To illustrate how these procedures would work for a hypothetical couple let’s look how each of these procedures would work for Bob and Martha Jones.  Bob and Martha Jones came to us with a rental property they own.  They have taken $100,000 of depreciation and no longer want to be landlords.

Assume the following:
Original cost basis	$300,000
Adjusted basis (after depreciation)	$200,000
Fair market value	$1,000,000
Age: Bob and Martha Jones	60

What are their options:

1 and 2 are not options.  They don’t want to die & they don’t want to sell and pay the taxes of approximately $185,000 (If they sold it today they would have a depreciation recapture of $100,000 and a Long Term Capital Gain of $700,000.  The tax liability would be about $230,000¹, leaving only $770,000 to be invested.

#3. is an option that they might consider.  If they do a 1031 Exchange from their property to a “like or greater value property”, they will defer the payment of taxes to a time in the future when they finally sell their property.  Naturally, the new property will be subject to future market fluctuations, and, of course, they are still in the rental and property management business, unless they hire someone else to provide them with that service.

#4. is an option for sellers who don’t want to be in the rental business any longer.  Think of it as a “commercial 1031 Exchange”.  That is to say the sellers Exchange their property for a commercial investment property, such as an interest in Home Depot, in Florida, Arizona or California that Home Depot manages.  The sellers are no longer managing the property, with none of the accompanying headaches, and they are usually “guaranteed” a return on their investment, say 6%-7%.  Again, this property is subject to market fluctuations, however, the T.I.C. market fluctuations are usually less that the residential fluctuations, due to the fact that the T.I.C’s usually have very good anchor tenants.

#5. is an option for those sellers who are Charitably inclined.  Capital gains tax is usually avoided, and the property cannot have a mortgage on it.  Sellers get a tax credit due to the fact that when the sellers pass away, their “Charitable Trust” must be transferred to a qualified charity.  Sellers are “guaranteed an income stream for the rest of their lives, or a period certain of 5% to 10%”.    Remember your family is not a qualified charity.  So, then when a couple established a Charitable Remainder Trust (CRT), they eliminated the capital gains tax, but after their death the corpus of the trust must be transferred to a Qualified Charity, such as Habitat for Humanity.  The way the family is “made whole” is by drafting and funding another type of trust referred to as a Wealth Replacement Trust.  If this procedure sounds like it will work for your family feel free to call us.