If a property has used all depreciation, What is the next move?

[John O'Sullivan]

If a property has used all depreciation, What is the next move one should consider?  Sell and do a 1031 Exchange?

[Dave Foster]

@John O'Sullivan Here's the menu:

1. Sell and recapture all of that depreciation at 25% plus the tax on gain.

2. Sell and 1031 into a similar priced property or properties and defer all depreciation recapture and tax on gain. But have no depreciation to write off against income.

3. Sell and 1031 into something larger and get additional depreciable basis.

4. Sell and 1031 and go into a passive instrument like a TIC. The depreciation and gain remain un-recaptured. And you get passive income stream.

Not a bad option in the bunch.  Just depends on your druthers.

[Thomas Rutkowski]

You can do all the things @Dave Foster says, or you could also do a monetized installment sale and take the money and do whatever you want with it. Get cash at closing and defer the gain for 30 years. The future taxes become a simple planning exersize.

[John O'Sullivan]

Thanks for the information guys.

Dave I'm not sure what a TIC is and

Tom how does monetized 

instalment work?

Thanks again!

[Bill Exeter]

Hi @John O'Sullivan, 

We have lots of clients that are in the same situation as this where they have fully depreciated their rental property and no longer receive tax benefits.  Dave has done a great job of summarizing the options available to investors.  You have to determine exactly what your specific goals and objectives are.  

Should you decide to sell and then 1031 Exchange into larger property so that you can create additional depreciation benefits, your heirs would still receive a step-up in cost basis upon your death so that they would not have to worry about the taxable gain.  

You should always consult with your own legal and tax advisors before proceeding with any specific tax planning strategy to ensure that it is the right choice for you.  

[Thomas Rutkowski]

Originally posted by @John O'Sullivan:

Thanks for the information guys.

Dave I'm not sure what a TIC is and

Tom how does monetized 

instalment work?

Thanks again!

 Hi John - Its a way to structure your sale so that you can monetize an installment sales contract (seller financing). The tax deferral comes from a 30 year interest only installment sales contract. The second part is monetizing that contract in a way that doesn't violate the IRS pledge rule. That's the secret sauce. 

I'll respond privately because, as you can imagine, there are details that need to be covered and you'll want to know how you are protected in the transaction. 

[Dave Foster]

@John O'Sullivan, TIC refers to both a way of owning real estate (tenants in common) and a specific passive fractional ownership syndicated product that is set up so it looks acts and feels like a LP but qualifies for 1031 treatment. Other products like this are the Delaware Statutory Trust and NNN Leases.

Since they are both passive and qualify for 1031 you can exchange into them continuing to defer tax and depreciation recapture.  And gain long term cash flow from that deferred tax with no active management requirement.  Kind of like the last cookie jar you fill before retiring so you can continue to avoid recapture until death when it goes away in the step up to your heirs.

[John Thedford]

If you just want cash, refi. Loans are not taxable as long as they are repaid.

[Andrew Johnson]

John O'Sullivan Well the classic answer is going to be a 1031 exchange, it's also the most logical. However, there are plenty of people who keep properties after the depreciation is "used up". They love the property, it performs well, it's low/no hassle, etc. In short, there isn't an option attractive enough to offset the loss of the depreciation write-off. It's a unpopular thought here but taking a suboptimal return (in this case, losing a deduction) to keep life simple isn't always a bad decision. Or, put another way, I wouldn't 1031 into a suboptimal property just to get a tax deduction. But that's me 🤷🏻‍♂️

[Bill Exeter]

Hi @Andrew Johnson is right on the money.  If it isn't broke, don't fix it!  Sometimes the closing costs, headaches and potential suboptimal property make it a better decision to just stay put!