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What to do with taxable million $ ??
Old 06-19-2020, 05:46 PM   #1
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What to do with taxable million $ ??

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
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Old 06-19-2020, 06:17 PM   #2
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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.
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Old 06-19-2020, 06:25 PM   #3
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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.
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Old 06-19-2020, 06:29 PM   #4
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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.
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Old 06-19-2020, 06:34 PM   #5
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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.
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Old 06-19-2020, 06:39 PM   #6
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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.
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Old 06-19-2020, 06:46 PM   #7
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Originally Posted by Backpacker View Post
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.
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Old 06-19-2020, 06:53 PM   #8
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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.
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Old 06-19-2020, 07:12 PM   #9
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Originally Posted by Souschef View Post
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-matte...n%20is%2025%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!
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Old 06-19-2020, 07:14 PM   #10
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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.
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Old 06-19-2020, 07:15 PM   #11
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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.
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Old 06-19-2020, 07:29 PM   #12
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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.
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Old 06-19-2020, 07:55 PM   #13
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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.
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Old 06-19-2020, 08:01 PM   #14
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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. Iíd stay away from office and hospitality right now, and Iíd be really careful with industrial. Youíll pay up for the investment-grade tenants and long leases.

I have DSTís 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 DSTís through Kay Properties and Investments. You may not get the best deal, but if you must exit, this is the only option Iím aware of.

You might check into an UPREIT. Iím 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). Iíve 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 didnít want to tie my money up for 10 years with no expectation for cash flow until late in the term.
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Old 06-19-2020, 08:13 PM   #15
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Yeah, get rid of it and pay the tax, make the world go round.
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Old 06-20-2020, 05:56 AM   #16
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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%
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Old 06-20-2020, 08:04 AM   #17
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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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Old 06-20-2020, 09:11 AM   #18
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+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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Old 06-20-2020, 09:44 AM   #19
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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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Old 06-20-2020, 09:53 AM   #20
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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.
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