Rental Properties: Is it time to sell

Real estate has been and can be an attractive and often lucrative investment. An individual can purchase and manage several rental or commercial properties which may provide a substantial stream of income for the owner. However, that income is taxed at ordinary income rates, and the property taxes, management fees, expenses for repairs and vacancies can substantially reduce the net income being derived from the properties. In addition, the owner may be tired of the responsibilities of ownership and wish to be free to travel, or spend their time with other, more leisurely activities! It may be time to sell, but there are taxes, market risks and investment options to consider.

If the time and circumstances are right, a structured sale can provide a seller of a property the following benefits:

Tax Deferral All applicable taxes are deferred until received and spread out over the term of the payments. Can also be used to spread out a balloon payment.
Flexibility A stream, or streams, of income or payments can be tailored to fit the seller’s future needs.
Period Certain – payments over any set number of years (5, 10, or 12 etc.)
Lump sums – The seller can time lump sum payments in the future for certain expenses (College Education, Balloon Payments, etc.)
Payment can be monthly, quarterly or annual.
Seller can defer any recognition of income or taxes for up to 20 years in the future.
Multiple partners with multiple needs
Not an “all or nothing” option. The seller can receive a portion of the proceeds cash, execute a partial exchange and/or structure the balance.
Guaranteed Payments All future payments are guaranteed and not subject to the ups and downs of the market.
Security Payments are made and backed by US Treasuries.

To illustrate these benefits let’s look at an example of an actual listing for a rental property. A couple wishes to sell their rental property. It has a market value of $750,000 and a mortgage balance of $100,000. The property was purchased for $375,000 and they earn a combined income of $100,000 per year from their other careers. Current income and expenses associated with the property are as follows:

Market Value $750,000
Traditional Cash Sale: Monthly Rent
Management Fee 8%
Utilities (based on vacancy factor)
Maintenance
Property Taxes
Interest
Total Expenses
Net Profit Before Tax Net Profit After Tax (28% ave tax rate)
$2,000
-$160
-$25
-$170
-$200
-$417
$972
$1,028
$740
Structured Sale: Proceeds from a Structured Sale would be:
Cash at time of sale to pay off mortgage
Guaranteed Monthly Payment (for 30 yrs)
Capital Gains Taxes (15%)
After Tax Monthly Income from Sale
$100000
$2394
-$180
$2214

By selling the property and using the Structured Sale, this couple nearly triples their monthly income for the next thirty years. They are free to retire with peace of mind knowing that all of the payments are guaranteed and applicable taxes are deferred until the year in which they are received.

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