When and how should retired investor sell?

Question

I "retired" 5 years ago but kept two rentals because they're in great locations, with great tenants, good (not great) cash flow and are appreciating nicely. My plan was to sell them when I turned 70, in 5 years. However, I'm exploring new exit strategies since mine results in a high tax event and, like all of you, I frickin' hate taxes. Any and all thoughts or ideas are welcome and thanks in advance for your help.

In return for your help allow me to help for you: Note, I'm old and financially independent but I'm still learning and planning five years ahead, more actually...and so should you.

In return for your help allow me to help for you: Note, I'm old and financially independent but I'm still learning and planning five years ahead, more actually...and so should you.

Nathan Gesner · Answer

You can find an investor that wants owner financing. Take monthly payments, let the buyer worry about dealing with tenants and maintenance.

Dave Foster · Answer

@Steve Hartkopf, owner financing as suggested by @Nathan G. is a common strategy that can mitigate but not eliminate those taxes.  The biggest thing you have to be ready for in an owner financing situation is that you will have to recapture all depreciation in the year of the sale.  So if a significant amount of the gain is depreciation recap then you could still end up with a nasty bill.

Other options using a 1031 exchange ( so all tax and dep recap are deferred)

1. Sell and move into passive instruments - either NNN properties, or fractional TICs or DSTs or manager dependent properties far from temptation to get involved :)

2. Sell and purchase a vacation rental or two.  Have some fun and have your units professionally managed.

3. Purchase a really nice property and in a year or two convert it into your primary residence.  Sell your current primary and take that cash tax free while keeping the tax deferred as long as you own your new primary.

The three keys to the above strategies are that they all use the 1031 to get there.  So tax is going to be be completely deferred.  And that means that if you keep that deferral until you pass away your heirs will get the properties tax free because of the step up in basis that @Greg Scott was referring to.

Greg Scott · Answer

Why sell?

Or, if you sell, why not plow the proceeds into properties with higher cash flow using a 1031 exchange?

Since we are talking estate planning, the benefit of the second strategy is you get to enjoy the cash flow at, as you know, very low tax rates.   Even better, your heirs will inherit the property at a stepped-up basis.  It is SOOOOO much better to leave your heirs real estate than just about any other kind of asset.

I plan on dying with a whole bunch of rental property.  My kids will probably curse at the complexity of it all but if I do it right, they will be instantly retired.

Jay Hinrichs · Answer

You may want to look at Charitable remainder trust  and or generation skipping trust.

some of my high net worth clients use these.

others will form their family foundation then donate the asset to the foundation.

Good tax planner could probably advise if this works for your situation.

Jay Hinrichs · Answer

I have become aware of them as i brokered a few deals were the seller was doing this.. and some of my partners have family foundations and they are right now as real estate has peaked are moving the assets to the foundations.. They already own enough real estate so not looking to expand a rental portfolio they are just doing new builds with me.. in and out make money cash out..

Jay Hinrichs · Answer

I have no first hand experience with these.. other than what people tell me and that they are expensive lots of fees and what not.

Clayton Mobley · Answer

@Steve Hartkopf I second the recommendations of @Dave Foster and @Jay Hinrichs . If you want to stay invested in real estate, a 1031 is going to be your best bet. If you have appreciated property you could likely turn two properties into a whole portfolio of cash flowing rentals in markets with better returns. You could, potentially, keep executing 1031 exchanges until you die (morbid but effective), at which point, your heirs inherit your properties with a 'stepped up' tax basis equal to their FMV at the time of your passing.

Basically, you leapfrog from investment prop to bigger/better/more investment props via 1031s, deferring taxes all the way, then when you die your heirs get the props and, if they sold them the day after you die (for example), pay zero taxes. If they hold onto them and they appreciate more, they'd only pay CG taxes on the gain accrued after they inherited them. Same for any depreciation recapture if they keep holding them as rentals.

It sounds like you're going to have both a hefty CG bill and a large depreciation recapture tab, so if you're ready to get out of the REI game, look in the Charitable Remainder Trust that Jay mentioned. Basically, you 'donate' an asset (like rental property) to a charitable cause of your choice via an irrevocable trust. This removes it from your estate for tax purposes. You continue to receive income from the asset through the trust (there are rules about how much and for how long) and then at the end of the period the remainder of the trust value (the actual properties, for example) pass to the charitable organization of your choice. It's fairly complex and you definitely need a good CPA on your team, but if you have a sizeable estate and lots of appreciated assets, it's a good option to be aware of - and it's not only for real estate. You can also use the income from the trust to purchase a life insurance policy (within another trust to keep it out of probate court) that replaces any lost inheritance for your family.

You can also just 1031 your way into a good sized portfolio and THEN use the CRT, no need to do it now.

Dave and I actually talked about this option a while back on a different thread, where I go into more depth about how CRTs work and can be used for wealth preservation: https://www.biggerpockets.com/forums/48/topics/458...

Alllll that being said, **I AM NOT A CPA**. I'm just a finance nerd and an REI pro, so I talk to our clients a lot about how to build and preserve wealth for the next generation. If you like the 1031, talk to Dave. If you want to learn more about the CRT, do some research and talk to a really good CPA about the ins and outs.

You've got options, best of luck!

Clayton

Caleb Heimsoth · Answer

@Steve Hartkopf. Likely if you leave these

Properties to your kids and they have no real estate experience or don’t want to deal in real estate they will sell it and not pay any taxes on the sale because of the stepped up basis

Matthew Ryan · Answer

@Steve Hartkopf - Read up on Opportunity Zones. They are similar to 1031 exchange but with more flexibility and better tax deferral strategy IMO. If you hate paying taxes, one simply cannot ignore the MASSIVE tax benefit OZ's present as well as how they kind of force you to look at a project in a 10-year timeframe.  This, in my opinion, is very positive for someone in your position because it will make you consider tax liabilities, cash flow and ways to create liquidity. I think we too often get bombarded with return profiles and financial metrics which keep us from focusing on those three key aspects. We'll be hosting webinars and I'm happy to run you through the complexities of OZ's in a quick call.

Account Closed · Answer

@Steve Hartkopf and @Greg Scott

in regards to the estate planning aspect of real estate.. expanding on Dave's mention of DSTs.  1031 exchanging your properties into Delaware Statutory Trusts real estate portfolios allow you to effectively retire from active management, diversify into professionally managed portfolios across asset class/sector/geographic, have limited/passive ownership, and collect tax advantage income that gets a step-up in cost basis at passing eliminating any capital gains tax.  The strategy works well for retiring real estate investors when the heirs have no interest or experience in real estate. Happy to further explain if you feel this may be a possible solution for you to explore. Best

When and how should retired investor sell?

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