Condo building might be sold to investor. Big Windfall, Big Tax Bill, IRS 1031

[rantk81]

I own two condo units (both rentals) in a condo building. Both are 100% paid off.

The building is starting to receive interest from investors who want to buy the whole building (80 units) and turn it into an apartment building. The numbers being thrown around seem "almost too good to be true".. Quite a bit higher than what units have individually been selling for lately.  However, if the investors are serious about wanting to buy the whole building, this high premium might be necessary, since an owner vote of 75% (60 of the 80 units) would need to vote in favor of a sale in order to force the sale of the building.

I am sitting on a rather large unrealized capital gain on the condos.  Since they are both paid off, the rental income I get each month, net of expenses, is quite good. Still, the price numbers for the whole building that are being mentioned are so ridiculously high that I would be in favor of selling.

I have been thinking about "getting out of the landlording business" for a while -- and the idea is appealing to me of of being able to sell both my rentals without individually dealing with the hassle of lawyers, agents, offers, closings etc.

I had hoped one day to try to sell the rentals in a tax year where I had very little other income, in order to reduce the size of the checks I will be sending to Uncle Sam and to the Land of Lincoln.  As it stands now, I have quite a large amount of W-2 income thus far in 2017, and quite a bit of dividends and realized capital gains in my brokerage account. I could potentially get hit big time with taxes -- including the ACA surcharges.  My spreadsheets tell me it could be upwards of $50k in extra taxes to pay for this event.

In the past, I had briefly looked into IRS Section 1031 for "like kind exchanges." It seemed like a complicated, onerous, and time-sensitive thing. I guess I will be looking into it much more closely. A big challenge is, if there is a building decision to sell the whole building, I will have very little influence on the time-table of it. This might make a 1031 difficult.

I've never done business with a tax adviser/planner before... but I think it might be necessary. I'm usually pretty comfortable doing all of my tax planning and tax prep myself. However, this event might be a bit over my head...

If anyone here can give me some friendly advice, it would be appreciated. Especially if you have ever:
- Done a Section 1031 like kind exchange
- Been involved in a condo association that received offers to buy the whole building
- Been involved in a condo that actually did sell the whole building

Cheers

[Catbert]

I've never done a 1031 exchange for exactly the reasons you mentioned (complicated and time sensitive).  However, I believe there are "accommodators"  who will (for a hefty fee) buy and hold properties so that you can meet time limits.

It's been a long time since I investigated, but basically you could find a property you want to buy, the accommodator buys it at the price you negotiate with the seller and then accommodator sells it to you when you are in the appropriate tax window.  Not cheap, but maybe worth it.

[Mr. Green]

You might look into a structured sale. It's not very common; you might have a hard time finding a third party that will act as your agent (typically some type of lawyer) but it can be worth it under the right circumstances. The idea is that, at settlement, the agent takes whatever amount you desire (up to 100% of the sale price) and purchases an annuity with you as the beneficiary. The annuity can be whatever terms you'd like to work out with the insurance company. Because you are not technically receiving the money at settlement, you only pay taxes at payout of the annuity, so smaller amounts each year. However, you might not want to lock in a long term period where you know you'll receive X amount if it might mess with your ACA subsidies, etc. The IRS has reviewed and approved the structured sale concept. From a risk standpoint, an annuity will be similar to bonds, if that's really what you're after. In the event that you did want a lump sum down the road there are always companies that will give you present value on an annuity but I'm guessing it's not great terms.

[Dicey]

I have a really sharp Realtor/Broker and she has lots of experience with 1031 Exchanges. There are additional fees charged by other parties in the process, but she doesn't tack on anything extra.

My advice is to start by finding an experienced Realtor. Referrals are the way to go. Perhaps start by calling a few R.E. Firms and ask to speak to the person who does the most 1031's in their office. Costs you nothing but a little time.

I'd be worried that if the economy blips, they'd walk away from or lower their offer.  If you've emptied your units and the deal falls through, that would be ugly.

 To protect myself from that as much as possible, I'd hire a really sharp lawyer. The Realtor you've tracked down will know someone.
If it works out, early FIRE?

[Michael in ABQ]

1031 Exchanges are pretty common for commercial real estate. The bottom line is you have a certain time period to identify a property and a period after that to close on it. I think it's around 180 days total. You have to purchase like kind real estate but I'd talk to an expert to see what the IRS considers to be like kind. I.e. you might need to purchase residential property but it wouldn't need to be a condo, or be two units. I've seen some sales of commercial properties where the buyer overpaid because they would rather pay the full asking price and be assured of having their 1031 exchange go through than try and negotiate or shop around and risk having to pay tens of hundreds of thousands of dollars in taxes. Is overpaying by $10,000 to defer $50,000 in taxes worth it? That's up to you to decide. I don't think the fees are too onerous, probably several thousand, but I'm normally analyzing transactions that are well over a million so those kinds of fees aren't really a big deal.

[Kakashi]

Contact a company that specializes 1031 exchange.  It's cheaper than you think.  Typically about $1K or less.  Think of it as a $1K "option".  You enact the 1031 and if you don't find a property to place the proceeds into, worse case scenario is you just pay the cap gain tax.

[rantk81]

Update:

It's been quite a process, but we just had an official vote for the building.  The bulk sale was approved with about 78% ownership interest voting in favor of the sale, and about 10% voting against the sale.  (75% super-majority was required for it to pass, per state condo law.)

I am hoping for a smooth and fast closing.  I'm also wondering how much resistance is going to be put up by the 10% who voted against, and perhaps the 12% who didn't vote...