Mini Case Study: Selling Rental Properties
This week, we helped one of our high-net-worth clients navigate the tax implications of selling rental properties following the passing of her spouse.
Here’s what that looked like.
After her spouse passed away, our client was considering selling several rental properties. One important tax consideration with this was the potential step-up in basis from her husband’s passing, because that could significantly impact the taxable gain on the sale.
So, we ran four different projections to determine the most tax-efficient strategy.
Projection #1: Hold The Properties
In this projection, our client would not sell any properties and instead would continue holding the real estate.
Projection #2: Sell Everything at Once
Selling all the rental properties could generate approximately $3.5–$4 million in proceeds.
After factoring in the adjusted basis and estimated federal and state taxes, the overall capital gain would be approximately $400,000, a relatively favorable outcome given the total value of the properties.
Projection #3: Sell Over 2 Years
By spreading the property sales across two tax years, we could take advantage of the different tax brackets and potentially reduce the overall tax burden. Doing so would leave her with approximately $200,000 of capital gain recognized in each year.
Projection #4: Sell Over 4 Years
Spreading the sales across four years would provide the greatest opportunity to utilize lower tax brackets and minimize capital gains taxes.
While selling over four years could potentially produce the lowest tax liability, we recommended a two-year sales strategy as the best balance between tax savings, cost-effectiveness, and simplicity.
This allows our client to access a significant amount of equity in a relatively short timeframe while still taking advantage of tax brackets to maintain a manageable effective tax rate (assuming her other income remains relatively consistent).
The takeaway of our client’s story is that the timing of a real estate sale can be just as important as the sale itself.
Proper tax planning before selling can help you keep more of the equity you've built. Please send me an email (Madison@swrpteam.com) or book a time on my calendar (here) if you’re dealing with a similar situation and need a trusted Advisor who can help.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.