Windfall coming... tax plays available?

Question

I am anticipating a meaningful profit on a residential rental property sale in a year or so (the sale is contingent on certain zoning changes the buyer should be able to achieve). I purchased the property in 2002.

- I will not qualify for a full or partial home profit exclusion as it has operated as a rental for the last 7 years.

- I do not wish to conduct a 1031 exchange, preferring to deploy the profits in stock market investments at this time.

Are there any other kinds of significant tax breaks that might be available?

Brandon Hall · Answer

@Gunnar F. If you wish to get out of real estate, you can look at rolling the funds into various types of tax advantaged trusts, or seller financing. The latter will allow you to spread the gains over a number of years.

Joseph Gozlan · Answer

how about a solo401K?

You will be able to take a lot of the gains and put them into a tax-deferred account that you can use to put it into the stock market.

Bill Exeter · Answer

The above post needs some clarification.  The depreciation recapture, if any, will be taxed in 2016 as structured above, not in 2017, but the capital gain will be deferred into 2017 as stated.  You can also elect to take the entire tax hit in 2016 if that works to your advantage.  It does not push the entire taxable gain into 2017 as stated.  You should consult with your accountant to make sure that you fully understand how much would be taxed in 2016 and how much would be taxed in 2017.

Accountants often to not realize that the above strategy is available.  You can assist them in their research by telling them that the 1031 Exchange works in conjunction with Section 453 (Installment Sale Treatment).

Dave Foster · Answer

@Gunnar F., It was slightly weird to see a post from my son Gunnar Foster this morning :) - Good name!

Congratulations on your potential sale.  Of course a year from now the landscape could be entirely different so it is key to keep your powder dry and options open till then.

There are a couple of twists to a 1031 that may allow you to still benefit from one and yet re-position your money to your benefit as well.

1. 1031 into an alternative real estate investment.  You're from the heart of oil country.  Oil, gas, and mineral interests qualify as like kind with other types of investment real estate.  If you have an interest in that direction you can 1031 into those.

2. Structure your sale so it occurs after 11/16/16  but before 12/31/16 and begin a 1031 exchange.  This will lock up your proceeds in your exchange acct for a period of time but will also have the benefit of keeping your options open.  If you don't see a property you want, you simply do not complete your 45 day identification and your exchange dies sometime after 1/1/17 and you receive your funds.  Your gain will be fully taxable but because you receive the money in 2017 the tax will not be due until April of 2018 thus extending use of the tax for your benefit by a year.

Gunnar F. · Answer

Great Idea, Joseph Gozlan. I am, for once, ahead of the curve. As my company does not offer a qualified, US-based 401(k) I have established an SEP, which I must fund with after-tax salary, but that is better than nothing. I will certainly put some gains into that but I am already limited to only about 50K a year and fortunately the gains far exceed that limit.

Gunnar F. · Answer

@Bill Exeter sounds very solid -- many thanks! I think my Financial guy would be able to help by managing this account on an informal basis. I have a good trusts attorney in mind. Really appreciate the additional advice!

Bill Exeter · Answer

You can probably find an attorney that can structure the most appropriate trust for you, but have your existing financial advisor manage the assets for you.  I would ask accountants and attorneys in your area for a referral to attorneys are specialize in the area.

Gunnar F. · Answer

@Dave Foster many thanks.

Reality is I don't have any interest in tying up my money in more rental property since I live in Asia and I am looking forward to a break from landlording. But I think your idea to delay tax using the 1031 approach is clever. If the tax is big enough maybe I could find some kind of vehicle that would offer a meaningful guaranteed return. Free money!Will kick it around also. Thanks and best to Gunnar from Gunnar!

Gunnar F. · Answer

You rock, Brandon. Thanks. The tax advantaged trusts looks interesting. The thing is, my financial advisor has an amazing record over the last 15 years and I am not sure he deals in those. I will check.

Windfall coming... tax plays available?

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