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RETIREMENT IS SAID to be a time for reviewing and reminiscing. We try to understand who we were and how we came to be who we are. But the health trials of the retirement years can also project us into the future. When couples enter their twilight years, they begin to contemplate how they’d cope if the other died first. I believe “survivor rehearsal” is one way our biology helps us to contain the fear of having to cope on our own.
Some people think this rehearsal process is disrespectful or self-indulgent, and maybe that’s why it’s a phenomenon rarely discussed with partners or friends. Still, in U.S. society, I suspect survivor rehearsal is almost universal, though some folks may feel too guilty or ashamed to admit it.
Ever since my wife Alberta was diagnosed with breast cancer six years ago, I’ve found myself directing my own survivor movie. My need to experiment with different scenarios—and feel how they might play out—is surprisingly strong, though it’s not at all clear what this movie will look like. As things stand, my own precarious health makes me more likely to predecease Alberta than the other way around.
Knowing me so well after 40 tumultuous years, Alberta helps me discern which scenes are likely to roll out smoothly and which will require more than one take. If I’m the survivor, I know I’d have to grapple with my health on my own, be more proactive about my social agenda and maintain a mutually comfortable relationship with my son Ryan. And all the while, I’d need to work through the unimaginable grief of losing my best friend.
Investing has been a major theme in my adult life, but I’ll need to control it better than I do now. Today, my modus operandi starts with a merry addiction to following market movements and developments. But should I be the survivor, I’ll also be fending alone in the social and entertainment arenas, where I have depended on Alberta to be my concierge. It would be tempting to submerge myself in the financial domain, where I’ve had some success and feel more confident. My romance with the stock market looms as both a blessing and a curse.
Quite by contrast to my passion for the market, I dislike the responsibilities of private real estate investment. Our residential income properties served us well as an appreciation compounder and diversifier, but 40 years of direct ownership takes a toll, and I have no desire to shoulder the burden on my own.
I have a wonderful property manager, but she can’t shield me from all the vulnerabilities of private real estate investing. I want to wake up Monday morning looking forward to a pancake breakfast with an old friend and not obsessing about the mold my tenant—a lawyer, no less—found growing on his bathroom ceiling.
Different scenes about how I’d handle the properties play out in my imagination. I would love to shed the entire landlord business. But I’m trapped. I bought several small income properties starting in 1983 and have enjoyed substantial appreciation, which means a massive potential tax liability. I could potentially sell by taking advantage of one of real estate’s most egregious tax loopholes, the 1031 exchange, which would delay capital gains taxes.
But the transaction requires identification of the replacement property within 45 days of the sale and its purchase within six months. It’s an unnerving timeline, may force settling for a less-than-ideal substitute, and is vulnerable to a time-consuming dispute at the closing or a disastrous pullout by the buyer.
Besides, I don’t want to replace one set of properties with another. Rather, I want to cash out and diversify across liquid investments like cash, bonds and broad stock market index funds. I would allocate the largest amount, maybe as much as 30%, to real estate investment trust ETFs, which trade like stocks and would keep a healthy stake in property ownership without the headaches.
I’m also dissuaded from cashing out entirely by another preposterous feature of the tax code. If the properties are inherited, the heir’s cost basis is stepped up to the value of the investments on the date of death. The capital-gains tax bill I face today need never be paid, and selling now would mean forgoing that governmental gift.
My real estate predicament poses a dilemma: escape from a few years of bondage by unloading the properties or follow the financially prudent course. I, alas, know which course I’ll take. Ryan’s welfare and my family heritage trump my comfort zone. No, that’s not exactly a Hollywood ending for my peace of mind, but it is indeed a rational and loving final act.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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Steve,
I always enjoy your articles but this one also makes me a little sad. It’s the idea that you owe it to your son to remain in real estate “bondage” so as to pass along to him the benefit of a stepped up basis.
I admire your devotion to your son and your sense of duty, but I believe you’re also entitled to consider your own happiness—this is your life after all. I suspect you have been generous with your son throughout his life and that he will receive the benefit of your hard work and wise investing through your estate, whether it’s a little bigger or a little smaller.
I know you would want him to live his life without stressful financial burdens, and I bet he would want the same for you. Shedding that heavy real estate burden might just make you both happier. Love, after all, is a two way street.
Andrew,
Thank you for taking all that time to try and help me resolve a family dilemma. You said it all when you said, “shedding that real estate burden might just want to make both of you happier.” In fact, you can add in my wife Alberta. I am still dealing with some old tapes from my real estate upbringing. But hearing that sensitive message from someone like you helps me in my decision to turn the page. Again, I really appreciate that you reached out to me in this way. Steve
I don’t want to be intrusive, but if the problem is “old tapes”, maybe you would benefit from a therapist, rather than from financial advice. What would you say to someone who came to you in your professional capacity with this problem?
What an honest article. Thank you.
I’ve had a moment to think a while about what you wrote. Just want you to know that yours is the comment that means the most to me. Steve
Thanks Michael
i try to be as transparent as I can, or what’s the purpose of trying to communicate with everyone?
This. One of the main reasons why I never wanted to be a landlord. Thanks for this discussion.
Thanks Jeff. It does take a certain kind of personality, and I’m not sure it’s been all that good a fit for me either.
Sounds good to me. It’s taken me a while because my family mantra has always been “own it yourself,” but I’m ready for the new program.
Steve:
I can relate to your rental real estate experiences. I have completed a 1031 and it wasn’t as complicated as you suggest. The timelines can be managed with the help of a good intermediary. I have one in California if you want to speak details with him.
Gary
I was a small-time landlord once. While the tax bite of selling out was inconsequential in my case, I can attest to the wonderful feeling of freedom that resulted from leaving the landlord life behind. It’s been all REITs ever since.
M Plate
Please see response written above. Thanks.
In regards to your personal residence a few tax thoughts. Persons who reside in a community property state, like California, generally get a step up in tax basis to full fair market value for the entire property if the property is owned jointly with right of survival (JWROS) when the first spouse dies.
For those not living in a community property state the step up in tax basis for JWROS property with the surviving spouse is typically just for half of the property value and the remaining one half tax basis of the home remains the original cost basis. The surviving spouse may want to get a qualified appraisal to document the current value at death to establish the new tax basis if they intend to continue living in the home.
Currently, federal taxable gain on the qualifying sale of many personal residences is often zero as the taxable gain is limited by the IRC 121 exclusion of $250K/$500K (single/married filing joint status) when compared to the realized gain.
Between the step up in basis at death provisions and the IRC 121 exclusion the surviving spouse may find the time after the death of the first spouse a good time tax wise to dispose of a large family home that the surviving spouse has outgrown without incurring additional tax regardless of the state they reside in.
Additionally, over my years in tax practice, I heard more than once a surviving spouse comment that the home had too many memories with the spouse that passed for them to continue living in the home.
The emotional decisions and financial actions after the death of the first spouse, home related or otherwise, may override the tax considerations. Advance planning, discussions and actions by the spouses during life are crucial to making and then carrying out informed tax decisions by and/or for the survivor after death of the first spouse to die. I vividly recall a conservation with a friend and tax client decades ago who was informing me of his terminal cancer diagnosis and he said he did not want my sympathy, he wanted my help in arranging his financial affairs for the benefit of his wife and minor children.
You are right on about personal residences. But I have a problem. If I sold our home rather than our investments, I would probably be looking for a condo for myself!
If there is some portion of your wealth that you’d like to use to benefit non-profits whose work you believe in, you could donate real estate to a charitable remainder unitrust. The trust will be able to sell the real estate free of capital gain tax, and then invest the proceeds to pay income to you and your wife during your lifetimes. You’ll also receive a charitable deduction to help offset some of the capital gain tax due on any real estate you sell outright. There is a lot more to this, but contact your favorite charities and inquire.
Thanks for your help. I must confess that my own charitable contributions have probably been too scattered and unsystematic to maximize the kind of impact I know is most desirable and rewarding.
If you have a large capital gain, what is wrong with realizing it and paying the tax due? Americans seem to have such an unreasoning reluctance to pay taxes, no matter how much money they have, when they are necessary for a functioning, never mind civilized, society. You will still net a large sum after paying the taxes, right?
You don’t want to manage the properties, your son, based on a previous article, doesn’t want to manage the properties, they have become an albatross. The obvious solution is to sell them. Even though the market is down from last year, it is still way up from three years ago. (And can’t you stagger the sales?)
Your point is well taken and, in fact, Biden has proposed limiting 1031 exchange deferrals to $500,000 ($1 million for couples).
I would also note that rental properties are subject to both capital gains and recaptured depreciation taxes, which are taxed as ordinary income up to a maximum of 25%. Rental property is depreciated over 27.5 years so the bite from recaptured depreciation for those of us who have owned our properties for many years can exceed the tax on the capital gain. While this is another tax that seems reasonable, long-term rental owners can easily end up in the top tax bracket if they don’t do 1031. The IRS assumes you depreciated your property even if you didn’t, so it is impossible to avoid the large one-time tax bite if you don’t do 1031.
I agree. I also find myself “worrying” about paying taxes, but when I stop to actually think about it our combined federal and local government taxes collectively fund a lot of great things. More than 75% of all government employees are teachers, police, firemen, military, various code enforcement (like food, buildings, medicine, etc), national parks employees, coast guard, etc. There’s certainly nothing wrong with donating to a favorite charity, but I it odd that “charities” hold such an esteemed place in our regard compared to paying our taxes. I guess we don’t tend to consider how our taxes provide the foundation for our collective common welfare.
Yes and no. I could stagger the sales. But my tax burden would be in the hundreds of thousands and so I think not advisable in my situation. But you do bring up a truism about most of us Americans. Unfortunately we don’t seem to have as much of a sense of social universality here as in many other countries.
But if your tax is that large, your gain after taxes must be even larger. Why would it not be “advisable”? If you are going to net hundreds of thousands, maybe even millions, what is the problem? What percentage of the profits would you be paying in tax?
Steve, Thanks for a thought provoking article. My experiences with aging parents and in-laws have convinced me that a well-organized, clear, and executable estate plan is a gift we give to our children/heirs. Now that we have reached retirement I’m realizing that it is not as simple as I may have hoped. There are conflicting issues – like the real estate decision you face. There are pluses and minuses on both sides. As suggested below, I would have a serious discussion with your son and see if his preference is a larger inheritance, or a simpler estate to deal with. Dealing with my parents infirmities and financial challenges was a life-changing event for me and set me on a stronger path for my family. I with you and your wife many more years of health and happiness.
What a kind post and thoughtful suggestion about discussing this dilemma with my son Ryan. Your transparency in opening up this conversation with your own family requires a love, trust and generosity of spirit we can only admire and hope to emulate.
Have you considered a 1031 exchange to a REIT via a DST?
https://www.realized1031.com/blog/rolling-from-property-to-reit
https://www.ipx1031.com/dsts-an-option-to-keep-on-your-1031-radar/
All these loop holes and workarounds are why the US tax “system” is such a convoluted mess. When I lived in England it took me ten minutes to do my taxes, and now I need an accountant.
Thank you so much. This could be a game changer for me and perhaps many others. When my wife Alberta read your post, she turned to me (at 5 o’clock California time) and said only half in jest, “and why didn’t YOU think of this possibility before……” One of the ironic twists of writing for Humble Dollar is that I hope to contribute as much to readers’ lives and investments as they do for me and my family. I will soon put in a friendly call to my accountant.
Glad that I could be of help.
My wife and I stumbled into being landlords in 1999 when we purchased a 5-story brownstone in Park Slope, Brooklyn that had an owners’ unit on the lower three floors and 3 apartments on the top two floors. We hadn’t planned on remaining landlords when we retired and sold our house in 2019 until our accountant told us that we could defer ~ $350,000 in taxes if we did 1031 exchange. I’ve enjoyed managing the 4 houses we purchased in NC, but we have decided to move back to NY so now I’m weighing turning things over to a management company versus possible alternatives. While a REIT might be doable, I much prefer the much lower volatility of rental income.
As I reach 80 this year and my wife is to be 84, that survivor rehearsal is in my mind every day. Will my wife be able to cope with all the physical limitations she now faces? I need to help her up and down a curb. Just yesterday I told her she must start driving again, just for her own good. Coping with her accidental loss of sight in one eye has made it worse.
I am confident finances will never be an issue or a burden for our children, but the thought of her trying to use a step stool to reach a box of cereal is frightening.
Sometimes I think the person who dies first is the one being selfish.
If your wife has vision problems, and is reluctant to drive, can you not look for alternatives? For her sake, and for other road users! (My one and only accident was the result of a mistake by an 80 year old driver.) My town has a ride service for seniors that is cheap (in some instances, free). It does need to be booked ahead of time. Then there are Uber and Lyft and even taxis. I am sorry to sound like a broken record, but this is also where a CCRC is valuable, and why I am glad mine is on a bus route.
Would moving in with a child be a possibility? I have a 90 year old friend who has a basement apartment in the house of one of her children.
Agree with all points. The rate of fatal auto accidents in drivers over 80 is significantly higher because of slower reaction time and increased frailty. In addition to the services you mentioned, friends, neighbors and relatives can usually help with driving. At my local YMCA there are members who drive members no longer able to drive so that they can have a safe place to exercise. These thoughtful people had noticed that some members were no longer attending because they could not drive.
In my age group (60’s) we have a friend with vision problems and we take him to the grocery store and doctor appointments.
What a sensitive way to think of dress rehearsal—not for yourself, but for your partner. A few years ago a contributor to the Modern Love column of the NY Times told of performing the ultimate and for most of us unimaginable act of placing an ad about the wonderful life someone could have by partnering with her soon to be widowed husband. Incidentally, I got the initial idea of the dress rehearsal from your article Counting Down.
It sounds like you aren’t ready to transfer some of the real estate properties to your heirs in order to shed yourself of the management headaches and to teach them about finance?
H&R Block: “If the value of the gift exceeds the annual exclusion limit ($16,000 for 2022) the donor will need to file a gift tax return (via Form 709) to report the transfer. However, they will not likely owe gift tax due to the unified gift and estate tax exemption, which is $12,060,000 for 2022.”
Thank you for illuminating what could be a way out of this kind of predicament for many people.
Thanks so much for illuminating a way out of this kind of predicament for many people.
Based on the description above, the adjusted cost basis of the person receiving the gift will be the donor’s basis at the time of the gift. So this would transfer the CG tax burden to the person receiving the gift.
Thanks for letting me and readers know what we all to remember: navigating our opaque tax code, especially for our investments, is fraught with danger and often requires the input of a savvy tax advisor.