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The Tax Bill Landlords Don't See Until They Sell · How to Retire on Time

• 0:00
  Mike: Hey. Thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. Alright.
• 0:06
  Let's do the next question here. Alright. Got a rental house with my tenant who moved out before re renting it. And I'm wondering if it's a good time to sell rental real estate, or to move to a less me involved investment. The classic landlord situation.
• 0:24
  Yeah. So, everything has a benefit in Dutchman. Being a landlord, if you have good tenants, they stay in there long time, great. Yeah. If you have bad tenants, they trash the place, that's a detriment that you're you're That's a risk you're taking.
• 0:36
  Just like a dividend can stop paying, just like a stock may stop growing but start declining, rental real estate can stop paying income. That's one of the risks. Yeah. Because of the either a bad tenant or the neighborhood goes south or a whole lot of issues. So here's here's the general and I wrote a book on this, we'll we'll publish it soon.
• 0:58
  How to retire from rentals. First, need to ask yourself, do you want to be a landlord or not? Do you enjoy the responsibilities? For some people, it's the reason they get out of bed. For others, they couldn't be bothered.
• 1:12
  It was fun while it lasted, but now it drives them crazy. Yeah. Okay. And they don't make appliances like they used to. Appliances need replacing sooner.
• 1:21
  David: Isn't that a shame?
• 1:22
  Mike: Yeah. So, affordability is is, you know, people aren't making as much as they used to. So people can afford your rent. That's going to put pressure, inflationary pressure against you on what you can charge for rent and so on. So there there are those factors.
• 1:37
  So if you decide, I'm not really sure I wanna still be a landlord. You've got three options. One option is sell it and pay the taxes. Now it's not just the gains, you've probably been depreciating the asset year over year over year. What does that mean?
• 1:54
  That means you're paying a lot of ordinary income or depreciation recapture tax, plus the capital gains tax. That's a hefty tax bill. It might be like 30% or so of whatever the total, sale price was that's going to taxes. That's a tough pill to swallow. Yeah.
• 2:10
  Okay. And that's in addition to all your other cash flow movements and income movements on your your financial situation. But that is an option for smaller cost houses or homes, rental real estate, you know, like maybe a little condo here or something there. That might be a viable, you know, townhome that wasn't worth that much. Maybe you just say, wanna get out of it and have complete liquidity and flexibility and you just pay the tax bill and move on.
• 2:34
  Mhmm. But for the first person that has a $500,000 home or a million dollar home or a duplex worth a lot or a $10,000,000 apartment complex or a shopping mall, or a strip mall. Those taxes add up real quick. Mhmm. And now, you are trapped by taxes because you might struggle to stomach that tax bill and you wanna pass it on to your kids because if you wait, the kids get the step up in basis.
• 3:02
  It's now you're a slave to your property because you're trying to save some money in taxes for legacy purposes. You're not putting yourself first. Here are your other options. One is, you might be able to find a real estate investment trust that will do what's called a seven twenty one up REIT.
• 3:22
  David: Okay.
• 3:23
  Mike: They absorb your property and then give you operating partnership units of the REIT, and then you maintain cash flow based on not your property, but the overall REIT, and it's someone else's problem.
• 3:34
  David: You sort of split ownership with them, but they like You don't take care split. Of everything?
• 3:38
  Mike: They own it.
• 3:38
  David: They own it, and then you just get some shares.
• 3:41
  Mike: So so Retire is a company.
• 3:43
  David: Okay.
• 3:43
  Mike: And the company, you now are a part owner of the company, but you're not a controlling partner.
• 3:48
  David: Oh, okay.
• 3:48
  Mike: You're you're the guy that, you know, they're gonna give you the check and say, now don't bother us. I'm not trying to be mean, it's like Yeah. You call them and say, hey, think we should do this, they're not probably gonna listen to you.
• 3:58
  David: Alright.
• 3:59
  Mike: You're giving up control for the paycheck and to avoid the tax bill. Okay. And that kinda complicates in some ways, and we don't have time to really digest all of it on the estate planning purposes, on how do you liquidate it, what's the liquidity purposes like, when you liquidate if you're alive versus the legacy on how the taxes are handled. But still, it's that's a easy way to go about it. Yeah.
• 4:20
  Be very careful about the seven twenty one up REITs because some companies realized what this tax code can do and they have grown faster than I think they can handle. And if it's if a up REIT, we'll call it, a REIT grows too fast and they can't handle all of the properties that they're now now managing, those properties start to decline. That hurts the income, that hurts. So, it just be very careful. Do the vetting process of this.
• 4:50
  The other one is a Delaware statutory trust. So, instead of being a partial owner of a company, you can do a ten thirty one exchange to fractional ownership of actual real estate. A lot of people don't know about this one either. Here's how it works. Let's say you take your property, you get rid of it, buy, you sell it, and it goes through a qualified intermediary.
• 5:12
  You can't touch the money.
• 5:13
  David: Yeah. So the proceeds of the sale don't come to you, they go to the intermediary.
• 5:17
  Mike: Yep. Okay. They have to go to someone else. Yep. And then you've got forty five days to select properties that you want, and then a hundred and eighty days total to be able to get the funds to then those properties.
• 5:27
  Delaware statutory trusts. But these are institutional grade investments. So think of like an Amazon warehouse, or a self storage unit, or a marina, or something like that. And you now own like one or 2% of that property. So you maintain your cash flow.
• 5:44
  Many times, your cash flow actually can increase. When I say cash flow, I mean income coming in, specifically. And you can spend it or reinvest it. That's up to you. But, you've got money coming in.
• 5:55
  The asset appreciates in value. And it's The DST is gonna be sold probably in five to seven years. So, then you'll have to get another one and then another one and then another one.
• 6:03
  David: Okay.
• 6:04
  Mike: Okay. The joke is that this is the swap until you drop strategy because you defer taxes until you're dead. Kids get the step up in basis, but you're maintaining your cash flow without the responsibilities. Very few advisors understand or even have the relationships to do this. Right.
• 6:23
  It's very specialized. It's one of the things we do here at Kedric Wealth, but it is not your normal situation. Okay? One red flag though, these are high commission products.
• 6:34
  David: Oh, these DSTs? Mhmm.
• 6:36
  Mike: Uh-huh. They're gonna pay five to 7%, sometimes even more of whatever you put in there. Now, because we don't have the brokerage licenses here, because we are fiduciaries and we cannot accept back end security commissions, You're paying our planning fee, sure, it does take work. But we've negotiated that you actually get the commission, not us. Because the commission's going to someone.
• 7:02
  We can't legally accept it. So you might get a bonus too for it. We're not trying to engineer that in any way. We're just saying that we can't take it. So, we'll negotiate that you get that.
• 7:11
  Yeah. Kind of a nice bump. Nice bonus. Don't want money to go to waste. No.
• 7:16
  But I say that because some people may push one or two products because they pay a slightly more or a higher commission. We really don't mind where you go as long as it's the right risk, with the right suitability, with the right type of property, and it's something you're comfortable with. We're one of the few that charges a flat fee to do the whole vetting process and to get you from point a to point b. Mhmm. You know, if that's something you want, Retire on time.com, click Scott, that for you and anyone else, just click the button, talk to a planner.
• 7:46
  Tell us what's going on. We'll dive a little bit deeper, and if it makes sense, we can go through that process. It's good to have a more comprehensive plan with it, so you can see all the factors. But some people just want to sell it and move on. Here's a follow-up question.
• 7:59
  Do the DSTs and seven twenty ones and so on keep you out of the cycle of the stock market? Yeah. So, generally speaking, you've got different markets, and here's kind of the different as I see them. You've got the cash market, which is heavily influenced by the Fed. You've got the bond market, which is heavily influenced by the treasury.
• 8:16
  You've got the stock market, which is in the public stock market. Right? And then you've got the insurance market. Because those are complex instruments that operate, they're their own thing. Then you've also got the alternative market.
• 8:28
  So think private equity, private credit, collectibles, all it's like the random market, and then you've got the real estate market.
• 8:36
  David: Mhmm.
• 8:37
  Mike: They're like in 02/2002 when the stock market was just tanking. The bond market was fine. The real estate market soared.
• 8:44
  David: Oh, right.
• 8:45
  Mike: So, what I can't say is that when the stock market goes down, the real estate market goes up. That would be a inverse correlation. It's not that way. It's that they're independent markets.
• 8:56
  David: Yeah. So if one goes down, the other one doesn't go with it. They're independent.
• 8:59
  Mike: Yeah. Sometimes they'll go both go up at the same time. Sometimes they'll both go down at the same times. Sometimes they'll be the opposite of each other. They're just they're independent markets.
• 9:08
  So, and when when people say, well, the stock bottom market, they they rhyme kind of.
• 9:15
  David: Okay.
• 9:15
  Mike: But not always. Like 2022, they both went down together. So they're independently correlated. That's how you diversify by markets, which is another way of saying diversify by strategies.
• 9:27
  David: Okay.
• 9:27
  Mike: Different tools in the toolbox that do different things. That's a great way to go about it. You don't wanna just buy a bunch of a bunch of the same thing over and over again. That doesn't really help. Mhmm.
• 9:36
  But you understand the different strategies, the different tools in the toolbox. That's when it can help. Be very deliberate about it. So, that's all the time we have got though for today. Hopefully you enjoyed the show.
• 9:46
  If you want to schedule a call, retireontime.com/call. That's how you get there. Or retireontime.com. Click talk to the planner. Thirty minute call.
• 9:54
  Tell us what you want your retirement to look like. Tell us what you want from a financial professional and we will proceed as such. If you decide to proceed in our planning process, the first two appointments are free. Not gonna charge you so you can get an idea of what the planning process actually look like. After that, it's up for you on how you wanna decide to proceed.
• 10:11
  As always, we've got these shows, live Tuesdays, weekends, or on the radio stations as well. We show we air it on YouTube or repost on YouTube and our podcast on the weekends. Thanks for all being here. Appreciate the time. We'll see you next week.
• 10:25
  Same time, same place.