You Can Defer Capital Gains Tax on the Sale of Investment Properties — Or Reduce It

Colorado owners of investment real estate have built up a lot of equity over the last several years through appreciation. Selling those properties outright would subject the seller to significant capital gains tax, but there are several strategies for deferring — and in one strategy reducing — that capital gains tax liability.

Many property owners have inquired about selling their investment property in a way that locks in their gains — including owners who are looking to exit the landlord business altogether. 

Whether your rental property is a single-family home, a duplex, other multi-family dwelling, or a commercial property, you may well be looking to cash out while values are high, but how do you do so while minimizing your tax exposure?  There are several strategies for doing so, but one that was created by the Tax Cuts and Jobs Act of December 2017 is particularly attractive, both for its flexibility and the fact that it allows for reduction of the deferred capital gains tax and elimination of future tax.

There are four exit strategies that simply defer capital gains tax obligations. They include the traditional Installment Sale, the Monetized Installment Sale, the Deferred Sales Trust and the Delaware Statutory Trust. By using one of these exit strategies, you can defer the amount of tax you pay on the sale of a rental property, putting your pre-tax capital to work elsewhere. A fifth tool, the Opportunity Trust Fund, created by the Trump tax bill, is likely to become every investor’s favorite. Let me explain why.

The Trump tax bill allowed states to identify “Opportunity Zones,” and Colorado identified 126 such zones, 40% of which are in the Front Range, including Denver and Jefferson County. Altogether there are now 8,700 Opportunity Zones in all 50 states, the District of Columbia, and in five U.S. territories.

If a new investment in an Opportunity Zone property — or in an Opportunity Zone Fund which invests in such properties for you — is held for 10 years, you pay no capital gains tax when you sell.

There’s a further advantage when you roll the capital gain on your current investment property into an Opportunity Zone investment, because you can sell your current property, take out your basis on that property tax-free, while rolling only your gain into an Opportunity Zone Fund. Your basis on the rolled-over gain is increased (and tax liability reduced) by 15% after 7 years, and your gain on the new investment is tax-free if you hold it for 10 years. I’m told that these tax benefits decline on investments made after 2019.

In this article, I’m only telling you what I understand from reading up on the subject, including at https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questionso. You’ll want to speak to your tax advisor before making any changes in your real estate investment portfolio.

I thank broker associate Andrew Lesko, who specializes in duplex and multi-family properties, for bringing this and the other tax-saving strategies to my attention. If you’re thinking about selling your duplex, triplex, townhome or condo, contact Andrew for a current market analysis at 720-710-1000 or visit www.DuplexAlerts.com, where you’ll find more details about all five tax deferral/reduction/elimination strategies.

If you have a commercial property to sell, call me at 303-525-1851 so I can refer you to a trusted commercial broker.

Coming Next Week: 2-Story Home in Mesa Meadows

1230 Wyoming Street, Golden

This Genesee-built home at 1230 Wyoming Street, listed at $850,000, Shas been the home of one of Golden’s  pre-eminent families since just after it was built in 1997. The summertime picture of the front yard only hints at the loving care this home has received over the past 20-plus years. See a gallery of 33 pictures of this home at www.MesaMeadowsHome.com, including pictures of the mountain view from the formal living room. This is a large house, with 4 bedrooms and 3½ baths spanning 3,596 finished square feet. There’s another 609 square feet of unfinished storage space in the walkout basement. It has a main-floor study, formal living and dining rooms, two family rooms (one in the basement) and an eat-in kitchen with access to a west-facing deck. It has a 3-car tandem garage, too. Access to the North Table Mountain open space park is just 2 blocks north, and the bicycle-pedestrian trail to downtown Golden (1½ miles away) is in Cressman Gulch park, just one block west.

Because the sellers are downsizing, there’s an estate sale happening this weekend, and the totally vacant home goes on the market next Wednesday, Feb. 27. Open Sat., Mar. 2, 1-4 pm.

2-BR Arvada Condo Just Listed by Debbi Hysmith

Be sure to check out this 2-bed/2-bath condo at 5585 W. 76th Ave. #102. This 1,104-sq.-ft. condo is on the first floor, with a kitchen that opens to a private patio. A gas fireplace is the focal point of the living room. The master bedroom includes a walk-in closet & master bath. The second bedroom is large enough to add a sitting area and has its own entrance to a full bath. Add your own washer and dryer to the laundry room and forget about having to leave your home to do laundry ever again! By following the private walkway through the Wood Creek community, you will find the gated pool. Visit www.ArvadaCondo.org for more pictures and a narrated video tour — just like an actual showing. Buyers, you will love this condo!

It was just listed at $250,000.  No open house. Call your agent or Debbi Hysmith at 720-936-2443 to set a showing.

Help Mark Stenberg Recover From a Severely Broken Leg

Mark Stenberg is more than just our valued handyman. He has been my friend since I first hired him in 1991. Last week, while serving a past client, Mark fell 12 feet from a roof onto a concrete driveway, severely breaking his right leg in two places. It will be many weeks or months before he can resume earning a living.  He has no family and no savings.

We can’t relieve Mark’s pain, but our agents and several clients have already donated to help ease the financial burden which Mark is facing. Now I’ve set up a GoFundMe page so that others can contribute to his recovery. The web address for the GoFundMe page is http://www.gf.me/u/qvfut5

Thanks for helping us help Mark!

GoFarm Needs a Refrigerated Box Truck or Large Van (with A/C) — Can You Help?

I am helping this great non-profit that is dedicated to providing our community with fresh locallygrown produce. If you know how they might obtain a used refrigerated box truck or large van with A/C (as a full or partial donation), call Founder/CEO Eileen O’Rourke at 303-906-6222.

GoFarm, which is active in combatting food insecurity in Jeffco, is holding a fundraising brunch this Saturday, Feb. 23rd, at The Origin Hotel Red Rocks in Golden. Event includes brunch, mimosas, and interesting conversation!  Click here to purchase the $25 tickets on Eventbrite.

Security Devices Could Allow Sellers to Eavesdrop on Buyers During Showings

The increasing prevalence of smart speakers like the Amazon Echo and security cameras inside and outside of homes, has introduced the possibility that sellers could be watching buyers and their agents and listening to what they say during showings.

The Colorado Real Estate Commission considers the privacy implications serious enough that this year’s annual update class for real estate brokers includes a section on legal jeopardy and practical advice.

Imagine, for example, that a buyer is overheard by a seller telling his/her broker, “I must have this home. I’ll pay whatever I have to!” The seller would immediately have an unfair negotiating advantage over the buyer.

The next time you are being shown a home, consider the very real possibility that the seller is parked nearby, watching and listening on his smartphone as you walk through the home, monitoring everything you and your agent say.

Although Colorado is a “one-party consent state,” meaning that only one party to a conversation needs to know it is being recorded, the implications of such technology are serious.

Given that people have rapidly embraced the use of internet-connected video and audio devices, enabling homeowners to monitor the goings-on in their homes, buyers and their agents would be well advised to minimize talk about the property and their level of interest during showings. Don’t count on being able to spot the devices. 

Also, to avoid possible breach-of-privacy litigation, sellers should consider disabling such devices when putting their homes on the market or, at a minimum, placing a notice on the front door advising visitors of the presence of monitoring devices that might be active.

Rita and I have a Ring video doorbell on our house, and we love it. It rings on Rita’s cell phone, enabling her to see and speak with the visitor. Chances are, the person at the front door would think we are home, even if we are not, which is advantageous from a security standpoint. This feature accounts for the rapid adoption of Ring and other brands of internet-connected video doorbells and security cameras.  Not everyone is a fan of these devices, as some believe that if your doorbell faces the street you could be violating the privacy of someone walking or driving beyond your front property line. (That was a point made during the annual update class which our agents took last month.)

In the update class our agents were advised both to warn buyers that sellers could be watching and listening, and to ask sellers during listing appointments whether they have video and audio recording devices in their home and, if so, to advise them of the implications of their use.

What are the legal arguments? A buyer’s lawyer would argue that a buyer, alone in an unoccupied house with his broker, has a “reasonable expectation of privacy.”  A seller, on the other hand, can claim a legitimate interest in monitoring – and even recording — the activities and conversations of strangers in his home, as the possibility exists that someone could be casing the home for a subsequent burglary.

It’s likely that these arguments will play out in front of judges in the not-too-distant future, at which point we’ll have case law to guide us. Until then, both buyers and sellers should understand that the issue of privacy is real and that the use of eavesdropping equipment could put sellers in legal jeopardy.

Environmental Film Festival Is Next Weekend

Every February, Golden Real Estate is proud to co-sponsor this nationally-recognized festival featuring short and feature-length films about the environment and the all-important issue of climate change.

Recently I attended a preview of this festival — a celebration of the inspirational, educational, and motivational power of film to engage people in the protection of their environment —  and  came away looking forward to seeing as many of the films as I can during this year’s festival.

Featuring over 50 films, including several world and Colorado premieres, this important event will be held Feb. 21-23 at the American Mountaineering Center in downtown Golden.

Both local and international, short and feature length films will be shown.  Films that explore the undeniable and inescapable interconnection of our planet’s ecology, societies and economies. Award winning pictures, such as Elephant Path, winner of the Best Feature Film Award at the Portland EcoFilm Festival in 2018, will be screened, as will newer films, including ones made by youth filmmakers.

Another film, Hearts of Glass, documents an ambitious experiment to provide year-round produce to a mountain town, while employing community members with disabilities.

Audiences will be entertained and will leave inspired, surprised, motivated and transformed through events that will involve audience members and filmmakers in thought-provoking dialogues and forums about the films.

In addition, there are children’s films, festival celebrations, and an Eco-Expo (where Golden Real Estate will have a booth) highlighting local efforts to address environmental issues. The festival’s web site, www.CEFF.net, provides a schedule, a description of the various films and ticket-purchase info.