Think back when you bought your first Shore property. Are you still thinking? Okay. Did you buy the property as a pure investment with the thought of not really using it, other than the 14 days provided to you for basic upkeep and maintenance? Were you the typical second home buyer thinking you would rent it part of the summer season and use it whenever you could take the trip to the beach for a week or a long weekend? The third and less travelled path is the pure second homeowner who has the property for them and friends the whole year around. Was that you?
As life changes so does the use of your property at the beach ( Of course you can substitute beach for lake, mountain or golf and tennis resort.) Once used often, now it has been a put on the market as a vacation rental. Interesting enough you own the property for dozens of years and it’s time to be refurbished or taken over by a new owner. This is the easiest for tax purposes as it is considered an investment property as long as you were showing the income from the rentals and deducted the expenses and depreciated the property for the time
you owned it. You will be taxed as a long term tax gain. Your accountant will adjust your basis by adding any capital improvements you made doing the period you owned at as long as you didn’t already write it as maintenance for that year. If you read or have read my other posts you will discover the benefits of a 1031 if you want to continue investing. The total assets can be invested in another investment property as long it is more expensive than the first. No taxes are due and the only expense is the cost of an intermediary performing the services of the 1031 Tax Free Exchange.
What happens when you use the property as a mix use (Rent some, use some). How have you set this up with your accountant. Don’t forget this could make this a personal vacation home if the use is more than 14 days plus emergencies. Did you buy the property in a LLC? Did you show the income as rental income? I am not an attorney or an accountant (Talk to your professional) so please cross your t’s and dot your i’s to make sure you know what you own and how the government thinks you own it. If everyone considers it an investment property you can back in the depreciation and capital improvements and either sell the property and pay the long term capital gains(as long as you owned it for more than one year.) The other choices are the 1031 Exchange, find a promising DST(Delaware Statutory Trust) which might invest in rental housing communities or other categories of real estate.
You might fit into this last group of beach property owners. I know I have, because in the beginning of our journey we seem to need the rental income to help us with the costs of maintaining the property. You remember in the you had the P+I+T+I (principal+interst+taxes+insurance) that scared us a bit. Let us say we own the place for 10 years and we now rent it a couple of weeks to friends and family or we finally put the last kid through college and we don’t have to rent it at all. Let us also thank the fact that interst rates have been favorable that we reduced our payment almost in half. So now you own a vacation home that you use and write off the interest, maybe a small amount of the taxes and are sitting with a huge long term capital gain if you decided to sell it. So what would I do?
First of all I would do a review of my finances and see if I need that money for other things. In most cases I shouldn’t since the assets have been tied up in the property for years and that hasn’t changed my lifestyle. Then I think that the market is at a top that is about 40-50% higher than the last top and this is a perfect time to lock in the profit. Thinking back many years my mother would always remind my if you have to pay the taxman you made a profit. Joan is not around to help me with this one so I’m on my own. How does a 5, 10, 15, 20 annuity sound? Lock in a nice profit, and get a monthly or quarterly payment with interest for a time certain period. So that wasn’t difficult was it? Sounds complicated? Not really. See the chart below to see a basic accounting of my Seller financing to defer my Capital gain. There are many moving parts so many of you will like a different scenario.
Are you thinking about taking some money off the table, but are concerned about the tax impacts?
Are you ready to take some cash out of your highly appreciated properties?
Want to spread out the taxable gains over 5, 10, 15, 20 years?
How about earning interest income higher than the banks, for a set period of time?
Call me to help you manage the situation to suit your individual needs. I have experience working with accountants and attorneys during the process of selling your property or properties.
Ian Lazarus, CRS, Broker
Shore Points Realty