“Retire” from Being a Landlord

Allen is 72 and owns an apartment building worth $900,000, that he purchased many years ago for $300,000. He has taken straight-line depreciation deductions on the building and now has an adjusted basis of only $40,000. Allen plans to move to a retirement community and wants to sell the apartment building and invest for a good retirement income.

“I’m tired of dealing with tenants,” Allen said to his attorney. “It’s time I cashed in and took life a bit easier.” But capital gains taxes would take $155,000 of his profit if he were to sell outright, his attorney pointed out. Allen is a longtime supporter of our endeavors, and upon learning that information, his attorney suggested a different plan:

Allen will transfer the apartment to a charitable remainder unitrust that will pay him and his wife, Marge, age 70, 6% of the value of the trust each year for the rest of their lives. The $155,000 capital gains tax won’t come due when the trustee sells and reinvests, so Allen and Marge will begin receiving trust income based on the full $900,000 – about $54,000 a year. Based on their ages and other factors, Allen also will receive a charitable deduction of about $337,000. Summing up, Allen has:

  • established a lifetime income – one that can grow with inflation;
  • reinvested a highly appreciated asset without incurring capital gains tax that would have included $600,000 taxed at a 15% rate and $240,000 taxable at 25% under depreciation “recapture” rules;
  • reduced his income taxes significantly (the $337,000 gift will be deductible up to 30% of the couple’s adjusted gross income, with a five-year carryover for any excess deductions);
  • gained the investment and management services of a trustee;
  • shed the financial and personal burdens of property management;
  • made a magnificent gift to support our programs.

Allen’s gift plan would work equally well for people who own office buildings or undeveloped real estate and wish to sell and reinvest without paying capital gains taxes. For land that does not produce income (such as a vacant lot) the unitrust would probably be arranged so that income payments are postponed until after the trustee sells the property.


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