Suggestions for grandpa getting rid of office building?

Question

Hi everyone, I have an 85 year old grandpa-in-law that owns an office building in MI. Recently, he expressed interest in selling it to me and my group of real estate partners. This would be my first real estate deal with them. I have about $25k cash to work with on my end and my partner could make about $100k available.

He absolutely does not want to pay any capital gains on a transaction of this property, so I am trying to get some ideas of the ways around this. He would want a monthly payment plan from me to him until he dies so that he is still making a little off of it. He also wants no mortgage on anything.

The building is currently worth anywhere between $700k-$1mil and his basis in the property is roughly $120-150k because he purchased the land and built it in 1965. It is obviously fully depreciated. The building is fully leased and has positive cash flows of about $5,000 a month according to him (I need to verify that with his records).

He did a cash out refi on about $300k a couple years ago so the mortgage is still close to that, let’s say $290k.

The issue with a 1031 exchange would be that he doesn’t have any additional cash laying around, so even if the sales price was $290k, that would go directly to the mortgage payoff and he would have $0 to move into a new property. A sales price of $450k would leave $160k to move into a new property, but that would leave $290k of unused 1031 exchange which would then be taxed.

My thought is that if he would be open to moving it into a new real estate partnership with me, then I can run the building and set up a monthly payment plan with him out of it.

He also has 2 children that this asset would fall to when he passes away, one is my mother-in-law and the other is a son.

If he were to pass away today, they would probably be able to sell the building for $700k because neither of them wasn’t to run it. They should also get a step up in basis to the $150k basis. So if my math is correct, it would be $700k sales price minus $290k mortgage, so $390k...Take away the step up in basis,it is about $240k taxable sale.

I feel very lost on this and would appreciate any options to try and keep this in the family to be able to keep a great cash flowing property alive. Thanks everyone!

Dave Foster · Answer

@Kyle Bartholomew, Any seller financing by him is going to result in tax to him. But it will be spread out over the life of the note.

You're a cash strapped buyer and probably not much can be put together between the two of you if you cant buy it out from him. But if you were to agree to manage it for him then you could do that and provide him cash monthly while letting it pass into his estate for the step up in basis.

You could even set up a management entity with your partners and let your GF hire you to manage his property so you get some benefit as well.

Kyle Bartholomew · Answer

@Scott Wolf

I appreciate the feedback! This was definitely all over the place. I am exceptionally new to real estate and am not familiar with most concepts and terminology, so thank you for your patience!

I did not realize that heirs get a step up in basis to Fair Market Value. That definitely makes a world of difference! It’s a very old building in Flint, MI, so in my mind, I was thinking that if I could take possession of it now for the mortgage payoff price of $290k, I could 1031 it in the future (when he passes) into a better property. In my mind, that was the only way to avoid taxes on it, but you definitely clarified that is not the case!

Thanks Scott!

Scott Wolf · Answer

This is all over the place. Not sure why/where the $290k or $400k sales price comes from if the property is worth $700k.

Not sure where you got the $150k for a stepped up basis. If he passes away and your mother-in-law and her brother inherit it, they would get a stepped up basis to today's value. So essentially the $700k. If they put it on the market, and sell it after he passes they would pay no tax on the sale of the property due to the stepped up basis.

If he wants no responsibility in the property, you should speak with a CPA and tax attorney in MI. Perhaps him giving you a loan with seller financing so it's a monthly payment to him could work. Additionally, he could 1031 into a NNN property that gets him a monthly payment with no LL responsibility(which would also pass to his heirs upon his passing, and eliminate the tax liability if they choose to sell within a year of his passing). Happy to discuss further if you'd like.

Suggestions for grandpa getting rid of office building?

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