Exactly, my proposal is guys similar to your previous situation, wuqijun focus on location (thought he is from Manchuria, not HK), and I forgot you’re not from HK, is manch who is from HK. wuqijun might have thought I’m referring to Lee Kashing!
The best, as I am thinking this way, let it increase max after 27.5, sell it, make 1031 exchange with multiplex or apartment complex (once loan paid off), you get an annuity along with another depreciation ! Enjoy the annuity for 27.5 years (if we live !)
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Two issues: 1031 might not be available. Too old to deal with rentals.
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Definitely good points to account !
HELOC is risky loan and buy annuity is low return, it is unlikely to have positive cash flow with (Annuity return - Tax - Heloc payment).
History shows that if the wealth gap gets too large then there’s revolt. That doesn’t end well for the rich, since they are significantly outnumbered by the non-rich.
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Not really. The world is currently at its biggest wealth gap ever. And it will only get bigger.
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The only issue I see is that I am already in a multiplex and want to effectively wipe out some of the gain achieved over the years. Soooo, the idea is to exchange to a SFH around here at a higher price and higher mortgage and continue to rent it out for a number of years before I move in and make it our primary home for a few years to get at least some of the taxes wiped out due to primary residency. My understanding is that it would not be the full $500k as if straight primary residence all along (or is it?). Yes, I figure I may be eating it cash flow wise for those few years but I believe I would still be ahead (instead of straight sale and paying the capital gains tax).
I believe during your 3 year (or less) that you are renting, you will be claiming the depreciation. You don’t claim during your primary home days. So as long as depreciation re-capture + your appreciated value (selling price - cost) is less than 500K (assuming married), you are safe. Basically you need to add back the deduction you take during the rental days back to your profit equation. Consult your CPA to be sure, but that’s my assumption too, and I’ll be filing my tax return next year with this situation.
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Using 500k LTCG primary exemption, you save 166k (20% IRS+10% CA) which can be easily managed with 1031 exchange and depreciation.
Look at Multiplex as cash flow aspect of it mainly. Good Location is mandatory, but appreciation is added optional aspect.
Once you have multiplex, changing to SFH is not economical. Recent 1031 exchange I tried, but it is not all economical for few aspects.
For my case,SFH rental to bigger SFH rental, I entered into a contract and finally withdrew the offer when I learnt that Lender (and tenant) is going to eat away my tax gain !
You will see better cash flow and profit with old multiplex than new SFH (lower rent, higher cost property tax etc). Second, lenders eat away at least 1% hike in rate which can be avoided by paying full cash.
Even though case to case matters are different with many variables, conceptually this is not good option for aging community, esp above 50s.
Obviously, you’ve done it (or tried to do it) but here would be some counterpoints (and as you expressed, YMMV, at the end of the day):
- I would focus on a SFH that has a tenant. I would only continue renting to that person for at most a year or so to limit my exposure. I will hike up rent since no rent control on SFH to the point that the tenant will leave voluntarily, so no buyout needed.
- I only get the higher mortgage as a formality and perhaps inline with 1031 rules (if there is any). At least everything looks kosher and straight forward. The reality is that after a short time I get rid of loan or pay it off so no more higher mortgage cost. This should be achievable due to the decent proceeds after selling the first place as mortgage is fairly low. I will have a fair amount of money to play with.
- I proceed to live in place and just live there the minimum needed time to then sell place as primary residency.
Ok, so I find it really hard to believe that assuming you were going to do all of this essentially too that you wouldn’t have come out ahead (instead of (gulp) paying the full capital gain tax!!!). I agree, a lot of work and time, but we don’t have kids and we are not picky on the exchange property since we know we are not staying there for long anyway. Why won’t this work???
1031 exchange has a right time window of 45 days. Why not do a reverse mortgage?
You can buy a property first with a bigger mortgage, bigger than your current mortgage. However, since you already paid downpayment, how will you use the proceeds from your sale later? Do you have to use all the sales proceeds to pay down your new mortgage? In that case, you need to make sure your new mortgage is larger than your expected proceeds. But the leverage will be too little for reverse 1031
Yes, I am exploring a reverse exchange as well since that is easier (we all know we can sell our place, but can we find one?). We qualify and can easily buy anything that fits the profile necessary without the proceeds from the selling asset. My concern (unfounded or not) is that the reverse exchange may set off some alarm at the IRS and it wants to challenge my exchange. That is why I am trying methodically to do it via the more acceptable and common way, you sell then buy. Yes, many variables to account for but I am going to try to do it that way. I just need a willing seller who is hopefully greedy enough to want to work with me, since time is money as they say.
Why won’t this work??? ==> I do not squeeze my mind to counter these points. Well, if your financial plan works out, go ahead and do it.
Only one point: If your plan is right, you end up right !
Many times, I changed the plan, struggled to recover, but somehow I was lucky to get benefit out of it !
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I am a reasonable person, just trying to cover all bases and understand where the tricky parts are (and hopefully address them). I certainly plan to talk and engage with Sec 1031 experts in the biz who can guide me. I certainly don’t want to be like the Millennium Tower developer: a penny wise and pound foolish. Gotta hit that Sec 1031 gravy train before it leaves the station!!!
Frankly, I would have made 1031 exchange worked out well (extra payment/bidding) as this is possible with all the constraints, but do not want to take too much loan at this stage.
We rolled back all 1031 exchange, as profit was 20% on sale, planned to pay tax, pay of loans to reduce debt and have better cash flow.
I hear the rationale for not doing it, but that freaking capital gains tax for me is as The Donald says…huuuuuuge!!!
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Yes, we all love depreciation (which is why I sold since I lose it next year). Thanks depreciation!!!
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I like how he talked about the benefit of depreciation but the article is biased against stocks. I never had to pay any capital gains on my ETFs as long as I don’t sell. In fact the dividends I’m getting is as good as (sometimes better than) the income from real estate. Because it’s truly passive and you don’t have a tenant bugging you the whole time. You do need to pay a management fee for etfs but that is built into the structure already and never explicit. Fees can be lower than .25% if you go with vanguard.
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@myo did you file taxes this year with above situation. If yes, was the above understanding correct?
Yes, except that 500K profit is nothing to do with depreciation re-capture. You can get 500K gain on your profit and you must pay back taxes on the depreciation you took during the rental period.