When would you sell?

Question

What is the general consensus? I have a property with a very low initial basis compared to what it will sell for. If I sell, I feel the best situation is a 10-31 exchange. During my initial cursory views of 'what is out there', I'm seeing properties that are a bit overvalued IMO. Not the best time to be a buyer. So I ask the group what would you rather do? Sell in a high market, knowing you have to re-purchase in the same sellers market, or wait for a correction then sell for less and re-purchase during the upswing? Sorry for the run-on. I'm interested in what the seasoned pros think?

What are the other options besides a 10-31? I'm familiar with a DST and a collateralized loan sale (Somewhat makes sense for me to sit and wait for the correction.)

What are the other options  besides a 10-31?  I'm familiar with a DST and a collateralized loan sale (Somewhat makes sense for me to sit and wait for the correction.)

Jeff Glass · Answer

Under Sec. 453 or the federal tax code, with an installment sale you defer tax on all capital gains tax, including any depreciation recapture from straight-line depreciation. If you have taken any accelerated depreciation then there will be recapture on that.With a monetized installment sale there are two separate transactions that take place:1. An installment sale to a dealer, which results in:a) deferral of capital gains tax (for 30 years);b) an installment note from the dealer, which pays the seller interest-only payments for 30 years, and ending in a balloon payment, at which time the principal is repaid to the seller by the dealer and the capital gain is recognized.2. A separate loan is provided to the seller by a third party lender (who is introduced to the seller by the dealer). That loan amount is 95% of the sales proceeds received by the seller on the above installment sale. The closing costs associated with this loan are roughly 1.5% of the loan amount.The payments on the installment sale note fund the payments to the lender who has made the "monetization" loan. (Normally this is done automatically for the seller via a long-term escrow account.) Those payments therefore cancel each other out.The net effect of these two separate transactions is that the seller is able to defer the capital gains tax for 30 years and also obtain cash equal to 93.5% of the net sales proceeds (via the loan). The cash may be invested however the seller chooses.This can be a good strategy for someone who wants to defer their gain on sale of real estate and not rush become obligated to rush another real estate investment.

Under Sec. 453 or the federal tax code, with an installment sale you defer tax on all capital gains tax, including any depreciation recapture from straight-line depreciation. If you have taken any accelerated depreciation then there will be recapture on that.

With a monetized installment sale there are two separate transactions that take place:

1. An installment sale to a dealer, which results in:

a) deferral of capital gains tax (for 30 years);

b) an installment note from the dealer, which pays the seller interest-only payments for 30 years, and ending in a balloon payment, at which time the principal is repaid to the seller by the dealer and the capital gain is recognized.

2. A separate loan is provided to the seller by a third party lender (who is introduced to the seller by the dealer). That loan amount is 95% of the sales proceeds received by the seller on the above installment sale. The closing costs associated with this loan are roughly 1.5% of the loan amount.

The payments on the installment sale note fund the payments to the lender who has made the "monetization" loan. (Normally this is done automatically for the seller via a long-term escrow account.) Those payments therefore cancel each other out.

The net effect of these two separate transactions is that the seller is able to defer the capital gains tax for 30 years and also obtain cash equal to 93.5% of the net sales proceeds (via the loan). The cash may be invested however the seller chooses.

This can be a good strategy for someone who wants to defer their gain on sale of real estate and not rush become obligated to rush another real estate investment.

Roger R. · Answer

@Jeff Glass I was under the impression that the with an installment sale you got 95% of the sale price and you had to pay back any depreciation that you had taken thus far.   Where did the extra 1.5% come from?

Jeff Glass · Answer

You can sell with a monetized installment sale, which results in 30 year deferral of capital gains tax, and provides you with 93.5% of your net sales proceeds in cash. This way, you can wait and see what the real estate market does, and redeploy your capital when the time is right to get back into another property. Meanwhile, you can park your funds in some other shorter-term, more liquid investment.

Blair Poelman · Answer

Selling in a high market is always great when you're in a good position.  However if you 1031 you will be required to also buy something in that same high market - unless you happen to sell right before the market crashes and you can get better pricing when you buy a few months later.

Also, it would probably be worth sitting down with a QI and your CPA who can advise you on the tax side - if your cost basis is super low it might be a good time to capitalize on the current market pricing to get your cost basis up to lower your tax liability.  But maybe my thinking is backwards on this...

Aaron K. · Answer

You could wait for a correction that never comes as well or one that isn't as steep as you expect, it is probably better to base your decisions based on the quality of each individual property and its current value.