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Investing question from a reader

By Patrick following x   2017 Nov 4, 9:41am 516 views   30 comments   watch   quote     share  



I’m seriously thinking about purchasing (for 100% cash) a piece of land on the bay in Virginia Beach, VA. The purchase price would be $465k.

The money would be coming from a 1031 exchange so my only options are to buy real property, buy oil and gas property, or take the long-term capital gain at the 23.8% rate.

I currently have the following assets:

$5.5 million in S&P 500 ETFs
$575 thousand in oil and gas royalty trusts
$50 thousand in demand deposit accounts
$10 thousand in a short term CD
$50 thousand emergency fund in a money market

I have sold $495 thousand worth of real property in a qualified exchange and have 15 days remaining to identify a replacement piece of real property to defer the gain. I have a zero basis in the property. If I do not defer the gain, I will pay 195K in combined taxes, leaving me with 300K.

I am considering the following replacement property:

1. An oil and gas royalty trust interest that pays about 7% year. The value of the units, however, swings with the commodity.
2. Two and a half undeveloped acres on an inlet of the Chesapeake Bay in Virginia for $480K. The tax rate is 1%. It’s a nice neighborhood with good schools. However, I would have to build a rental house or hold it for sale down the road.
3. Scramble to find some other income producing real property.

I have an option on the Virginia property and am leaning in that direction. My understanding is that after two years I could covert some or all of the property to personal use. (Part time rental, part time personal use for vacation etc.)

Obviously I know what realtors will say. What I need is input from independent thinkers. What better place that this site?

One other detail… I’m 100% debt free. A chunk of my S&P 500 is in tax deferred retirement accounts.


#investing
1 Patrick   ignore (0)   2017 Nov 4, 9:42am   ↑ like (0)   ↓ dislike (0)     quote        

My main question is the proper way to value undeveloped land. I'm not sure how to do that.

@iwog what do you think?
2 Patrick   ignore (0)   2017 Nov 4, 10:20am   ↑ like (0)   ↓ dislike (0)     quote        

Please mark all insults as uncivil.
3 anon_fca32   ignore (0)   2017 Nov 4, 10:27am   ↑ like (2)   ↓ dislike (0)     quote        

PCGyver off topic on a rant about another user? So it ain't so.

Back to OP: check the zoning plans. What can be built on the land and in the zone surrounding the land?
4 anon_3cc1a   ignore (0)   2017 Nov 4, 11:13am   ↑ like (0)   ↓ dislike (0)     quote        

Yes, go away. Let people respond OP.
5 bob2356   ignore (1)   2017 Nov 4, 11:59am   ↑ like (0)   ↓ dislike (0)     quote        

Patrick says

I have sold $495 thousand worth of real property in a qualified exchange and have 15 days remaining to identify a replacement piece of real property to defer the gain. I have a zero basis in the property. If I do not defer the gain, I will pay 195K in combined taxes, leaving me with 300K.


Patrick says

I have an option on the Virginia property and am leaning in that direction. My understanding is that after two years I could covert some or all of the property to personal use. (Part time rental, part time personal use for vacation etc.)


Don't you have a tax lawyer + real estate lawyer involved? What do they say?

I've never done a 1031 without having the swap set up first. Don't have a clue what the legal/tax ins and outs are.

I've never heard of a zero basis. How does going from zero to 500k work?
6 a   ignore (0)   2017 Nov 4, 1:26pm   ↑ like (1)   ↓ dislike (0)     quote        

The zero basis is a result of depletion. It's not technically a zero basis but recapture of the depletion. The ID period expires on the 15th. The actual purchase can wait. As for listening to coders... there's wisdom in a multitude of counsel so why not seek out different opinions?
7 FortWayne   ignore (1)   2017 Nov 4, 2:30pm   ↑ like (1)   ↓ dislike (0)     quote        

Patrick says
My main question is the proper way to value undeveloped land. I'm not sure how to do that.

@iwog what do you think?


try comps at landsofamerica.com that's how most realtors do it for land. they usually base it on size, location, and zoning, any permits, etc...
8 anon_a896e   ignore (0)   2017 Nov 4, 2:42pm   ↑ like (1)   ↓ dislike (0)     quote        

a says

The zero basis is a result of depletion. It's not technically a zero basis but recapture of the depletion


Are you talking about depreciation recapture? How does one get to zero that way? You can't depreciate land, only buildings. The rate is 25% for the recaptured depreciation and 15% for capital gains. Is there some kind of really squirrly alternative rules for ETF real estate?
9 Ceffer   ignore (1)   2017 Nov 4, 3:26pm   ↑ like (0)   ↓ dislike (0)     quote        

Rich without a RichFuck advisor? Was this an accident?
10 HEY YOU   ignore (6)   2017 Nov 4, 4:38pm   ↑ like (0)   ↓ dislike (0)     quote        

Check the elevation of the property in relation to sea level rise.
11 Strategist   ignore (1)   2017 Nov 4, 5:33pm   ↑ like (0)   ↓ dislike (0)     quote        

Patrick says

I’m seriously thinking about purchasing (for 100% cash) a piece of land on the bay in Virginia Beach, VA. The purchase price would be $465k.


Why Virginia Beach?
12 anon_5ee84   ignore (0)   2017 Nov 4, 6:10pm   ↑ like (0)   ↓ dislike (0)     quote        

anon_a896e says
a says

The zero basis is a result of depletion. It's not technically a zero basis but recapture of the depletion


Are you talking about depreciation recapture? How does one get to zero that way? You can't depreciate land, only buildings. The rate is 25% for the recaptured depreciation and 15% for capital gains. Is there some kind of really squirrly alternative rules for ETF real estate?


Oil and gas related. Way too long to explain here but 100% sure it’s correct.
13 anon_5ee84   ignore (0)   2017 Nov 4, 6:12pm   ↑ like (1)   ↓ dislike (0)     quote        

Ceffer says
Rich without a RichFuck advisor? Was this an accident?


No “Rich” advisor means no “stock broker poker”... that’s where your experience and his money becomes his money and your experience.”
14 anon_5ee84   ignore (0)   2017 Nov 4, 6:13pm   ↑ like (0)   ↓ dislike (0)     quote        

Strategist says
Patrick says

I’m seriously thinking about purchasing (for 100% cash) a piece of land on the bay in Virginia Beach, VA. The purchase price would be $465k.


Why Virginia Beach?


Family reasons. Might convert to seasonal rental down the road.
15 anon_5ee84   ignore (0)   2017 Nov 4, 6:14pm   ↑ like (0)   ↓ dislike (0)     quote        

FortWayne says
Patrick says
My main question is the proper way to value undeveloped land. I'm not sure how to do that.

@iwog what do you think?


try comps at landsofamerica.com that's how most realtors do it for land. they usually base it on size, location, and zoning, any permits, etc...


Great input
16 Ceffer   ignore (1)   2017 Nov 4, 6:41pm   ↑ like (1)   ↓ dislike (0)     quote        

anon_5ee84 says
No “Rich” advisor means no “stock broker poker”... that’s where your experience and his money becomes his money and your experience.”


He who needs more than Colt 45 and a welfare check is greedy in the extreme!
17 Strategist   ignore (1)   2017 Nov 4, 8:43pm   ↑ like (0)   ↓ dislike (0)     quote        

anon_5ee84 says
Strategist says
Patrick says

I’m seriously thinking about purchasing (for 100% cash) a piece of land on the bay in Virginia Beach, VA. The purchase price would be $465k.


Why Virginia Beach?


Family reasons. Might convert to seasonal rental down the road.


That could easily end up being a $1 million to a $2 million property. Are they really economical to rent on a seasonal basis?
I'm looking from an investment point only.
18 Sniper   ignore (8)   2017 Nov 5, 7:09am   ↑ like (2)   ↓ dislike (0)     quote        

Patrick says
2. Two and a half undeveloped acres on an inlet of the Chesapeake Bay in Virginia for $480K. The tax rate is 1%. It’s a nice neighborhood with good schools. However, I would have to build a rental house or hold it for sale down the road.


Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night. When you're ready to unload the property, sell the Tiny Houses separately and sell the property.
19 HEY YOU   ignore (6)   2017 Nov 5, 9:11am   ↑ like (1)   ↓ dislike (0)     quote        

reader,
Life's a gamble. We never know if our decision is correct until after the fact.
Good Luck!
20 anon_61c8a   ignore (0)   2017 Nov 5, 10:37am   ↑ like (0)   ↓ dislike (0)     quote        

Sniper says
Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night.

Sniper will even sell you a tiny house.
21 Strategist   ignore (1)   2017 Nov 5, 10:43am   ↑ like (1)   ↓ dislike (0)     quote        

Sniper says
Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night. When you're ready to unload the property, sell the Tiny Houses separately and sell the property.


It's a great idea. Certain to yield powerful returns.
22 Sniper   ignore (8)   2017 Nov 5, 10:58am   ↑ like (0)   ↓ dislike (0)     quote        

anon_61c8a says
Sniper says
Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night.

Sniper will even sell you a tiny house.


It's a win - win for everyone!
23 Sniper   ignore (8)   2017 Nov 5, 10:59am   ↑ like (0)   ↓ dislike (0)     quote        

Strategist says
Sniper says
Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night. When you're ready to unload the property, sell the Tiny Houses separately and sell the property.


It's a great idea. Certain to yield powerful returns.


How come I have to think of everything around here.

The guys I know putting them on Airbnb are making some decent money.
24 mell   ignore (1)   2017 Nov 5, 11:09am   ↑ like (1)   ↓ dislike (0)     quote        

If you have over 5 million in liquid assets, why the hassle to become a landlord to maximize profits? Unless you want to hand over a highly profitable business to one of your kids, I'd just stay with dividend yielding assets and diversified stocks (all sectors), funds/ETFs (long and short), precious metals and cryptocurrencies and enjoy life instead of dealing with assholes. Of course some are born to be landlords but I certainly would not want to take on such an enterprise. And of course there is always more risk there as well although it may pay much more if done right. I'd save the time for myself and put the money to work in non-time consuming endeavors, esp. with many millions at hand. Good luck!
25 anon_32244   ignore (0)   2017 Nov 5, 11:14am   ↑ like (0)   ↓ dislike (0)     quote        

Sniper says
Patrick says
2. Two and a half undeveloped acres on an inlet of the Chesapeake Bay in Virginia for $480K. The tax rate is 1%. It’s a nice neighborhood with good schools. However, I would have to build a rental house or hold it for sale down the road.


Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night. When you're ready to unload the property, sell the Tiny Houses separately and sell the property.
That's a cool suggestion.
26 anon_32244   ignore (0)   2017 Nov 5, 11:15am   ↑ like (0)   ↓ dislike (0)     quote        

HEY YOU says
reader,
Life's a gamble. We never know if our decision is correct until after the fact.
Good Luck!
So true.
27 Sniper   ignore (8)   2017 Nov 5, 11:15am   ↑ like (1)   ↓ dislike (0)     quote        

mell says
Of course some are born to be landlords but I certainly would not want to take on such an enterprise. And of course there is always more risk there as well although it may pay much more if done right.


Exactly right, which is why every time I think about becoming a landlord, I make sure to have my wife smack me upside the head and wake me up from that nightmare.
28 anon_32244   ignore (0)   2017 Nov 5, 11:18am   ↑ like (1)   ↓ dislike (0)     quote        

mell says
If you have over 5 million in liquid assets, why the hassle to become a landlord to maximize profits? Unless you want to hand over a highly profitable business to one of your kids, I'd just stay with dividend yielding assets and diversified stocks (all sectors), funds/ETFs (long and short), precious metals and cryptocurrencies and enjoy life instead of dealing with assholes. Of course some are born to be landlords but I certainly would not want to take on such an enterprise. And of course there is always more risk there as well although it may pay much more if done right. I'd save the time for myself and put the money to work in non-time consuming endeavors, esp. with many millions at hand. Good luck!
This is exactly the sort of advice that I like hearing from Patrick.net. You don't get it everywhere. If I don't buy this or another piece of real property, I will have a huge tax bill. I'd prefer to defer that under the exchange rules. Real property is a hassle, but I think I might put up with the hassle to defer 195K in taxes. Thanks for your insight.
29 Strategist   ignore (1)   2017 Nov 5, 11:48am   ↑ like (1)   ↓ dislike (0)     quote        

Sniper says
Strategist says
Sniper says
Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night. When you're ready to unload the property, sell the Tiny Houses separately and sell the property.


It's a great idea. Certain to yield powerful returns.


How come I have to think of everything around here.

The guys I know putting them on Airbnb are making some decent money.


You want the commies here to do their own thinking?
30 Sniper   ignore (8)   2017 Nov 5, 12:03pm   ↑ like (0)   ↓ dislike (0)     quote        

anon_32244 says
Sniper says
Patrick says
2. Two and a half undeveloped acres on an inlet of the Chesapeake Bay in Virginia for $480K. The tax rate is 1%. It’s a nice neighborhood with good schools. However, I would have to build a rental house or hold it for sale down the road.


Buy the property, then buy a few Tiny Houses on wheels and put them on the property, rent them out on Airbnb for $150 a night. When you're ready to unload the property, sell the Tiny Houses separately and sell the property.
That's a cool suggestion.


I have the first one ready for you right now:


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