclipse]

Rather simple answer. Vacant land parks the money, will hopefully see it grow, and has minimal management complexities.

[mpeirce]

Quote:

Originally Posted by COcheesehead A tax on gains means you were successful. I have written a lot of 5 figure checks to the IRS and I am about to write a 6 figure check to them. I consider myself fortunate.

I did something similar.

My main advice is to develop a relationship with a good CPA. Knowing all the ins and outs of the tax law is their business. A good one is worth their weight in gold!

[Elbata]

First world problem for sure. Here in CA look to pay another 13.3% state tax. Yeah.
It's got to be a tough decision though. Money is rolling in, guaranteed income and appreciation on the investment.

Sell property, pay the taxes, put money in market and watch market drop 30%. Has to be a little scary after having such a secure investment for so many years.

But at 70 years of age, you have a responsible lifestyle, you surely know you can't take it with you. Enjoy the fruit of your labor.

[MasterBlaster]

Quote:

Originally Posted by rothlev depreciation recapture tax is at 25%

Depreciation recapture is taxed by the feds at 25%.

Then there is whatever your state charges. The total (state depending) could be over 33 percent.

same issue with the remaining capital gains. The feds charge up to 23.8% (3.8 of that in NIIT) for high income folks. Then there are state cap gains charges. Where I live that can be up to 14 % additional for a total of up to 37.8% for high income folks.

Quote:

Originally Posted by nwsteve Found it quicker than I thought--called a Deferred Charitable Gift Annuity] https://giftplanning.wsu.edu/real-estate The link above also has some other approaches for dealing with real estate appreciation YMMV

regarding charitable based solutions they can be better than paying taxes up-front. Look in to charitable remainder trusts (CRUTs and CRATs). Basically you give the asset to a charity. Then they pay you (and your spouse for example) a (large) asset based stipend while you are alive. The asset can be converted into something like a bond (CRAT) or invested in securities (CRUT). Also you get a immediate tax deduction for the expected asset remainder value at your expected demise.

Seriously this approach just may be better than paying all those taxes up-front and then living off of what's left

[kevdude]

Calmloki, I'm curious what you decided to do here.

Lately I've started looking at DST's and I think they could be decent investments, after all. It seems the sponsors probably do much better, but if you're fine with a 5%-6% return on your full investment after selling costs, i.e. no taxes, then it could make sense. Especially considering you still get all the tax advantages and and have a totally passive real estate investment. I don't think there would be much appreciation, though, since the offering prices that I've seen are quite a bit higher than the original investment in the properties.

I was looking at our returns on our equity in our properties and we are around 5%. Part of that, though, is due to the incredible appreciation we've seen in the Seattle area. So, if I'm fine with 5% while we are managing the properties ourselves, why not accept the 5% with no effort on our part?

[calmloki]

The latest is that some shark RE agents sent us a purchase offer on a 9-unit - one we specifically had said was not on the table yet (planned to put it in the hands of a specific friend/heir). I lit them up a bit as they were pushing hard and I didn't like being offered money to change our desire and cut out a friend. On the good side, we offered the place to our friend for less than the proffered offer minus RE commission with about a 12% down and a 30 year mortgage. That would give us about enough to pay depreciation recapture this year and the carried contract, principal and interest, would bring in close to what the rental profit is right now.

Capital gains taxes would be paid as principal is received, so our immediate tax hit would be low. I talked with the head of an escrow company we use and he assured me that "Transfer on Death" deeds are commonly seen in his office. Still trying to check the tax ramifications, but am hopeful that buyer and seller will both benefit. Buyer has a pretty safe bet that we won't be around for the end of the 30 year contract and will have remaining contract years as a free bonus, will have full control of the property including right of sale, and will have substantial depreciacion to write of against income. If we die after 20 years he will have the property, all contract terms will have been met, and I don't think he will have a taxable event. Sellers will avoid immediate total tax hit, continue getting income (P&I) about equal to what we are now getting in rent, and at our demise may transfer some amount of equity to the buyer. Still waiting for definite agreement on tax treatment for buyer and seller.

Also offered a triplex to an adjoining industrial neighbor - haven't heard a peep back from them - and checked guestimated value with a RE agent. Figure I might as well have several pots cooking.

Right now a 5% return is looking pretty good - We carried a few property sales back when at 7% - it was a point or so low for a number of years, but has looked really nice the last couple! Wonder how 5% will look in ten years? Will we care?