So perhaps you’ve owned your building for a long time and now you are considering retiring from residential real estate and putting your property on the market. Before you do that let’s discuss the 5 exit strategies for multifamily investors.
Pay Your Capital Gains Taxes
This one is pretty simple. Sell your building and pay your Federal, State, and Net Investment Income taxes as well as your 25% depreciation recapture. It might total as much as 40% of your profit but surprisingly many sellers I have worked with chose this option. It might make sense if you have loads of cash already and you don’t want to be bothered with figuring out the best strategy to defer your taxes. But for the rest of us it makes sense to examine all of the other deferral options.
The next two options are not true exit strategies because you will still own real estate but the last two options are true exit strategies with no further real estate owned.
1031 Exchange to Triple Net Retail Property
This may be a good option for those sellers who are not ready to get out of the real estate game but do not wish to manage or operate residential real estate and all of the associated hassles of dealing with tenants, leaky toilets, and rent control. I have known many apartment owners who opted to exchange their multifamily property for commercial.
With a triple net commercial property, the tenant is responsible for the majority of expenses, so the rent received by the owner is profit. The tenant pays the utilities, taxes, and insurance, and usually any repairs or maintenance. So, the day to day headaches of managing tenants and maintaining your multifamily building are eliminated. Not to say there are no risks with commercial triple net. There are a whole different set of things to consider namely the financial strength of the anchor or main tenant and the remaining number of years left on the lease. If this is something you would like to know more about please contact me.
Delaware Statutory Trust (DST) in Managed Commercial Real Estate
A definition and explanation of a DST from Wikipedia:
“A Delaware statutory trust (DST) is a legally recognized trust that is set up for the purpose of business, but not necessarily in the state of Delaware. Delaware statutory trusts are formed as private governing agreements under which property (real, tangible and intangible) is held, managed, administered, invested and/or operated.
DST Investments are offered as replacement property for accredited investors seeking to defer their capital gains taxes through the use of a 1031 tax deferred exchange and as straight cash investments for those wishing to diversify their real estate holdings.
The DST property ownership structure allows the smaller investor to own a fractional interest in large, institutional quality and professionally managed commercial property along with other investors, not as limited partners, but as individual owners within a Trust. Each owner receives their percentage share of the cash flow income, tax benefits, and appreciation, if any, of the entire property. DSTs provide the investor the potential for annual appreciation and depreciation (tax shelter), and most have minimum investments as low as $100,000, allowing some investors the benefit of diversification into several properties.
The DST ownership option essentially offers the same benefits and risks that an investor would receive as a single large-scale investment property owner, but without the management responsibility. Each DST property asset is managed by professional investment real estate asset managers and property managers”.
One option for DST investors is to go with flexibility-equity investments in commercial property run by professional managers. These flexibility-equity investments mean that you only have to buy (exchange) a portion of the commercial offering, not the whole thing. For example, you could invest in single tenant properties leased to healthcare related companies on long term leases. One firm that I am familiar with in Southern California is Kingsbarn Realty Capital who is a leader in the DST industry. You can see their website and read about DSTs by clicking here.
Charitable Remainder Trusts (CRT)
Are you the altruistic type? Well a CRT may be a good choice. Here is the definition and information of CRTs from Investopedia.com:
“A charitable remainder trust is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. This is a “split interest” giving vehicle that allows a trustor to make contributions, be eligible for a partial tax deduction, and donate remaining assets.
A central idea of a charitable remainder trust is to reduce taxes. This is done by first donating assets into the trust and then having it pay the beneficiary for a stated period of time. Once this time frame expires, the remainder of the estate is transferred to the charities deemed as beneficiaries.
Charitable remainder trusts are irrevocable. This means that they cannot be modified or terminated without the beneficiary’s permission. The grantor or trustor, having transferred assets into the trust, effectively removes all of her rights of ownership to the assets and the trust upon creation of its irrevocable status. In contrast, a revocable trust allows the grantor modifications.
This charitable giving strategy also enables people to pursue philanthropic goals while still generating income. In addition to tax management, charitable remainder trusts can offer benefits for retirement and estate planning”.
If you have been thinking of selling, gifting to a charity or school, while greatly reducing your tax bite, please give me a call. I can put you in touch with some financial and tax professionals that can help you decide if a CRT is the right tax planning vehicle for you when you sell your building.
Installment Sale Coupled with a Monetizing Loan
There is something in the tax code called an installment sale that if structured properly, can help you defer your capital gains taxes for 30 years. This is an often-overlooked strategy that many tax advisors or attorneys are not aware of. However, it is real, and many smart investors are taking advantage of this particular strategy that is in the tax code.
If you are tired of tenants, want to exit real estate, defer your taxes for 30 years, and still retain a big chunk of cash that you can invest any way you wish this, strategy might work for you.
If you want to learn more about this program, give me a call and let’s discuss your situation. I will explain the basics of how this program works and I will put you in touch with the right people that can make this happen for you. There is an option besides paying those crushing capital gains taxes. You can download some case studies of other investors who have done this at http://1755.keep-your-wealth.com/.
By the way I don’t give tax advice. I simply give tax awareness so you can be a bit more informed when it is time to sell your building.
For any specific questions about your tax situation please contact your tax advisor. Thank you.
Do you have some questions about your property? Please contact me at [email protected] or by cell/text at 310-308-3174. Or you can book a phone or an in-person meeting with me at https://calendly.com/derrick-ruiz