Cashing Out in NJ - Sell, Hold or DST?

[John Haelig]

I am a 64-year-old landlord with 2 condos adjacent to a medical school in suburban New Jersey. For 30 years it’s been a never-ending supply of tenants who are almost never home and always pay on time.

Why would I want to get out? Well - sale prices are through the roof right now. These are wood frame Hovnanian units built in 1986 that are holding up well, but windows are starting to fog, HVAC units are coming due for a second time and the kitchens are beginning to show their age. Their sky-high value will begin to decline at some point.

End of year I am grossing $25k each unit, and netting $11k on the paid off unit after taxes, insurance, HOA fees and modest repairs. The mortgaged unit gets the full $25k and is 2 years from paid off. It will then net about the same $11k. Our living expense needs are pretty well handled by Social Security and pensions, so there is no crisis at hand.

First unit is a $410k listing with no mortgage. Purchase was $134k and it has fully depreciated after 27.5 years.

Second unit is a $350k listing with a $45k mortgage remaining. Purchase was $188k and has been depreciated for 12 years to date.

The online Capital Gains calculators show an outright sale losing over 30% to capital gains, depreciation recapture and the 3.8% Medicare tax (an extra stick in the eye). Then New Jersey comes knocking. I lost my lunch when the net take-away number appeared.

It looks to me like a 1031 exchange into a DST is the way to go. I did a 1031 for my 88-year-old father and turned some farmland into 3 other condos by the med school. The math showed that was the right choice to get the step-up in basis within the foreseeable future. However – it would be nice to get out of the property manager business – without giving up a gigantic portion of the proceeds.

We are very fortunate to be in a position to ask these questions, but we absolutely need to process a lot of information before committing to any sales.

What do you think – Take immediate advantage of huge sale prices, then get into a DST (or several)?

Keep the units until we die?  Perhaps hire a property manager to handle the phone calls and factor in the (depreciable) window, kitchen, HVAC costs?

Eat the sickening cap gains taxes and enjoy what’s left?

Many thanks -

John