Care-Free Retirement Income from Real Estate
Picture yourself in an exotic location. You are finally on the long-awaited retirement trip with your spouse.
The telephone rings. It is three o’clock in the morning. Startled from you sleep, your mind immediately races with dread. Who could be calling at this hour?
“Did our son have an accident? Is my sister in trouble? Is a neighbor calling to say our house is on fire? Has a loved one died?”
You answer the phone as if in slow-motion.
It is nothing you feared, to your relief. It is your property manager calling, the person you pay to take care of your rental house, calling to inform you that a water pipe broke. The tenants had to be evacuated. He asks you what to do, and you are unprepared.
The truth is that you are not fully retired. You still have this income property’s manager to supervise.
This property served you well during your working years. It provided a nice tax shelter and a steady income. Now, the income has increased a bit but the tax benefits are nearly exhausted and repairs are on the horizon. Each problem comes with a financial implication, and you contemplate your options.
The obvious first choice is to sell the property. However, there will be a significant tax bill due at sale, a result of the accelerated depreciation you claimed and market appreciation over the years.
Or you could exchange the property tax-free for another property, though that only delays dealing with the problem.
Or, another possibility might be to give the property to heirs, but isn’t that just transferring your problems to them?
All these options give you a headache, even as you hoped retirement would bring freedom from thorny financial decisions.
Yet it may be possible to eliminate the large tax bill and simultaneously avoid the other problems.
Consider making a transformational gift to benefit your favorite charities using that rental house while retaining the income it delivers. If correctly coordinated, this gift might also increase retirement income because it can help to delay the start of qualified plan payouts (so those funds can continue their tax-deferred growth).
Be aware there are issues unique to income-producing real estate that must first be resolved in order to make the gift work. To learn more about how this might solve several of your problems at once, call your charitable advisor or give me a buzz at 614-338-2365.
It might mean that your rental house can work harder for you in retirement – instead of you working hard for it.
Article appears as originally published in the Ohio Jewish Chronicle, October 15, 2015.
Jackie Jacobs is the Chief Executive Officer of the Columbus Jewish Foundation, the Central Ohio Jewish community’s planned giving and endowment headquarters.