Here’s a 1031 exchange / retirement strategy that might be useful for readers of this thread.
Step one: Buy an investment property, such as a small rental property in your community, or perhaps as a condominium to rent to your child and roommates as they attend college.
Step two: Use the rental income to essentially let your tenants pay the mortgage for you while you enjoy the the tax benefits of “depreciation”, an accounting gimmick designed to benefit the political donor class.
Step three: Sit back and let the property appreciate in value.
Step four: Sell the property but structure the transaction as an “exchange”, whereby you use a “qualified intermediary” and reinvest the sale proceeds into another “investment” property, which property conveniently meets your future retirement objectives, such as that nice lakefront house in a state with no income tax.
Step five: Hold the newly acquired property as an investment, again letting the tenants pay your mortgage while you get the tax writeoff.
Step six: When you’re ready to retire, sell your primary residence, and take up to $500,000 (for a married couple) as long term capital gain exempt from federal taxes.
Step six: Relocate to the house on the lake, converting it to your primary residence.
Step seven: Live happily ever after, knowing that when you eventually sell the lake house that its appreciation, including the appreciation from the kiddie condo, will qualify for for another potential $500,000 capital gain exclusion.
Step 7, that’s not the case any more. One of the tax reform bills a while ago now requires you to prorate the gain between the time it was a rental and the time it was your primary residence, and you will owe taxes on the portion of the gain assigned to the rental period.
I had already planned to go back to work in the fall, but this makes it a must rather than a want. I think things may get worse, which scares me. I worry that I won’t be able to get a job. I figured we would be fine even with a market downturn … but this is more than a downturn, I fear.
Very true. Appreciation has always been the great unknowable. But even with zero appreciation, mortgaged property has gradual equity growth as the debt is paid down. /ultimately, once the tenants pay off the mortgage you own the property f&c.
I was unaware of the change regarding #7, but I just checked and you’re exactly right. Upon the ultimate sale of the second some of the gain would be excluded and the rest would be LTCG, so still low.
But another important benefit remains fully intact: all of the cash proceeds from the first sale are available to be reinvested into the second purchase; the tax on that gain is deferred indefinitely.
Watch that capitol gain exclusion if single. It is half, $250,00. I had to pay taxes after selling my big house, as even post improvement deductions were not sufficient. Last week my financial guy said I am the only client he has ever seen have to pay on that appreciation. I told him it is part of the unfairness towards single people who might be indulgent enough to own homes.
After the market freefall, we are definitely thinking about delaying our retirement. We even had the date picked out, Sept 1, 2021, and were going to a retirement seminar next month. Our account is very aggressively invested, though at least we have real estate. I don’t even want to look anymore, but I can estimate the carnage.
It’s not just the financial part, but going to work during all of this has made me feel better. It gives me a sense of purpose. I realize there’s some added risk by traveling around the country, but I feel like I’m doing my part for the economy and helping other people by going out there and working. Our company is going to weather this disaster well, and is even picking up extra business, so we feel very fortunate. Even though our retirement funds are plummeting, at least we have this job.
H is retired and I have been temporarily not working. I was getting kinda used to it … but the recent events have changed that. We did get my in-laws settled in assisted living, got their house cleaned out … and it sold before it was officially listed. We can’t visit them due to lockdown, so I guess my unpaid work is done. I have been spending a lot of time job searching, and I truly hope that I can get hired. We have savings, but I don’t want to use them up. Here’s to me finding a job soon!
And for the record, I have no regrets about leaving the last job. I probably would have major health issues had I stayed. Better to have to weather a financial storm than not be here at all.
I genuinely cannot decide if I should take advantage of today’s small bounce to pull some money out of the market, or take advantage of the 30% drop, not try to time the bottom, and move some money into the stock market.
I am paralyzed… the default is probably do nothing. I was about 70% stock/30% cash at the peak, it’s probably closer to 40% cash now.
I was seriously considering retiring in June and had DW half convinced… now, who knows.
My feeling is that, based on Italy, the economy could get much worse in the near future. But shouldn’t that risk already be priced in? Or are people just refusing to face reality?
I’ve nibbled on the huge dips. Nibbled a bit more yesterday, before the market recovered late. I’m an optimist. The crisis will be solved and 2-5 years from now the market will have recovered and then some.
Personally I think the market correction is going to get deeper but over time. This was just the beginning - First leg down. It’s like watching 2000/2008 all over again. It’s all normal. Every bull has a correction. However, I have a gut feeling it will End up being worse than those. Also, I use charts to determine whether to be in or out of the market. If the Nasdaq is above the 50D that’s healthy. If it crosses below that’s not healthy. If its below the 200D that’s even worse. It’s like seeing all the footprints. My philosophy is Even tighter than using the 50D And I have a maximum loss rule that is in the single digits. For example if you lose 50% of your money it will take 100% return to get it back and it may take years. If you lose 10% it’s so much easier to make that back and quicker too. The number one rule in my book is protect your capital so pick a hard fast loss rule and stick to it. It allows you to invest another day.
The trick is knowing when to get back in… I remember reading an article that if you were out of the market for the wrong 30 days over the last 20 years, you lost money.
But it’s tempting to pull some money it even now… Usually that means the market is about to recover.
DH kept buying when things dropped over these past weeks, and then of course they dropped even more. Oh well. He is hopeful that these will eventually do well.
This mess may have in fact hastened my retirement. I have been semi-retired for some time now, and when they recommended folks my age minimize contact, I cancelled every appointment until the end of the month. Well, that now seems like it will drag on well past early April. We’ve been able to work through the short term issues with telesessions, but so far have only had a few comfortable doing that.
Will see what happens with DH’s employer. They have been running into constant red tape trying to complete an acquisition and this will he a negative impact, along with the clear impending downturn in the industry. They may have layoffs, and for us, the biggest concern is healthcare for him. Not fun times. I can decided to start collecting social security , and if he gets laid off I will have to start my medicare B (they told me I’d have to go in in person to do this because I have to bring in some paperwork, and hopefully the social security offices will be open and safe).
@jym626, I agree totally - this is no fun!
I think maybe worrying about the financial aspects is helping me refrain from worrying as much about the potential health aspects, which are even scarier.
I suspect for some of us retirement will be sooner, not by choice, but because of businesses shutting down or decreasing number of employees, or later, because even if you’re invested fairly conservatively, your retirement savings may have taken a huge hit.
