I’d talk to my CPA first. That said, we haven’t held them that long, at this point. But an installment sale comes to mind. This would be getting a down payment from your buyer and creating a note where you get the rest of your money over time. I have sold on installment a number of times. I like getting a lump sum of money and then a stream.
If you owned the property for 30 years - chances are that the property is fully depreciated.
You have the following options
- Keep the rental property.
You would be entitled to the cash flow. You may have some tax liability since you likely don't have much depreciation to take unless you made some recent improvements. Depending on age and estate planning. There is a potential to pass to heirs with stepped-up basis.
- Sell the property(without 1031) - You will pay federal capital gains tax + state income tax on the difference between selling price and adjusted basis. The fact that you may not have any adjusted basis appears to make the tax liability potentially large. A portion of the gain will also be subject to depreciation recapture.
- Sell the property (With 1031) - You can exchange the property for another property of similar or greater cost without paying income tax
- Seller financing - You can sell the property and provide the buyer with seller financing. Please note that you would still be required to pay tax as a result of depreciation recapture in year of sale.
It ultimately depends on your goals. However, you should weight in on all your options.
How about pull some cash out? That will create some expense to offset the depleted deprecation. And here in CA you'd keep your very low property tax rate. Then buy something else with the cash.
@Matt Hoyt , pulling out cash in a refi does not create expense it only affects equity and does not affect accumulated depreciation or gain. But if you refinance then it is true that you can use those funds tax free to purchase something else that will give you a new depreciation schedule.
Option 3 that @Basit Siddiqi gave in his great list also has the added potential benefit that if you 1031 and buy something significantly higher in value than you sell you not only avoid taxes and depreciation recapture you get the added depreciable basis on the amount purchased over the amount sold.
@Liz C. Installment sales are a great method as well as just pulling cash out to buy more property but nobody has mentioned this yet, please make sure you discuss with a lawyer/cpa about the Dodd Frank Laws around installment sales. Many realtors are still operating as if you can do installment sales in the same fashion as 2008 and while they may get away with it the risks with making a mistake are so high that I would think otherwise. I'd also discuss your CPA and lawyer how you'd like to handle your estate as well.
If you are looking to retire use seller financing. Holding the mortgage should defer taxes over a longer period of time.
Reality is that the taxes have always been owing you simply deferred them during ownership so you pay what is owing regardless. Death and taxes are a part of life might as well enjoy what you have before you die..
@Dave Foster I meant the interest expense on said cash out against future rental income. I don't really like to pay tax on my cash flow and without interest or deprecation that place is pretty taxable cash flow wise. That why I suggested the cash out. But only if the property makes sense in some way, otherwise exchange...
@Matt Hoyt , Claro - Yep the refi to purchase would have the interest expense as well as new depreciation.
Helping a gentleman buy a NNN pharmacy building right now. 20 year lease he'll never see the end of. But cash flow till he dies. His grand kids get the property then and never a penny in cap gain tax because he's 1031d along the way. That's retirement, estate planning, and tax mitigation all in the same package.
1031 into a deal that allows you to step out gradually. Options depend on your situation (net worth, objectives, income). PM and I can give you options.
@Dave Foster what’s difference between refinance and cash out ?
I though they are the same , cash out refinance same as refinance?
@Basit Siddiqi when you mention selling property with 1031 again but the new one I am buy won’t have depreciation
1031 into a great property and get more cash flow for yourself.
leave it to your children or charity, they will have step up base. It will become a true family legend...
@Dave Foster hi Dave can you tell us a bit more about the Gentlement deal? What did you do to help him getting that. And do you do state planing as well?
@Liz C. I'll reach out off line.
Sorry @Liz C. , just saw the refi question. Those two terms are used pretty interchangeably. But technically you can refinance without getting "cash out". This usually happens when the objective is to lower payments or escalate principle pay down and take advantage of a lower interest rate. Just semantics mostly.