Embarassment of income

[MBAustin]

While inheriting our places at a stepped up basis is a great deal for our heirs I would rather not saddle them with running rentals - nor would I feel right about sticking our tenants with clueless landlords.

You are definitely doing your heirs a favor. My parents left a bunch of rental houses in our hometown to us (actually they gifted them to us over a number of years). They were all older low-rent homes in a depressed small town, not close to where either my sister or I live. I think I've spent more having an accountant do my taxes than we've made in rent over the years. We've been disposing of them but some of them are impossible even to give away. One left that we just can't seem to get rid of. What a pain.

 

[calmloki]

What about 1031 into a REIT?

Interesting idea - not sure it is allowed as a like kind exchange, but if it is and avoids tax on the exchange that would be great. Can't imagine how divesting of the REIT would be taxed though - pulling profit seems simple, and maybe heirs could sell at stepped up basis, but if we were to divest or exchange for some other fund it feels like a tax nightmare.

 

[Texas Proud]

What about 1031 into a REIT?

Interesting idea - not sure it is allowed as a like kind exchange, but if it is and avoids tax on the exchange that would be great. Can't imagine how divesting of the REIT would be taxed though - pulling profit seems simple, and maybe heirs could sell at stepped up basis, but if we were to divest or exchange for some other fund it feels like a tax nightmare.

Just me, but I do not think that a REIT would be close enough for the 1031...

The reason for the 1031 is to defer recapture of depreciation... there is never any recapture of depreciation if you sell shares in a REIT... so, just does not pass the smell test to me...

however, if you are talking big dollars it might be worth going to a bank that handles these and talk to an expert... they know the various rules and could tell you right away what will and will not qualify...

 

[calmloki]

Just me, but I do not think that a REIT would be close enough for the 1031...

The reason for the 1031 is to defer recapture of depreciation... there is never any recapture of depreciation if you sell shares in a REIT... so, just does not pass the smell test to me...

however, if you are talking big dollars it might be worth going to a bank that handles these and talk to an expert... they know the various rules and could tell you right away what will and will not qualify...

Suspect you are correct but can run it by our tax person. She has shot down more cunning plans of mine.... Keeps us out of the kind of attention we don't need.

 

[jimnjana]

Investing in upREITs as 1031 Exchange Replacement Property Solution Guess I should have clarified type of REIT. I looked into doing this years ago, just didn't have the potential tax liability to make it worthwhile, plus we decided to pay off house at the time with the extra cash.

 

[Texas Proud]

Investing in upREITs as 1031 Exchange Replacement Property Solution Guess I should have clarified type of REIT. I looked into doing this years ago, just didn't have the potential tax liability to make it worthwhile, plus we decided to pay off house at the time with the extra cash.

Interesting... I had not heard about these... you still have the same problem you had before... just deferring it some more...

From the article (my bold):

The sale or disposition of their interest in an upREIT will result in a taxable transaction, including the recognition of their deferred capital gain and any depreciation recapture. The upREIT also has control over the asset they 1031 Exchanged into and therefore has control over the sale or disposition of the asset. The sale or disposition of the asset can trigger the recognition of the investors deferred capital gain and any depreciation recapture.



So, you no longer have control over when you are going to be taxed on the gain or recapture... might be getting into more trouble than it is worth... but, if you are in a very high bracket now and will be lower in the future it might be worth the trouble..

 

[jimnjana]

Interesting... I had not heard about these... you still have the same problem you had before... just deferring it some more...

....

So, you no longer have control over when you are going to be taxed on the gain or recapture... might be getting into more trouble than it is worth... but, if you are in a very high bracket now and will be lower in the future it might be worth the trouble..

DD is certainly a must. Units in UPREIT are convertible to units in the parent REIT. UPREIT take away the inheritance "landlord" issue.

 

[tryan]

I feel your pain .... after writing a 70k check to the IRS one year, I told DW "never again". Sooo when I was looking at getting "wacked" again we did the 1031 exchange into the lake property. Something we've really enjoyed.

I think you have a vacation place already .... but is there something/place to buy that would be "fun" (more fun than say, a multi in the intercity)?

 

[Huston55]

What about placing your rental properties into an irrevocable trust? My limited understanding is that this allows beneficiaries (which can include your spouse or SO) to receive income, and also steps-up the cost basis of the properties upon your (grantor's) death to avoid taxes on all the cap gains. I think you can also set up the trust, even though irrevocable, to have a fair amount of control. If you have enough properties and gains, this might be worth a tax experts time.

 

[nwsteve]

Just researched the depreciation recapture rule. At sale, you have to "recapture" all the depreciation previously claimed. Depreciation recapture amount is taxed at a statutory rate of 25%. Any remaining gain over purchase cost plus improvements is taxed at whatever cap gain rates bracket your income puts you in--15-25%.
We are considering gifting our rental property to our university when depreciation is exhausted and we do want to deal with it any longer. No recapture plus a deduction.
Nwsteve

 

[LoneAspen]

We've been disposing of them but some of them are impossible even to give away. One left that we just can't seem to get rid of. What a pain.

If you truly don't want it, and don't need any equity out of it, then just quit claim it to the current occupant.

Or, if it's unoccupied, see about quit claiming it to a local charity, Habitat for Humanity, etc.

Worst case...stop paying taxes on it and force the county to sell it off at a tax sale. Might affect your credit, though, I'm not sure.