sell all rental homes in one year or stager them yearly

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boaski
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sell all rental homes in one year or stager them yearly

Post by boaski »

I have just turned 63 this year and decided to get out of the landlord business.
My wife and I are childless we keep our income low enough to get healthcare subsidy and I guess our tax rate is 12% with no state tax.
We have four rentals all are similar in every aspect two I have had for ten years and two about twenty with a cost basis of 110k each and we own them outright.
I have one ten year old one under contract for 490k and expect to receive 460k plus after closing costs.
I do not know but I believe that would probably put me over the threshold for that extra medicare and obamacare tax.
All things considered what would be the best way taxwise to dispose of the properties all in one year or stager them.
Thanks.
Humility101
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Re: sell all rental homes in one year or stager them yearly

Post by Humility101 »

Have you considered a 1031 exchange to buy a another property you can use for your personal enjoyment? That would solve the tax problem and the landlord problem.

Other wise it may be wise to stagger the selling unless you want a massive tax bill.

Cheers,

Humility101
livesoft
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Re: sell all rental homes in one year or stager them yearly

Post by livesoft »

Sell one and see how it goes. At that point you can do the math on your future tax return and also decide whether to sell another one in the same year or not. Rinse and repeat. Do the tax math.
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jpelder
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Re: sell all rental homes in one year or stager them yearly

Post by jpelder »

If my math is right, you'll have $380,000 in capital gains from the house you're currently selling ($490,000-$110,000). This will be added to your other sources of income. If all that gets your AGI over $496,601, then you'll be paying the top long-term capital gains rate of 20%. AGI between $80,001 and $496,601 will have you paying 15% marginally. All in all, if you sell one, you might get into the top tax bracket, and if you sell more than one, you definitely will get there. You have to compare the cost of the marginal 5% of all the proceeds over $496,601 vs. the benefit of the ACA subsidies that you wouldn't qualify for each year you sell a house. The implications on Social Security are also something I'm less familiar with. Looks like no matter what, you'll run into the Medicare net investment income surtax, as that kicks in at a MAGI of $250,000, which just one house sale will get you to.

Might be worth plugging some numbers into tax software to get a ballpark. Make a new return with last year's income info and add the capital gains.

This is assuming that these houses don't qualify for unrecaptured section 1250 gains, which appears to change the tax treatment of the gains. I confess that I don't really understand how, though.
HomeStretch
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Re: sell all rental homes in one year or stager them yearly

Post by HomeStretch »

Do an analysis of the impact on your marginal tax rate by year of selling all properties in one year vs. in two, three and four years. Include as part of your marginal tax rate calculation any additional “tax” from any forfeited ACA subsidy, any Medicare IRMAA impact (your income at age 63 will determine your premium for the year you are age 65) and any Net Investment Income Tax that you become subject to as a result of the sale(s).

The analysis will help you figure out the best strategy for tax purposes. However, there is likely more to your decision than just taxes. For example:
- Do you want to stop bring a landlord right now by selling all at once or are you willing to continue for another 1-4 years if you stagger the sales?
- Do you need the sale proceeds for living expenses now?
- Should you take advantage now of a hot Seller’s market
(especially if any property would normally be hard to sell for some reason)?
- Do you have any tenant issues that need to be resolved before selling?
- Do you anticipate any costly rental repairs or vacancies over the next couple years?
- Etc.
chassis
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Re: sell all rental homes in one year or stager them yearly

Post by chassis »

What type of neighborhood are the four rentals in? What level of desirability are the neighborhoods? Are there any negative factors in the neighborhoods (drug houses, adjacent to a major highway or railroad, urban development/rezoning nearby?

Sell one house per year to modulate the income and associated taxes. Sell them all now if there are short term issues affecting value, which relate to the questions above.
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TomatoTomahto
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Re: sell all rental homes in one year or stager them yearly

Post by TomatoTomahto »

I know nothing about real estate, taxes, or ACA. However, we are selling mother in law’s house now because the market is hot beyond all sense. If you don’t want to be a landlord, you don’t want to be a landlord now, not 4 years from now. I’d sell them now and be done with it. Suffer the tax consequences once.
I get the FI part but not the RE part of FIRE.
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Watty
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Re: sell all rental homes in one year or stager them yearly

Post by Watty »

We cannot talk about politics or proposed legislation because of the board rules but one risk of not selling them this year is that there could be tax law changes which could mean that if you delay the sale the tax rates could be higher when you do sell them.

There is also a non-zero chance that if you do not sell them soon that one of you could die and the survivor would be in the higher single tax brackets when they sell the houses. This is especially true if you decide to not sell them for 5 or 10 years or more.

It would of course be good to consider getting professional tax advice before you sell them but in most of the country the real estate markets are real strong if not red hot. In addition to making the selling price good selling property in a hot market also has these advantages;

1) Houses sell fast. Even in a week but not terrible housing market it can take six months or longer to sell a house. If the house is sitting empty for six months while it is for sale then that can get expensive.

2) Buyers are not as picky about the condition a house. In a weak housing market a buyer may try to get you to fix up every little thing that comes up in a house inspection.

3) If any of the houses have "issues" then buyers may be willing to overlook those in a strong housing market. I once had a house which had minor flood damage which had been repaired. I was able to sell it OK in a fairly strong market but it would have been very hard to sell in a weak housing market. If any of your houses have issues like being in a flood zone, near power lines, on a busy street, etc then you might want to sell them while the housing markets are still hot.
exodusNH
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Re: sell all rental homes in one year or stager them yearly

Post by exodusNH »

Assuming that you've taken the depreciation deductions, watch out for depreciation recapture. You might want to talk with a tax person.
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quantAndHold
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Re: sell all rental homes in one year or stager them yearly

Post by quantAndHold »

Watty wrote: Thu Apr 15, 2021 9:23 am
There is also a non-zero chance that if you do not sell them soon that one of you could die and the survivor would be in the higher single tax brackets when they sell the houses. This is especially true if you decide to not sell them for 5 or 10 years or more.
Isn’t the cost basis stepped up on the death of the owner, just like it is for other investments? In that case, “you could die” would be an argument for keeping the properties.
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gwe67
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Re: sell all rental homes in one year or stager them yearly

Post by gwe67 »

This illustrates one of the hazards of being a landlord: the quandary of how to get out.

Your choices are death or taxes.
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Topic Author
boaski
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Re: sell all rental homes in one year or stager them yearly

Post by boaski »

To answer a few questions I built the houses from the ground up and now maintain them the reason for selling the is the rest of my family is 1200 miles away from me and I do not want them to have to deal with them when I am gone. the houses are in middle class neighborhoods in southwest Austin Tx. With the hot market I thought I would just pay the tax and end up with more money than earlier projections'
I could see a home in my subdivision getting ready to go on sale so I decided to put a sign out and got a full price, as is offer in two days just paying 3% commission.
I do not want to go the 1031 route and if I stager the sale it is not a problem I will just keep doing as I have.
I do not need the money we have about 1.9 mil. at vanguard'
I asked my cpa about this last year and he pretty much told me the same thing thank you all for your insight .
trueblueky
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Re: sell all rental homes in one year or stager them yearly

Post by trueblueky »

Are there people/companies who would buy all four at once?
Californiastate
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Re: sell all rental homes in one year or stager them yearly

Post by Californiastate »

exodusNH wrote: Thu Apr 15, 2021 9:58 am Assuming that you've taken the depreciation deductions, watch out for depreciation recapture. You might want to talk with a tax person.
This and state income tax brackets come to mind.
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dratkinson
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Re: sell all rental homes in one year or stager them yearly

Post by dratkinson »

Good problem to have. I vote: maximize your after-tax income to invest in your taxable account.


Believe 2018 was the first year of the current tax code (signed Dec 2017). And it was to have a 10yr sunset, after which time tax brackets would return to former higher rates. Assuming it does, better to sell before sunset.


Assuming you start Medicare at age 65. The Medicare IRMAA is based on your AGI from 2yrs before (age 63).

If you learn that any one sale will put you in the highest tax bracket, then might want to sell all in one year and get it over with---one and done. Then you're no longer a landlord, and after a 1yr tax hit (age 63) and IRMAA hit (age 65, based on age 63 AGI), you're back to lower income and ACA subsidy for 1yr (age 64), before taking Medicare (age 65, with higher IRMAA for 1yr*), and living on property sale proceeds to delay SS until age 70. (* IRMAA is not a terrible thing, as you have the money to pay it.)

But if selling one-at-a-time over 4yrs keeps you out of the highest tax bracket, then that would seem to be better income tax-wise.


Idea. Recall some donate appreciated property for the tax deduction. See if this will work for you. Assume all properties of equal value ($460K), and sold in 1yr.
+sell property 1(+460K).
-donate property 2 (-460K).
+sell property 3 (+460K).
-donate property 4 (-460K).
$0, net addition to AGI for the year. But you pocket 920K (before tax) to invest, and keep your ACA subsidy (age 63 and 64, and minimize IRMAA age 65).

But above also means you give up 920K (before tax), to keep your ACA subsidy and minimize your IRMAA. That seems like a high price to pay... so maybe this idea is letting the tax tail, wag the investing dog.


I vote: get the most you can at the lowest cost (income tax + loss of ACA subsidy + IRMAA). If this means spreading sales over 4yrs then so be it.

But your answer will depend upon which your prefer more: being tenant free, or maximizing after-tax income on sales. So time to run some sample tax returns to see what can be done (tax savings from dragging out the process), and how much you want to drag out the process.

Search: https://www.google.com/search?q=depreciation+recapture


I know nothing, so should double-check everything with a competent tax planner
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Watty
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Re: sell all rental homes in one year or stager them yearly

Post by Watty »

quantAndHold wrote: Thu Apr 15, 2021 10:03 am
Watty wrote: Thu Apr 15, 2021 9:23 am
There is also a non-zero chance that if you do not sell them soon that one of you could die and the survivor would be in the higher single tax brackets when they sell the houses. This is especially true if you decide to not sell them for 5 or 10 years or more.
Isn’t the cost basis stepped up on the death of the owner, just like it is for other investments? In that case, “you could die” would be an argument for keeping the properties.
That makes sense.

One thing to keep in mind though is that the step up in cost basis might not exist in 20+ years if there is a tax law change.
Slama40
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Re: sell all rental homes in one year or stager them yearly

Post by Slama40 »

Some additional points to consider. You could 1031 into a syndication which would require less hands on management. Would you consider moving into one of the properties for two years in order to take advantage of the primary home exclusion of 250k/individual or 500k/married couple? This can be repeated every 2 years. You could also do seller financing which would spread the tax hit out over a number of years. This would be beneficial if you don't need all the money now and the properties would still be secured.
I would spread the sales out over a number of years if I wanted to sell. You could also cash out refinance if you want the cash. Depending on your state tax law, your basis would be stepped up partially/all on the death of the first spouse which would also save you taxes overall on the sale. I believe TX is a community property state so the basis would be fully stepped up, saving you tons of taxes. You may want to liquidate after the death of the first spouse if this is correct.
Please check with your CPA. This is a large transaction to do based on internet advice. Verify, verify, verify.
Gill
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Re: sell all rental homes in one year or stagger them yearly

Post by Gill »

Another point to consider; Are you sure of your basis? Is that after depreciation? The ones you have held for twenty years may be nearly fully depreciated.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
MarkNYC
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Re: sell all rental homes in one year or stager them yearly

Post by MarkNYC »

Slama40 wrote: Thu Apr 15, 2021 2:29 pm Some additional points to consider. You could 1031 into a syndication which would require less hands on management. Would you consider moving into one of the properties for two years in order to take advantage of the primary home exclusion of 250k/individual or 500k/married couple? This can be repeated every 2 years.
If a property is acquired in a Sec. 1031 exchange, that property is not eligible for the principal residence exclusion until after the 5-year period starting on the date of acquisition.

Also, a 1031 exchange is a "like-kind" exchange, meaning a rental property cannot be exchanged for a personal residence. The 1031 exchange of a rental property will be valid if the property acquired is rented for at least 2 weeks for each of the first 2 years before being converted to a personal residence, and the personal use of the property during those first 2 years is minimal.
CurlyDave
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Re: sell all rental homes in one year or stager them yearly

Post by CurlyDave »

Humility101 wrote: Thu Apr 15, 2021 6:54 am Have you considered a 1031 exchange to buy a another property you can use for your personal enjoyment? That would solve the tax problem and the landlord problem.

Other wise it may be wise to stagger the selling unless you want a massive tax bill.

Cheers,

Humility101
15 years ago I did a number of 1031 exchanges and at least at that time it was not possible to 1031 exchange between a rental property and a personal use property.

As I recall it, our tax advisor said that 1031 exchanges only worked from rental to rental. And the new property had to be rented for at least one year before it could be converted to personal use...

Things may have changed since them so YMMV.
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4nursebee
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Re: sell all rental homes in one year or stager them yearly

Post by 4nursebee »

Talk to CPA.

Do capital gains really change ordinary income and FEd tax rates? In other words, don't you just pay fed taxes on gains, not also as income?
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eric321
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Re: sell all rental homes in one year or stager them yearly

Post by eric321 »

Also consider an opportunity Zone fund to defer and potentially eliminate some of the capital gains.

Look into a Delaware statutory trust as a 1031 into a real estate fund.

Don't forget to factor in the depreciation recapture. Your purchase basis is relatively low but this could be another big tax impact. If you bought the house for 110k and the land was worth 10k and the building was worth 100. You divide up the building into 27.5 years and expense and reduce your cost basis down. When you sell your basis may be 30-40k and you're taxed on the difference.

Consider section 179 deductions. Although this is not the best time to buy a pickup truck with supply and chip shortages. It is business equipment to manage rental properties and the entire amount can offset current year taxes.
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