So probably 20 years ago my grandparents split off a section of their larger property and gifted it to myself, my parents, and my brother (25% each). We built a small house on it (~3 bedrooms, 1.5 baths) and used it for summer vacations growing up. Nowadays we don’t go down there as much, maybe ~1 week a year, and try to rent it for the rest of the summer.
Until recently these rentals covered the costs of maintaining the house, and we’ve kept it mainly for emotional reasons — lots of relatives have houses nearby, grandparents live down there full-time, land has been in the family for generations. However, in the past couple years, some larger properties nearby have sold for astronomical sums of money (tens of millions), and the town has recently appraised our house at around 8 million. There’s no way seasonal rentals of a 3 bedroom house could possibly cover those taxes, so selling is likely an imminent possibility.
My question is what options we might have for maximizing future income from the property sale, assuming that we could get the 8 million at which the property is assessed (questionable; it was previously assessed for less than half that amount). The property has a negligible basis (a few hundred thousand dollars in 1990 or so when it was gifted, a few hundred thousand in improvements), so the tax burden of a cash sale would be significant. Specifically, my parents will need income in retirement, my wife and I will soon be buying our first home, and we’d likely want to purchase another ‘vacation rental’ type property with significantly lower property taxes.
Some of the options we’ve considered are a 1031 exchange for a number of income-generating properties and perhaps a lower-income potential vacation rental. This would essentially mean getting into the real estate investment business and setting up an LLC. We’re also considering a 1031+721 exchange for shares in an UPREIT, which could be a much more passive investment opportunity. The final option could be just to sell the house, split the income, and take the ~30% tax hit. But I wonder whether the income potential of the tax-deferred sale value in real estate would be higher than the post-tax proceeds. Are there other options we should consider, or potential problems we should be aware of?
Some additional details, my parents are probably a few years away from retiring (sooner if they had the money…). My dad actually works for a real estate management company, so he likely would have some industry experience in managing a real estate investment LLC. I’m late twenties, my wife + I both have full time jobs. Brother is early 30s, working to start his own business (not in real estate).
Location is in Massachusetts
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