Selling RE - how can I minimize tax burden? something like a 1031

[Charles Wesley]

This is my first post folks so I hope I'm in the right place.  I sure do appreciate hearing other perspectives from all the creative minds on this forum so thank you in advance!

I have a vacant parcel of commercial land, free and clear.  Someone wants to purchase it for 450K.  My gain will be about 250K.

I own a few other investment properties including duplexes and houses that all have mortgages.  My primary residence also has a mortgage.

How can I be strategic from a tax perspective with the gain?  Is there any way I can use the gain from the sale of the land to pay down mortgages on other investment properties?  I really don't want to reinvest the gain in a new property so I think that means no to a 1031.  I am really most interested in trying to pay down debt that I already have.

Other things I have heard about are self-directed IRA's where title to a property is held in the name of the IRA. Could that help?

Any ideas??

Thank you!!!
Wes

[Dave Foster]

@Charles Wesley, You're right, in a 1031 you'd have to buy new real estate.  But sometimes it can be real estate that doesn't exactly look like real estate.  DSTs like @Matt K. indicated are one such product that is passive cash producing and 1031 compliant.  TICs are another form of fractional real estate ownership that is actual real estate ownership but completely passive and provides monthly cash flow.  Strangely enough it's about time in the cycle to begin talking about oil and gas royalties and working interests as replacements for investment real estate.  These are actually considered to be real estate for 1031 purposes but allow you to exit traditional real estate ownership.

The IRA is a powerful tool but not really applicable here. If you sell without a 1031 you're paying tax. An IRA contribution can help mitigate the tax bite but not much.

But I get your real issue - you are wanting to eliminate debt not increase the portfolio.  You're not going to get there with the land without paying a hefty tax.  So I'd still 1031 that to avoid tax but put it into something debt free that simply produces net predictable cash.  Then use the cash it throws off to "snowball" your debt on the other properties.  It's slower but if you could get 7%ish on your passive vehicle without a capital gain tax bill then that would be more than $2600/mo to dump on debt.

Another stodgy but sure way to get where you're trying to go would be to take a page from Dave Ramsey and other financial planners and consolidate and eliminate debt one of two ways.

1. Pick the property with the lowest balance or highest interest rate and dump all extra cash into that payment every month till it's gone.  Then move to the next one.

2. Do a cash out refi on one or more of your properties that have the greatest equity and least gain.  Use the refi to pay off some of the other properties and then sell it.  Your tax hit is minimized but you're also paying down debt tremendously fast.

3. Combine 1 and 2.  Refi (Yes Dave R is spinning in his grave or I'm sending him there more quickly)  Refi and consolidate debt on one or two properties and then apply all cash from every source you got including banks you can rob and lunch money you can steal from your children to that one loan.

Paying of debt is a very good goal.  Doing it without paying tax for the privilege is even better.