Liquidating rentals now what?

[SLC OB]

I have a similar dilemma and would love the advice from White.Beard.Doc and
pit.alumni
Thanks CordMcNally my teens have enough sleeveless hoodies for the whole family... what is up with that?!?!

My 84 year old mom moved in with us at Thanksgiving... we have been cleaning out her condo (on top of working way too hard, caring for her and my teenagers, laundry, etc.) and deciding what to do with it. It is mine and my husband's condo, as we put the downpayment down, supplemented her rent, paid property taxes, etc. even though it is in her name. If we sell now, we would get about $525K from the sale tax free ($250K from her living there recently, then rest due to the receipt of all the payments over the last 16 years, per my estate attorney).

So... do we sell?
Or... we can do a long term rental for about $3000-3500/month. There is still a mortgage, about $170K, left at about $1500/month (which includes the HOA monthly fees).
We do not have the time for STR (both my husband and I work full time, too much hassle for us and there is a moratorium by the town on STR for now).

So... sell and take the cash (with rising inflation... we could pay off our primary mortgage but at 2.375% not really the best idea)?
Or rent? Do you judge the rental potential on the current value or the amount you paid for the house? (for instance, we paid $300K for the condo... worth about $775K now). Also, do you look at the rental $$ as that much above your cost (meaning anything over mortgage, property taxes, slush fund for water heater, etc.) or any money coming in ($3000 x 12 months)?

Thanks for looking at this!

[bovie]

My 84 year old mom moved in with us at Thanksgiving... we have been cleaning out her condo (on top of working way too hard, caring for her and my teenagers, laundry, etc.) and deciding what to do with it. It is mine and my husband's condo, as we put the downpayment down, supplemented her rent, paid property taxes, etc. even though it is in her name. If we sell now, we would get about $525K from the sale tax free ($250K from her living there recently, then rest due to the receipt of all the payments over the last 16 years, per my estate attorney).

Is it just me, or does it sound like the condo is actually your mother’s?

Would love to believe that your estate attorney is correct about this, but it’s in her name…

For example, if something were to happen (God forbid) to your mother tomorrow, it would then become part of her estate—no?

Seems like a bit of an interesting situation, financially.

[StarTrekDoc]

Personally, I like having roughly half of my investments in real estate and half in stocks. We have switched over to mostly professional management for the real estate portfolio. In retirement, the juicy monthly cash flow on the real estate will be a nice counterpoint to the lower dividend income but higher growth potential of stocks.

Exactly. Our retirement portfolio is 50/50 direct RE/equities at this time too and trying to maintain that balance --- of course our NW is significantly lower than your home runs

[Tim]

Personally, I like having roughly half of my investments in real estate and half in stocks. We have switched over to mostly professional management for the real estate portfolio. In retirement, the juicy monthly cash flow on the real estate will be a nice counterpoint to the lower dividend income but higher growth potential of stocks.

https://www.aicpa.org/resources/arti...-professionals
Protect that REP status for the wife! You have a ton of tax exposure there!
“Each interest in a rental real estate activity is a separate activity, unless the taxpayer elects to treat all interests in rental real estate activities as one activity (Sec. 469(c)(7)(A)). The election, which is binding for all future years unless there is a material change in facts and circumstances, makes it easier to meet the material participation tests under the passive loss rules. ”
She needs to replace We. She is the REP for tax purposes. I know you vetted this extensively. Just a reminder. “is involved in the operations of the activity on a basis that is regular, continuous, and substantial.” When you vetted, I would suggest getting advice not only for one year, but any ongoing requirements.
Way out of my wheelhouse. Apologies and don’t want to sidetrack this thread.

[Dont_know_mind]

That’s a lot of tax.

I would be better off if I had forgotten about the real estate and not sold any.

Particularly if I had forgotten about the debt on the property and just never worried about paying it off.

But then things could have turned out differently. And my portfolio is not yours and neither is my risk preference. I guess everyone will be different.

REITS I have never had much interest in. I think real estate is not a bond. It is a risk asset to me. You probably think so too, which is why you want to sell it. But you want equity type returns.

[White.Beard.Doc]

I have a similar dilemma and would love the advice from White.Beard.Doc and
pit.alumni
Thanks CordMcNally my teens have enough sleeveless hoodies for the whole family... what is up with that?!?!

My 84 year old mom moved in with us at Thanksgiving... we have been cleaning out her condo (on top of working way too hard, caring for her and my teenagers, laundry, etc.) and deciding what to do with it. It is mine and my husband's condo, as we put the downpayment down, supplemented her rent, paid property taxes, etc. even though it is in her name. If we sell now, we would get about $525K from the sale tax free ($250K from her living there recently, then rest due to the receipt of all the payments over the last 16 years, per my estate attorney).

So... do we sell?
Or... we can do a long term rental for about $3000-3500/month. There is still a mortgage, about $170K, left at about $1500/month (which includes the HOA monthly fees).
We do not have the time for STR (both my husband and I work full time, too much hassle for us and there is a moratorium by the town on STR for now).

So... sell and take the cash (with rising inflation... we could pay off our primary mortgage but at 2.375% not really the best idea)?
Or rent? Do you judge the rental potential on the current value or the amount you paid for the house? (for instance, we paid $300K for the condo... worth about $775K now). Also, do you look at the rental $$ as that much above your cost (meaning anything over mortgage, property taxes, slush fund for water heater, etc.) or any money coming in ($3000 x 12 months)?

Thanks for looking at this!

There are all kinds of tax issues involved here. My first call would be to the CPA regarding the tax consequences of each of the different options.

As far as keeping the condo as a long term rental, you should start with an analysis of the property as a business. Income vs expenses. Income is annual rent. Expenses are mortgage, property taxes, insurance, condo fees, vacancy expense and finally maintenance and repairs. There are 4 ways you make money on real estate, cash flow, appreciation, mortgage pay down, and tax savings. If the condo will cash flow well, and the area has good prospects for appreciation, and if it will attract a high quality, low maintenance tenant, then it would be ok to keep it for investment. But alternatively, now is a good time to sell in terms of high demand and high prices in most markets. When you calculate the return on investment, I would use the amount of cash that you would receive post closing costs and taxes if you were to sell, as the amount invested in this property. That is the amount you would be investing in the market if you were to go ahead and sell.

[Larry Ragman]

I am going to list one of my rental properties since the long term tenant just gave notice. I will only have one left, lease expiring this spring, and I am thinking about listing it also. My rationale is the prices are significantly inflated and properties are selling quickly. I probably won't have to do a $50,000 renovation which would generally be required to make it more competitive. Both are solid rentals in good neighborhoods with a chance of continuing to increase in value but I am skeptical this will happen. I'm not sure the hassle of renting is worth the chance that in 5-10 years the house will not have increased in value if I could have just parked the funds somewhere and coasted.

My questions include does this sound reasonable? I started the landlord gig when I was in my late 20s and had minimal income. They have been very good to me but now feel like an unnecessary burden/liability. Second question is where do I put the proceeds? My rental properties are in the safe with appreciation potential category and despite being less than 10 years from retirement I'm not interested in being too safe at the expense of some income. REITs?

Thank you in advance for your insight and advice.

Selling would be fine, but it is not clear it is the best option. For example, you may have a significant tax bill waiting in LTCG and depreciation recapture.FWIW, I tend to think we are in a once a generation bubble in RE that will slowly subside with rising interest rates.

A few thoughts if you keep the properties and do the upgrade:
1. Saves taxes now and preserves stepped up basis for later
2. If tired of management, hire a management company
3. If want the money tax free, take out a loan on the property (ies)

If you sell:
1. Tax deferred exchange (1031) to a larger property to facilitate professionalizing the business (e.g., apartment building; office building). Hire management.
2. 1031 to a rental at the second home site of your choice (beach, mountain lake, etc.), rent for minimal time, convert to second home
3. Opportunity zone investment (fund, syndication)
4. Build up losses through tax loss harvesting this year to offset LTCG

Where to put the money otherwise? I am thoroughly unimaginative.
1. Pay the taxes
2. Take a trip
3. Buy low cost index mutual funds.
4. Maybe take 5% for a flyer. Oil and energy stocks?

[SLC OB]

Is it just me, or does it sound like the condo is actually your mother’s?

Would love to believe that your estate attorney is correct about this, but it’s in her name…

For example, if something were to happen (God forbid) to your mother tomorrow, it would then become part of her estate—no?

Seems like a bit of an interesting situation, financially.

It is in her will that it goes directly to us. My brothers (all the others in will) have known this forever.

[Larry Ragman]

It is in her will that it goes directly to us. My brothers (all the others in will) have known this forever.

Still, for now all the tax benefits accrue to her, not you. The upfront costs you paid don’t impact ownership, other than her agreement that she will leave it to you. Well, unless you co own it on the deed? If not you are likely better off from a tax perspective to rent it out now and inherit the stepped up basis when she eventually passed.

[StateOfMyHead]

That’s a lot of tax.

I would be better off if I had forgotten about the real estate and not sold any.

Particularly if I had forgotten about the debt on the property and just never worried about paying it off.

But then things could have turned out differently. And my portfolio is not yours and neither is my risk preference. I guess everyone will be different.

REITS I have never had much interest in. I think real estate is not a bond. It is a risk asset to me. You probably think so too, which is why you want to sell it. But you want equity type returns.

Thank you for your response. I was going to say no I absolutely don't feel RE is a risk asset just another thing to babysit with a slight increase in liability but maybe you are correct in that the time, aggravation is a liability. From a financial standpoint the last property is essentially guaranteed to hold value in a 10 years timeframe as it is and likely even with the necessary updates coming my way in the future. I'm really torn as to whether avoiding the occasional annoyances (renovation can be more than an annoyance but I've weathered it many times) is worth not having this investment vehicle.

Everyone who has responded has been very helpful, really appreciate it.

[pit.alumni]

This is exactly what is weighing on my mind. I'm not one of the docs who came from an affluent background or is well off. I'm looking at retiring with $3mil so I don't want to make a foolish decision. From strictly a financial standpoint the last house is unequivocally a solid investment and has been easy to rent. The mortgage is paid off and I could get $300 a month increase on current rent with $50,000 rehab. The tax hit now if I sell both would be be rough. I'm just not sure I want to be a landlord any longer. I imagine this is due in part to the chronic nature of the pandemic and being crushed at work but having one less aggravation, one less phone call to answer sounds very attractive right now.

In the end it's mostly a numbers game. You look at what's left after selling expenses and taxes and project a conservative return on that verses what you earn as a continued rental. A $300/month increase doesn't seem like a lot for a $50k renovation. It makes me wonder if a lot of that is deferred maintenance as opposed to cosmetic improvements. I've found things like granite counters, nicer appliances, flooring upgrades and central air give bang for the buck, a new roof doesn't increase rent. I wouldn't be a landlord without a property manager, fielding a call from the property manager is a different animal than fielding a call from a tenant.

[pit.alumni]

I have a similar dilemma and would love the advice from White.Beard.Doc and
pit.alumni
Thanks CordMcNally my teens have enough sleeveless hoodies for the whole family... what is up with that?!?!

My 84 year old mom moved in with us at Thanksgiving... we have been cleaning out her condo (on top of working way too hard, caring for her and my teenagers, laundry, etc.) and deciding what to do with it. It is mine and my husband's condo, as we put the downpayment down, supplemented her rent, paid property taxes, etc. even though it is in her name. If we sell now, we would get about $525K from the sale tax free ($250K from her living there recently, then rest due to the receipt of all the payments over the last 16 years, per my estate attorney).

So... do we sell?
Or... we can do a long term rental for about $3000-3500/month. There is still a mortgage, about $170K, left at about $1500/month (which includes the HOA monthly fees).
We do not have the time for STR (both my husband and I work full time, too much hassle for us and there is a moratorium by the town on STR for now).

So... sell and take the cash (with rising inflation... we could pay off our primary mortgage but at 2.375% not really the best idea)?
Or rent? Do you judge the rental potential on the current value or the amount you paid for the house? (for instance, we paid $300K for the condo... worth about $775K now). Also, do you look at the rental $$ as that much above your cost (meaning anything over mortgage, property taxes, slush fund for water heater, etc.) or any money coming in ($3000 x 12 months)?

Thanks for looking at this!

Not knowing your local market it's hard to give specific advice but some general things to consider. First, if you know someone involved in your local market that you trust ask them. In general, condos do not appreciate as well as sfh or multifamily but I'm sure there are market where that is not true. The fact that it looks like you can sell without taking a big tax hit is a good thing. I always look at my rental income as the net I have after paying all expenses, because that is what I can spend. But in calculating my return I also count the paydown of the mortgage. Appreciation, is never guaranteed but in general should keep up with inflation. With the big run up recently who knows what the next few years will bring. I don't know your market so I'm not sure what the rental pool is in the $3000-$3500 price range. A tenant would need to be earning about $120k/year to afford that which in many markets limits the rent pool. I'd look at what you expect to net each year and include the mortgage paydown in your earnings, Include the cost of vacancies, projected repairs and property management and then decide if that's a reasonable return on your $525k in capital or there are better places to deploy it.

[SLC OB]

Not knowing your local market it's hard to give specific advice but some general things to consider. First, if you know someone involved in your local market that you trust ask them. In general, condos do not appreciate as well as sfh or multifamily but I'm sure there are market where that is not true. The fact that it looks like you can sell without taking a big tax hit is a good thing. I always look at my rental income as the net I have after paying all expenses, because that is what I can spend. But in calculating my return I also count the paydown of the mortgage. Appreciation, is never guaranteed but in general should keep up with inflation. With the big run up recently who knows what the next few years will bring. I don't know your market so I'm not sure what the rental pool is in the $3000-$3500 price range. A tenant would need to be earning about $120k/year to afford that which in many markets limits the rent pool. I'd look at what you expect to net each year and include the mortgage paydown in your earnings, Include the cost of vacancies, projected repairs and property management and then decide if that's a reasonable return on your $525k in capital or there are better places to deploy it.

Rental market here is crazy... this is a 2 bed 2 bath condo going for $3000-3500. Some SFH renting for $4-6K/month for basic homes. We own one other property and have rented it out since August 2013 and have not had ONE day with it empty... therefore have never had to go in and paint, replace carpets, etc. and keep upping the rent by 5% (California... that is all I can increase yearly with same tenants). I doubt it will appreciate that much more... but I thought that last year when I thought we could get $650K for it and now comps have been $775K. Considering it has gone from $300K ---> $775K in 16 years, that's pretty good appreciation. I hate the HOA fees but it does take care of roof, snow removal, landscaping, outdoor painting, pool, gym, etc.

Yes, super awesome that we can sell without the tax hit (having to do with estate law and gifting us inheritance now along with the $250K for her and the receipts of what we have spent for her (basically, I think it will be considered a "pay back" of a loan to her). Not sure we will ever get back in the market... unless there is a crash again... as this is ridiculous pricing for a condo. But people are paying it!

With inflation, I was reading it is better to have hard assets like real estate than cash/savings. I do worry (but who knows!) that the stock market wont return much and so to get $30-35K/year in rent would be nice.

Thanks for responding!

[StarTrekDoc]

Yes, super awesome that we can sell without the tax hit (having to do with estate law and gifting us inheritance now along with the $250K for her and the receipts of what we have spent for her (basically, I think it will be considered a "pay back" of a loan to her). Not sure we will ever get back in the market... unless there is a crash again... as this is ridiculous pricing for a condo. But people are paying it!

Be careful on the gifting inheritance with step up and counting the prior costs/subsidies and how's that counted -- would really get a lawyer to sign off on that in case audit comes around to defend appropriately -- definitely abundance of choices on whether to keep or rent.

[Larry Ragman]

Rental market here is crazy... this is a 2 bed 2 bath condo going for $3000-3500. Some SFH renting for $4-6K/month for basic homes. We own one other property and have rented it out since August 2013 and have not had ONE day with it empty... therefore have never had to go in and paint, replace carpets, etc. and keep upping the rent by 5% (California... that is all I can increase yearly with same tenants). I doubt it will appreciate that much more... but I thought that last year when I thought we could get $650K for it and now comps have been $775K. Considering it has gone from $300K ---> $775K in 16 years, that's pretty good appreciation. I hate the HOA fees but it does take care of roof, snow removal, landscaping, outdoor painting, pool, gym, etc.

Yes, super awesome that we can sell without the tax hit (having to do with estate law and gifting us inheritance now along with the $250K for her and the receipts of what we have spent for her (basically, I think it will be considered a "pay back" of a loan to her). Not sure we will ever get back in the market... unless there is a crash again... as this is ridiculous pricing for a condo. But people are paying it!

With inflation, I was reading it is better to have hard assets like real estate than cash/savings. I do worry (but who knows!) that the stock market wont return much and so to get $30-35K/year in rent would be nice.

Thanks for responding!

The tax avoidance here does not track. It sounds like you could sell for ~$775 k and owe somewhere around $250k, leaving $525? Maybe off a little to cover selling costs, but let’s ignore those. So she gets a LTCG exclusion of $250k of the $525k. That means she owes LTCG on the balance, at 20% (maybe 23.8% if she owes the NII and ACA Medicare penalties) on $275k. Call it $55k. Certainly she could gift the rest ($470k?) to you, but I would not call it loan payback unless you had the loan properly documented. And if it were loan payback, you should have been getting market rate interest, and paying taxes on it. Regardless, with my (likely wrong) math, you would avoid the $55k tax if you inherited. Because if she sells now the tax has to be paid.

BTW, I should say I am no expert. This paragraph is how I understand the situation, but it really should be read as a question. I am interested in the mechanism your lawyer is using to help you avoid tax. How would it work?