All Forum Posts by: Russell Sherman

I moved out of my home in November 2022 and turned it to a management company.  They put it on the market November 10 and it rented for December.  On 2022 schedule E my accountant had fair market use as a rental as 365.  I questioned him about it and he said that is not how the IRS tracks properties.  Is that true?

This was in California and I changed residence to Ohio in February.  He said that didn't matter either.  

I am skeptical.  Anyone care to chime in?

Quote from @Rich Chavez:

Cant 1031 a primary into an investment. 

Read the entire thread, especially Dave Foster’s post where he mentions his book.  Then buy the book and read it, paying close attention to the chapters he references.

I’ve decided to hold off selling for now and reevaluate in 2024.  Firstly, I don’t want to risk the IRS challenging my claim of it being an investment property after only holding it 8 months.  In 2024 it will have been two tax filing periods and less likely to be challenged.  I have through 2025 to claim the $250k exclusion as Dave Foster describes in his book.  Secondly, this will give me time to decide what exactly to do.  As many have pointed out I have been going through significant changes in a short period of time.  Ultimately, I am only getting a 3% return on the asset.  I believe I can sell, take the 250k cash exclusion, roll the rest into other investments and still gross more than I am getting in rent - without the headaches.  Thank you for all the thoughts.  They have been very helpful.

I am in San Miguel de Allende - a great place to be while getting your head on straight.

Quote from @John Clark:

Quote from @Russell Sherman:

I would like to get opinions to help me determine my best financial options.

I am 59 and last year was forced into retirement and also got divorced.  My settlement was a single family home I purchased for $295,000 in the 1990’s.  The last 8 months it has been rented for $4550.  I just received an out of the blue offer to sell for $1.5M, which is a reasonable offer for the neighborhood.

You need to make some value judgments. PERSONAL value judgments. Specifically, you're in a high-stress situation (for you -- living in Mexico, don't like being a landlord, too many investment options, etc.) and a lot of your indecision/stress is based on a desire to avoid taxes. Specifically, you want to avoid long-term capital gains taxes (15%) on $1.2 million ($1.5 million minus the $300k you bought for).

And it's actually less than that, because you can exclude $250k from the $1.2 million, so now you're down to 15% on 1 million, or $150,000.

For your peace of mind, is the payment of  $150,000 -- resulting in clear ready cash of $1,350,000 -- worth it? Only you can answer that question.

If it is, then pay the tax and knock off getting the vapors over "paying taxes." If it isn't, then do a Starker exchange (1031) and accept your lot in life.

I believe the capital gains tax rate on gain over 500k is 20%, plus California is another 12.3%.  So a significant portion could be taxed at 33%.  A third is a lot to give up if I can help it, especially since I was forced into early retirement.  The house is my divorce settlement.  It’s all I have left. I need to make it count.  If I was 30 and still had a career in front of me, it would be different.  

I appreciate all the thoughtful insight everyone has contributed 

Quote from @Kenny Cho:

Depending on the neighborhood, it might make sense to just hold it, unless you NEED the cash now.

You can do a HELOC to get some access to cash.

Find a good management company and just collect the income.

It’s a desirable neighborhood - Hancock Park.  I initially had a property management company but found them unreliable and basically flaky.  I have 18 months in which to sell and remain eligible for for 121 exclusion of $250,000.  I don’t need the cash right now but I am afraid of the economy and do not like the stress of being an absentee landlord - I now live in Mexico.  This is the biggest financial decision I will have to make for the remainder of my life.  I can’t afford another mistake.

Thank you for the wonderful responses. It seems DST's might be my best option. Is it realistic to invest in 10 different DST's? My thought is they would each mature at different times and it will be less stressful deciding what to do with 10 investments of 100k over a couple year period verses 1 million all at once. I then have the option of paying the tax on one DST should I want to cash out and diversify at that maturation.

In the meantime, the big question is whether I would get a better return paying the capital gains tax (federal AND California!) on $900,000 and investing freely, or taking the $250,000 cash exclusion and 1031 the remaining 1.2M into DST's? Anyone have a crystal ball?

Quote from @David M.: 

@Russell Sherman

So, if the home was purchased in 1990's...  How was it used in the time prior to the last 8 months?

I hired a property manager to rent it out and manage it.  I moved to another state.  I intended to rent it for 2 years and then sell.  But I received an offer out of the blue.  Inventory is tight in this neighborhood and someone just lost out on a nearby house.

Quote from @Dave Foster:

@Russell Sherman,  All of the options you list that you could 1031 into come with some risk.  

Mineral rights and Oil is a roller coaster ride.  

Vacation rentals???  Well they're not making any more beach front. But your experience with managers make this iffy. 

DSTs? not sexy or high returning but fairly stable.  Especially if you took the rest of your 1031 and put it into several different ones to mitigate risk.  

A 721 - I'll probably get flamed for this but I never think converting tax deferred to taxed is ever a good idea.  But if you're going to do that then do it quickly and take the bandaide off quickly.  Don't go into a 721 with limited options at a time when many reits start to under perform.  Take the cash and don't a 1031.  Pay your tax and invest in something that you know or.... don't invest at all.  Do you have a mortgage on your house?  Pay it off.  

If you are done with work then you need to first provide for your future and then after that is secure you can invest if you have any excess money.  

I know I know.  It's not the exciting answer.  But the kind of exciting that comes from a sinking investment that represents 66% or your net worth is not a goood feeling exciting.

If you have options to work again.  Then my advice would be completely different. 

Dave, regarding the 721:  I thought of it as a traditional IRA where you don’t pay taxes up front, while allowing the principal to grow tax free.  The 30% I don’t pay in capitol gains will be able to earn a dividend.  If I ever need to sell I can sell only the percentage I need as opposed to everything all at once.  Am I missing something looking at it this way?

Another question:  if I roll only a portion into a 1031, do I pay the tax rate only on the portion that is boot?  Or the whole thing?  So if I keep $200,000 out of a 1.1M gain, do I pay 15% or 20%?  Maybe I keep a smaller portion on only what I am comfortable paying tax on…

I have no personal debt and have been drifting through Mexico for the last year trying to figure out what to do next, for what it’s worth.  Time to make a decision

I would like to get opinions to help me determine my best financial options.

I am 59 and last year was forced into retirement and also got divorced.  My settlement was a single family home I purchased for $295,000 in the 1990’s.  The last 8 months it has been rented for $4550.  I just received an out of the blue offer to sell for $1.5M, which is a reasonable offer for the neighborhood.

I hate being a landlord and would like to sell but don't know what to do with the money. I can take $250,000 exclusion and 1031 the rest into…. what? DST's? 721/upreits? Mineral rights? A turnkey rental? the options are overwhelming and every advisor I ask gives conflicting advice - I suspect they only know what they get commission on.

I would like $5000 month income after banking the $250k.  I don’t want to risk the principal.  Am I better off just paying the capitol gains and banking the rest?

Finally, I had a property manager but found them creating false repairs and fired them.  The sale of the house is about 2/3’s of my wealth.

thoughts?.

Quote from @Leslie Pappas:

Quote from @Russell Sherman:

I will be selling a high gain single family residence in Los Angeles in the next 12 months or so and am considering putting part of the rollover into a multi-family in Columbus, where I now live.  Would anyone be willing to meet or talk to go over the market, what to expect, etc.  I live part time in Mexico but will be in Columbus for the next several weeks.

 Hi Russell, 

There plenty of other opportunities elsewhere, my clients are involved in institutional grade properties across the country. My recommendation is to choose cities in safe and economically diversified areas with above-average income and population growth. It can also be safer to diversify your investment properties across the country. There is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key.

A very good source of local analysis is rereport.com

Leslie, the reason for Columbus is I grew up there and now that I retired will have at least a part time presence there. I am trying to determine if I want to allocate some of the gain to an actual structure or if I am better off simply doing the DST/upreit/mineral rights route. After taxes, insurance, maintenance, etc it's looking like it's about equal return. But I am still exploring with an open mind