I'm working with a seller who is in his mid 70's and is on the fence on selling due to taxes. He purchased the property about 15 years ago and has been using it as a rental (At this point I'm not sure exactly how much he has been depreciating each year). He currently owes $52,000 more on the mortgage. The ARV on the home is $215,000 and needs about $25,000 in work. He doesn't want to do a 1031 exchange since he isn't very motivated to invest his money into another long term play. He would like to "cash out" but doesn't want to get hit on the high amount of taxes on the proceeds. How could I position this to be a potential win/win?
@Eric Drum , I wish I had a nickel for every one of these that's crossing my desk lately. Its very common and a cautionary tale to us as we all grow older. If you want to get out intact and mentally healthy you've got to plan with the exit in mind. Whether you're a 1031 investor who chants in the mirror every day "defer defer defer die". Or whether you just love to buy and hold properties. You have to plan for the time when it's time to let go. I think our natural inclination to get more cautious as we age coupled with the perception that the real estate we can touch is somehow more secure. And it may be but it's never going to be passive. And it's never going to generate good quality returns as long as it's an appreciated asset with no debt (which unfortunately is also the most secure asset).
So understand his aging angst. Promise yourself you'll think differently when it's your time :) And find a way to ease him over that bridge.
One suggestion would be an owner carry note or an installment sale. He'll pay the tax but it will be spread out. Another might be a management agreement where you lease the property with an option to buy in a certain amount of time. Of course the most common answer is to 1031 into a passive TIC or DST at that price point. The work load is lighter and the cash flow usually higher than managing the long term buy and hold. But it's an emotional barrier for sure.
@Dave Foster Thank you Dave for taking the time to respond to my post. This information is certainly very helpful! However I'm not sure I know what a TIC or DST is? Thanks again for your help!
@Eric Drum , TICs (Tenants in Common) and DSTs (Delaware Statutory Trusts) refer to fractional ownership of larger investment properties managed by a sponsor. The two keys to them are that they are totally passive and 1031 compliant. They're really an excellent choice for the aging investor. The problem for the investor usually lies in giving up control.
I honestly don't know what the big deal is. I've been out of control all my life. No need to start now :)