All Forum Posts by: Matt W.

 @Dave Foster Thanks! Just so's I understand; say I buy house with all cash, no debt for $300k, and sell some years later for $300k (no gain) but on the way I depreciated $100k in some combo of straight line and accelerated depreciation. If I 1031 via a DST, all $300k goes into the next deal and there is no taxable event, but if I sell without a 1031, I'd owe @$25k of depreciation recapture, correct?

Does it matter if I move from a house to partial ownership of some big property with a DST? Is the 1245 property still "fundamentally equivalent" when changing asset classes?

Thanks again for always sharing your knowledge!

Quote from @Dave Foster:

@Gabe H., When you do a 1031 exchange the basis of the old property is transferred to the new property.  So the depreciation follows it.  If you purchase more than you sell then you are adding additional depreciable basis.  Your accountant uses the form 8824 to report the tax deferral and set up the new depreciation schedules.

As to your other question...Dude. Seriously?!  (just kidding you some of these benefits are indeed counter intuitive because so many of the gurus and experts out there only focus on the obvious).  But what do you call an interest free loan that you never have to pay back ---- A gift!!

OK get the easiest out of the way - Depreciation does give you a current year write off.  That reduces current taxes.  If you continue the deferral until death then that tax reduction does happen.  Along with that the 1031 exchange also allows you to defer tax on the gain.  And again if you continue until death the tax disappears.  So again a direct tax reduction.

And yes, if you just put a renter in that fix n flip for a while you will convert the ordinary income of a fix n flip into a capital gain.  Again a real reduction in tax over the same profit.

How about the principle repayment paid for by your tenants.  Those are real dollars back in your pocket and they're tax free.

And while we're on the subject of tenants.  All of those expenses to keep up the property are deductible from the rent paid by the tenant so they reduce taxable income which directly reduces taxes.  But their benefit is to keep up the value of the property so the depreciation you've been taking the benefit of isn't real

Think of your home as an investment.  It builds appreciation while you own it and the mortgage interest is generally deductible.  And when you sell it if you meet the primary residence requirements the profit is tax free.

It is possible in many instances to own successful rental real estate that generates real dollars in your pocket but operates at a loss for tax purposes.  That is real tax savings.  The government has set it up so that if you use some good accounting strategies you can avoid payment of tax for your life.  And then your heirs get the properties tax free.  Again a real reduction of taxes.

My favorite of all time though is my client who did a 1031 of a farm and bought investment properties in each of the three cities where their children lived (tax deferral).  The children managed them under the agreement that they would inherit them (tax free). Tenants paid all expenses (tax write off) including the mortgage pay down (tax free).  The couple makes more money than they ever did farming (OK not a tax break still tres cool).  And Grandma now gets to write off business trips to go see the grand kids every year.  

Yes this is a great country :)

 Hi Dave, 

Does this still apply to if I did an accelerated depreciation/cost segregation study and "squeezed out" depreciation early? I understand how and why you would defer capital gains forever with a 1031, but I've heard conflicting reports about whether or not depreciation recapture gets moved forward and deferred in a 1031, particularly if you did the "Trump era" 100% depreciation in one year move. 

Quote from @Account Closed:

Your understanding of the depreciation recapture process is almost correct, but there's a minor error in your calculation.

When you buy a house for $300,000, with $100,000 attributed to the land value, you have $200,000 allocated to the building or improvement value. As you mentioned, you can depreciate the improvement value over 27.5 years for residential property.

So, to calculate the depreciation recapture after 5 years, you can use the following formula:

Depreciation Recapture = (Original Improvement Value / Useful Life) x Accumulated Depreciation x Time Held

In your example, it would be:

Depreciation Recapture = ($200,000 / 27.5) x (5 years) = $36,364.36

So, after 5 years, your accumulated depreciation is approximately $36,364.36.

Now, when you sell the house for $400,000, the profit you'll have to consider for tax purposes would be:

Profit = Selling Price - Adjusted Basis

The adjusted basis is the original purchase price minus the accumulated depreciation. In your case:

Adjusted Basis = $300,000 - $36,364.36 = $263,635.64

So, your profit for tax purposes would be:

Profit = $400,000 - $263,635.64 = $136,364.36

This is the profit you'd pay capital gains tax on when you sell the property.

Regarding whether you're "adding to the profit" side of the equation or "deducting from the basis" side, it might seem like two sides of the same coin, but the way you account for depreciation and basis affects how you report it to the IRS. By reducing your basis through accumulated depreciation, you effectively increase the taxable gain when you sell the property.

It's essential to keep accurate records of depreciation, as it can have a significant impact on your tax liability when you sell the property. Consult with a tax professional or accountant for precise guidance on your specific situation, as tax rules can be complex and may vary depending on your individual circumstances.

Thank you for the detailed reply. 
I was thinking about this again as I am preparing to sell some properties and thinking about what to do with the proceeds. 
Let me put the question another way to make sure I am understanding:  
Let's take the same $300k house, $100k land value, and say I own it for 30 years and it has been completely depreciated. Now for whatever wild reason, I sell it for $300k, the same price as I bought it for. So now, my basis is only $100k, and I'm selling for $300k, meaning I have a $200k "profit," so I'd have to write a tax check for @ $40k?  Do I have that right?
If I am right, somehow it feels wrong! I know it is a tax on money I didn't pay tax on for all those 30 years, but it still feels like that is unjust somehow. I know the tax man will get his share unless you 1031 until you die, so this question is mainly for my own understanding, not something I would ever do. 

The house is 55 years old, floors look well worn as if they are original.  Tenant claims they were not like this when he moved in (I bought this house with these tenants in place a few years ago, so I never saw the house without stuff in it until they moved out)  For all I know they swell and buckle in the summer and sit flat in the winter. 

I recently had a tenant move out. He claims that in a spare bedroom, which was hidden by a bed, when he moved the bed out he discovered an extremely raised section of the hardwood floors. The "peak" of the raised section is about 4" higher than the rest of the floor. It's right in the middle of the floor, not near a window or any water source.  None of the other planks are cupped or show signs of water damage. 

I don't see a water stain or pee stain on the floor.  It seems wild that it would buckle that much right in the middle of the floor. Maybe each board swelled and the pressure all came together in the center.  This guy has been a good tenant and I don't want to unjustly accuse him, but it seems weird. BTW the house is on a crawlspace, not encapsulated but not soaking wet either. 

Anybody had this happen to them?

Quote from @Caroline Gerardo:

Your lender is not going to okay this plan, also insurance becomes a disaster waiting to happen. There are thousands of online goofs who will set up what you want for a $9000 fee, and $2000 annual forever, thereafter. 

LLC only helps you if you do something bad, AND you have a staff CPA to keep each penny distanced by miles not just accounts.

Get an umbrella policy, perhaps Chubb. Get high liability coverage. Be certain you do not have health or safety hazards- get an annual inspection. Hire licensed reputable people. Find great tenants. Be a good egg. 

I would respectfully disagree with the idea that LLC's only help if you do something wrong, in our litigious society I would rather have some layer of protection.

I agree that these youtube lawyers paint a picture that everyone is trying to sue you at all times for no good reason. I also agree that they are selling overpriced products and ridiculous subscriptions, but that doesn't mean that the concept is useless. I've talked to several of them on the phone they didn't give me a good impression. 

Regarding if the lender would allow such a thing, they claim that "Act XYZ of 1981" or whatnot outlines how the transfer into a land trust can be done, and then beneficial interest can be assigned to an LLC later that does not violate the DOS clause. I'm not a lawyer, so I don't know if this is all kosher. Obviously they are selling the solution, so I take it with a grain of salt and that's why I'm here searching for someone relatively local.

I have a big umbrella policy with all the extra liability you can get. I'm also a good landlord and screen well and take care of my properties. Unfortunately, I'm also a worrier! Thanks for your insight!

Hi BP, 

I've explored the forums and seen many folks having the same issue I am: I have several rentals in my name with mortgages, and would like to move them into LLC's via a Land Trust. I have an estate attorney, and he looks at me like I'm crazy when I bring these sorts of things up and says they are unnecessary (and maybe he is right). I have called many local attorneys, and they also have no idea what I'm talking about.

All that said, I am looking for a recommendation for an attorney in North Carolina that can help me with these issues. If possible, maybe even someone who is versed in setting up a holding company LLC in an anonymous/strong protection state such as Wyoming.

Thanks in advance!

Keywords: Wilmington, Raleigh, Charlotte, Greenville, Durham, Asheville 

Hi BP, 

I'm considering selling off my small portfolio of 3 SFH's and moving the money into either a Delaware Statutory Trust via a 1031 or just selling and paying the tax and then reinvesting the money in a syndication. I probably have an average of $150k of equity in each house. I live in NC, I'm 41, my wife is a high W2 earner, and we don't plan on touching this money for 12-15 years. Selling because I'm a little burnt out as a landlord and I see that my return on equity is pretty low. Yes, I know that in 10 years the houses will be worth more and will cashflow more, but that can apply to almost any investment, especially since the FED only knows how to print money.

I should note that I did a 1031 INTO 2 of the 3 houses, and did a cost segregation study and took accelerated depreciation on all 3 to offset 2022 taxes because I had a very profitable flip that year and I am a real estate professional per the IRS. I know all this deferred tax must be repaid if I were to sell without a 1031, so that tips the scales in favor of the DST option.

So the pros and cons of each option as I understand it:

1031 DST: Pro: start the investment with a bigger chunk of money because I didn't have to pay taxes on it. Not guaranteed, but very safe and boring national level companies that will not go out of business anytime soon. Con: lower returns (@7%) and higher fees. I'm not sure if my income is offset by depreciaton?

Syndication: Pro: higher (projected) returns, most seem to be around 15-20%. Cons: take a big tax hit up front, so I start with less money invested. Possibly riskier because the businesses are less established (of course I must do my proper due diligence.)

With my long time horizon before I plan to use the money, it's possible that the higher rate of return for syndications would offset the initial higher tax hit. I think both options can be rolled over with a 1031 indefinitely. I'm not smart enough to work out the math of which option would be best, or how long it would take for the syndication option to overtake the DST option.

Anyone who can help me think this thru, please chime in. Thanks!
 

Hi BP, 

As background, I've dabbled in lots of strategies in the past 4 years of real estate investing; currently own 3 long term rentals, 1031'd into multiple and bigger properties a few times, done several flips, purchased traditional and tax foreclosures, bought from estates and wholesalers, tried a medium term/nurse rental (hated it and sold for a decent profit, became a "long term flip").  So far everything has turned out well, not because I'm so smart but mostly because of strong local market and economic factors. 

Point being, I've tried many flavors and think I'm narrowing down what would work for me. My wife is a high W2 earner, so that makes the tax benefits of real estate especially important for us. I'm a licensed GC and agent, and would like to leverage these as much as I can.  The market where I live is very competitive and everyone has the same playbook for buying foreclosures and from wholesalers, so almost every existing house gets bid up to unprofitable levels.

My plan is to start buying buildable lots and build my own very simple 3/2 @1500 sq ft houses. I would pay for the lot and build with several lines of credit I have that are very strong and much cheaper and easier to use than hard money or construction loans. I would refinance the homes with long term debt and rent them for 2-3 years and then either sell them to pay a lower long term capital gains rate and put the money into a syndication, or 1031 them into something larger or invest in a Delaware Statutory Trust (DST). Ideally, I could build a few every year and use a combination of exit strategies to "waterfall" money at different times into the future.

For my family and me, real estate is all about money for the future. We are fortunate that my wife's income supports our daily needs, so investments don't need to cash flow from day one. This plan seems like the smartest option for us, because even if I got a 9-5 making $100k, after state and federal taxes once combined with my wife's income, that would end up being about $60k. 

If anyone has any constructive feedback or experience, I'd love to hear your take.  Thanks!

Quote from @Jay Hinrichs:

Quote from @James Hamling:

Quote from @Jonathan R McLaughlin:

@James Hamling agree very much with the general sentiment, but I think you are conflating criminal law and civil law. Breach of contract makes you liable for damages, but isn't a criminal act. 

Does sound like a great way to get sued and lose though.

I get where your coming from on that. But something being civilly illegal does not make it any more legal, illegal is illegal. 

And keep in mind, in this day and age, one can argue such an action become criminally liable. For example, stating a component of fraud, or theft by swindle. Or, one the gov. loves to bring in, wire transfer illegal in whatever measure pulling from civil into criminal. 

In a SubTo deal, one party argues "no, he told me it was all a-ok and nothing would happen, and now bank is _____, he lied to me, he's a con-man, I was conned", now it's no longer civil is it? 

As @Jay Hinrichs said, it's not something to toy with unless someone really knows, not just thinks they know but really truly holds commanding knowledge, and resources, for all facet's of SubTo. 

It's playing with plutonium. Lot's of power potential that can go horrifically wrong real fast mishandled. 

Maybe I can clarify this a little Both as a buyer of sub too and a Lender of hard money for many decades.

These transactions are defined by the terms of the Mortgages , Deeds of Trust , or Deed to secure debt or what ever type of debt instrument that is state specific.

And as you read through these documents many are 5 to 20 pages long.. But virtually all of them will have a numbered chapter that is titled EVENTS OF DEFAULT

its under that chapter that we find the following in 98% of all of these security documents. They will read that if the borrower does this:    Fails to pay tax's,  Fails to maintain the property ( commits waste) , fails to provide insurance  or ALIENATES the title.. Alienation of title includes selling the asset or any of the other methods talked about like land contracts transferring equitable interest etc.  

Its under the Events of Default Clause that the holder of the note would rely on a remedy. However the event of default just gives the holder or beneficiary of the security interest the RIGHT to accelerate all payments and call the note due.. The holder of the note or beneficiary is NOT obligated to do so..

So just like not paying your tax's or insurance is an event of default just like selling sub too but it is not illegal to not pay your property tax's  just gives the lenders certain rights.

The major issues come to play as James pointed out when there is lack of disclosure to the seller and a note does get called and puts them in a terrible position. Along with bad actors using this method to get into props with very little down and then ripping rents and never paying on the mortgage because its not in their name.. I do know 2 people in Oregon that did this and ended up in Prison. I was interviewed by the FBI on one case.

Thanks everyone, just to clarify, I'm looking to move my properties into LLCs for the (however thin) liability protection. I'm not into Sub2.