Twenty years ago Fred and Ethel began buying rental real estate. Today they own 4 rent houses and a small apartment complex.
Their Balance Sheet
| Assets | Liabilities | ||
| Cash | $100,000 | Credit Card | $5,000 |
| Rent Houses | $1,000,000 | ||
| Apartment | $2,000,000 | ||
| IRA | $400,000 | ||
| Total Assets | $3,500,000 | Total Liabilities | $5,000 |
| Assets | $3,500,000 | ||
| Liabilities | ($5,000) | ||
| Net Worth | $3,495,000 | ||
Their Income Statement
| Revenues | |
| House Rents | $48,000 |
| Apartment Rents | $97,000 |
| IRA RMD | $15,000 |
| Gross Income | $160,000 |
| Expenses | |
| Repairs and Maintenance | $40,000 |
| Taxes and Insurance | $32,000 |
| Total Expenses | $72,000 |
| EBITDA Earnings Before Interest Taxes Depreciation & Amortization |
$88,000 |
Fred and Ethel seem to spend a lot of time visiting their favorite tenants, Ricky and Lucy. In reality, they’re landlords and on-call 24/7. They want to retire.
Fred wants to sell everything, invest the money in the stock market and live off the dividends. Ethel loves owning real estate. She just doesn’t like managing real estate. Ricky’s lawyer still owes him for playing at the bar association banquet last year, so he offered to sell and close the Fred and Ethel properties, pro bono.
$3,000,000 – $800,000 (cost basis) = $2,200,000 Capital Gain
$2,200,000 – $528,000 (Capital Gains & Depreciation Tax) = $1,672,000
$1,672,000 + $800,000 = $2,472,000 of investable assets
$2,472,000 x 3.25% (average stock dividend yield) = $80,340 income per year
| Pros | Cons |
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1031 Exchange into a DST.
$3,000,000 x 5.75% = $172,500
| Pros | Cons |
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Ethel’s Plan saves $528,000 in taxes and provides $7,680 MORE income every month.
As always, Ethel is right.
Information for this Case Study came from the following:
