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PaperclipPerfector  6mo ago (text post)   1956 thread views

Wellness Wednesday for November 1, 2023

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Does financial wellness count? Hoping to have some tax-knowledgable folks in here.

Scenario: I have 2 properties.

Property A:

  • 2.75%
  • $300k in unrealized gains
  • Renting for net $1,500 / mo, 1.5 years

Property B:

  • 3.25% ARM (5 years till doom)
  • $0-$60k in unrealized gains depending on how delusional Zillow is on a given day
  • Primary residence for 1.5 years

I plan to divest myself of both properties within the next 5 years and relocate.

I wish to avoid capital gains taxes on the appreciated value on Property A. (I don't care as much about the gains on Property B). This would be 15% of $300k, so around $42,000. From what I see, I can do this two ways:

  1. I sell the house within the next 1.5 years, according to the 2-in-5 rule.
  2. A 1031 exchange later on for another rental property

Tools at my disposal include a parent-owned lakehouse that I could nominally buy and rent, and a decent amount of liquid capital that we both can deploy (along with extremely high trust between parties, as you'd imagine).

It seems like Option 2 is going to be a big pain. I'd prefer to keep renting the house for another 3-5 years instead of 1.5, but based on cap gains that's going to be 28 months minimum of treading water. I also hate losing the cheap money of that mortgage and booting out good renters who would probably prefer to stay in the house another 1.5 years.

In contrast, my second home's rate is... not great. An ARM that is great now and won't be later.

Frank thoughts and reality checks are appreciated.

A 1031 exchange later on for another rental property

Alternative: a Delaware Statutory Trust 1031 Exchange REIT deal-y

It's a loophole from the Patron State of tax loopholes, where through some fictitious trust system you can 1031 any amount of money into what amounts to a small REIT. You get partial ownership in one or more buildings, and you can shop around and fine one that does nothing but NNN leases to reputable corporations, or government buildings, or whatever you like. This has the advantage of being always available, so any time you sell your property you can park it there without tax consequences. I'm not super familiar with the process so don't quote me, depending on the business plan I am fairly certain that you can then re-1031 the proceeds into another property later on. So it allows you to play with your timelines a little bit.

Now, especially in today's environment, the yields are likely to be weak relative to other investments. And you do run the ever-present management risk with REITs. But you can select DSTs that have no leverage, which mitigates risk significantly. And your money is locked up, depending on the business plan of the trust, for some period of time in a low yield investment; though it sounds like you have the liquidity on hand to avoid that being a problem.

I've never used one personally, but I've looked into them in the past and keep up with them in case it does come up for me.

FUCKING OBVIOUSLY LOOK INTO IT MORE BEFORE YOU DECIDE TO PARK A LOT OF MONEY IN SOMETHING I VAGUELY SUGGESTED

Very cool option man. Exactly the sort of stuff I'm looking for.

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