Burt M. Polson | Napa Valley and Vallejo's Commercial Real Estate Broker

Guiding you through the real estate part of your life™

Commercial • Luxury Estates • Vineyards • Wineries • Land

Sales • Leasing • Consulting • Management

Napa Valley & Vallejo, California

Retirement, taxes and warm fuzzies - part 2

In my previous article, John and Martha’s desire in their retirement was to refocus their energies from managing their large home and investment real estate. They sold their family home pocketing $1.8 million from the sale. They purchased a condo for $600,000 and invested the balance in a combination of stock and bond ETFs.

The next step in their strategy is to lessen their level of management of their real estate investment portfolio.

Their portfolio provides them stable income of $280,000 per year. This is derived from an 8,000

sq. ft. strip center bringing in $150,000 per year income and a 10 unit apartment building, $130,000 per year. They wish to keep this level of income, pay less in taxes and eliminate the hands-on approach to their investments while maintaining stability.

Here are their options:

John and Martha could hire an outside service

They have reservations, but could hire a property management company. They have owned their properties for over 20 years and know them well. They are management intensive, therefore they doubt a property management company could provide the same level of service.

John and Martha could sell

They could offer both for sale: $2.5 million for the strip center and $2.5 million for the apartment building. There is no financing and their basis in both are low--$1 million and $850,000 respectively. After consideration for capital improvements they end up with a realized gain of $3 million. They will owe 28 percent or $843,000 in federal and state taxes.

John and Martha are not crazy

After calculating their tax liability they gain a renewed motivation to look into other options. A 1031-exchange allows for an investor to exchange an investment property into another and defer taxes. John and Martha could exchange both properties into another single-tenant absolute triple-net property offering no management duties.

John and Martha found two little known options

A Deferred Sales Trust is essentially a contract between you and a third-party trust. John and Martha could sell their properties to the trust who in turn sells to another party. The trust agrees to pay them over a future period of time in the form of an installment sale note. They name the terms of the note: when to start the installment payments, how much to pay and whether payment includes principal or interest. This gives them the ability to control their capital gain tax exposure.

A Delaware Statutory Trust is a form of crowdfunding a real estate purchase. John and Martha could exchange into a Delaware Statutory Trust and then pool their funds together with others doing the same allowing them to purchase ownership shares of a larger property.

John and Martha, being rather conservative in their investing, opted to exchange both of their properties into a single-tenant absolute triple-net investment. They purchased a CVS Pharmacy for $5.35 million (using some of their funds from their home sale) giving them total hands-off management except depositing their $24,521 rent check every month.

Burt M. Polson, CCIM, is a real estate broker with ACRES Real Estate Services Inc. helping clients sell, buy and lease real estate. Reach him at 707-254-8000, burt@acresinfo.com or BurtPolson.com.

An ACRES Real Estate Services, Inc. Company