Should I Sell My Inherited Property to Fund Retirement?

A common question we often get from clients who inherited a rental property is whether they should cash out or keep it and maintain the rental income/

In this video, we walk through 4 reasons retirees sell their inherited rental property.

Should I Sell My Inherited Property

Resources:

Full transcript:

SPEAKERS

Alex Okugawa & Matt Calcagno

Alex Okugawa 0:00
Hey there, it’s Alex and Matt from One Degree Advisors, we are Certified Financial Planners who help folks with all things tax, retirement, and investment related. So, Matt, there are advantages to owning real estate, right? It can help diversify, let’s say a traditional stock and bond portfolio. It can help you with cash flow in retirement as you receive those rents. Also, the property could appreciate in value over time. So there are good reasons to keep real estate. But there are also reasons why you may choose to sell rental real estate, especially if you’re inheriting the property. So one of the reasons and the most common reasons why we’ve seen our clients choose to sell a rental property is just for simplicity.

Matthew Calcagno 1:02
Yeah, no doubt, there’s something nice about receiving a nice check in the mail from your tenants each month. But one of the reasons we’ve seen retirees sell is they’re just not keen on the idea of managing tenants paying for maintenance, insurance, property taxes, and stuff like that, and frankly, your investments don’t call at midnight to say there’s a leak. So one of the ways retirees can achieve and the way we’ve seen them achieve simplicity is by investing in a diversified portfolio. And the advantages they receive are that they can invest very diversely, and also in a more customized way that ultimately helped them achieve their goals of, you know, tax efficiency, growth, and also income.

Alex Okugawa 1:46
Exactly, it can be more aligned to that specific client’s needs, not just this generalized purpose. And of course, for a lot of us, as clients continue to get older time becomes more of a premium over money. And at least that’s the case for a lot of retirees. So really, the second factor here is you have to think about multiple errors. Do you want to be in business with your family?

Matthew Calcagno 2:11
If you inherit a property, and you’re not the only beneficiary of that, you have to split up that pie somehow. And you can either cash out by selling it to someone else in your family or buy their portion or just sell the entire property as a whole, which ultimately is a team decision. Now for some of the people that are the sole beneficiaries, and they actually own that property. Now you have your own kids to think about, do you think they’re prepared and ready to manage that or sell it? And it’s just something you want to consider.

Alex Okugawa 2:45
Yeah, and for some families, they may be totally fine, kind of like jointly owning that property together, you have multiple people on it, some families are going to do great other families, and that is the case with a lot of families, they’re like No way, that’s going to be a recipe for disaster. The third factor here, or if you know when you inherited property, and if you should sell can come down to how the property was titled and the potential tax benefits.

Matthew Calcagno 3:09
Yeah, taxes are, understandably a jam-up for most people, because with a high appreciation of the property, there’s going to be a big potential capital gain. But you know, one reason we’ve seen a lot of people sell is that they received what’s called a step-up basis. And like you mentioned, if your property was titled properly, the IRS allows your heirs a potentially huge tax benefit here. So let’s look at an example of a father and a son. So, Jim, a California resident purchase a property for $50,000 in 1968. It sounds about right. If Jim sold this year in 2022, he will incur income tax, and these are just an example of the $950,000 gain. That’s $226,100, under some assumptions of course. Exactly. But let’s look at what happens when, you know, Jim, unfortunately, passed away and leaves it to his son Bill. So, unfortunately, Jim passed this year and did not sell the property, he left the property to his only son Bill, and with a step up in basis, the original basis will be stepped up to its current market value. And now because of that step up, you avoided a massive capital gain when you sell.

Alex Okugawa 4:24
So that’s a big piece of that is that if it is done correctly, inheritors can get out of the property without having any or any meaningful tax. Of course, you know, a lot of people when they look at this, they just need to make sure they’re looking at it the right way, right? If I sell this piece of rental property, it doesn’t mean that I’m eliminating any cash flow. So like you mentioned earlier in this video, if you’re able to sell you can still take that money and turn it into something that can be more tailored to you. It can give you more flexibility to what you need in your specific financial plan, not just a piece of real estate that now you’re tied to and potentially have other people on, it can be tailored to what you need potentially creating income, or potentially not until you need it down the road. But again, oftentimes with rental properties, a big piece of that is replacing the income.

Matthew Calcagno 5:18
Yeah. And like you mentioned, when people decide that, you know, it makes more sense to sell, they might be looking at it from a perspective of what that rent looks like compared to the whole fair market value of the property. So someone renting out their property for, let’s say, $3,000 a month, which equates to $36,000 a year, on a million-dollar property, that’s about a 3.6% yield. And maybe that’s enough, maybe that’s enough for somebody. But alternatively, what we’ve seen many people do is sell that property. Now they have the flexibility to invest in a way that’s tailored to them and where you can target income.

Alex Okugawa 5:54
And of course, there’s more to just the yield, there can be the property appreciation, but we want to keep it simple today. And real quickly, the last thing I know we want to hit on is just the goals, right? Does this align with your goals and your specific financial plan, oftentimes, what I’ve seen is that sometimes people when they get into these properties, their property, derive some of the decisions they make in their financial plan. And it really, it should be the other way around.

Matthew Calcagno 6:19
Yeah, you don’t want to have only the financial focus to be the full top of your mind here because, you know, your mission, your purpose in retirement, really should be that foundation. And whether you decide to cash it out, invest or you know, keep it as is you got to make sure it aligns with your goals. And as much as we’re called to help people make confident financial decisions, you know, I find most of the joy we get is helping someone align their money with their values at because at the end of the day, that decision has to maximize your purpose.

Alex Okugawa 6:54
Absolutely. And then one quick thing here. So, you know, we’re talking a lot about purpose. We have a lot of clients who are from Southern California, of course, we see clients all across the United States, but a lot of clients that retire that are working in California in San Diego, choose to move out of state. And so there are a lot of decisions to make there. We recently made a video talking about the things retirees should know, before moving out of state, people can watch them. Once again, this is Alex Okugawa from One Degree Advisors and if you’re curious about how we help clients to and through retirement, you can visit our website at onedegreeadvisors.com

Transcribed by https://otter.ai

The One Degree Blog

Not signed up yet? Get weekly financial insights right to your inbox.
Subscribers also gain access to our private monthly client memo.

We will keep your email safe. You can unsubscribe at any time.

This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures

close

Expert Strategies. Straight to Your Inbox.

Join the hundreds of other families and receive weekly financial insights.

Subscribers also gain access to our exclusive monthly client memo that we don't share anywhere else.

We don’t spam! You can unsubscribe at any time.