Selling RE - how can I minimize tax burden? something like a 1031
Member since 2018 · 4 posts · 0 votes
Selling RE - how can I minimize tax burden? something like a 1031
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes@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.
The 1031 Investor5137 Reviews
9 Replies
- Member since 2018 · 4 posts · 0 votes7y
Thanks for that suggestion, Matt. I am thinking I may want more control over my money/investment than a DST could offer. I am just learning about DST however it seems like it locks up my funds and is complicated compared to what I am used to which is simply managing rental properties. Is there a source you would recommend to research DST?
- 7yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@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.
The 1031 Investor5137 Reviews - Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes7y
Finance the sale. First you earn on some interest rate, Re the cash sale: Your cap gains on a cash sale bumps your taxable income into next higher or 2 tax brackets. Seller financing keeps your return of principal very low each year not bumping you up to higher tax brackets... Plus your making good income off interest collected.
Seller finance the sale. No sane buyer would turn your offer down, assuming reasonable terms. Even ask higher sale price for the privelage. :)
- Member since 2018 · 4 posts · 0 votes7y
Wow, you guys are all great!! Thank you so much for your thoughtful replies!
@Dave Foster , I see what you mean about using a 1031 to buy some alternative form of passive, cash producing real estate. These products seem interesting but because of my lack of experience with them, I prefer something more tangible that I can actually touch.
Also, generally speaking, I like the strategy that you give Dave R credit for which is selectively leveraging equity and paying debt. I will need to run the numbers to see what that looks like. Of course, this is just with the overall goal in mind of reducing mortgage debt and could be part of long-term planning. It doesn't necessarily have any bearing on my issue at hand which is determining what to do with the gain from the sale of a property which I am not sure I want to sell! :)
I go back to your comment that "If you sell without a 1031 you are paying tax." It may be really just that simple!
I was also considering if I do sell without a 1031 I could request 50% of the sale price this year and 50% in Jan 2019. It would be a big tax saving for me by doing so.
@Curt Smith I think that is a great straightforward approach. I wonder how to determine how much to insist as a down. I can figure out what is the most I can accept from a strategic perspective as it relates to my taxes. But as it relates to being a mortgage holder how do I decide when the buyer has enough skin in the game?
- 7yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Charles Wesley, Good thoughts. I'll be interested in what your numbers show. It's always dangerous to pay debt with debt. As Uncle Dave says, the banks are smarter than us. But there's a truth in the arbitrage if you can be disciplined about it.
Another option that just popped in my head from something you said - if you were to close on your sale after Nov 17, 2018 but before 12/31/18 then your exchange starts in 2018 but your 45 day identification period ends in 2019. If you were to not find a suitable replacement property then your smart move would be to not turn in a 45 day letter and simply pay the tax. But you'll be receiving the cash in 2019 while recognizing the gain in 2018. So you would get another year before having to pay the tax. That's not a bad plan either. But it does require that you start a 1031.
The 1031 Investor5137 Reviews - Member since 2018 · 4 posts · 0 votes7y
@Dave Foster Thanks for that detail on the timing of the 1031!
My primary goal is just to determine the best way I will handle the gain on the potential sale of the land. I definitely won't be going out getting any cash out refi's any time soon. :)
- Peachtree City, GA · Member since 2016 · 41 posts · 17 votes7y
@Charles Wesley it may be worth at least speaking to Brett Swarts at Capital Gains Tax Solutions. He has been very helpful in discussing options for deferring capital gains taxes using a Deferred Sales Trust. There is a cost to the setup and maintenance of the trust, but it would let you defer your gain until you find something you want to invest in and then the trust can actual invest in your new venture. Just a thought.
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