Deceased sister's home sold - thoughts on what to do with proceeds?

[Blue Poles]

Good stuff, All. Thank you.

The reason I am keeping the rentals is that they were bought with cash mostly from foreclosures - bottom of the market - are worth 3X now with significant income. Also, I have two kids - good way to transfer at stepped up basis. Sure, benefits them, but I don't need the money. Am I thinking about this wrong?

You just went through settling an estate that held real property, so I am sure you are aware of the hassles involved. Now add in rental properties to the mix, and you have an idea of the challenges presented to whoever settles your estate. So anything you can do to make it easier for them, without putting you in financial difficulty, is a nice thing to do. It doesn't necessarily need to be paid off mortgages - a file with all the information for each property would be useful (purchase price, income and property tax information, copies of rental agreements or leases, tenant information, repair records and invoice, insurance information, etc.). I recently had to deal with this and had to figure it out for myself, this sort of file would have been nice to have.

 

[Spock]

I find that most people (including myself) lie to themselves about their actual NET income on rentals. First most landlords, even those with property managers, underestimate the time/energy/stress spent on their properties which has a cost. Beyond that many landlords underestimate the obvious costs such as taxes, insurance, mortgage, utilities, etc.... Lastly, many landlords ignore or undervalue the cost of maintenance, deferred maintenance and vacancy.

With all that said I like the idea of selling rentals and diversifying into DSTs via 1031 exchange. Or, if they are valuable even 1031ing into syndication projects via TICs. For the latter it's typically $750k+ required so doesn't work for everybody but can greatly increase your returns.

I don't know how you can underestimate taxes, insurance, utilities, etc when it's all in black-and-white on the IRS Schedule E's.

By "DST" you mean a Delaware Statutory Trust?

 

[CaliKid]

I don't know how you can underestimate taxes, insurance, utilities, etc when it's all in black-and-white on the IRS Schedule E's.

By "DST" you mean a Delaware Statutory Trust?

Yes, Delaware Statutory Trust. They aren't for everybody as they are illiquid and high fees. However, to turn a headache into mailbox money seems like a good thing to me.

 

[Morgan22]

Good stuff, All. Thank you.

The reason I am keeping the rentals is that they were bought with cash mostly from foreclosures - bottom of the market - are worth 3X now with significant income. Also, I have two kids - good way to transfer at stepped up basis. Sure, benefits them, but I don't need the money. Am I thinking about this wrong?

Do you think your kids want to inherit the rentals? Will they have the fortitude to deal with renters and/or property managers, especially after you have passed?

With all of this extra cash you have on hand now, you could start gifting at least up to the yearly (no reporting required) limit to each kid from each of you. And maybe also to their spouses from each of you, so they get to enjoy it now. ($17k x 4) Maybe they'll be able to take better quality vacations, or update their homes?

Just some thoughts... It may be nice to see how the kids can enjoy their inheritance now.

 

[stephenson]

Thanks, All!

Badger - I probably wasn't clear enough, but did note, "We have a few rental houses and a primary home."

Blue Poles - good points - we maintain files and have data systems with access keys that will be available whenever the houses need to be transferred. My understanding is that they will step up in basis -with depreciation restarting at the stepped up value.

Morgan 22 - yep, already doing that and will increase amounts as our timelines converge I think they will coldly evaluate what it means to them - if they continue to not be in the area of the rentals, they may just sell off at stepped up basis (COULD be 5X by then ... or lower ), or if they have a suitable relationship with a good management company, simply hold and ignore everything except the income - and, the thought they have a lot more real estate than they bought themselves! And, I kinda like the idea of them dealing with the complexities, thinking they may learn something.

I should mention that our properties are managed (10%) and the management company does a great job of sorting, choosing and keeping us informed (quarterly photos of the entire inside and outside of the houses). I would certainly NOT want to pick renters and being in the personnel management business. Our philosophy, even though not the best one for most income, is that we would not buy, nor rent, any house we, ourselves would not live in. We like HOA involvement as a mechanism for maintaining the properties - all the houses are single family, slab on grade, two car garage, nice neighborhood. And, while others certainly don't like maintenance duties, I'm OK with the occasional repair, repaint, cleaning, etc. Keeps me busy!

 

[Koolau]

Good stuff, All. Thank you.

The reason I am keeping the rentals is that they were bought with cash mostly from foreclosures - bottom of the market - are worth 3X now with significant income. Also, I have two kids - good way to transfer at stepped up basis. Sure, benefits them, but I don't need the money. Am I thinking about this wrong?

To me, the most important thing you said was "I don't need the money." Based on that alone, why would you subject yourself to the hassle of renting to people who might not pay, might trash your property, might be allowed (by law) to stay for free (to them - not you)?


You can find other ways to pass your wealth to your kids with step-up basis. Have you asked the kids if they would prefer to inherit rentals or something else?

 

[stephenson]

To me, the most important thing you said was "I don't need the money." Based on that alone, why would you subject yourself to the hassle of renting to people who might not pay, might trash your property, might be allowed (by law) to stay for free (to them - not you)?


You can find other ways to pass your wealth to your kids with step-up basis. Have you asked the kids if they would prefer to inherit rentals or something else?

I meant that I didn't need the money from the sale of the properties - the income they provide is pretty nice. I have a great management company and they chose very well and have a good system to avoid the downsides you mention. Rents in our area (NW Florida) are still increasing - rents are up about 80% over the last four years). We will need to buy new roofs, water heaters, appliances, etc on occasion, but have planned for this.

Sure, there are other ways, but to get out of them and into another form of investment, I would need to pay income tax on the sales of the properties - with them being 3X from purchase price this would be a big deal.

Talking to kids about the houses is a good idea - they are aware of the level of income, and the values. If I were to guess ... as they don't live in the area, I think they will take them at stepped up basis and sell them immediately.

Now, a small but important point - my wife is likely to outlive me, and then she makes the decisions - she might feel quite OK with selling them immediately and moving to Nice.

 

[Koolau]

I meant that I didn't need the money from the sale of the properties - the income they provide is pretty nice. I have a great management company and they chose very well and have a good system to avoid the downsides you mention. Rents in our area (NW Florida) are still increasing - rents are up about 80% over the last four years). We will need to buy new roofs, water heaters, appliances, etc on occasion, but have planned for this.

Sure, there are other ways, but to get out of them and into another form of investment, I would need to pay income tax on the sales of the properties - with them being 3X from purchase price this would be a big deal.

Talking to kids about the houses is a good idea - they are aware of the level of income, and the values. If I were to guess ... as they don't live in the area, I think they will take them at stepped up basis and sell them immediately.

Now, a small but important point - my wife is likely to outlive me, and then she makes the decisions - she might feel quite OK with selling them immediately and moving to Nice.

It sounds like you have done your homew*rk and know what you want. SO, blessings on your plan!

 

[stephenson]

Well, there are plans, and there are good plans ... and there are bad plans. Then things like us stumbling into buying foreclosures and near foreclosures ... that was not a plan

I would consider selling the lot of them, but can't figure out a way to avoid paying federal taxes ... so, it seems reasonable to just let them ride?

Writing this I think about how I didn't have a plan for Roth IRA conversions - but should have.

As long as I'm baring my financial soul ... turning 70 next year, will have to take SS, would like to begin Roth conversions but probably too late, two years later will have to start MRDs ... good grief ...

 

[Koolau]

Well, there are plans, and there are good plans ... and there are bad plans. Then things like us stumbling into buying foreclosures and near foreclosures ... that was not a plan

I would consider selling the lot of them, but can't figure out a way to avoid paying federal taxes ... so, it seems reasonable to just let them ride?

Writing this I think about how I didn't have a plan for Roth IRA conversions - but should have.

As long as I'm baring my financial soul ... turning 70 next year, will have to take SS, would like to begin Roth conversions but probably too late, two years later will have to start MRDs ... good grief ...

When you get to retirement time, the only real question is "Do I have enough?" If the answer is "yes" then you don't need to dwell on woulda, coulda, shoulda. Concentrate on what you're gonna do with the rest of your time on Earth.

 

[Huston55]

I meant that I didn't need the money from the sale of the properties - the income they provide is pretty nice. I have a great management company and they chose very well and have a good system to avoid the downsides you mention. Rents in our area (NW Florida) are still increasing - rents are up about 80% over the last four years). We will need to buy new roofs, water heaters, appliances, etc on occasion, but have planned for this.

Sure, there are other ways, but to get out of them and into another form of investment, I would need to pay income tax on the sales of the properties - with them being 3X from purchase price this would be a big deal.

Talking to kids about the houses is a good idea - they are aware of the level of income, and the values. If I were to guess ... as they don't live in the area, I think they will take them at stepped up basis and sell them immediately.

Now, a small but important point - my wife is likely to outlive me, and then she makes the decisions - she might feel quite OK with selling them immediately and moving to Nice.

I expect you've quantified the cost the "peace of mind" you'll get from selling the rentals. And, in the end, your personal evaluation of that is the one that counts. However, it sounds like it could be substantial (you've owned them long enough for value to triple [Cap Gains] plus, you'll pay tax on the depreciation you've taken over the years [Depreciation Recapture]. Just as an example, selling three rentals bought for $111k each, held for 14 yrs, now worth $333k each would result in a tax bill of $150k+ (if my math is correct). I'd have to get a LOT of "peace of mind" to pay a bill like that, when it can be avoided via inheritance.

 

[stephenson]

Huston55,

Yeah - I'm in same boat - thought it would be easier and avoid some tax by letting kids do the work

 

[isisdave]

If you don't mind too much being a landlord, you might want to wait 18 months, or at least consider this:

"Excluding any action from Congress, the Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025. With it will come significant changes for businesses and individuals as the tax code’s non-permanent changes, like personal income tax rates and brackets, revert to pre-TCJA levels."

Congress will have to do something, or decide not to do something, and it probably won't happen until 2025, as next to nothing has happened in the current Congress. You might want to see if anything they cook up makes it preferable to do something before or after Whatever takes effect.

 

[goodcookie]

Sell

Spend your inheritance on something your sister would have liked you to have! You folks are 69yrs old. Enough with the accumulation! Sell the rentals, Give to Charities as hardily as you can. Spend on yourself, Give to your Children before you die, Read the book "Die with Zero". Such a waste to just accumulate and not use your financial resources. Your children will appreciate it now more than after you are gone. Please stop accumulating, save some for the rest of us. Lol!

 

[11522914]

When you get to retirement time, the only real question is "Do I have enough?" If the answer is "yes" then you don't need to dwell on woulda, coulda, shoulda. Concentrate on what you're gonna do with the rest of your time on Earth.

Excellent advice Koolau.

No dwelling over here [emoji16]

 

[11522914]

Thanks for thoughts!



Given we have sufficient cash reserves, taxable holdings and are getting ready to pull SS and then very soon MRDs, I think we’ll probably pay off the mortgages.



We could have paid off mortgages previously, but I kept delaying “just in case” - this just makes it seem more reasonable. And, given no other debt, it will feel good!

It feels awesome to be completely debt free.

Sounds to me like you know what you want to do.

So my advice would be, do what you already know is the right decision for you.

 

[PointBreeze]

We paid off our mortgage early 4 months before I retired (my spouse was already retired). My gosh, did it feel good to enter retirement without that big payment due every month. And 6 years later, it feels wonderful. Pay off your mortgages, and thank your sister in your heart every time you remember making those payments.

Peace of mind is worth a little interest foregone.

 

[aaronc879]

I am overly considerate towards other people often to my own detriment. That said, what I would do is pay off any debt including mortgages so my heirs don't have to worry about debt. Probably not the best financial move but it's what I would do.

 

[hotwired]

I might add a twist to that. Leave the personal residence mortgage, then pay off the rentals because the financing is probably favorable with the residents. But, check with your accountant to see if you can do some sleight of hand that will allow you to treat that personal mortgage as business. In other words a way to apply that or associate it with the rentals. For example, we actually refinanced our home, did a cash out to buy rentals, have always been in a position to pay it off but our accountant blessed us to write off the interest as rental property interest because of the paper trail we can chill. This may not apply to the op but at least let it bounce around in your head a little.

 

[hotwired]

The timing of when you'll need the most money can come into play here. For example it's easy to say that you'll be saving 4% or earning 4% rather by paying off a 4% interest rate mortgage. But, if you tally up the payment over a year, it will represent a much higher than 4% bite against the principal. I'm not sure if I'm explaining this correctly or if it's even worthwhile, but although you'll be saving/ earning 4% long-term by paying it off you might actually be earning 12% for the 8 years left in the mortgage for example. I think this comes in handy when you have a situation where sometime during the life of the mortgage you'll need more cash flow then after the expiration of the mortgage.

 

[Out of Steam]

Paid off house = money prison [emoji3]

If you end up having to take a loan to buy a car or maintain/update a house, yes. My wife and I could pay off our house, but would be in this category if we did.

For someone who can cover such needs without the money they would use to pay off the mortgage, there's no harm in paying off the house.