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Real Estate Investors Find More Retirement Options

For years, real estate investors found themselves stymied in their retirement efforts. Many are unwilling to be gouged by a hefty capital gains tax on heavily depreciated real estate. Now, through both legislation and creative deal structures, long term investors are finding relief.

Two local investors have owned a handful of residential income properties in and around Malden Center for a number of years. Recently, for various personal reasons, they have been working towards exiting these properties. Now, this fall, they are finally retiring. These folks plan to use a small change that was made to section 1031 of the tax code to roll the equity in their property into a larger institutional quality real estate investment in the form of a TIC or Tenant-In-Common investment effectively deferring all capital gains tax.

In 2002 the parameters for what qualifies for a 1031 tax-deferred exchange were expanded to include TIC interests. TICs, generally, are large retail, multifamily or office investment properties. A deeded fractional ownership arrangement is created for the property and the investor rolls the equity from their current property into the TIC before paying any capital gains tax. This arrangement allows the investor to put all of his money to work pre-tax. TIC owners have little or no hands-on involvement or time invested in managing the property, but continue to reap all the benefits of investment real estate ownership including appreciation, depreciation, monthly lease payments, etc. without any management hassles; these benefits make TICs ideal for retirees.

Recently another retirement option has emerged. Historically, investors have used Installment Sales (seller financing) to minimize their capital gains exposure. Common problems, however, include non-payment and deferral of maintenance on the part of the new owner. The SDIS or Self-Directed Installment Sale is new and better option. An SDIS allows a retiring investor to consummate a traditional sale and removes the risk of the regular installment sale. The legal structure involves a Trust, an LLC, and a mortgage, and allows investors to invest 100% of their equity, as they please. This arrangement stabilizes the sellers annual income and defers capital gains.

Brecht Palombo, President of PROVEST Real Estate Inc. is representing the sellers of the Malden properties. PROVEST Real Estate specializes in retirement strategies for real estate investors. At a time when markets are uncertain, most agree that equity preservation and income continuity are top priorities when considering a sale and even more so, when considering retirement.

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