I feel STUPID! Really STUPID! :(

[NW Landlady]

I have been lurking in this forum for the past week & U Peeps have amazing knowledge & ideas that I sooo wish I had checked out several years ago....

I feel really Stupid! Somehow I ended up on the Gerbil Wheel waaay too long & it won't be easy to get off of it for several years. Seems like someone encased the contraption in glass & I can't escape the wheel -- been running on it beyond my needs.

If retiring was as easy as giving notice to MegaCorp, I would gladly do it today, but unfortunately that is not the case. I am a business owner (Landlady) and I can't tell my boss to FOAD cause unfortunately I am the boss.

My stats are: Age 57, One SO/DP/DH who is ready to retire when he reaches 55 at MegaCorp next year. No kids - 2 pesky & adorable kitties.

I have about $300+K in mixed eq/munibonds/cash. This is actually miniscule compared with my Real Estate Equity, even in this down market. I own 6 apt bldgs that vary from 8 units to 36 units & 3 of them I own free & clear. I also own 3 SFH Rentals & a duplex - all free & clear. 3 of the Larger apt bldgs have Loans -- but still over 50% equity in them & good positve cash flow. DH keeps his assets/$$ separate and has between 700K and 900K depending on the Market in mixed mutual funds.

We co-own our house & the loan is paid off in 8 years, but we could pay it off tomorrow if it wasn't for the paltry tax deduction we get, we would!

To say the least, I feel really really really stupid because I am way beyond having enough money to retire on, but unwinding a RE portfolio shouldn't be done overnight due to tax ramifications (depreciation comes back as income--OUCH!-- Plus Cap Gains) & I was hoping there might be some knowledgeable Peeps in this Forum that have been there before & can give advice.

Right now I am having a few realtors look at the 3 buildings that I own free & clear to sell them, probably with Owner Financing. According to the realtors, this makes them more attractive than going to a bank for financing with huge down payments, etc. I ran a few What If Tax returns & the income from the notes will actually increase my tax liability (!?), even after I pay Unc Sam huge dollars for the sale.....

It may take a year or more to sell them in this [-]crappy[/-] Market, so I have to wait.

The other 3 bldgs can be sold later & are easier to manage since they are larger complexes. I manage my own buildings & don't really trust most property management companies, but when the time comes to FIRE, I may leave one or 2 of them in the hands of such outfits....

Anywho, I am here & happy I found this Place. Thank you for your welcomes and any advice you might have.

NW LANDLADY

 

[TromboneAl]

Welcome. I see your glass as over half full. Maybe you could dollar cost average out of your real estate, and retire soon. Sounds like you have a NW of 2-3 million.

 

[easysurfer]

Seems to me that you've been too busy being the boss of your own business and am just now starting to think, "wait a minute, I don't need to do this until I drop." I think you are starting to change your mindset and think like a FIRE'd person. That's the important first step.

When I FIRE'd, the last part of the puzzle was obtaining affordable health insurance. I had assumed the only road to health insurance before medicare was to run the gerbil wheel until I qualified for retirement covered health insurance from megacorp. When push came to shove, I realized there is such a thing as high deductible health plans coupled with HSAs. The light bulb came on . I had been too busy running the gerbil wheel and not looking at anything else.

Don't feel bad about feeling STUPID. I feel stupid every day. I only hope I feel smart more times than stupid each day

p.s. The ironic thing in my situation, here I am FIRE'd, and I've heard that the megacorp that I w*rked for is considering or already cutting back on retiree health benefits.

 

[Bestwifeever]

Congratulations on having built the assets that have supported you and will provide for your retirement (does that make you feel less stupid? Because it sounds pretty smart to me!). It will all work out.

 

[Texas Proud]

First... yes... you do have more than enough to stop being on the wheel..

But you ARE thinking inside the box... at least IMO...

Why NOT hire someone to manage the property If the tax hit is really bad, then the cost of a management firm is probably worth it so you can sell at your leisure or... when the market comes back...


Or... do you know of someone else who is doing the same... form a partnership and put your property in there along with his... pay him (or her) a salary and the rest comes to you in distributions...

You don't say if you want to stay put or move... what about a like kind exchange at a location that you LIKE... there are some very creative ways this can be done in a trust... you actually sell your property, put the money in a trust and buy what you want sometime in the future...

 

[calmloki]

Over 60 now and our units are all free & clear - and between Unca Sam wanting about a massive chunk of the sale proceeds in taxes and depreciation recap and the difficulty of selling for a fat price right now we are putting up with continuing to rent. Works out that a young man that we trust is taking over most of the day-to-day managerial stuff. We're paying him 10% of the gross rent received each month. The places don't fill as quickly, they aren't in the condition I kept them, and some of the tenants are not the people I would like to have rented to, but you know what? they are his problem. I only thought I knew everything when I started - he's learning, it's a process. Continuing to rent is paying better than trying to get the same income with the after tax proceeds. IMO.

Did have this cunning plan which would have us selling one or more of the places to the young manager in training for no money down, 7% interest only payments. Positives for him would be gaining equity (hopefully), buying for no out of pocket cost and locking the purchase price, increased annual income after taking depreciation write-offs on his taxes, and having zero risk - if the rental biz didn't pan out for him or the property values dropped he could do a deed in lieu of foreclosure back to us.

We would be getting 7% income on the whole of our equity value (something I'd be very happy with) and, since zero principal is paid this is what our tax lady says:
"If you did an installment sale, you would not include anything but the interest earned as income. The depreciation recapture rates will apply to all principal payments received up to the amount of depreciation taken. So...no principal - no tax.
As to the repossession part, think of the transaction in this way - you sold the property for 300K. At this point, it is no longer yours even though you hold the contract on it. You are now only involved with the property as a lender. Since you are using the installment method of reporting the sale, you can only add to basis what you have paid tax on. Otherwise there would be double dipping and you know how IRS is against that!"


The last paragraph is w/ regard to her thought that we would owe big taxes if we did get the property back on a deed in lieu - I was of the opinion that if we did owe big taxes if we got the place back that we should then be starting from a new tax basis. I'm still having a problem understanding how I would owe taxes after getting the property back if I'd received nothing in principal payments -



Anyway - this is my latest cunning plan - interested to hear from others, including tax pros, with their thoughts.

OP - we're down in Independence Oregon - 50 units now

 

[JOHNNIE36]

I personally don't have working knowledge of this real estate move but there is a thing called a 1031 Starker Exchange whereby you "trade" certain real estate capital gains for other types of investments. Just go to Google and check it out and then talk to a professional that deals in these kinds of exchanges.

 

[NW Landlady]

Thank you guys for the warm Welcome!!

I am sooo happy to hear I am not totally stupid, maybe just a little, LOL!

On finding a property manager, I do have several "resident" managers on site at the complexes that need a lot of hand holding & support -- but when I tried to train a "Over Manager" to take my place at the helm, the plan backfired when after several years of training my MGR had to leave due to health reasons. (Which is part of the reason I delayed getting FIREd. ) I have a new person in training right now, but I don't believe they will rise to the same level. Finding competent & trustworthy help has not been easy, but oddly enough the peeps who work for me have been loyal & long term workers -- some over 15 yrs of service.

ON Prof Mgmt companies, I could tell a lot of horror stories about them, I just don't trust or like them, have seen them lose substantial income and asset value of buildings while lining their own pockets. Commercial properties need a lot of interaction by management, to maintain, capital improvements, etc. Most of the Prof Mgmt Cos in my area just act as accountants & perhaps replace on site staff as needed. Not much else. Nonetheless, if I whittle down my portfolio to one or 2 bldgs, I will give them a shot...

Johnnie & TP: I like your suggestions on Exchanges. I have already done 1031 and reverse 1031 during my accumulation period. I think I will talk to a few more business advisors on this. DH & I have talked about buying a condo on Kona Big Island since we are avid scuba divers, & it would be an easy exchange. But beyond that, I am not so sure. I really just want the cash with less/no strings attached.... (therein lies my reason for the box, TP)

Calmloki - thank you for touching base with another NW Landlord. My properties are 135 units spread out over 35 miles & it is a very active business managing staff and contractors. Love your cunning plan....but not sure about the zero down part....foreclosure are messy and takes about a year I think and the buyer can suck the property dry before it is over (OUCH!!). One property I bought during accumulation had been a foreclosure & I was told the exiting buyers had even opened up all the laundry machines & taken the quarters on the last day before it went though the courts.

EZ Surf - I hear ya! I am on a high deductible/catast HMO plan & pay about $300/month...which I can live with.

You guys are great! Thanks for the Support and ideas!

 

[JOHNNIE36]

You ought to be very proud of yourself for having accumulated such wealth. I don't understand your lead in "I feel stupid--really stupid". I wish I would have been that stupid and was able to accumulate all that property. Actually I did very well in real estate myself. I still think that it is the best investment in the world. Just ask "the Donald".

 

[Nords]

... but unwinding a RE portfolio shouldn't be done overnight due to tax ramifications (depreciation comes back as income--OUCH!-- Plus Cap Gains) & I was hoping there might be some knowledgeable Peeps in this Forum that have been there before & can give advice.

I personally don't have working knowledge of this real estate move but there is a thing called a 1031 Starker Exchange whereby you "trade" certain real estate capital gains for other types of investments. Just go to Google and check it out and then talk to a professional that deals in these kinds of exchanges.

Do you want to defer taxes or do you want to ER? The former objective could delay your ER but if you sell in a reasonably prompt and tax-efficient manner, despite paying huge depreciation recapture & cap gains taxes, then you may still have plenty left over for ER.

As Johnnie says, you could 1031 into a TIC partnership. However you are definitely paying an extra layer or two of management fees to defer taxes while receiving a yield competitive with CDs or I bonds. You have to decide whether it's worth the extra hassle/expense (and loss of control) or whether it's better to bite the bullet, pay the taxes now, and enjoy no-fuss CD/bond returns from an index fund.

 

[Texas Proud]

Over 60 now and our units are all free & clear - and between Unca Sam wanting about a massive chunk of the sale proceeds in taxes and depreciation recap and the difficulty of selling for a fat price right now we are putting up with continuing to rent. Works out that a young man that we trust is taking over most of the day-to-day managerial stuff. We're paying him 10% of the gross rent received each month. The places don't fill as quickly, they aren't in the condition I kept them, and some of the tenants are not the people I would like to have rented to, but you know what? they are his problem. I only thought I knew everything when I started - he's learning, it's a process. Continuing to rent is paying better than trying to get the same income with the after tax proceeds. IMO.

Did have this cunning plan which would have us selling one or more of the places to the young manager in training for no money down, 7% interest only payments. Positives for him would be gaining equity (hopefully), buying for no out of pocket cost and locking the purchase price, increased annual income after taking depreciation write-offs on his taxes, and having zero risk - if the rental biz didn't pan out for him or the property values dropped he could do a deed in lieu of foreclosure back to us.

We would be getting 7% income on the whole of our equity value (something I'd be very happy with) and, since zero principal is paid this is what our tax lady says:
"If you did an installment sale, you would not include anything but the interest earned as income. The depreciation recapture rates will apply to all principal payments received up to the amount of depreciation taken. So...no principal - no tax.
As to the repossession part, think of the transaction in this way - you sold the property for 300K. At this point, it is no longer yours even though you hold the contract on it. You are now only involved with the property as a lender. Since you are using the installment method of reporting the sale, you can only add to basis what you have paid tax on. Otherwise there would be double dipping and you know how IRS is against that!"


The last paragraph is w/ regard to her thought that we would owe big taxes if we did get the property back on a deed in lieu - I was of the opinion that if we did owe big taxes if we got the place back that we should then be starting from a new tax basis. I'm still having a problem understanding how I would owe taxes after getting the property back if I'd received nothing in principal payments -



Anyway - this is my latest cunning plan - interested to hear from others, including tax pros, with their thoughts.

OP - we're down in Independence Oregon - 50 units now

Just a question on the proposed loan... the way you make it sound... he would only be paying interest... correct

If he is paying a note down, you will have to report the gain each year...


I don't see how you would have any gain on a foreclosure unless the property appreciated while he owned it... but then if that happened... he can sell the property with your lien in place and MAYBE the new owner would want to keep that loan... maybe not if he has to get one from a bank....

 

[Texas Proud]

Johnnie & TP: I like your suggestions on Exchanges. I have already done 1031 and reverse 1031 during my accumulation period. I think I will talk to a few more business advisors on this. DH & I have talked about buying a condo on Kona Big Island since we are avid scuba divers, & it would be an easy exchange. But beyond that, I am not so sure. I really just want the cash with less/no strings attached.... (therein lies my reason for the box, TP)

I would go to one of the banks with a big trust dept and talk to someone who does this for a living... when I was in the trust dept, one of my bosses took over that section and I was shocked on what 'qualified' as an exchange.... you would think it was an apartment for an apartment... but I think they did bldgs with oil wells etc. etc... (I can't remember some of the strange ones now... dang)... but they can tell you the rules.. you will be surprised on what you might be able to get...

And IIRC, you have one, maybe two years to decide what you want to get... the money sits in an escrow account until you decide.. so you are out from under the rental property and now can look for your new investment...

 

[calmloki]

Just a question on the proposed loan... the way you make it sound... he would only be paying interest... correct

If he is paying a note down, you will have to report the gain each year...


I don't see how you would have any gain on a foreclosure unless the property appreciated while he owned it... but then if that happened... he can sell the property with your lien in place and MAYBE the new owner would want to keep that loan... maybe not if he has to get one from a bank....

My thought was just that - by receiving only interest I thought that I would only pay tax on the interest earned. Our tax person agreed with that and indicated that we wouldn't even be paying on recapture of depreciation taken as long as we received no principle payment.

The wrinkle, if I understand her correctly, is that if we got the property back then tax would be due (this part doesn't seem right to me) as we would be getting the property in lieu of the cash payment on the loan. So if we got the property in lieu of say $300k cash sale price then we would owe the tax on the sale. My feeling is that if that is done then we should be able to view that as a new purchase for $300k and depreciation schedules should start fresh. Taxes are not my forte however.

 

[IndependentlyPoor]

Maybe I am naive, but now seems like the optimum time to divest oneself of commercial property. Earned income as well as capital gains rates are unusually low. What are the chances that they will go even lower rather than rising, particularly in the higher categories?

You might even make out on the recapture of depreciation. True, you would have to pay it all in a painful lump, but the tax rate now might well be lower than at the time you took the depreciation.

 

[Texas Proud]

My thought was just that - by receiving only interest I thought that I would only pay tax on the interest earned. Our tax person agreed with that and indicated that we wouldn't even be paying on recapture of depreciation taken as long as we received no principle payment.

The wrinkle, if I understand her correctly, is that if we got the property back then tax would be due (this part doesn't seem right to me) as we would be getting the property in lieu of the cash payment on the loan. So if we got the property in lieu of say $300k cash sale price then we would owe the tax on the sale. My feeling is that if that is done then we should be able to view that as a new purchase for $300k and depreciation schedules should start fresh. Taxes are not my forte however.

I have done taxes before... but this is a special case I do not know...

But if it is true that you do have to recognize the property as 'payment' on the loan.. and then pay the taxes... yes, your basis will be the principal amount on the loan... with the resulting new depreciation...

 

[tryan]

Yeah, lots of flexibility with the 1031 exchange ... my last one was a dulex for raw lakefront land.

Seems like carrying paper would be the best way to back out slowly.

But why not dump a few before the tax reforms expire? The best time - tax wise - to sell is NOW ... it'll only get worst.

 

[NW Landlady]

Just an update ER Peeps!

Just had a Comml RE Broker provide proposals on 3 of my Bldgs I can sell on Owner Contracts (OC). Apparently there is a lot of interest in Multifamily properties where the seller can provide financing because the Banks are requiring 30-40% down payment in our area (OC terms are usually 20 - 25%). The bad news is that OC interest rates have dropped - 6% - 6.5% although anything is negotiable. I was hoping more 6.75-7%.

Any who, I have a few "direct" potential buyers that are looking at them this week before I decide to list with the Comml Broker. According to the Realtor, the properties should sell in 6 months time. WOOOO HOOO!!

 

[Texas Proud]

Just an update ER Peeps!

Just had a Comml RE Broker provide proposals on 3 of my Bldgs I can sell on Owner Contracts (OC). Apparently there is a lot of interest in Multifamily properties where the seller can provide financing because the Banks are requiring 30-40% down payment in our area (OC terms are usually 20 - 25%). The bad news is that OC interest rates have dropped - 6% - 6.5% although anything is negotiable. I was hoping more 6.75-7%.

Any who, I have a few "direct" potential buyers that are looking at them this week before I decide to list with the Comml Broker. According to the Realtor, the properties should sell in 6 months time. WOOOO HOOO!!

Remember... there is a direct relationship between sales price and interest rate.... IF you want to get a 7%... or even and 8% rate you can... but the price would be lower... figure out what you want tax wise and go from there.

 

[calmloki]

Outstanding! While an OCC doesn't address the desire for all cash now it's hard to argue with 6-6.5% interest. These days! - can you remember ever paying under 9% on commercial loans? Maybe we just haven't kept up with buying.

What is your take on taxes? My understanding is that capital gains taxes are going up 5% next year (could be wrong) - would you think of paying the entire tax bill on the sale(s) this year even if you had to reach into your pocket or would you pay the tax as principal came in? Not that taxes should drive decision, but interested in what you have discovered or are thinking.

 

[Onward]

Sounds like you have a NW of 2-3 million.

I wanna be stupid too!

 

[HpRyder]

Last year I faced your problem, but on a much smaller scale, 1 SFR. I investigated 1031ing into an OO house, then waiting for the 5+ years to go by before selling & using the 500K exemption. I put the SFR up for sale but the market vanished. But I did investigate the 1031 classic approach. The new RE law changed that some what, but I concluded it was still a viable approach.

Without completely reviewing the new law, I think you can 1031 into a house you want to eventually want to live in, rent it for 1 yr, then convert it to OO. With your resources you can withstand the refurb cost after the renter leaves, and still come out ahead by deferring taxes and ERing.

 

[NW Landlady]

Outstanding! While an OCC doesn't address the desire for all cash now it's hard to argue with 6-6.5% interest. These days! - can you remember ever paying under 9% on commercial loans? Maybe we just haven't kept up with buying.

What is your take on taxes? My understanding is that capital gains taxes are going up 5% next year (could be wrong) - would you think of paying the entire tax bill on the sale(s) this year even if you had to reach into your pocket or would you pay the tax as principal came in? Not that taxes should drive decision, but interested in what you have discovered or are thinking.

Yeah, I remember having an OC at 9% interest....boy are buyers spoiled now!
On the Capital Gains, I am just going to wait until year end & see what options I have with an accountant. I won't know for a while how many (if any)properties will sell in 2010 and I may also sell one other property (a duplex) on a cash out basis, which would really make my taxes go thru the roof this year (Uncle Sam is going to Love this ).

It would be nice to take my capital gains tax this year, thanks for mentioning it.