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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire On Time, a show that answers your retirement questions. Say goodbye to oversimplified advice you've heard hundreds of times. This show's all about getting down to the nitty gritty. As always, you can your questions to (913) 363-1234. And remember, this is just a show, not financial advice.
Mike:David, what have we got today?
David:Hey, Mike. How do you map out which rental homes to sell and which to push out?
Mike:Yes. This is actually an easier question than may seem. So I believe the premise of the question is to avoid taxes. And if you have, let's say, five properties, and you sell one of them, let's say, for a $500,000 gain because you bought it at dirt cheap and all real estate appreciated in value, you don't wanna pay $500,000 in long term capital gains. Don't forget the depreciation recapture and all of this that you're paying in arbent and leg in taxes.
Mike:So And a lot of people will say, well, shoot. It's gonna take me five years to get out of all my properties. Kind of. So if you want to sell the property, pay the taxes, and then do whatever you want with it, and these are nonqualified assets at this point, Remember the nonqualified asset conversation we had. Mhmm.
Mike:Then you might wanna spread it out one or two a year and keep it within a certain taxable threshold, and we're looking within depreciation recapture and long term capital gains. We're not looking as much on the income tax side of it. That may be true, and that's just a conversation of, okay, what properties have the lowest net operating income after all expenses are paid for, after you've paid property taxes, after you've done your depreciation recapture, all those things. How much cash flow are you actually taking? And then how much of the cash flow is income, and how much gets reinvested?
Mike:Many times, we'll look at properties, and we'll say, you're actually losing money on this property. So you'd wanna prioritize those first, and then other ones later just from a cash flow standpoint. No one likes to pay monies for someone else to live in that house. That doesn't make any sense. But once you understand that, then you can line things out.
Mike:If you wanna pay the taxes, if you wanna get out of it slowly over time, and maybe that's right for you. However, if you wanna just be done with it, then you've got another option. One is a seven twenty one up REIT. So that's where you're gonna take your property for fair market value, assuming you can get fair market value and negotiate that it's then rolled up into a REIT, a real estate investment trust, where then you're getting basically a paycheck because your property is now as a part of that overall umbrella. And as a part of that trust, you're gonna get OP units.
Mike:Those are operating partnership units, and you're just gonna receive income as a partner.
David:Do you still own the property, but it's just part of this trust now, or do you Yep. Sell it? No. You don't sell it. Oh.
Mike:You just move it in there, and you receive open units in exchange for it.
David:Okay.
Mike:So if you've got, like, a $510,000,000 apartment complex Mhmm. That might be very appealing to you, but it's all gonna go into one property or one REIT.
David:Okay.
Mike:So that might be concerning to you. And how is the REIT managed? What's the dividend? Are they leveraged? Are they not leveraged?
Mike:Leveraged for the uninitiated that's that they're taking. Real estate investors know this, but for everyone else, you're taking basically debt to try and get better cash flow. So you really wanna get a CPA or someone that can do a deep dive into the financials of the REIT that it would be inherited so that you're getting you're not moving your property into something that's just risky. If you take a healthy property and you move it into a REIT with a bunch of unhealthy properties because they're not being well managed, maybe the cash flow is hurting, maybe there's a lot of neglect, it's going to take a toll at some point on your property. So you wanna make sure that things are very suitable.
Mike:Or you could do a ten thirty one exchange into a Delaware statutory trust and buy a couple of different DSDs instead of taking a seven twenty one up rate, which is fractional ownership of a trust, you're buying fractional ownership of the actual real estate property. So that's another way to do it, and you can buy a couple of them. Think of, like, student housing, self storage units, boring properties, but someone else is the landlord. You're getting cash flow, so you're getting your income, and the appreciation of the property will continue, something that it does appreciate. And then in maybe five to seven years, you'll sell it and defer it into another seven or let's see, ten thirty one exchange into the next property, and you just maintain your cash flow over and over until you pass, and then your beneficiaries get the step up in basis.
Mike:So that means that you they get it tax free at that point.
David:On the second option though, the DST, that you are selling your real property, right, in that case?
Mike:You sell it, but you move the proceeds to a qualified intermediary.
David:You
Mike:cannot touch the assets. Yeah. And there's a whole thing, forty five days to identify your properties, hundred and eighty days to actually get it there. So there's some nuance there. You could take some of the cash out and just pay the taxes on that portion of it.
Mike:So it's complicated in how it's done, but if you wanna just be done with it, then the question is, can you get a good deal on the sale of your property? Because there's no limit to this, at least right now based on current law. It's been floated to limit this. Right now, there's no limit that I'm aware of. But you could just sell all your properties and be done with it, and now you've got your cash flow.
David:Okay. And so when you say limited, like, there's no limit on the dollar amount? Yeah. Selling all these properties, it could be tens of millions or a 100,000. Yep.
David:Doesn't matter. Okay.
Mike:There's been talk of making a 5,000,000 or so Oh. Limit on ten thirty one exchanges. Everything above that would have to be taxed. That's just never actually been passed.
David:Okay.
Mike:So lot of options there. Many people either don't know about the seven twenty one UPREIT or the ten thirty one exchange, the Delaware statutory trust. And if they did know about it, there are many restrictions, so their firm will just say, we don't do that, so you can't facilitate that. And then people are compromised saying, well, you just have to sell and pay the taxes, and that's kind of it. We have more tools in our toolbox for those that do want to explore other tools.
Mike:That's why we're here. You may not know the tax efficient ways to get out of your real estate like what we just talked about, and there's other ones we haven't even talked about. We could even explore things like qualified opportunity zones or oil and gas partnerships that can wash out certain taxes in certain ways. There are so many ways it could be done. The question is which one's right for you?
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get podcasts. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. Is not your ordinary financial analysis.
Mike:Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.