How To Sell Your Duplex Without Writing A Check to the IRS

Now that the market has nearly fully recovered from the economic crash of 2008, many long-term duplex and investment property owners who survived it are considering selling.

Most are at or near the age where the cash flow from that rental property would supplement their retirement income. The challenge is, frankly, they are tired of being landlords.

There are two big hurdles in selling a rental property, however; captial gains tax and depreciation recapture. Combined, they can total as much as 35 to 40 percent tax on the gain of the sale. For many, this is a deal breaker.

Of course, one of the numerous advantages of owning real estate is it may be passed on as part of an estate and heirs inherit the property at a stepped up basis. They are not subject to capital gains tax or depreciation recapture if they choose to sell the property.

So are there any options for people who are tired of being landlords but don’t want to pay the IRS either?

Yes, several.

1. Contract for Deed – With this option, the seller works as the buyer’s bank. Instead of making payments to a lender, the buyer makes payments of principal and interest to the seller. Interest rates and the length of the loan are negotiable. The amount of payments and total interest paid most often total more than a conventional sale. Most often, there is a balloon payment at some point before the end of the amortization schedule. For example, the payments may be spread over 30 years, but the buyer may agree to refinance after five, thereby taking the seller out of it. Sellers are charged capital gains tax and depreciation recapture for only the principal they recoup in each year. Interest is taxed as ordinary income.
2. 1031 Exchange – Rather than taking proceeds from closing, investment property sellers may choose to buy a replacement property. The new property does not have to the the same kind as the relinquished property. For example, owners may sell a duplex exchange for land, a vacation home, a commercial property, or trade into a Delaware Statuatory Trust or Upreit, where there are no managerial responsibilities whatsoever. There are strict rules and deadlines to this process, so it’s important to work with a Realtor who is familiar with investment property and investment property sales. Just remember, any time you touch the proceeds of the sale of an investment property, it’s a taxable event.
3. Master Lease with an Option to Buy – Under this arraingement the eventual buyer pays the duplex owner a fixed amount of rent. Some or all of that amount may be credited toward an eventual down payment on the property. The buyer or “master tenant” of the then takes over management. He or she may keep whatever amount of rent collected above and beyond expenses and the payment to the seller. Capital improvements – things like roofs, boilers or furnaces and updating kitchens are usually paid for by the seller. If the buyer chooses to take this cost upon themselves, he/she does so at the risk of losing that money.

If you’re a long time Twin Cities landlord tired of trash, tenants and toilets, give me a call. You have options.