What to do with taxable million $ ??

[Dakotah]

Charitable remainder trust

Have you considered giving a portion away as a charitable remainder trust.
There are tax benefits and a guaranteed income stream for your lifetime.
With no kids to worry about you could pick a charitable cause you feel strongly about and greatly help their cause.

 

[imnontrad]

That was in Michigan and I'm not sure if each State handles these types of sales differently

I think the capital gains would be paid to the state where the property is located. If not, it would be a great idea to move to a state without income tax on earnings or cap gains before selling property.

 

[levindb]

I do not know if this can be done, but can you sell 8 units one year and the other eight the next year? Even doing it December and January might be a better tax solution depending on your other income for the year.

 

[DenverCraig]

Suck it up?

We'd been landlords for almost 15 years. We'd bought a house, paid it off, cash-flowed positive. About 8 months ago we realized a) the market was hot and b) we are VERY close to FIRE. So let's see if we can get rid of this thing. We calculated the taxes we'd have to pay and it was not insignificant. We looked at as many alternatives as we could think of but our thinking always came around to the fact that you can defer the taxes but avoiding them entirely would be non-trivial and non-trivial is non-attractive to us.

We sold the house for what we were asking, got the cash, paid the taxes (or will shortly) and we walked away with money to bridge us till 59 1/2 (ie we can start drawing off 401Ks if needed). Couldn't be happier.

Sell the property, pay the taxes, go play golf.

 

[yclipse]

Buy raw land as 1031 exchange

Rather simple answer. Vacant land parks the money, will hopefully see it grow, and has minimal management complexities.

 

[mpeirce]

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.

I did something similar.

My main advice is to develop a relationship with a good CPA. Knowing all the ins and outs of the tax law is their business. A good one is worth their weight in gold!

 

[Elbata]

First world problem for sure. Here in CA look to pay another 13.3% state tax. Yeah.
It's got to be a tough decision though. Money is rolling in, guaranteed income and appreciation on the investment.

Sell property, pay the taxes, put money in market and watch market drop 30%. Has to be a little scary after having such a secure investment for so many years.

But at 70 years of age, you have a responsible lifestyle, you surely know you can't take it with you. Enjoy the fruit of your labor.

 

[MasterBlaster]

depreciation recapture tax is at 25%

Depreciation recapture is taxed by the feds at 25%.

Then there is whatever your state charges. The total (state depending) could be over 33 percent.

same issue with the remaining capital gains. The feds charge up to 23.8% (3.8 of that in NIIT) for high income folks. Then there are state cap gains charges. Where I live that can be up to 14 % additional for a total of up to 37.8% for high income folks.

Found it quicker than I thought--called a Deferred Charitable Gift Annuity]
https://giftplanning.wsu.edu/real-estate
The link above also has some other approaches for dealing with real estate appreciation
YMMV

regarding charitable based solutions they can be better than paying taxes up-front. Look in to charitable remainder trusts (CRUTs and CRATs). Basically you give the asset to a charity. Then they pay you (and your spouse for example) a (large) asset based stipend while you are alive. The asset can be converted into something like a bond (CRAT) or invested in securities (CRUT). Also you get a immediate tax deduction for the expected asset remainder value at your expected demise.

Seriously this approach just may be better than paying all those taxes up-front and then living off of what's left

 

[kevdude]

Calmloki, I'm curious what you decided to do here.

Lately I've started looking at DST's and I think they could be decent investments, after all. It seems the sponsors probably do much better, but if you're fine with a 5%-6% return on your full investment after selling costs, i.e. no taxes, then it could make sense. Especially considering you still get all the tax advantages and and have a totally passive real estate investment. I don't think there would be much appreciation, though, since the offering prices that I've seen are quite a bit higher than the original investment in the properties.

I was looking at our returns on our equity in our properties and we are around 5%. Part of that, though, is due to the incredible appreciation we've seen in the Seattle area. So, if I'm fine with 5% while we are managing the properties ourselves, why not accept the 5% with no effort on our part?

 

[calmloki]

The latest is that some shark RE agents sent us a purchase offer on a 9-unit - one we specifically had said was not on the table yet (planned to put it in the hands of a specific friend/heir). I lit them up a bit as they were pushing hard and I didn't like being offered money to change our desire and cut out a friend. On the good side, we offered the place to our friend for less than the proffered offer minus RE commission with about a 12% down and a 30 year mortgage. That would give us about enough to pay depreciation recapture this year and the carried contract, principal and interest, would bring in close to what the rental profit is right now.

Capital gains taxes would be paid as principal is received, so our immediate tax hit would be low. I talked with the head of an escrow company we use and he assured me that "Transfer on Death" deeds are commonly seen in his office. Still trying to check the tax ramifications, but am hopeful that buyer and seller will both benefit. Buyer has a pretty safe bet that we won't be around for the end of the 30 year contract and will have remaining contract years as a free bonus, will have full control of the property including right of sale, and will have substantial depreciacion to write of against income. If we die after 20 years he will have the property, all contract terms will have been met, and I don't think he will have a taxable event. Sellers will avoid immediate total tax hit, continue getting income (P&I) about equal to what we are now getting in rent, and at our demise may transfer some amount of equity to the buyer. Still waiting for definite agreement on tax treatment for buyer and seller.

Also offered a triplex to an adjoining industrial neighbor - haven't heard a peep back from them - and checked guestimated value with a RE agent. Figure I might as well have several pots cooking.

Right now a 5% return is looking pretty good - We carried a few property sales back when at 7% - it was a point or so low for a number of years, but has looked really nice the last couple! Wonder how 5% will look in ten years? Will we care?

 

[CaliKid]

Calmloki, I'm curious what you decided to do here.

Lately I've started looking at DST's and I think they could be decent investments, after all. It seems the sponsors probably do much better, but if you're fine with a 5%-6% return on your full investment after selling costs, i.e. no taxes, then it could make sense. Especially considering you still get all the tax advantages and and have a totally passive real estate investment. I don't think there would be much appreciation, though, since the offering prices that I've seen are quite a bit higher than the original investment in the properties.

I was looking at our returns on our equity in our properties and we are around 5%. Part of that, though, is due to the incredible appreciation we've seen in the Seattle area. So, if I'm fine with 5% while we are managing the properties ourselves, why not accept the 5% with no effort on our part?

This is how feel about DSTs also. You are paying high fees but you are taking a significant amount of work/stress off your plate. Most of us landlords are good at focusing on our good investments but not as good about remember how much that new HVAC really cost, how long that one unit was actually empty, how much that one eviction hurt, etc.... My eventual plan is to sell the rentals and diversify into a bunch of DST and similar investments.