Author Topic: Rent or Sell? CA Condo Held by BVI Corporation  (Read 294 times)

stevewilson

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Rent or Sell? CA Condo Held by BVI Corporation
« on: June 03, 2019, 05:15:22 AM »
Market Value: $3,000,000
Original Purchase price: $1,000,000
Original Mortgage Amount: None
Interest Rate: Not Applicable
Mortgage Term: Not Applicable
Term remaining: Not Applicable
Amount remaining on mortgage: Not Applicable
Gross Rents: $14,000 per month
Principal and Interest (the P&I of your PITI - should match with the above info): Not Applicable
Taxes and Insurance (the T&I of your PITI): Annual Property Tax is $17,790, i.e. $1,482.5 per month on average; insurance is $148 per month
HOA costs: $3,810 per month
Deferred maintenance notes: Not applicable
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):

This is a condo in California that was used as a vacation home when I lived in the United States. I no longer live in the United States.

The condo is held by a BVI corporation. Therefore, rental proceeds would be subject to 21% federal tax and 8.84% state tax on the net income. Then, an additional 30% "branch profit tax" would apply to the remaining amount.

But if I rent, after two years I could do a 1031 exchange for a nicer property to rent out. Then, if I return to live in the US in the future, I'll have the option of moving into that nicer property. This way, I would have upgraded to a nicer property without having paid capital gains tax during the process.

If I sell now, sale proceeds would be subject to 21% federal tax and 8.84% state tax on the capital gain. (I believe "branch profit tax" could be exempted under the "termination exemption," but would be grateful if anyone could shed light on this issue as well.)

I am a non-resident alien for US tax purposes. Therefore, any sale or rental proceeds I get that I invest in the US securities market (the only place I would invest any excess cash) would be subject to no capital gain tax, but a 30% flat tax on the dividends.

Thank you very much in advance for any feedback you may have.


« Last Edit: June 03, 2019, 10:45:28 AM by stevewilson »

waltworks

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Re: Rent or Sell? CA Condo Held by BVI Corporation
« Reply #1 on: June 03, 2019, 07:41:15 AM »
Looks to me like you're netting *roughly* (assuming 100% occupancy and no maintenance costs) $8k per month, so $96k/year before taxes. Taxes are eating about half of that, so $48k a year after all is said and done.

That's a *horrible* return on a $3 million place. You'd do better with a CD or a savings account!

Even if you only get $2 million after closing, you'll be doing far better with that money invested in basically anything else.

I'd sell it immediately.

-W

stevewilson

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Re: Rent or Sell? CA Condo Held by BVI Corporation
« Reply #2 on: June 03, 2019, 10:42:13 AM »
Thanks for sharing your thoughts W.

Would your view change given the following?

If I rent, after two years I could do a 1031 exchange for a nicer property to rent out. Then, if I return to live in the US in the future, I'll have the option of moving into that nicer property. This way, I would have upgraded to a nicer property without having paid capital gains tax during the process.

affordablehousing

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Re: Rent or Sell? CA Condo Held by BVI Corporation
« Reply #3 on: June 03, 2019, 10:58:40 AM »
Yes, was assuming you'd do a 1031. Why would you ever just cash out and pay taxes? No need, just roll it into something better. Then when you die let your kids enjoy the step-up.

waltworks

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Re: Rent or Sell? CA Condo Held by BVI Corporation
« Reply #4 on: June 03, 2019, 11:17:17 AM »
Thanks for sharing your thoughts W.

Would your view change given the following?

If I rent, after two years I could do a 1031 exchange for a nicer property to rent out. Then, if I return to live in the US in the future, I'll have the option of moving into that nicer property. This way, I would have upgraded to a nicer property without having paid capital gains tax during the process.

I would still sell, unless you can 1031 into something that will produce a much, much better return. I am not clear on whether you can legally 1031 a single residence into, say, an apartment building (which could work) - but I think you're going to struggle to find any $3 million SFH/condo properties that will provide a decent investment return.

The return is just so awful (and with a single property, the risks are insane - how's your earthquake insurance?) that I'd take the capital gains hit and sell it.

That said, my assumption is that you're so wealthy at this point that it doesn't matter much. If you could afford to pay cash for a $1 million condo in the past, I'm guessing you won the money game a while ago. So you can just sit on the place if you want, and it's not going to materially affect your life.

You should consult an accountant about your 1031 plan - my understanding is that you can't simply move into a 1031 property as a primary residence and hence avoid capital gains. The capital gains are due when the rental is removed from service. I think depreciation can be deferred until sale though.

Again, not an accountant myself - consult someone who is.

-W
« Last Edit: June 03, 2019, 11:37:52 AM by waltworks »

Papa bear

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Re: Rent or Sell? CA Condo Held by BVI Corporation
« Reply #5 on: June 03, 2019, 09:43:19 PM »
Thanks for sharing your thoughts W.

Would your view change given the following?

If I rent, after two years I could do a 1031 exchange for a nicer property to rent out. Then, if I return to live in the US in the future, I'll have the option of moving into that nicer property. This way, I would have upgraded to a nicer property without having paid capital gains tax during the process.

I would still sell, unless you can 1031 into something that will produce a much, much better return. I am not clear on whether you can legally 1031 a single residence into, say, an apartment building (which could work) - but I think you're going to struggle to find any $3 million SFH/condo properties that will provide a decent investment return.

The return is just so awful (and with a single property, the risks are insane - how's your earthquake insurance?) that I'd take the capital gains hit and sell it.

That said, my assumption is that you're so wealthy at this point that it doesn't matter much. If you could afford to pay cash for a $1 million condo in the past, I'm guessing you won the money game a while ago. So you can just sit on the place if you want, and it's not going to materially affect your life.

You should consult an accountant about your 1031 plan - my understanding is that you can't simply move into a 1031 property as a primary residence and hence avoid capital gains. The capital gains are due when the rental is removed from service. I think depreciation can be deferred until sale though.

Again, not an accountant myself - consult someone who is.

-W
I think there’s more tax issues to unpack here with this property than we are used to. Foreign owned property comes with a lot of baggage to sell. 

I agree 100% that if everything being equal, sell this place and take the gains.  But with the extra taxes looped in here, I would go find an attorney or accountant (or group practice) that specializes in these types of sales.  I would imagine that they can work out something to avoid or defer taxes better than what we can come up with here on internet free advice land.


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