1031 Exchange or Charitable Remainder Unitrust?

Question

I'm nearing retirement and considering what to do with a few rental properties that would net about 900 K, if I avoided taxes. I've owned both properties for about 20 years.

I have been thinking it would be nice to receive regular, passive income, without being an active landlord.  Perhaps a 1031C into a commercial property with something like 1031Crowdfunding.com, but quite frankly I'm nervous about the risks of doing an investment like this, not having a lot of experience or knowledge in this area.

The other option I've been reading about is a CRUT or Charitable Remainder Unitrust, where you put the real estate in an irrivocable trust, sell the real estate, invest the money, and receive yearly payments from the trust until death, at which point the remains go to a charity of your choice. Frankly, the CRUT sounds less risky, but would like to understand the ongoing costs of a CRUT and what the downsides to this approach would be. Also would like to know if there are other options I should be considering.

Dave Foster · Answer

@Walter Wintermute A charitable remainder trust will probably not keep the tax in your pocket.  But the tax will benefit the charity you work with.  An installment sale would let you defer the tax but only for a while. And you would be paying tax as the payments come in.  A syndication with a 1031 might work.  But only if they can sell you a tenant in common interest in the real estate itself.  Not a membership interest in the entity.

Only the 1031 indefinitely defers all tax and depreciation recapture and can be eliminated in your estate.  If you're wanting to avoid taxes on your sale and you want to reinvest in something passive then you might want to look into Delaware Statutory Trusts. They are fractional ownerships in real estate that provides passive income, and best of all they have been specifically blessed by the IRS as suitable replacements for 1031 exchanges. So, you can defer all tax and depreciation recapture and sit back and let your money work for you.

Jim Pfeifer · Answer

I think you have another option - the "Lazy 1031".  I prefer to avoid things that are complicated and the 1031 Exchange and CRUT both are expensive to implement, complicated and might not be necessary for your situation.  You mentioned not wanting to 1031 into crowdfunding, but there are better options for that I think.  I sold all of 38 of my active doors and deferred all of the capital gains tax by doing what my CPA calls a Lazy 1031.  Basically, I invested the proceeds in real estate syndications that did cost segregations and bonus depreciation.  This gave me large amounts of passive loss that I used to offset the gains from the property sales.  You don't have to worry about timelines, except that it needs to be done in the same tax year.  This meets your goal of deferring the tax and it also meets your goal of passive cash flow.  I have found that these syndications produce more cash flow and upside than my active investing did.

The thing that is missing for you - as you said - you don't have knowledge or experience in this area.  More people don't!  Most people also don't have experience with active rentals - until they do!  There are plenty of ways to get educated about passive real estate syndications.  A great place to start is the book, Hand's Off Investor by @Brian Burke.  It is a fantastic introduction to syndication but also delves deep into how to vet a sponsor and how to analyze a deal.  I also highly recommend joining a Community that focuses on educating syndication investors.  This will help you find quality operators and help you learn how to analyze deals.  This type of investing is different - you can't walk out your front door and chat with your neighbors about syndications like you can about your 401k.  This is why a Community and a network are so important.

Good luck!

Glenna Wood · Answer

I'm looking at the same thing right now since about half my estate will go to charities. There are several charitable trust types and the larger charities can walk you through the details. Other options I'm considering: simply give a large donation in the year of the sale or donating property in kind. The cash donation will help offset the capital gains. Or you can make a cash donation for a charitable annuity. That gives you a donation deduction and income til you die but a portion of the annual payout is taxable. The devil is in the details so it takes putting numbers into different models for your specific numbers. I'm still on the hunt for a really good estate planning pro to me help through the options. But hopefully I'll walk through the door with some knowledge ahead of time. Best wishes!

Bill B. · Answer

I don’t know how run down your properties are. But with a dozen properties And a decent PM I don’t spend an hour a month on my properties. And it could be zero if I wanted to give them more authority.

Swap a couple of them in to one dream property you’d love to retire in and then a couple years later decide to live there instead of using it as a rental, especially if it’s in a state with no income tax. (After not paying state income tax for 20 years I had to write a check to the state of MN for $20k just for selling a cabin.)

It sounds like you’re willing to live with lower returns (the CRT) you could certainly swap them in to new builds with near zero work, again if you can get them out of tax states that could pay for itself. you reset the ratio of time as a rental before being a primary with the sway, this could pay you $100k or more to live there in reduced taxes.

Brian Racine · Answer

I've heard of people in a similar situation using a DST (Delaware Statutory Trust) - here is a link with more information https://www.1031exchange.com/d...

If you don't mind sharing, keep us posted with what you end up going with, thanks Walter!

Walter Wintermute · Answer

Thank you for your responses and providing me some additional options to consider!

Jacqueline Gardiner · Answer

Hi Walter, What about selling the portfolio to someone you trust using an installment sale? or, perhaps selling off individual properties using installment sales (potentially reducing the risk)? Or, hiring a property manager to take care of much of the management work and then, over time, selling off parts of the portfolio? You might also 1031 into a single property that has a NNN lease or has professional management. I am invested in syndicated deals and occasionally see that they will accept money via a 1031 exchange.

1031 Exchange or Charitable Remainder Unitrust?

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