Advice4Life | August 2018 | What do you do when you want to ‘retire’ from your rental properties?

August 14th, 2018 | | Advice4Life

Rental property can be a great investment, but what do you do when you want to ‘retire’ from your rental properties?

If you are pondering an exit plan for your investment properties or know someone who is, please read on, AEGIS Financial Advisors can provide help…

You have had a nice portfolio of rental properties for many years which has given you a nice stream of income with the many tax advantages of owning investment real estate. These properties may have aided you in realizing your dream of retirement from your job, but now the properties themselves feel more like the job that you were trying to retire from. The properties may no longer be contributing to your long term goals, but actually be a detriment to some of those goals such as traveling or spending more time with the grandchildren. Now what? You have had these properties for many years, and you know there will be significant gains when you sell. Do you even want to sell or do you want to hold the properties so that your heirs enjoy the step up in cost basis when you pass away? Is there a way to sell, but reduce taxes, or defer taxes?

There are actually many options to consider for exiting your real estate investments, and all the options have their own unique set of pros and cons. A few of the common options include:

  • Selling the properties slowly over several years so as not to realize too much capital gain and depreciation recapture in one year
  • Maintaining ownership but transferring operational responsivities to a third party
  • Performing a 1031 exchange to another investment property which will be less hassle,
  • Transferring the assets to a Charitable Remainder Trust
  • Selling via a land contract or installment sale.

We recently were presented with a situation which include one single property with a very large capital gain and an equally large amount of depreciation. We are in the process of exploring a different variation of an installment sale which involves transferring ownership of the property to an irrevocable trust prior to selling the property outright. The trust can then sell the property, invest the funds, and then distribute the remaining funds over a set period of time. By utilizing this strategy, the depreciation recapture still must be realized in the year of sale, but the capital gains can be spread over a number of years.

What is the main advantage? If all capital gains would be realized in year one, the capital gains in this particular case would be taxed at the maximum rate of 20% plus an additional tax of 3.8% which is triggered when gains exceed a certain level. By spreading out the capital gains, we may be able to keep the client’s income low enough so that the capital gains are taxed at the lower 15% rate, or even the 0% rate. Sound complicated? Yes it is, but given the right set of circumstances, this method can be very advantageous and can lead to you keeping more of the sale proceeds.

Are you in a similar situation or does this sound like someone you know? Real estate exit strategies are complex and require a diverse set of knowledge and resources in order to evaluate all options and make the best decision. If you or your friends would like assistance, please feel free to share our information or reach out to us and we can make the initial contact.

The above example is provided for illustrative purposes only. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
You should consider all of your available options and the applicable fees and features of each option before moving your retirement assets.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Real estate investments can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

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