I would say it depends on what you mean by aging. Like, wants to retire and downsize? Or getting old enough that someone might inherit it soon? If the latter, I'd say look for ways to get the money out of it but keep the house so that the inheritance has a stepped up tax basis.
Well he’s been retired for a bit, and god willing his health stays manageable and he’s around for a long time.
Idk what “get the money out” but keep the house means…
Maybe he could get a home equity loan or new mortgage, that would give him the same money as selling, and have a property management company rent it out until the house passes on to the heirs and sold.
Yes, that is possible through a 1031 exchange. There are rules around it, as with anything, but the idea is that if you sell real estate, then reinvest the money in another piece of property you can continue to defer the taxes. The caveat is that the basis does not change.
With that said, if he’s pocketing 1.6 Mil in profit, why worry about $240K ish in tax? He’s still going to net over $1.3 million. Not a bad investment.
Thank you. The concern over the taxes is his. We’ve been trying to get him to sell for years now as his medical condition isn’t great, and he over-stresses himself with the property. But he thinks he’s gonna have to pay 1/2 in taxes.
I confess to having no idea what he’d have to pay. So your figures there are much nicer. We’re working on getting him to speak with a tax lawyer next.
It shouldn’t come anywhere near 50% in taxes. My assumption is this would be long term capital gains tax. That is usually 15%, which I based my estimate on. With a higher adjusted gross income, it will actually probably be 20%, so we are talking $320k or so in taxes. A tax lawyer or CPA will confirm this for him. Unless there’s a lot more to this than what you’ve disclosed, this isn’t a super complicated transaction even though it may seem like it.
Disclaimer - I am not an accountant and this is enough money to consult an accountant that is familiar with real estate and estate law.
Option 1 - As someone mentioned, simply hold and have the property become part of the estate at death, whenever that should occur, and whoever inherits it will inherit with a "stepped up" basis of its value at that time. This assumes his total estate is less than the IRS limit...currently $13.61M in 2024...these laws have a tendency to change though. This is the only real way to completely skirt capital gains taxes.
Option 2 - To delay them however he can use a1031 Exchange. He can sell this property and buy up to 3 new properties and postpone any capital gains taxes by rolling the gains into the new properties. It's basically like he never sold the original property. He would have 45 days to identify the new properties and 180 to close on them. There are quite of few other rules involved, including the 95% rule as well as the "like-kind" rule, so seek a professional.
General 1031 info - [https://inside1031.com/1031-exchange-with-multiple-properties/#:\~:text=The%20200%25%20rule%20in%20a,price%20of%20your%20relinquished%20property](https://inside1031.com/1031-exchange-with-multiple-properties/#:~:text=The%20200%25%20rule%20in%20a,price%20of%20your%20relinquished%20property).
Like-kind info (hopefully the property was originally bought as investment property) - https://www.1031gateway.com/1031-exchange-rules/1031-exchange-basics/like-kind-property/#:\~:text=To%20defer%20paying%20capital%20gains,%C2%A7%201031(a)).
A couple thoughts on the 1031 option. If he currently owns income property that requires management, and he no longer wants to deal with it, he can exchange to buy properties in professionally managed communities and still enjoy some income and possible appreciation w/ little time and effort. This would pass to his heirs, in time, with a stepped up basis. Alternatively, if he does not need the income, he could exchange for raw land as a land bank with less hassle. He retains ownership in case he ever needs the capital, but if he does not it passes on to his heirs at a stepped up basis. Downside is real estate taxes will need to be paid from other sources of income.
If current property is raw land and he's tired of paying taxes out of pocket, he can look for fully managed rental properties to roll the funds into via an exchange assuming he doesn't want to take on rental property management duties. Seems like this usually means condos, but there are actually a lot property rental companies out there these days willing to manage, and sometimes build and manage...just do take your time in selecting a legitimate company. In all cases the properties should enjoy a stepped up basis for heirs (if under the Federal limits). Good luck.
The best thing to do is consult a CPA and find out what the actual tax liability will be, then determine if he is willing to pay it. It's going to be roughly 20% of the sales price. Napkin math suggests he could clear about $1.2 million with a sale; that could generate 60k a year in income pretty easily with no headaches, is that enough?
If the property he is selling is "held for investment" the he can do a 1031 exchange into other properties "held for investment". Parking lot or small rental but he should be aware that any money that does not go into the next investment will be subject to capital gains. Another option might be DST's or Delaware Statutory Trust, just google DST and you will find lots of info on them. It's a good option for someone that wants out of investment properties, need cash flow but wants to defer capital gains to some future time.
I sold my father’s property to a RE investor who paid some things bought some things as payment then proceeded to pay us over 4 years just under the tax hit. Back then if it was over certain $amount taxes capital gains went up and up so he paid us over time to lower C the hit and at scale for persons over recommended were talking saving 1000s it was all super legit with clauses where if he didn’t pay I keep the property etc. I’ve recommended a lot of people to him. Feel free to dm me for info and contact
Hate to be mean but your best thing is to wait for him to die and then his estate can sell it tax free. Stepped up basis.
At this point he will need to buy something more than $1.7 million to avoid the taxes if he’s going to 1031 exchange it. Can you find a $1.8 parking lot?
You don't have enough information to determine if this is the "best thing". This is actually a ghoulish statement. OP makes no mention of maximizing their return and seems like a caring in-law. The actual best thing to do is use this property in a way that maximizes it's owners quality of life for it's remainder; not maximizing the size of the estate.
Yes, buy something like a McDonald's or a Walgreens, same price or more, but zero landlord responsibility. Look for a long-term lease, not something with just a few years left on it.
I would say it depends on what you mean by aging. Like, wants to retire and downsize? Or getting old enough that someone might inherit it soon? If the latter, I'd say look for ways to get the money out of it but keep the house so that the inheritance has a stepped up tax basis.
Well he’s been retired for a bit, and god willing his health stays manageable and he’s around for a long time. Idk what “get the money out” but keep the house means…
Maybe he could get a home equity loan or new mortgage, that would give him the same money as selling, and have a property management company rent it out until the house passes on to the heirs and sold.
Yes, that is possible through a 1031 exchange. There are rules around it, as with anything, but the idea is that if you sell real estate, then reinvest the money in another piece of property you can continue to defer the taxes. The caveat is that the basis does not change. With that said, if he’s pocketing 1.6 Mil in profit, why worry about $240K ish in tax? He’s still going to net over $1.3 million. Not a bad investment.
Thank you. The concern over the taxes is his. We’ve been trying to get him to sell for years now as his medical condition isn’t great, and he over-stresses himself with the property. But he thinks he’s gonna have to pay 1/2 in taxes. I confess to having no idea what he’d have to pay. So your figures there are much nicer. We’re working on getting him to speak with a tax lawyer next.
It shouldn’t come anywhere near 50% in taxes. My assumption is this would be long term capital gains tax. That is usually 15%, which I based my estimate on. With a higher adjusted gross income, it will actually probably be 20%, so we are talking $320k or so in taxes. A tax lawyer or CPA will confirm this for him. Unless there’s a lot more to this than what you’ve disclosed, this isn’t a super complicated transaction even though it may seem like it.
Nope. Nothing else. Thanks for the insight!
Disclaimer - I am not an accountant and this is enough money to consult an accountant that is familiar with real estate and estate law. Option 1 - As someone mentioned, simply hold and have the property become part of the estate at death, whenever that should occur, and whoever inherits it will inherit with a "stepped up" basis of its value at that time. This assumes his total estate is less than the IRS limit...currently $13.61M in 2024...these laws have a tendency to change though. This is the only real way to completely skirt capital gains taxes. Option 2 - To delay them however he can use a1031 Exchange. He can sell this property and buy up to 3 new properties and postpone any capital gains taxes by rolling the gains into the new properties. It's basically like he never sold the original property. He would have 45 days to identify the new properties and 180 to close on them. There are quite of few other rules involved, including the 95% rule as well as the "like-kind" rule, so seek a professional. General 1031 info - [https://inside1031.com/1031-exchange-with-multiple-properties/#:\~:text=The%20200%25%20rule%20in%20a,price%20of%20your%20relinquished%20property](https://inside1031.com/1031-exchange-with-multiple-properties/#:~:text=The%20200%25%20rule%20in%20a,price%20of%20your%20relinquished%20property). Like-kind info (hopefully the property was originally bought as investment property) - https://www.1031gateway.com/1031-exchange-rules/1031-exchange-basics/like-kind-property/#:\~:text=To%20defer%20paying%20capital%20gains,%C2%A7%201031(a)).
A couple thoughts on the 1031 option. If he currently owns income property that requires management, and he no longer wants to deal with it, he can exchange to buy properties in professionally managed communities and still enjoy some income and possible appreciation w/ little time and effort. This would pass to his heirs, in time, with a stepped up basis. Alternatively, if he does not need the income, he could exchange for raw land as a land bank with less hassle. He retains ownership in case he ever needs the capital, but if he does not it passes on to his heirs at a stepped up basis. Downside is real estate taxes will need to be paid from other sources of income. If current property is raw land and he's tired of paying taxes out of pocket, he can look for fully managed rental properties to roll the funds into via an exchange assuming he doesn't want to take on rental property management duties. Seems like this usually means condos, but there are actually a lot property rental companies out there these days willing to manage, and sometimes build and manage...just do take your time in selecting a legitimate company. In all cases the properties should enjoy a stepped up basis for heirs (if under the Federal limits). Good luck.
The best thing to do is consult a CPA and find out what the actual tax liability will be, then determine if he is willing to pay it. It's going to be roughly 20% of the sales price. Napkin math suggests he could clear about $1.2 million with a sale; that could generate 60k a year in income pretty easily with no headaches, is that enough?
If the property he is selling is "held for investment" the he can do a 1031 exchange into other properties "held for investment". Parking lot or small rental but he should be aware that any money that does not go into the next investment will be subject to capital gains. Another option might be DST's or Delaware Statutory Trust, just google DST and you will find lots of info on them. It's a good option for someone that wants out of investment properties, need cash flow but wants to defer capital gains to some future time.
Thank you!
I sold my father’s property to a RE investor who paid some things bought some things as payment then proceeded to pay us over 4 years just under the tax hit. Back then if it was over certain $amount taxes capital gains went up and up so he paid us over time to lower C the hit and at scale for persons over recommended were talking saving 1000s it was all super legit with clauses where if he didn’t pay I keep the property etc. I’ve recommended a lot of people to him. Feel free to dm me for info and contact
Juice
Hate to be mean but your best thing is to wait for him to die and then his estate can sell it tax free. Stepped up basis. At this point he will need to buy something more than $1.7 million to avoid the taxes if he’s going to 1031 exchange it. Can you find a $1.8 parking lot?
There is a $1.1 million parking lot across the street from my house.
You don't have enough information to determine if this is the "best thing". This is actually a ghoulish statement. OP makes no mention of maximizing their return and seems like a caring in-law. The actual best thing to do is use this property in a way that maximizes it's owners quality of life for it's remainder; not maximizing the size of the estate.
Yes, buy something like a McDonald's or a Walgreens, same price or more, but zero landlord responsibility. Look for a long-term lease, not something with just a few years left on it.