What to do with taxable million $ ??

[calmloki]

We've been doing rental real estate for decades and it has been good to us. Now both over 70, no kids, and the 36 mostly one bedroom apartments aren't really what I want to spend my remaining time dealing with. Our biggest and best building, 16 units, keeps having offers in the $1.25 million range. We've owned it for about 20 years, taking depreciation every year, and it looks like the taxes on a sale in that range would be based on an even million in capital gains and depreciation recapture.. Gal and I own jointly and file separately, so it looks like we could be looking at taxes based on $650-$700k each in one year.

We live very modestly, have no debt, and our lives are pretty much based on not being wasteful and optimizing. Our taxes are substantial, our social security income after paying the medicare income adjustment is in the $700 range total.

Looking for a way to avoid as much of the tax for as long as possible. (no - really? shocked I say!)
A 1031 means trading a known residential rental for an unknown and keeping the onus of management/care - or taking on a bigger place and a bunch of debt and managing a manager.
A 1031 into a triple-Net commercial rental avoids the care, but seems problematic in this vacant storefront Covid era.
Delaware Statutory Trust? An unknown, though I know a few on this board have them. Think you are kind of trapped in them and at the whim of the managers.
Opportunity Zone Funds? Think we've missed the ability to shelter 5% for holding an OZ fund for 7 years as Dec. 2026 is an end point. Still possible to avoid tax on 10% of the invested capital gains and all of the gains on the investment if held for ten years. How to find a good fund though? My understanding is most of the funds are set up by entrepreneurs seeking funds rather than experienced real estate builders/managers. One fund manager is quoted as saying something like;"OZ funds are like high school sex - lots of talking about it, but not many doing it". "The Mooch", Scaramucci, is into Opportunity Zones through SkyBridge Capital. Doesn't fill me with confidence we would still have our lunch money after playing in that game.

Wurra wurra. We would like to avoid giving a third or more of our gains to the taxman at sale time. We'd like to have some annual return and/or have the money grow. We'd like to do a TOD to whatever heirs we choose and have them get a stepped up basis. Right now though? deer in the headlights.

Can any of you weigh in with what you have done or with suggestions of things (or companies) you would recommend?

Gracias

 

[Koolau]

Is there a way to sell "on time" to the buyer. Not sure that would work, but I'm guessing it might lower your yearly taxes. Just a thought as I'm ignorant of tax law.

 

[Backpacker]

Could the potential heirs fill the role of property manager? Allows them to get paid a percentage and maybe learn the ropes from you. I'm much smaller scale than you. Only have 4 single family houses, but am leaning towards having one of my kids manage the properties when I'm older and don't want to be bothered.

 

[calmloki]

We've done that in the past and probably will on some of the other places, but these apartments seem to be attractive to people doing a 1031 exchange and looking to cash us out.

 

[Souschef]

Unless I am looking at it wrong, the maximum LTCG tax is 20%. Even if you had to recapture all the depreciation, which was based on the value 20 years ago, figure the gain is an even $1 mil, the tax is 200K, or 100K each.
Someone please correct me if I am wrong.

 

[RunningBum]

Are you really going to pay 1/3 or more in taxes? Is depr. recapture at ordinary income or cap gains? If CGs, you'll pay 15% LTCG on nearly half, 20% on the other half (maybe more than half depending on other CGs), + 3.8 NIIT on most of it, maybe all if you are already there. Plus state tax (5.4% in Missouri?). If ordinary income, it depends on how much is the recapture.

 

[calmloki]

Could the potential heirs fill the role of property manager? Allows them to get paid a percentage and maybe learn the ropes from you. I'm much smaller scale than you. Only have 4 single family houses, but am leaning towards having one of my kids manage the properties when I'm older and don't want to be bothered.

Lets just say that it wouldn't be a good thing for my tenants or relatives or me to do so. I did transfer a property to a young man who lived with us for a while and who takes care of our places when we are gone. Kinda plan to have him end up with another of the properties, but not giving it to him. Thinking of doing a sale with a transfer on death clause, but want to have income for us, income for him, and doing a current sale at low cost would screw up his depreciation as well as losing him stepped up basis at our deaths (I think). Selling to him at market value and low down means we reach deep in our pockets to pay the taxes or if we pay taxes as we get payment from him we would have a big tax due at our death(? not sure on that). Odds are a 30 year contract would outlast us and with TOD would be a good deal for him, but wouldn't cash flow all that well till we croaked it. But that's another problem for another time. The 16 unit isn't the one we plan to have him get.

 

[COcheesehead]

Unless I am looking at it wrong, the maximum LTCG tax is 20%. Even if you had to recapture all the depreciation, which was based on the value 20 years ago, figure the gain is an even $1 mil, the tax is 200K, or 100K each.
Someone please correct me if I am wrong.

20%+ACA tax at 3.8%+whatever the state charges+recapture.

 

[calmloki]

Unless I am looking at it wrong, the maximum LTCG tax is 20%. Even if you had to recapture all the depreciation, which was based on the value 20 years ago, figure the gain is an even $1 mil, the tax is 200K, or 100K each.
Someone please correct me if I am wrong.

https://www.wgcpas.com/405-tax-matt...n recapture is the portion,of the gain is 25%.

The gain is just about exactly what you figure according to our tax person's reckoning last year and past sales seem to have cost about 24% in effective fed tax. Then there seems to be a little you-made-too-much 3.8% tax for going over $200k. OH - and Oregon would like about 9+%, thank you very much.

Shoot, maybe I'm cheap, but even if the taxes were $200k, if we can legally avoid paying more in taxes in one year than we spend to live on for five years I'd love to do that!

 

[pb4uski]

Agree... off the cuff I would think 28% on depreciation recapture portion of the gain and 20% on the remainder.... but there might be state taxes involved that bring it to 1/3 of the gain that OP mentions.

One alternative is to just "suck it up buttercup" and pay the tax... in a year it will be long forgotten.

That, of find someone capable with a good head on their shoulders that you can groom to be the property manager as a part-time job rather than hiring a management company.

 

[pb4uski]

Is there a way to sell "on time" to the buyer. Not sure that would work, but I'm guessing it might lower your yearly taxes. Just a thought as I'm ignorant of tax law.

Yes, if you do an installment sale it spreads out the tax bite... but with the risk that the buyer fails to make the installment payments and you have to take the property back and it is in worse condition than when you sold it to them.

 

[calmloki]

Yes, if you do an installment sale it spreads out the tax bite... but with the risk that the buyer fails to make the installment payments and you have to take the property back and it is in worse condition than when you sold it to them.

Just so. On the good side, while you still owe the taxes for the original sale price to your buyer you retake the property at your sale price, so get to start a brand new depreciation schedule! Or I think that's what our tax person said.

Last little house we sold (on a contract that will outlast us) is now covered with blackberry vines on one wall. Rough and getting rougher. Still getting payments though, so fingers crossed.

 

[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.

 

[Bruceski44]

Your 1031 into NNN could be retail, but could also be industrial, self-storage, residential, medical, office, hospitality, etc. Better yet, diversify amongst several smaller properties in a few sectors. I’d stay away from office and hospitality right now, and I’d be really careful with industrial. You’ll pay up for the investment-grade tenants and long leases.

I have DST’s with Capital Square Realty Associates and ExchangeRight and am pleased with both. Distributions as of this month are unaffected by Covid. The CSRA multi-family in GA is collecting >97% of rents and has a few tenants in a payment plan who are all current. Occupancy is >95% and stable. With rent forgiveness being discussed in blue states, you must be very careful as to location.

There is now a secondary market for DST’s through Kay Properties and Investments. You may not get the best deal, but if you must exit, this is the only option I’m aware of.

You might check into an UPREIT. I’m not an expert, but I think you sell your properties en masse to a REIT who operates them and pays distributions to you.

I was poised to invest in an Opportunity Zone with Caliber Investments in Scottsdale, AZ (www.caliberco.com). I’ve invested with them for 6 years now and believe them honest. From what I hear, they are a national leader in the space. I decided against the OZone because I didn’t want to tie my money up for 10 years with no expectation for cash flow until late in the term.

 

[RobbieB]

Yeah, get rid of it and pay the tax, make the world go round.

 

[rothlev]

Are you really going to pay 1/3 or more in taxes? Is depr. recapture at ordinary income or cap gains? If CGs, you'll pay 15% LTCG on nearly half, 20% on the other half (maybe more than half depending on other CGs), + 3.8 NIIT on most of it, maybe all if you are already there. Plus state tax (5.4% in Missouri?). If ordinary income, it depends on how much is the recapture.

depreciation recapture tax is at 25%

 

[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

 

[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.

 

[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.

 

[SumDay]

Could the potential heirs fill the role of property manager? Allows them to get paid a percentage and maybe learn the ropes from you. I'm much smaller scale than you. Only have 4 single family houses, but am leaning towards having one of my kids manage the properties when I'm older and don't want to be bothered.

My dad did that to me, and I'll never forgive him. "If you love your children, you won't leave them real estate." Your model may be very different than his, but I could write a book about the unbelievable mess it all turned into.

Just my .02.

 

[Bruceski44]

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.

 

[pb4uski]

.... and only fools overpay their taxes out of some misguided sense of duty, or paying back favorable treatment. ...

Where did you think anyone was suggesting that anyone overpay their taxes?

 

[Sunset]

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.

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

 

[Livefree]

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.

 

[nwsteve]

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.