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When you own a rental property (income producing property) then sell it, a large chunk of your profit goes to the government. Currently 20% capital gains taxes plus an extra 3.8% Obamacare tax PLUS your state may want their “fair share” to help spread the wealth.
Andy sent in these good reasons to control a property with a master lease versus owning:
First not a lawyer or CPA! Those of you who are please feel free to correct me.
Currently when you inherit real estate the basis (that is your acquisition cost) is adjusted to the current value of the real estate.
So an example I like to use is a building purchased in 1980 for $100,000 which was split $20,000 land and $80,000 building for depreciation purposes, therefore its current basis would only be $20,000 since the building is fully depreciated.
Let’s assume this building currently earns $100,000 per year and therefore based on a 10 cap the building is worth $1,000,000.
If someone came along and put $1,000,000 into escrow what would be left over at close?gross income $1,000,000
commission and closing <$100,000>
Depreciation recapture <22,000> $80,000 X 28%
Capital Gains <225,000> $900,000 X 25%Net cash at Closing $653,000
Invested at 3% earns $19,590 per year at $50,000 per year, seller is at Wal Mart’s front door in 16 years. (he’s not going to buy options or commodities)
When he dies the kids get what’s left over from the $653,000
OR
Master lease the building for $60,000 per year for 30 years with a buyout at death escrow:
When does he end up at Wal Mart’s front door? 30+ years
What do the kids get at his death?
gross income $1,000,000
Commission <0>
Closing <$10,000> pulled out of butt maybe covered by buyer
depreciation recapture <0> no depreciation
Capital Gains <0> $1,000,000 – $1,000,000 = 0Net cash at closing $980,000
David Tilney is doing a special Master Lease and Management class in Colorado Springs September 22-24.
See details at
If you come in a few days early, Bill Cook will be in town to take people out knocking on doors. You can get live, on the job training for free!!!
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This note is for when you’ve accumulated at least $500,000 using whatever combination of HBS deals, master leasing, assisted living facilities, Airbnb vacation rentals, etc, etc of CashFlowDepot low-risk strategies to build your nest egg, and then some.There are other kinds of control worth knowing about, without any intention to demean master leasing. I’ve taken David Tilney’s wonderful course, and I’ve also seen that process work for commercial properties. Now keeping in mind J. Paul Getty’s famous remark that KEEPING the money you make is 10 times harder than making it in the first place, there is a strategy that rather wealthy families have perfected to control wealth, make it grow WITHOUT OWNERSHIP, and keep that process going within the family for generation after generation — without greedy tax thieves or lawsuit-happy attorneys getting a shot at it. The guy who explained it to a crowd of us in Austin a few years ago also said the process works best when you start with at least $500,000.
That goes into a family bank owned by a foundation in a country with foundation-friendly law (which the US still has, so far, since some of its wealthiest families live here). Any family member, including future generations, is eligible (but not required) to participate in that bank if they wish. Participation requires annual but reasonable contributions, but the huge benefit is that any participant, once they submit a borrower’s proposal that includes a plan the bank approves to pay back that loan, they can borrow huge sums over and over for the rest of their life, or however long they choose to keep meeting the participation requirements. In the event that a deal goes sour, and despite the borrower’s best efforts (and the bank’s best possible judgment), the loan can’t be paid back, the bank would have to approve that participant’s continued participation.
This is a global plan, and again, it has worked generation after generation, and there’s nothing for tax thieves or greedy courts to confiscate (in the name of each participant).
In this era, when there are serious expectations that the US Dollar’s role as the global reserve currency is rapidly coming to an end (with Russia, China and Iran all developing petroleum trades that are gold backed, or at least non-dollar backed, and that avoid the “exorbitant privilege” of being required to buy US dollars to acquire petroleum), I can visualize that a family bank such as I’ve described above could use gold as their currency, and make loans only in countries where the legal system would honor a gold clause in the loan documentation. See law professor Henry Mark Holzer’s book “The Gold Clause, what it is, and how to use it profitably” (copyright 2000) that describes how such loans were made in this country until the FDR era of gold confiscation outlawed the gold clause loans, how they were finally legalized again in the 1970s, and presumably how that process might work in any country where the legal system permits.
Again, this potentially creates a very interesting century-after-century-tested alternative of control (rather than ownership) instead of passing property via a will or trust to an heir who could be a target for tax thieves or predatory courts.
–Dee
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Using Master Leasing to avoid capital gains taxes and depreciation recaputure works for single family houses too. NO MONEY DOWN.
It’s a great selling point when talking to sellers and their heirs. The reason you can avoid the 23.8% capital gains taxes and depreciation is because the heirs get a STEP UP IN BASIS when the owner passes away. The new basis becomes current market value. So, if they sell, they pay no taxes on the “gain” or depreciation.
I should mention this to everyone you talk to about a master lease versus selling the house. It could save their family $100,000s of dollars.
If you have a long term master lease with an option (life estate) to buy when the seller passes away, you also get to enjoy the benefits of ownership, a lot of cash flow, and avoid capital gains and depreciation taxes. It’s the best of both worlds. A life estate also protects the property from many liens.
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