All Forum Posts by: Christopher D.

Has anyone here executed a "Tax Deferred Cash Out" transaction?  In trying to figure out how to avoid capital gains taxes on the sale of a rental property, I came across a few companies advertising this on the internet.  Basically, you sell the property to the intermediary and receive a note with a 30-year term and interest only monthly payments to an escrow account with a balloon payment at the end of the 30 years.  The intermediary then sells the property to the buyer, and sets you up with a lender who loans you 93.5% of the property's value on the same terms (30-year term, interest only payments w/ a balloon payment at the end).  So you end up deferring cap gains taxes for 30 years.  Seems too good to be true, so checking with the experts here.

 Thanks @Grant Schroeder - I didn't know that it increased.  Very helpful!  Do you know if anyone is doing 2nd mortgages for rental properties?  I locked in a 3.75% fixed rate when I refinanced in 2020 and would like to keep that rate for that portion of the loan.  

Hi BP community,

I own a condo/townhouse in a San Diego beach town that has appreciated significantly since I bought it in early 2013. I would like to cash out the significant amount of equity in it to remodel my primary residence. I am having trouble finding a way to do so without taking a significant tax hit (depreciation recapture + capital gains). I have already refinanced to the max conforming limit ($510k), which allowed me to take out some cash and maintain a reasonable interest rate, but that still leaves me at about 40% LTV. Even if I took out another loan on it, the additional monthly payment would make me cashflow negative. A few questions for the tax experts out there:

1. This was previously my primary residence.  Can I sell outright without paying taxes?  We did not live in it for the required two years.  I am active duty military, and we moved out and began renting it after six months due to deployments, then living in military housing, then permanent change of station to the East Coast, which should qualify us for the exemption.  I've talked to a few accountants on this and received three different opinions.  The first (my realtor's CPA) said no taxes owed whatsoever; the second said I'd have to pay cap. gains and depreciation recapture in full; the third said I'd have to pay depreciation recapture, and 25% of the capital gains would qualify for the tax exemption (6 months out of the required two years) but the remaining 75% of capital gains would be taxed.  Any real estate tax attorneys out there that can help me out with this?

2. I've done some research online, and found an obscure variant of the 1031 exchange called a "leasehold improvement exchange."  Anyone have experience executing this type of transaction?  It looks very complex.  Is this feasible with the replacement/improvement property as a primary residence?

3. Any other refi / 2nd mortgage / HELOC options that could provide tax-free access to this equity and minimize/eliminate the monthly payment?

This situation is frustrating - we bought this property as our home and held onto it (making very little cashflow and return on equity) so that we wouldn't lose out on housing market gains as we moved around and rented while I served on active duty.  Now that we're ready to move on from the military, we want to sell and put that equity into our new, forever home, but we stand to lose over 40% of the equity we've earned to taxes.  I'd appreciate any help or referrals (CPAs or RE Tax Attorneys in California) the BP community can provide me!

I’m looking to sell a property in CA and want to make sure I don’t get slammed with capital gains taxes. I lived in it and then converted it to a rental and need a professional opinion on whether I qualify for the military clause to be exempt from capital gains tax when I sell.

Any recommendations?

I’d prefer someone with knowledge of CA tax law so I can avoid state cap gains taxes as well.

I've got a lot of equity built up in a property in CA that I'd like to access to remodel my primary residence, but if I sell it, I'm going to get slammed with taxes on capital gains and depreciation recapture.  Does anyone know a way to avoid this?  I've already hit the ceiling on cash-out refinancing ($510k conforming loan limit).  A 1031 exchange wouldn't solve anything, because we're looking to remodel an existing residence, not buy a new property.  Please let me know if there are any other tax loopholes I'm missing here.  It's frustrating to have all that equity just sitting there.

The article linked below kind of explains why lending standards have suddenly become more constrained, despite rates dropping. 

I came across a quote recently, although I forget from where (BP podcast?) and who said it.  Something along the lines of: Ask for money when nobody needs it; spend money when nobody has it.

By Clare Trapasso | May 4, 2020

https://www.realtor.com/news/t...

Thanks guys.  @Lisa Eckman I checked with my current lender and a local credit union.  They're offering rates in the mid to high 5% range.  It looks like the rates I'll get through my mortgage broker are the best deal around, and I'll likely take it.

From the mortgage professionals in the forum ( @Shaun Weekes , @Nicholas Covington , @Alex Bekeza ) - do you think it's worth waiting to see if rates drop even lower?  Seems like the Fed is not looking to go to negative rates, and lending requirements will only get stricter, so I'm leaning towards biting on this now while I can.

Anyone else having trouble getting a decent deal on a refinance right now for rental properties?

I've got a 3 bed / 3.5 bath condo in a popular beach town in San Diego.  Incredible long-term, cash-flowing performance as a long-term rental property (no vacancies ever!).  Also, I've got near-perfect credit and really good W-2 income.  On the down side, all 4 units in the building are now tenant-occupied, which I know lenders do not like.  Also, this is one of four mortgages in my personal name (all four rentals are cash-flow positive).

The property is worth about $840k and I owe about $408k on the current mortage (7 years into a 4.25%, 30-year, fixed rate mortgage).

I'm looking to refinance for two reasons: (1) take advantage of historically low interest rates and eliminate the PMI that was built into my old rate; (2) take out $200k+ in equity so I can to be in a better position to buy more rentals in another area in case the market goes down. I'm looking to stick with a 30-year, fixed-rate mortgage, and believe I can do all this while leaving 25% equity in the property, which will allow me to break even every month on cashflow.

I've spoken to friends of mine who recently refinanced at 3% APR or lower. One of these was for a rental property in the same town as mine - they locked in their rate at 2.99%.

However, my mortgage broker is telling me banks will only go up to 60-65% LTV right now (I'd only be able to pull out about $100k, which would give me back my initial capital and is better than nothing), and the best he can do is a 3.99% rate (would not really help that much in reducing the interest rate).

I feel like I am getting into this late, and banks are averse to anything that might look like risk given the uncertain state of the housing market going forward, but this seems excessive to me, given the property's "A" location and perfect rental history.

Anyone else running into similar issues, and if so, any advice?  I ran into this in late-2007 when purchasing my first property, and was still able to finance at favorable terms, although it was difficult, so I am optimistic.

Anyone have any updates on this?  My tenant has contacted his bank (Wells Fargo) twice now to get the $ back using the R10 code, with no success.  WF stated that since the transaction from the bank to eRentPayment went through properly, it is between me and erentpayment.  I am not going to pursue this avenue anymore, as it is not fair to the tenants - they paid their rent and held up their side of the bargain. Frankly, I agree with WF that this is between erentpayment and landlords, and it should not be on the tenants and banks to resolve.   

Is anyone pursuing legal action to attempt to get their money back?  If there is a class action lawsuit or something in the works, please contact me. I am out $3,500 because of these guys!  As most of these are probably relatively small claims, it would be more efficient to pool resources together to minimize legal fees. Also, if echeckit is going through bankruptcy because of this, i would think that all of us whose money they took should be paid out through the bankruptcy proceedings. 

By the way, I am looking at buying this as a long-term buy-and-hold, so having a tenant in place already and not having to pay immediately for rehab cost is also appealing to me.