[Capable]

Hey everybody, I am hoping for some guidance from the real estate investors out there. My sister and I inherited a small home from our father 11 years ago that we fully remodeled and have rented out for the past 10 years.

She has now moved out of state and we’re both considering selling now that weve started our only little families. And also while our relationship is still good (always has been but never know).

I am trying to decide whether it would be worth trying to 1031 exchange into another rental.

The Property:
Single family
3 bed 1 bath 1000 square feet
Owned in a 50/50 LLC between my sister and I currently.
The home is paid off.

Accountant says bases is at 95k
Market value about 250k.
Market rent in area $1,500-1,600
After sales cost i figured roughly 14-15k in capital gains EACH. 28-30k total

Backround:
My wife and I own 2 other rentals together and would like to buy more in the future.

Baby #2 is on the way, due this fall.

Good with money but currently a little tight trying to pay off the HELOC (15k balance) used to buy one of our two rentals.
Both rentals are two family.

My sister is not interested in real estate investing.
We’re Mid 30’s in wealth building phase.

Question is do we sell and pay the capital gain tax or buy my sister out of the LLC and off the title?

If i were to buy out my sister, what would the easiest way?
Any ideas would be greatly appreciated.

Thank you!

[Christina]

I am a landlord and am getting tired of landlording even when I am cashflowing nicely. So, I’d sell. If your gains are significant, then I might 1031 to avoid paying taxes.

But with just $15k gains then the taxes are not worth taking on extra responsibilities.

[Tom]

Why pay taxes when you can take tax deductible debt? Tax a cash out refi for her half plus whatever you need to pay off.

Your cash flow will drop but you’ll still make some and the tenants will pay it down for you.

[Jule]

I’d say keep the house and buy your sister out. However since you have another baby on the way and already things are tight trying to pay off existing HELOC, I think it’s best to sell it, split the profit, pay the taxes and your debt.

Have some breathing room and pad your savings before you go buy more properties.

[Karl]

Don’t forget in addition to capital gains you pay recapture tax on the depreciation taken over the 10 years/.

[Shawn]

I think selling is a pretty good option. I think you could probably buy her out over time in a way that is tax efficient for her and gives you some time.

Something like convert her ownership to preferred shares and pay interest until the the principal is repaid.

If you want to do a 1031 exchange I believe the LLC needs to do it.

The other option would be to distribute the property to your own LLC so you can do a 1031 with your own half.

[Author]

Posts