a Good problem to have - what to do with windfall profits??

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Steve Vaughan · Answer

I'm in the same boat.  Where to invest truly passively during my several years long divestment from RE?

My first $10k x us and our entities went into I bonds.  9.62% risk-free.

Next I'm dribbling into the market.  Seeing it fall peaked my interest.  Why does buying after/ during a fall want you to turn away? I'm buying specifically hammered best in class issues and sector and broad index funds and ETFs.  I may be catching a falling knife some but am so glad I didn't start months ago. I also have a 5+ year time horizon.

Put your opportunist hat on and buy the hammered while they're on sale👍

Scott E. · Answer

If I were in your shoes I would get in touch with a 1031 exchange agent and try to find another property to 1031 the profits into. If you don't identify another property, the only downside is that your funds will be tied up for 6 months with the exchange company.

Talk to your CPA but if you don't 1031 these profits you're going to likely be facing a big tax bill next year.

Dave Foster · Answer

As @Scott E. pointed out you're in a great position to do a 1031 exchange. You can defer all tax and depreciation recapture from the sale and use those proceeds as well to reinvest in a property or properties of equal or greater value. If you want to differ all tax from the sale you have to use all the cash proceeds from your sale in the purchase of your replacement investment property.  But the location, number and type of real estate doesn't matter.  So you've got a lot of options depending on what the market is "telling you".

Mike Dymski · Answer

That's the million dollar question that everyone has (except yours is a two million dollar question).  Typically, the best option is to follow a model similar to what generated the 2 million to begin with...and invest in strategies where we have knowledge and business associates and processes in place.  Absent that, possibly passively invest in syndications...or index funds and ETFs.

Jon Kelly · Answer

@Daniel Miller definitely look into 1031 exchange for tax savings. I would do one of two things:

1. Purchase a large multi-family property. Let's assume you take home $1.8M after expenses. With 25% down you purchase a multi-family property up to $7M. If you purchase a large enough complex you can hire an on-site property manager.

2. Become a limited partner in a syndication. This is a truly passive option that yields 8%+ per year.

Julio Gonzalez · Answer

@Daniel Miller Are you familiar with 721 exchanges? It's an exchange where you investment the gain into a passive real estate investment that would allow you to defer your capital gains tax. Here's an article that I wrote on it: https://www.biggerpockets.com/...

Daniel Miller · Answer

Okay, thank you all... I'm unfamiliar with 1031, so I'll do some reading on that...Just as a side response to a couple of comments here, I did *not* live in this house, I was renting it out; it was my dad's house until he passed away a few years ago.

Mind ye, the reason I'm selling the house now is that I don't want to deal with rental issues any more, especially on a house that was 30 miles from mine... so if 1031 involves managing another house, I won't want to bother with it...

Colton Hahn · Answer

Investing in syndications is an option, while you likely will take a short term tax hit the long term benefits often times out weigh the short term tax loss. You get the benefits of owning large multi-family properties, while also freeing yourself to live your life. Something to consider

Al D. · Answer

@Daniel Miller First of all, I am not a tax adviser, and don’t know anything about you beyond what you posted in this thread.  Based on the little I know about taxes in situations like you described, my answer depends on what your long-terms goals are:

-If you want cash flow, then do a 1031x (which needs to be started before any proceeds may hit your bank account/check issued to you) - especially if you can leverage your purchase(s) at 4:1 or better.  You would not need to deal with recapturing depreciation.  However, in this case, the full amount of your sale (including your sizable stepped-up basis) is “forever” (if you choose to never sell those new properties, or 1031x them - thus avoiding a taxable event) tied in to whatever you buy.  But even that may not be bad if you should also want a chunk of cash to use elsewhere:

With a 1031 option, as I described above, you can be getting cash flow, as well as take out equity that there may be in the purchased property(ies) - tax-free - as a loan.  (You can even purchase with 100% cash, and do “delayed financing” within 6 months: https://selling-guide.fanniemae.com/Eligibility/Mortgage-Eligibility/Loan-Purpose-/COR/1033001981/What-are-the-requirements-for-a-delayed-financing-exception.htm)  And upon your own passing, your heirs get to “enjoy” that day’s (presumably-) stepped up value, which is what it sounds like happened to you.

-Alternatively; although, I presume this may not be your case: “… In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.”

https://www.irs.gov/taxtopics/tc701

If you are married and file jointly, “Section 121 sale” would get you exactly $500k tax-free, but you’ll need to recapture any depreciation, which, I imagine, would not be much.

a Good problem to have - what to do with windfall profits??

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