Many Intelligent Citizens Purchased Rental Houses Or Other Rental Properties At The Right Time In The Chaos Or Downturn.
They now have some good amounts of equity. They can continue getting more inflation and operation monies, or they could consider selling. Selling could bring on some tax problems, because the famous $250K/$500K Exclusion of Gain does not apply to rental properties.
Gifting It To Someone Is Also A Problem
There is a BASIS problem. When you gift rental houses, the tax basis of the house follows to the new owner or giftee. When they sell, they would be liable for a tax bill.
If someone receives a property with a low basis on the death of the owner, the basis goes to fair market value at the time of the death. Sell the property the next day and no tax. That is why in so many cases gifting real estate on your death bed is not always the best thing to do. Die and there is no tax, so death is sometimes good tax planning.
What Could You Consider?
The old relic, the 1031 Exchange. Exchange the property for another larger property or two houses and get more leverage, more inflation, and other benefits. You do a Tax Deferred Exchange.
Some people in the area around my office bought nice rentals in the downswing at around $300K. Many of them today are worth over $600K. An owner who has not refinanced might have up to $350K of equity.
Consider 20% down on replacement property, they could get more property. Let’s use the old 20%X equals $350K problem. X or the value of property that this person could purchase is $1.7M. Not a bad move up. Of course, there has to be some professional analysis to make sure that there is enough income to carry the mortgage required. But it is a thought.
Not so adventurous. Trade the house for two houses at $600K each. Double down.
What Is Involved In An Exchange?
The properties must be similar use which is a broad definition. To be completely tax deferred, the trader must come out of the transaction with more value and more mortgage in the new properties. It is called the Napkin Test because years ago Marvin Starr, a California attorney, at lunch wrote on a napkin, “Go up in value and up in loans, and you will pay no tax”.
There Are Many, Many Other Rules
Some of the basics include:
- You must select your new property within 45 calendar days and complete the transaction within 180 calendar days or you will pay tax on your sale.
- You must give the proceeds from your sale to an accomodator to hold until needed for the “upleg” property.
This transaction needs professional advice for all parties, every step of the way. There are so many sources where information can be found.
Real Estate Agents:
If you know someone with large equity in a rental property. You might learn the basics of Real Estate Exchanging and discuss the facts with said clients. You could really assist them in their estate building and be an information source for rental property owners.
If you can transact a 1031, there would be a listing for you on the present home and then perhaps two more purchase transactions. And you have done the person a real service.
Remember One Fact About Real Estate:
You sell a home in today’s market and people seem to stay there for a long time. You sell a rental home in today’s market, and they may want to buy or sell another one tomorrow. I loved selling or exchanging apartment houses, because you were selling multiples.