[Garrett Francis]

Garrett Francis

Hi guys,

First time posting on the forum and a new member of Cash Flow Depot. I’m in Tampa, FL and have a potential deal that I’m working on. Details below and would appreciate feedback on the question below:

Seller currently has a home listed with an agent for $120,000 and owns the home free and clear. She is selling the house in order to buy a new home with her daughter. The new house has a down payment requirement of $45,000 so the owner only needs partial liquidity. Multiple offers have been made in the mid 110’s range and the seller has refused because she does not want to “give away her equity”. The new house now closes in 8 days and I don’t see any quick solutions via a retail buyer. My offer to her is $123,000 with 50k down and the balance paid over 30 years (i.e. zero percent loan). She is very receptive to that offer, but wants to learn more about how it will logistically work.

Here’s my question:

1.) Her taxable value is very low and in Florida taxes can get reassessed upon a change of ownership. I was thinking about having her deed the property into the trust and assign the beneficial interest to me, but my competency in explaining that structure is iffy and I think going down this path may create doubt. Does anyone have a different acquisition strategy for avoiding the step up in taxable values?

Thanks in advance!

[Bill Eisenhauer]

Bill Eisenhauer

Has the seller used the house being sold as their primary residence? If so, you might want to check out Section 121 of the Tax Code.

Here’s a synopsis:

Section 121 of the Internal Revenue Code, which is often referred to as the 121 exclusion, generally allows homeowners to sell real property held (owned) and used (lived in) as their primary residence and exclude from their taxable income up to $250,000 in capital gains per homeowner, and up to $500,000 in capital gains for a married couple filing a joint income tax return.

If that applies, it sounds like there may be no tax issue at all.

[Garrett Francis]

Garrett Francis

Hey Bill- I should have clarified. By taxes I meant property taxes, not income taxes. My full-time job is in real estate private equity and when we purchase deals we always see a massive jump in taxes the year following the purchase due to the taxable values getting reassessed and a new value set.

[Dee L Graber]

Dee L Graber

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Francis, you didn’t mention whether this deal was intended for the private equity organization you work with, or for your personal use, either as a residency or as an offsite landlord. This discussion of Florida property tax gotchas dates back to 2010, but it seems to make the point that residents get the best deal, and all other get clobbered:

https://www.trulia.com/voices/Home_Buying/is_there_higher_property_taxes_for_non_residents_o-101717

This last paragraph makes the point:

“During the recent real estate bubble in Florida homesteaded resident’s assessments only increased around 10 – 12% while non-resident assessments increased, in many cases, more than 100%. Mine went up 135%. Since the bubble burst assessments have been very slow to come back down … Florida counties are almost totally dependent on property taxes. They will charge you from 1.2% to 2% of your property value every year in taxes. About half the millage rate goes to public schools. Therefore, as a non-resident, you can end up paying way more for Florida public education than the homesteaded residents pay. Florida is the #1 non-resident property tax “hell” in the USA!!!”

Not what you’d call cheery news, but since you asked…..

–Dee

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[Garrett Francis]

Garrett Francis

Thanks for the feedback See. This deal is a personal investment and not a homestead or a deal within my company. We buy apartments in Texas, Florida, and Colorado and Texas/Florida have been tough with tax reassessments. We’re about to purchase a 600+ unit property and expect property taxes to almost triple upon new purchase price posting in records. Just wondering if we can use a trust help determine that cost increase.

[Dee L Graber]

Dee L Graber

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Francis, your clarifications help a lot.

First, most trusts that people here on CFD are familiar with are land trusts. (Yes, there are several hundred types of trusts, but that’s a different expertise body of knowledge.) The trustee of such a land trust would not qualify as the resident of your target house, nor could that trustee even disclose to the county who the beneficiaries might be. So I can’t imagine any way in which the county could rule that there would be a resident owner to keep the property taxes as low as possible (even given whatever reassessment might be triggered by the title change).

But there are other issues you may not have considered. There are several of us watching some longtime financial gurus who are convinced that the latest Federal Reserve generated housing bubble (just like a decade ago) is about to crash, and much harder than before. If that happens as we think (and coastal areas tend to get hit the hardest), then you would be buying in at the peak — just before the bottom falls out. That’s a tough high risk way to take on any housing deal. Much better to learn how to master lease such properties to sub-lease, and get an option (that could be re-negotiated much later) which doesn’t commit you to a purchase at what is likely the worst possible time (now), but leaves you the choice to purchase later at a time when you can benefit greatly AFTER the crash.

That’s one basic low risk strategy to do straight rentals. A much higher return strategy could be to learn how to choose properties that are suitable for, or reasonably convertible into, assisted living facilities (and Florida is full of seniors…) — and then lease to qualified ALF operators while you sit back and deposit their much higher checks. The house you’re looking at may or may not be a good candidate for that much higher return strategy.

Have I tickled your imagination a bit?

–Dee

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[Garrett Francis]

Garrett Francis

Thanks for the feedback Dee. We are in an inflated market but locking up no interest financing on a 30 yr term creates strong immediate cash flow that marginalizes the price . This is a pretty strong rental market and my expected levered coc yield is close to 18% with a conservative 20% vacancy factor. My downside scenario still has resident income paying for my payments so I’m good with that risk.

I hear ya on the Feds though. Hayek and Mises are rolling I’m their graves.

[Dee L Graber]

Dee L Graber

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As long as you’re aware of the various threats, but are still comfortable with the numbers, I wish you the very best of outcomes. And I do treasure my copies of Human Action (von Mises) and the Creature from Jekyll Island (G. Edward Griffin, 5th ed.)

–Dee

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