What to do with taxable million $ ??

[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

 

[ivinsfan]

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?

 

[RenoJay]

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.

 

[COcheesehead]

+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.

People need to remember that your tenant(s) paid the mortgage, the property tax and likely even more all those years too.

 

[Bruceski44]

People need to remember that your tenant(s) paid the mortgage, the property tax and likely even more all those years too.

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.

 

[COcheesehead]

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.

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.

 

[Bruceski44]

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

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.

 

[CardsFan]

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.

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.

 

[pb4uski]

....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. ...

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.

 

[Bruceski44]

But at some point, if you need/want the cash, you need to pay up. It is called DEFERRED taxes for a reason.

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.

 

[pb4uski]

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.

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.

 

[COcheesehead]

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.
.

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.

 

[pb4uski]

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.

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.

 

[CardsFan]

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.

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.

 

[Scrapr]

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.

 

[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]

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]

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]

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]

LTCG Tax - Couple of other options to explore

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]

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?