In my previous column I wrote about John and Martha’s desire in retirement to refocus their energies from managing their large home and investment real estate.

They sold their family home, pocketing $1.8 million from the sale. They purchased a condo for $600,000 and invested the balance in a combination of stock and bond ETFs.

The next step in their strategy is to lessen their level of management of their real estate investment portfolio.

Their portfolio provides them a stable income of $280,000 per year. This is derived from an 8,000-square-foot strip center bringing in $150,000 per year in income and a 10-unit apartment building, $130,000 per year. They wish to keep this level of income, pay less in taxes and eliminate the hands-on approach to their investments while maintaining stability.

Here are their options:

John and Martha could hire an outside service

They have reservations, but could hire a property management company. They have owned their properties for over 20 years and know them well. They are management intensive, therefore they doubt a property management company could provide the same level of service.

John and Martha could sell

They could offer both for sale: $2.5 million for the strip center and $2.5 million for the apartment building. There is no financing and their basis in both is low — $1 million and $850,000 respectively. After consideration for capital improvements they end up with a realized gain of $3 million. They will owe 28 percent or $843,000 in federal and state taxes.

John and Martha are not crazy

After calculating their tax liability they gain a renewed motivation to look into other options. A 1031-exchange allows for an investor to exchange an investment property into another and defer taxes. John and Martha could exchange both properties into another single-tenant absolute triple-net property offering no management duties.

John and Martha found two little-known options

A Deferred Sales Trust is essentially a contract between you and a third-party trust. John and Martha could sell their properties to the trust, which in turn sells to another party. The trust agrees to pay them over a future period of time in the form of an installment sale note. They name the terms of the note: when to start the installment payments, how much to pay and whether payment includes principal or interest. This gives them the ability to control their capital gain tax exposure.

A Delaware Statutory Trust is a form of crowdfunding a real estate purchase. John and Martha could exchange into a Delaware Statutory Trust and then pool their funds together with others doing the same, allowing them to purchase ownership shares of a larger property.

John and Martha, being rather conservative in their investing, opted to exchange both of their properties into a single-tenant absolute triple-net investment. They purchased a CVS Pharmacy for $5.35 million (using some of their funds from their home sale), giving them total hands-off management except depositing their $24,521 rent check every month.

Burt M. Polson, CCIM, is a real estate broker with ACRES Real Estate Services Inc. helping clients sell, buy and lease real estate. Reach him at 707-254-8000, or


Load comments