One of my favorite old westerns is “El Dorado”. It stars John Wayne and Robert Mitchum. Yes, it has James Caan and Arthur Honeycutt. And more importantly, it has Charlotte Holt and the cutest Cary, Michelle and of course, the golden tunes of George Alexander singing the theme song.
In the movie, the bad guy, played by Ed Asner, tries to steal a ranch owned by the McDonald family. In the end, Wayne, Mitchum, Caan and Honeycutt come to the rescue and the ranch is saved. Maybe the best part of the movie was when Ed Asner got shot about a gazillion times at the end. Considering how he treated Mary Tyler Moore about 80 years later, he got what he deserved.
The moral of the story is when the McDonalds thought that they would lose their ranch, the gang came to the rescue and that is what we are going to discuss with a couple of changes. Instead of Ed Asner being the bad guy, it will be California politicians and Joe Biden. I am not trying to be political but rather discuss the current environment. I will proudly take the place of the gang sans cowboy hats and guns. All the apartment owners are the McDonalds.
Help for Apartment Owners
It seems that every day, I am getting emails about new regulations and taxes pounding apartment owners. My heart goes out to some people affected by the virus but that should not be an excuse not to pay rent or even a partial payment. In many cases, tenants may be making more money staying unemployed but still cannot seem to find money to pay rent. And if I remember correctly, tenants in California will have up to 10 years to repay the rent that they have not paid.
Having participated in roughly a dozen AOA Trade Shows over the years, I’ve had the opportunity to meet some amazing apartment owners. I certainly felt their pain when so many wanted to sell and leave California but could not do so – and that was before the virus. But now that may be a possibility. There is help for apartment owners from continually being crushed by California politicians.
If you want to sell your apartment and do not want more real estate, you will pay capital gains tax, state tax, depreciation recapture and the Medicare tax on the profits of your sales proceeds. Depending on your situation, that could be hundreds of thousands if not potentially millions of dollars in taxes.
If you want to transact a 1031, you have 45 calendar days once the property is sold to find another property. The problem is that you are not solving the problem. You are just kicking the can down the street. But it may get worse. Biden has already signaled that if elected, he would eliminate 1031s and will probably also eliminate the stepped-up basis. He also wants to increase the capital gains tax to roughly 43%. Will the last person leaving California please turn out the lights?
Section 453 to the Rescue!
It is time to fight back and here is how we are going to do so – Section 453. That is right, Section 453. I have discussed this in the past but there is no better time than now to mention this again. Using our Section 453 tax deferral trust, you can sell today, defer taxes today and if you want to retire, you can defer all of the above stated taxes for the rest of your life AND the tax deferral and income generated from the deferral can be passed on to your heirs. But even better, if you want to leave California, you can leave and take your trust with you. If you like low humidity, move to Arizona. If you like high humidity, Texas says howdy. Live the rest of your life in a lower-taxed, lower cost of living environment and on your own terms – a great exit strategy. Does that sound good?
But what if you want more real estate? Even better. You can defer all the taxes stated above and have an unlimited time to buy another property … anywhere you like. You are not limited by 1031 requirements so you can sell today using our trust, defer all of the above taxes, move to another state if you like and then have an unlimited time to buy another income producing property. A 1031 cannot do that.
To my knowledge, California law says that if you sell a property in California and buy a replacement property in another state, you will be held liable for California state taxes at some point. That is not a concern for us.
But there may be other reasons to get back at those wonderful, caring politicians. For example, say that you want to buy more real estate later. As you know, depreciation is a key factor when owning investment property because it increases expenses, increases cash flow and reduces taxes. You can get a new depreciation schedule on your new property – but you do not with a 1031.
The Cost Segregation Study
Using a cost segregation study could be helpful today. It may be possible to increase depreciation on your property now and by doing so, you may be able to increase your cash flow and reduce your taxes today at a time when many apartment owners are being caught between nonpaying tenants and clueless politicians. In addition, there may be other tax credits that may be of benefit to apartment owners as well.
You own a property with a partner. After 20 years, you cannot stand each other. Imagine that. You both want to sell to get away from each other. One partner wants to sell and defer taxes and the other partner wants to sell and run to Vegas … not necessarily a bad strategy. A 1031 will not work this way. One partner can use our trust to defer taxes and the other can run to Vegas on one condition … he takes me with him.
What if you wanted to downsize your property and still wanted to buy more real estate but also wanted to diversify your sales proceeds? In a 1031, you have to buy only real estate but there is a way you can buy whatever property you want at any time in the future and also invest in stocks, bonds, fixed income, guaranteed insurance contracts or any other appropriate conservative investment. You can make changes to benefit from any market changes. Sounds like a great idea to me.
If Biden is in the White House, then 1031 exchanges and the stepped-up basis will probably no longer be opportunities and the capital gains tax will potentially be doubled to about 40%. Because of the financial problems caused by the virus, it would come as no surprise if California taxes are increased as well. And you are caught in the middle.
If Trump was reelected, then things will probably stay the same. But the larger point is that regardless of what happened, there is a better option to defer taxes and retire or buy more real estate and that is our Section 453 tax deferral strategies. If you are thinking of selling and you want to move to a lower taxed state, you have the vehicle to do so. You have the choice to either retire or move and buy another property, so do it. Do not let politicians locally or nationally dictate your life. Stay safe and best wishes.