Creative ways around capital gains?

Question

Hi everyone,

There's an apartment building that fits my value-add criteria in my hometown, and I know the owner. He says he doesn't want to sell because capital gains tax will get him... I'm assuming he's leveraged the apartments to a point that he may lose money if he were to sell. He has owned the apartment for around 10-15 years, and many people call them the crack-head apartments because they are pretty ran down.

Any idea how to alleviate this capital gains conundrum? There has to be a creative way to purchase real estate that works around capital gains a little bit.  I thought about seller financing, but I don't think he's interested in that.  He would do a 1031 exchange, so should I start looking for apartments that aren't value add that he can buy in to and still cash flow?  I'm sure he's got a cash cow, and the deferred maintenance is adding up.  Any ideas would help!

Natalie Kolodij · Answer

He should talk to his tax pro about it.

You suggesting general ideas given to you on the internet is a great way for a misunderstanding to take place and him to end up screwed.

There are lots of options but without knowing tax law and his big financial picture you shouldn't suggest any of them.

1031 - then he owns new rentals tho

1031 into a DST - up to his trusted financial advisor tho

QOZ - I'm not the biggest fan for many people, again he could go into a fund but I'd want him to talk to a financial advisor

Monetized installment sale

Dave Foster · Answer

@Stephanie Martinson, There's a lot of information you should gather as intel from that seller before you steer them down any path.  I've found that the more options I try to give a seller for why and how they should sell to me the less legitimacy each one has.  You want to explore their motivations and desires more and then put them in touch with the right professional so you're not perceived as entangled with the solution.

Whether it's a 1031 into passive or active replacements or what have you there's lots of good answers but only one that's perfect for her.

Matthew Ryan · Answer

@Stephanie Martinson -  Of all the options available to him that have been mentioned, Opportunity Zones are the most flexible from a timeframe perspective. However, as @Dave Foster said, your issue isn't with the options available to him your problem is trying to understand and tweak the psychology of a seller and owner who's ideas of running a business do not sound similar to your own. It's an easy psychological rabbit hole to get into when you're first starting, and you see that asset that you KNOW you can make better. I've done it dozens and probably fastly approaching hundreds. I would find the most straightforward solution, offer it up to him, keep pounding him for 30-60 days until he tells you to buzz off or he breaks down and takes a hard look at it. But be aware of the opportunity cost of the time and energy you'll put into it vs. the other deals that are getting done with motivated sellers. Lastly, be honest with yourself that this deal is the right deal for you and you can be the one to turn it around. That is not an easy task.

Thomas Rutkowski · Answer

@Stephanie Martinson - If the seller does not want to pay the capital gains and wants to get out of real estate altogether, then coupling a monetization loan with an installment sale is usually the most efficient way to dispose of an asset. This can defer the capital gains tax and depreciation recapture for 30 years. It puts cash in the sellers hand that they can reinvest or use for retirement income.

Here's a good explanation...

https://www.biggerpockets.com/forums/51/topics/569293-can-i-use-100-bonus-depreciation-as-alternative-to-1031-exchange?highlight_post=3455810&page=1#p3455810

Cody Ruff · Answer

@Stephanie Martinson I would definitely do a 1031 exchange where you can close on that property then find one of similar or more value to put that cash flow into. One of the greatest advantages I think of the 1031 exchange is that you can use that over and over again. Also once you pass away and if you will it your kids or whoever. Whoever inherits it doesn’t have pay the capital gains tax.

Jake S. · Answer

Hey @Stephanie Martinson! You could certainly help him do a 1031, that is one way to go about itAnother thing you could do is called a "master lease" where you are the lessee but you can sublease it out and have full control over the property while you still pay the owner.Do some research on it, but this video should help a bit https://www.commercialpropertyadvisors.com/master-lease-agreement/Here is a BP article on it for you! https://www.biggerpockets.com/blog/master-lease-option

Wes Ripley · Answer

Is the owner able to do seller financing?  If so, you can swing a lower sell price with a higher interest rate.  The seller will pay less in taxes and you can potentially pay less overall as well.  You could both come out ahead and Uncle Sam is the only loser.

You would also have more money available for you repairs/value add up front since you just put less down on it due to the lower selling price.

Matthew Ryan · Answer

@Stephanie Martinson - You see an opportunity and you're being aggressive in your pursuits; you can't teach that. Knowing what basket to put your eggs in, luckily, can be taught ;) Glad I was able to help. Happy to be a resource in the future should you actually land the property.

Stephanie Martinson · Answer

@Matthew Ryan Thank you for the honest post.  I appreciate that.  I have been running down the rabbit hole, chasing nobody else by myself.  Yikes!

Parmer Cherry · Answer

@Stephanie Martinson

Look into opportunity zones in his area, and find properties there he could invest in. Opportunity zones have great capital gains tax advantages.

Creative ways around capital gains?

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