Q: I am in my late 60s and would like to put some of my investment money in another class of assets. I currently own four apartment buildings that have no debt. They have a value, based on the income, of about $550,000 and net out about $55,000. They tie me to the area and require that I be involved in the everyday management. I would be happy with a safe, trouble-free investment that would yield half of that. I am troubled by systemic corruption in the investment community. I just don't trust the private sector to act honestly with my money. Any ideas?
A: The first idea that strikes Robert Burkarth, a CPA with Householder Group, in Stamford, Conn., is that you need to get the chip off your shoulder about investment advisers. Yes, there are a few bad eggs. But the vast majority are honest professionals and since you likely can't pull off by yourself any of the recommendations he's about to make, you're going to have to figure out how to trust a few of them.
Let's assume that right now your cash flow is OK, maybe you are even saving money. But your living expenses will increase over time at a minimum of the rate of inflation. There is also no mention of ultimate estate/wealth transfer goals to a next generation, if any, which would affect any recommendation.
That being said, Mr. Burkarth presents three options on converting the rental properties into different holdings that provide some level of guaranteed income. Ideally, that income would have the capability to increase over time as the cost of living rises.
Option 1: Sell the properties and use IRS Code 1031 to eliminate any capital-gains tax on the sale. A condition of the 1031 exchange is that it is "like kind," e.g., rental property for rental property. Typical yields are in the 6 to 7 percent range, with no management duties or other expenses associated with the investment, on top of appreciation of the property's value. No tie to the area, no responsibility for everyday management.
Option 2: Create a Charitable Remainder Unitrust and transfer the properties to it. Properly applied, this can eliminate the capital-gains tax, thus preserving the full principal value of the real estate to be invested for income or total return. With current rates, approximately an 8 percent distribution for life would give you a $200,000 tax deduction. You or anyone you name can be trustee of the funds, investing and managing them as seen fit. Every year, 8 percent of the year-ending principal is distributed to the investor (you), which is taxable at differing rates depending on the investment results of the trust.
Option 3: Sell the properties, pay the taxes, and invest the money yourself or with a professional. Unfortunately, many investors are looking for the "investment Bigfoot" – full liquidity, high guaranteed returns, no risk, and no cost for the advice. That combination may exist, but like Bigfoot, Burkarth says, it's highly unlikely.
Questions about finances? Ask us at:
Work & Money Q&A
The Christian Science Monitor
1 Norway Street
Boston, MA 02115