How to pay less on Capital Gains Tax if over the age of 62.

Question

Lets say I bought a bought my rental property 10+ years ago for $300K and it's now worth $1Mil plus. I have a mortgage of $400k+ and want to sell it for what's it's worth now. How can I save on capital gains taxes and I am over 62 years of age? I understand it puts me in a higher tax bracket at 39% and will be paying 20% on the gains. I don't want to do a 1031 exchange, I don't want to a seller finance...what other creative financing options are there that will allow me to save on taxes.  Please advise.

Brandon Hall · Answer

Feeling charitable? If so, check out Charitable Remainder Trusts. You sell the property within the trust and don't have taxes on sale. You will have to make minimum distributions from the trust which will be taxable, but now we are spreading the tax liability out over a number of years rather than getting hit all at once.

Another option - perform a cost seg study on another property you own. The missed depreciation that you will get to accelerate will allow you to shelter the majority of the capital gains.

Congrats on building wealth through real estate!

Dave Foster · Answer

@Taylor Brugna, and everybody did!  Twas a glorious time long long ago!

Taylor Brugna · Answer

@David Faulkner The exclusion is prorated, that's not how it works unfortunately. It if did, everybody on BP would be moving in to their appreciated rentals for 2 years before they sold :)

Thomas Rutkowski · Answer

The best solution for you would be to use a Monetized Installment Sale instead of a 1031 exchange. This would allow you to defer the taxes on the sale of your personal residence too. In a monetized installment sale you defer the taxes by selling on an interest-only installment sales contract (seller financing) through an intermediary. The monetization loan lets you walk away from the closing with cash that can be used for any purpose. You don't HAVE to get back into real estate right.

David Faulkner · Answer

Not an option that most would choose, but I'll throw it out there anyhow ... move into the property as your primary residence for two years, then sell and take $250k of the cap gains ($500k if you are married) tax free. You will still owe some taxes, but that may get you most of the way there ... plus, I have to think that if it is now worth $1M then it can't be all that bad of a place to live :)

Natalie Kolodij · Answer

@Kebron Girma a DST is a passive investment. It's like income you receive from being invested in annuities or something similar- the  kids each owning properties is totally irrelevant. It would them income monthly to enjoy retirement and then when they die that same income would pass down. Kind of like stocks.

Unfortunately if you want to sell something and receive a big chunk of money that you can then just have and enjoy in it's entirety- you're going to pay taxes.

Kebron Girma · Answer

@Dave Foster they are all great advice, however, with the depreciating health condition, my friend doesn't want nor have the luxury to do all that. We already have buyers for the property that are ready to close on the property next week, and I'm trying to see if there's a way she can pay as little as possible on taxes.

Dave Foster · Answer

@Kebron Girma, That's the age old wall that 1031 investors typically run up against.  There's a gap between when active investing stops being fun or practical and the time when estate planning takes effect.

During that middle time you kind of end up with a choice - to either stay active longer than you'd like.  Or to not wait the length of time to get full tax benefit and sell and incur tax prematurely and unnecessarily.

Boy do I get it.  We have clients with this dilemma all the time.  But there may be a couple of options you haven't thought about.  But they each involve 1031 so even though you said no 1031 try these on for size because they're not the normal.

1. Sell the property and do a 1031 to buy a very nice SFR home and a beautiful maintenance free no step ranch condo near your family. When you purchase these with your 1031 you are obviously buying them as investments.  However they do not need to stay investments forever.  After a year or two you could move into the first home and live there near family with no tax triggered and the clock beginning on a sec 121 primary residence exclusion where you will get to take part of the sale of that SFR as tax free.  When it is time  you will sell that SF now primary residence and move into your nice single floor maintenance free condo - again without triggering a tax event.  With a little patience you can use 1031 to purchase what ultimately become your retirement homes for indefinite period and upon selling them you will get a portion of the gain tax free.

2. Sell and do a 1031 and place the proceeds into a passive fractional investment - a DST or TIC or NNN ground lease.  These are usually national credit tenants and totally passive.  The returns are paid monthly and they still qualify for 1031 treatment.  They act just like dividend stocks with the added benefit of tax deferral of the 1031 and continued use of the depreciation allowance.  These usually become the cornerstone of a 1031 investors planning going  into retirement.

So I know you said no 1031 but.....?

Kebron Girma · Answer

@Natalie Kolodij the children have their own properties...my friend is just looking to cash out and enjoy life in retirement. I have already tried those options. Besides, the subject property needs a lot of work and is not habitable.

Natalie Kolodij · Answer

@Kebron Girma

They can look at a limited family partnership option

They could Look at doing a 1031 into a DST or something with passive income, that would pass on to children and continue to allow cash flow without management.

They should really sit down and talk with both a tax professional/ estate lawyer

How to pay less on Capital Gains Tax if over the age of 62.

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