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Get out of the Landlord Business Tax Free

By:  A collaborative effort brought to you by Ian Lazarus, CRS

 

It was 2006 and I was traveling the Midwest talking to advisors who were helping farmers sell their highly appreciated properties and consolidate their otherwise complicated life into a predictable stream of retirement income, all without paying a cent of capital gains tax. Well, that party ended when the real estate market crashed.

 

Fast forward to a market that has put the real estate crash in the past, on the east coast, we have a large group of aging baby boomers who have a similar challenge as the farmers that came before them…but this time it’s highly appreciated rental property on the New Jersey and Delaware coastline. Many investors are planning a move down south and no longer want to manage a property a plane ride away. Others are tired of getting phone calls at 2am about a running toilet or busted hot water heater. Some would like to own a smaller investment property than what they currently own. Or maybe the market has peaked and it’s time to get out. Regardless of their reasons, they all have a similar problem. Uncle Sam!

 

For those unfamiliar with the IRC 1031 like-kind exchange strategy, the time restrictions and other potential tax-triggering pitfalls seem far too daunting to even consider. For those well seasoned in the art of 1031 exchanges, it no longer seems like a viable strategy given their desire to start downsizing their properties, which would trigger a tax liability. Or, they just don’t want to be a landlord anymore. Unfortunately, most owners think they have only two choices; a) bite the bullet and keep your property or b) sell and pay taxes, sometimes upwards of 50% of your sale proceeds!

 

Good news, you have a third choice that may solve all of your problems. Let me explain using a recent case I helped solve. John Walton (name changed to protect the innocent) has owned a shore home for almost 30 years. His adjusted cost basis after depreciation is almost zero. And his expected sales proceeds, after debt pay-off, was supposed to be about $2,000,000. But, he was expecting to have to pay total taxes of $940,000!  For a retired guy to generate income on his after-tax proceeds of $1,060,000 at today’s rates, he could only expect about $42,400 per year. That’s terrible considering he was collecting net income of over $100,000 before he sold. We encouraged him to consider a 1031 exchange, but rather than finding another property to privately own, we identified two apartment complexes professionally-managed and owned within a Delaware Statutory Trust (DST for short). And, by owning beneficial shares of this DST exactly matching his sales proceeds and with a loan-to-value ratio higher than his shore home, we deferred 100% of the taxes due. More importantly, with 100% of his proceeds invested in the DST, we were able to generate a tax-favorable income of $110,000 (5.5% yield) and eliminate all the hassles of being a landlord.

 

So, what’s the catch you ask?  Well, all the same rules apply to a 1031 using a DST as they do with any other 1031 exchange. However, there are some differences between DST ownership and private ownership.

 

  1. Due Diligence – If you are using a good advisor, the due diligence during the acquisition process is second to none. This certainly beats conducting your own search, worrying about inspections and going through the painful task of mortgage underwriting.
  2. Professional Management. Acquisition, management, and disposition decisions are made for you by a highly experienced real estate investment firm. All you do is cash the monthly rental checks.
  3. Diversification and scale. Most DST’s are buying commercial properties valued at over $50 million. A DST gives you access to more sectors of real estate and at a price point usually reserved for institutional money.
  4. This is where a DST greatly differs from your own property. The DST maintains control and makes all decisions to buy, manage, and sell property. Although you lose that control, each real estate investment firm clearly explains their investment plan and the expected time horizon of ownership. Quarterly financial reports are also provided to keep you apprised of the real estate operations.
  5. Flexibility of Investment Amount. If you are exchanging $2 million of property, you may buy one DST or diversify across two or three properties. However, if you are exchanging into your own property, but have decided to downsize, now you can exchange the difference (boot) into a DST to avoid 100% of the tax, as DST fractional ownership can be customized to your need as low as $100,000.
  6. Income and Estate Planning. 5% of 100% is always better than 5% of 50%. So, if you can defer the taxes and generate real estate rental income on your entire sales amount, this could be the answer for you. Additionally, if you are simply interested in the income, but planning to leave the property value to your next of kin, this strategy works perfectly as 100% of the capital gains taxes will be eliminated on the day you die, due to the step-up in cost basis on the date of death.
  7. Future Exchanges. Upon the sale of the property by the DST, usually targeted in the first 7-10 years of ownership, you will always have the option to exchange again.

 

I used the example of my client buying apartment complexes. But DST’s are not limited to a single sector of real estate. At any given time, we have inventory in student housing, triple-net retail, office, industrial, self storage, and hospitality.

 

If you have ever considered selling your investment property at the shore, but something has stopped you in your tracks, please consider reaching out to our team to discuss your specific situation. We can bring a team of real estate, financial planning, tax, and legal advisors to you or we are happy to work in tandem with your existing advisors. Either way, knowledge is power. And power leads to a lifetime of financial freedom.

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Two Things to Consider When Renting Out Your Vacation Home – CMPS INSTITUTE

1 – IRS Guidelines: How Many Days Are You Using the Home for “Personal Use”?

In order to deduct the mortgage interest on your vacation home as “qualified home mortgage interest”, you need to use the vacation home for your own “personal use” for the greater of:

  • 14 Days per Year; or
  • 10% of the number of days that you rent it out for fair market value

For example, if you rent out the property for 100 days per year, you’d need to live there for at least 14 days per year. On the other hand, if you rent out the property for 200 days per year, you’d need to live there for at least 20 days per year.  Keep in mind that “personal use” includes use by immediate family members including your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

2 – Lending Guidelines: Do You Have Control of the Property?

You may still be able to treat the property as a second home for mortgage approval purposes if you rent it out for part of the year. In this case, conventional lending guidelines require that:

  • You must occupy the property for some portion of the year;
  • You must have exclusive control over the property; and,
  • The property cannot be subject to any agreements that give a management firm control over the occupancy of the property.

Of course, there may be other rules that need to followed.  Contact me for more information.

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED FINANCIAL OR TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION.

 

First Choice Loan Services Inc. (NMLS# 210764), a Berkshire Bank Company (NMLS# 506896 | Member FDIC), is located at One Tower Center, Floor #18 East Brunswick, NJ 08816. First Choice Loan Services Inc. is registered or exempt from state licensing in the states it originates mortgage loans. Licensed by the NJ Department of Banking and Insurance. AZ BK#0918586. First Choice Loan Services Inc. is not an agency of the federal government and is not affiliated with your current lender.

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Sea Isle City Ladies Weekend April 28th-April30th

Featuring endless opportunities to eat, drink, shop, and pamper your way through Sea Isle City, Girls Weekend is the perfect getaway for you and your girlfriends. With more than 40 participating businesses, the event includes three full days to take advantage of huge discounts on retail, salon and fitness services, restaurants, lodging and more. Don’t miss out on the event that only happens twice per year!

 

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Easter Weekend in Sea Isle City

It should be a beautiful Easter weekend in Sea Isle City. The Sea Isle City Chamber has a list of places open.

 

Food, Dining & Nightlife

A Modo Mio

5900 Landis Ave., 609-486-5455, amodomioristorante.org

Open Wednesday through Sunday at 4:30pm

Andrea Trattoria Italiana II Restaurant

4216 Park Rd., 609-263-5001, andreatrattoria.com

Open Wednesday through Saturday 11am-2pm for lunch & 4-9pm for dinner

Azzurra Pizzeria & Ristorante

5012 Landis Ave., 609-263-1868, azzurrapizzeriasic.com

Open Friday and Saturday 11am-10pm and Sunday 11am-9pm

Basilicos Ristorante

27 43rd St., 609-263-1010, basilicosristorante.com

Open Thursday through Sunday at 5pm

Braca Cafe & Henri’s Bar

18 JFK Blvd., 609-263-4271, bracacafe.com

Open Thursday and Friday at 5pm, Saturday and Sunday at noon for lunch and dinner

Casino Pizza

4000 Landis Ave., 609-263-2277

Open Friday and Saturday at 4pm

Deauville Inn

201 Willard Rd., Strathmere, 609-263-2080, deauvilleinn.com

Open Friday through Monday at 11am and Tuesday through Thursday at 2pm

Diamond’s Liquor Store

4009 Landis Ave., 609-263-8411, diamondsliquor.com

Open Wednesday, Thursday, Friday and Sunday noon-8pm and Saturday 10am-9pm, Closed Mondays and Tuesday

Doc Magrogan’s Oyster House

8600 Landis Ave., 609-263-3627, docmagrogans.com

Open Easter weekend Thursday through Sunday, serving Easter brunch; weekends Friday and Saturdays through Mother’s Day

Kix McNutley’s &a Side Kix

63rd St., 609-263-6341, kixmcnutleys.com

Open Monday through Thursday 9am-10pm, Friday and Saturday 9am-1:30am, and Sunday 10am-10pm

La Costa Complex

4000 Landis Ave., 609-263-3756, lacosta-seaisle.com

Open daily at 9am, Sunday at 10am

La Fontana Coast

5000 Landis Ave., 609-486-6088, lafontanacoast.com

Open Easter weekend Wednesday through Monday at 4pm

La Fontana Del Mare

1 Ocean Dr., Strathmere, 609-263-7700, lafontanadelmare.com

Open Thursday through Sunday at 4pm

Lobster Loft

318 42nd Pl., 609-263-3000, thelobsterloft.com

Open Thursday through Saturday at 4pm, Saturday serving 2 for 1 dinners $29.99 and weekend specials

Maryanne Pastry Shoppe

108 44th St., 609-263-3814

Open Easter weekend Saturday and Sunday 7am-1pm, weekends through Memorial Day

Mike’s Seafood & Dock Restaurant

4222 Park Rd., 609-263-1136, mikesseafood.com

Open Friday and Saturday 9am-7pm, open daily in May

Ocean Drive

3915 Landis Ave., 609-263-1000, theod.com

Open Easter weekend Friday at 7pm, no cover and Saturday at 6pm, no cover

O’Donnell’s Pour House

3907 Landis Ave., 609-263-5600, odonellspourhouse.com

Open every Friday and Saturday night serving dinner from 5-9:30pm

Rita’s Water Ice

4107 Landis Ave., 609-741-1021

Open weekends beginning in April

Shoobies Restaurant

4001 Landis Ave., 609-263-2000

Open Easter weekend Saturday and Sunday at 8am, Be our Guest Breakfast on Saturday, Breakfast with the Easter Bunny Sunday

Spinners Pizza- Ice Cream Grill

3800 Boardwalk, #1, 609-263-4951

Open weekends in April Saturday 11am-6pm and Sunday 11am-4pm

Steak Out…The Breakfast & Lunch Place

4005 Landis Ave., 609-263-6200

Open weekends Saturday and Sunday 8am-2pm

Apparel

A Touch of Fashion

3600 Boardwalk at the Spinnaker Shoppes, 609-263-3200

Open Friday 11am-4pm, Saturday 10am-4pm and Easter Sunday 10am-1pm

Birdcage

3914 Pleasure Ave., 609-263-1313

Open Saturday and Sunday, 10am-5pm

Breezin’ Up

4204 Landis Ave.,609-263-1748, breezinup.com

Open Friday Saturday and Sunday, 10am-5pm

Coastal Palms Boutique

4110 Landis Ave., Suite B 609-439-3800, coastalpalmsboutique.com

Open Easter weekend Friday noon-5pm, Saturday 11am-5pm and Sunday 11am-3pm. April weekend hours Saturday 11am-5pm and Sunday 11am-3pm. Extended Girls Weekend Hours

Groovy Girlz

3814 Landis Ave., 609-263-6700, groovygirlz.com

Open Easter weekend Friday and Saturday 10am-6pm and Easter Sunday 10am-3pm

Heritage Surf and Sport

3700 Landis Ave., 609-263-3033, heritagesurf.comSurf Lessons

Open Monday through Saturday 10am-6pm and Sunday 10am to 5pm

Kathy’s Boutique

3500 Boardwalk at the Spinnaker Shoppes, 609-263-6464

Open Saturday 10am-4pm

Sunsations Resort Wear

28 JFK Blvd., 609-263-7140

Open Easter weekend: Friday 11am-5pm, Saturday 10am-6pm, and Sunday 11am-3pm

Health & Beauty

Forza Fitness

3514 Landis Ave., 609-432-2822, forza.fit

Open daily, easter weekend classes, Friday Aerial Yoga at 10am and Saturday tough glove boxing at 8:30am

NJ Beach Yoga

JFK Blvd. & the Beach, 609-602-3398, njbeachyoga.com

Yoga Flow on Good Friday at 7:30am at Community Lodge

Salon Shannon Leigh

3918 Landis Ave., 609-263-8805, salonshannonleigh.com

Open Tuesday through Friday 9am-9pm, Saturday and Sunday 8am-5pm

Surfside Fitness

5900 Landis Ave., 609-263-9023, trainwithcheryl.com

Open via key tag entry 365 days a year

Home & Specialty Shops

Allison Valtri Interiors / Shutters To Shades

3033 Dune Drive, Avalon, 609-967-5800, allisonvaltriinteriors.com

Open Monday through Saturday 8:30am-4:30pm

Anchored in Sea Isle City

4000 Pleasure Ave., 609-225-3143,  anchoredinsic.com

Open Easter Weekend Friday and Saturday 10am-4pm (Closed Easter Sunday) Open weekends Saturday 10am-4pm and Sunday 11am-3pm

Gardener Hardware

2847 Route 9, Oceanview, 609-624-1625, truevalue.com/gardener

Open Monday through Saturday 8am-5pm

Sands Department Store

6208 Landis Ave., 609-263-3351, sandsdepartmentstore.com

Open Monday, Tuesday, Thursday Friday and Saturday 9am-5pm, Sunday 10am-1pm, Closed Wednesday

Seaside Shade Shack

3700 Boardwalk #9B, 609-263-3100

Open weekends in April. Friday through Sunday 10am-6pm. Open Easter Sunday 10am-3pm.

SOS The Crooked Tail Thrift Shop

4208 Landis Ave., 609-972-5887, seaislecats.org

Open Easter weekend, Saturday 11am-3pm

Services

Maids Available Services

335 47th Pl., 609-263-1747, maidsavailableservices.com

Open year-round, 24/7

The Blue Book

PO Box 87 609-263-3195

Open daily 9am-5pm

 

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Is North Wildwood Becoming the Home of NFL Quarterbacks?

Dan Mcquade recently wrote an article in the Press of Atlantic City titled, Is Carson Wentz Really Buying a House in North Wildwood? 

Dan writes…

But it’s the last paragraph of the story where things get really interesting, when writer Jack Tomczuk lets a little rumor drop about the development in the former location of Coconut Cove:

It’s even rumored that Philadelphia Eagles quarterback Carson Wentz is building a home in the development—but it’s unclear whether his presence will attract more commercial interest to North Wildwood’s gateway.

Yes, that’s right: Carson Wentz could soon own a summer home in the land of sand and Tully Nuts.

 

Another interesting aspect of this potential story, it that another NFL quarterback also spends some time in North Wildwood. As it was reported, during the Super Bowl Matt Ryan’s family has had a home there for decades.

“My family has had a house there for a long time,” Ryan said in a phone interview in November. “I enjoy spending a few weeks down there whenever I can.” 

Well it doesn’t seem like anyone really knows whether Wentz is really purchasing a home but it could make for some interesting speculation around pick-up football games in North Wildwood.

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New Price for Sea Isle City Beach Block Townhouse

4404 Pleasure Avenue, Sea Isle City, NJ. New Price! Take a good look at this newer townhome with 5 BR’s, 4.5 baths, attached garage, 4 oceanview decks. Only 4 houses from the beach! Well maintained gas ht & central air systems, gas fireplace, hardwood floors and a low maintenance exterior. The gourmet kitchen features a center island with granite counter tops and ceramic tile backsplash. Spacious dining and living room with gas fireplace, plus 2 sliders to the main deck. This is alot of house for the money!! If rentals are your concern, this property is a money machine with over $62,000. for 2016. Click here for full details.

 

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November Sea Isle City Market Report

View Sea Isle City Monthly Market Report

Search All New South Jersey Shore Listings 

The market is stable and steady with lots of transfers. We are looking at a sideways market direction for the next six to 12 months with a premium during the Spring selling season. With a great stock market and rebounding regional real estate market many homeowners are experiencing increased equity as well as in their 401K’s. Todays prices are approximately 10-15% from the top of the hey days of 2004 and 2005. This time around we have worked through the cycle in a much more orderly manner and the experts expect a nice five to ten year growth spurt because of supply and demand pressures brought on by the wave of BabyBoomers that are still experiencing additional discretionary income, significant inheritances and low interest rates.
This is the time to look at this opportunity (3.875% interest 30 year fixed rate mortgage, $475. month per $100,000.) while the rates are still at historic lows.
This is the time to look at this opportunity to move up before the prices continue to rise and the larger properties will increase more at the same appreciation rates. Next year will a great time to both buy and sell. Good clean homes will get top dollar. On a different note, I have a couple sellers would like to trade real estate for their Sea Isle City townhouse. This doesn’t always work out but I have put together many deals that were win-win for all partiesContact me to determine if you have a property (anywhere in the Continential United States) that could work for someone.
Below are a few free newsletters I have included with my blog:(By the Numbers is my favorite.)
 
Thank you and I hope you share it with people who might be interested. Many of you own your properties with spouses or partners so please send me there email addresses and I can send them to them each month as well.
I hope you are enjoying your home at the Shore..
Let me know if I can ever help.
Ian Lazarus
Search Sea Isle City Properties here 
Only 166 Sea Isle properties for sale.