Looking for investments to avoid capitol gains

[Gail L boucher]

Greetings 

my name is Gail Boucher. I 70 y.o. and own a 3 family which im sick of being a landlady. I bought the house for 230 in 2007 and its worth 600 now. I dont want to buy another rental obviously but i want to avoid capitol gains. What are alternative. Thank you in advance. Gail

[Jack Martin]

@Gail L boucher as @Dave Foster mentioned, there are several options available for you to sell your property, end your days of being a landlady, and avoid paying the tax. 

Some may or may not be appropriate for each case, so I would encourage you to speak with professionals who understand the implications of each strategy, along with your personal goals. 

I can speak to one such strategy, commonly referred to as "the lazy 1031". This strategy would allow you to sell your property and reinvest into a passive investment that includes bonus depreciation. As a MHP sponsor, we are actively using this strategy, so I will explain:

When a property is purchased and a formal cost segregation study is performed, the entire portion of the property's value with a useful life of 20 years or less can be taken as a passive loss in the year the property is purchased. This is known as "bonus depreciation".

This has the potential to create substantial passive losses, which are allocated to those who invested in the property. These losses show up on your K1 and can be used to offset the gains you incurred from the sale of your property, as long as the gain AND the investment with bonus depreciation occur in the same calendar year. Any passive losses you have no use for in that calendar year will carry over, so they can also be used in subsequent years.

Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner substantial passive losses, often equal to the amount of capital invested, or more, even in years where the benefit begins to sunset.

A few words of caution: Be careful not to let the "tax tail" wag the dog. Avoid investing in a poor property or poor location, simply for the depreciation benefit. In that same vein, if you are investing passively in a syndication with bonus depreciation, make sure to vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is an incredible tax benefit, but when you take the time to combine it with the right property and sponsor, that will prove to be a wining formula.

Disclaimer: I am not a tax advisor or CPA. This perspective is solely from years of experience managing mobile home park funds and working with the tax experts around us. 

All the best,

Jack