“I’ve owned apartments in San Diego for 40 years and I’m tired. I’m 71 and want out of being a property manager. My wife and I own a 7-unit complex of Normal Heights apartments. Any ideas on how to sell it without paying a lot of tax?”
Answer:
Here are six ideas for you:
1. Keep it and hire a manager.
This obviously isn’t selling it, but it gets you out of most of the management.
2. Sell and pay Uncle Sam.
See your tax professional to determine how much tax you’d pay. Capital gains tax rates are at historic lows (15% fed, 9.3% state), but at this writing the fed rate is set to go 20% on January 1, 2011, unless Washington extends the Bush tax cuts. Also, you’ll pay a higher rate on the portion called “depreciation recapture.”
3. Do the tax two-step.
First, do a 1031 exchange, selling the apartments and trading them for a home you’d like to live in. Rent that home for one to two years so it qualifies as a valid exchange. Then sell your current home, defer up to 500K (250K for singles) in gain, and move into the rental house. Result: you’ve sold the apartments, hopefully own a nicer home, & potentially paid ZERO tax.
4. Exchange into an easier to manage property.
Sell the apartments and do a 1031 exchange into one or two houses or condos near you. You may get less cashflow, but they’ll be simpler to manage.
5. Exchange into a “TIC,” or “Tenant In Common” property.
A recently popular real estate investment vehicle. You buy a % ownership of a flagship commercial property with professional management. Your main job is cashing your check every month. To find out more, call me at 858-457-KENT and I’ll refer you to a professional who handles TICs.
6. Consider a “Capital Gains Bypass Trust.”
This creative yet apparently legal approach can be very beneficial if you owe little or nothing on your property. See your tax professional for more information.
