Capital gains by selling an investment property

13 Replies

I am working with few owners who have owned their multi-units for the last 30 years. They want to retire now by disposing off their properties. One of their concern is capital gain tax that they incur due to the sale. What are some tax saving strategies ?

Any thoughts ?

I'm assuming they don't carry a note on these properties.  Perhaps seller financing would be a good option for them to continue to get monthly cash flow without the headache of managing the property.  They would also get a large initial down payment.  If that won't work, then they might just have to bite the bullet and pay the taxes, which is a shame.

I've always heard there can be tax savings to the seller if they finance the property to you. I'd ask them to talk to their CPA and get back to you

Thank you Both. Yes, most of them own their houses 100%.
 

Though I am not a CPA, but I would like to give them some ideas so that they can think and take steps in that direction. 

It looks like seller financing would be one idea that I can throw at them to consider to minimize their tax gains. 

@Pandu Chimata

The issue is tough because if they are up there in age - they may want to pass down the property to their family with a stepped up in basis(avoiding the capital gain's tax).

Seller financing is a technique to lessen the burden of capital gains tax. 
1031 will also defer the gain...but this doesnt seem to be an option if they are looking for cash to retire on unless they 1031 to a smaller house.

They could 1031 exchange their properties into a passive income stream such as a DST. Essentially they become an investor in a larger property (multi-family, self storage, etc), receiving a preferred return every month with ZERO action required while still staying exposed to the real estate market. DSTs are perfect for the retiring investor who wants to continue to make money without any of the work. Typical returns are 5-6% plus any capital gains upon exit with a 5-7 year hold period.

There are some other requirements but that is the gist of it. (minimum $100k investment for a 1031 exchange, they must be an accredited investor, etc).

If interested let me know and I can send you an example of one available now so they can see the structure, etc. They must be purchased through a Series 7 licensed advisor (I am one) but can be an option for completely deferring any capital gains for tax purposes.

@Pandu Chimata , Several good options here by folks.  Seller financing is a very viable option but it will not defer the tax only delay and spread it out and the recapture of all depreciation in the year of the sale can be a major sting if that property has been owned for a long time.

The track that most of our clients will take at the retirement stage is to continue to defer the tax on gain with one final 1031 into a completely passive 1031 compliant investment. This could be a DST or TIC or NNN property. All of these work with 1031 exchanges so the clients can continue to defer all tax. They each have their advantages and disadvantages so it would be good to get to know all three. But they all have a longer window (especially the TIC and NNN which can commonly be found with 20 year lease terms).

this means that the client becomes ,wait for it,  a true Lazyboy landlord.  Their investment is absolutely passive and as @Basit Siddiqi said when they pass their heirs get the step up in basis so the gain disappears and they can start over with inherited property and no tax liability.  What a great gift to pass to your heirs.

@Pandu Chimata ,  as others have mentioned above, a 1031 exchange is the best way to defer capital gains taxes indefinitely.  It also prevents them from having to pay back all the depreciation (depreciation recapture) that they enjoyed during the lifetime of the investment too.  And the beauty of it, is that under current law, it can be done over and over again.  

Also, when the investor dies and heirs inherit the property, it’s done on a stepped up basis.  What this means is that they don’t have to pay the taxes either. The strategy is sometimes humorously called “ defer, defer and die”. 

DSTs are one way to invest in these. However, most have huge upfront fees  and other huge hidden fees.  For example, it’s not unusual to have a 7 to 11% sales load right off the top.   This can offset a lot of the expected tax savings. So you want to make sure that everything is examined before committing to anything. 

Tenants in common v1.0  was another 1031 exchange option that was done a lot a few years ago, but ran into issues because all the investors have to make decisions together.  So a single investor can mess up what the rest of the investors want to do.  

The new generation of TICs put the investors into an LLC which then invests in the TIC. The LLC has them pre-agree to certain parameters and rules on selling, etc. which heads off many of the issues with TIC version 1.0. A sponsor that offers this sort of set up, can be much cheaper than most DSTs.

I negotiated with one owner who was looking to owner finance his properties so that he could avoid capital gain taxes. The deal fell through when he decided he rather hold onto all the properties until he passed away so that his kids could inherit them, sell them at market value, and not be taxed on the capital gains.

Thank you folks. I am trying to understand some terms that I am not familiar with such as - DST, TIC, NNN etc.

Originally posted by @Pandu Chimata :

Thank you folks. I am trying to understand some terms that I am not familiar with such as - DST, TIC, NNN etc.

Hi Pandu. DSTs (Delaware Statutory Trusts) are viable options for accredited investor who are seeking to defer their capital gains tax and also don't want to be a landlord anymore. They are hands-off, institutional grade real estate investments, and they allow the option to diversify. Investors can buy into institutional grade $50-125M projects with as little as $100,000. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. Investors get potential cash flow, tax shelter and appreciation. Loans are non-recourse. 

Feel free to check out any of the blogs I've written about DSTs,

https://www.biggerpockets.com/blogs/7993/65923-wha...

Thank you Leslie. I read the article and got some high level understanding. How do we find such investment opportunities ? 

If I have to offer this solution to my landlords who does not want to maintain their properties but still want to minimize the capital  taxes, how do I offer them in a simple 3 or 4 executable steps.. so that they can consider the relevance of this solution to their situation.

This post has been removed.

Originally posted by @Pandu Chimata :

Thank you Leslie. I read the article and got some high level understanding. How do we find such investment opportunities ? 

If I have to offer this solution to my landlords who does not want to maintain their properties but still want to minimize the capital  taxes, how do I offer them in a simple 3 or 4 executable steps.. so that they can consider the relevance of this solution to their situation.

 Hi Pandu, happy to help, might be best to set up a call, you can find more info in my signature below.

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