Sounds like you want to sell, as it eats up a lot of your income.
I live in No. CA, thus don’t know the location, so cannot assess the potential either for increased value in the future. Nor for the potential to sell it.
In general, holding vacant land is not a good approach unless there is extremely high appreciation in vacant land taking place, in my view.
You do have some other options here, however, it seems to me.
This is an investment property for you. Thus, if you sold to somebody else and carried back a loan for some of the financing, you would be doing what is known as an “installment sale.” You would only pay your capital gains tax as you get in payments on the loan. Each loan payment to you would be allocated to three parts: interest—which is taxable at ordinary income rates, return of capital—the money you put in to purchase it and is not taxable, and gain—which is taxable at the capital gains rate, probably either 10 or 15% for you. This last is assuming you have held it for one year or more, something you don’t indicate. You might get a buyer who would pay you 8-10% interest, perhaps more. You also get to collect interest on the portion of the sale price which represents the taxes you will have to pay but have not yet sent the money in to Uncle Sam and Cousin Schwartzenegger.
Here is my favorite idea.
You can also do a 1031 tax-free or tax-deferred exchange into other investment property. For it to be totally tax-free, you have to put all of the sales proceeds into the purchase of the new property, you have to have at least as much debt on the new property as you gave up from the old property, and you must buy property with at least as great a price as the net selling price of the old property.
The advantage to you is that all of your money goes into the new property. If you make a good choice or good choices, you can buy a property or properties that produce positive cash flow for you. The property/properties could also appreciate in the future and you could take advantage of the tax benefits of owning investment property, reducing your income tax bills—federal and CA state—each year.
I favor this because it seems to me that investing in real estate is far better than putting your money into savings accounts.
Since you have been investing $1500 a month, you obviously have more income than you need to live upon. If you continue to invest some or all of that amount each month by buying other income-generating properties, you could build up a very high net worth over the next 15-20 years, so you can then do anything you want with your time. Of course, you probably would not be buying a property every month. You would save up your earnings and buy another property as you accumulated enough to buy it.
For instance, I buy “rent houses” in OK state. It is possible to buy some houses there for less than $75K. Typically these properties will produce at least break even and possibly even positive cash flow. If your credit is good, you might be able to put down just 10-20% plus closing costs to buy a property. This might be $7,500 to $15,000 down plus maybe $3,000 closing costs for a property.
For your exchange, let’s assume you buy just $60K houses. You would have about $180K to invest. To get a totally tax-free exchange, you would need to buy at least $440K worth of properties, thus having at least $260K in debt. These properties would probably rent for about $475-550 a month each. You could buy 8 houses for $480K plus about $25K in closing costs. These properties would likely appreciate about 3-5% a year or about $14,400 to $24K a year. That is about $1220 to $2000 a month in non-taxed wealth creation through appreciation. You would have a cash flow which would be approximately break even, assuming a 7.5% 30-year fixed rate loan, and a 5% vacancy and uncollected rent allowance. With a break-even cash flow, you would also get depreciation on the properties that would knock off about $1200 a month from your income, thus reducing your taxable income by about that amount. You can figure out your tax savings by seeing what taxes you would pay should you get that much less monthly income, or about $14,500 less taxable income in a year.
The appreciation is not spendable now. However, it accumulates non-taxed and eventually you can withdraw it through non-taxed refinancing. Or by selling. You can also increase your wealth by exchanging up into larger properties, which will provide you with more Cash flow, Appreciation, and Tax benefits, making your CAT fat..
If you buy properties at below market value, you might actually get 9 or 10 houses for your money, increasing your income by perhaps 10-30%, giving you a positive cash flow of about $290-575 a month. This income would be sheltered by your depreciation, so would not be taxable to you. Of course, that will increase your taxable income, reducing your apparent tax savings.
If you buy still cheaper houses than my $60K examples, you will have some positive cash flow. If you buy carefully, getting a better ratio of monthly rents to purchase price than the 1% I assumed here, you will get some positive cash flow.
Now, this approach to investing will work in other places than OK. Anywhere that properties are low cost and there is reasonably good rents. The main issue is the ratio of the gross scheduled rents to the purchase price. In general, this means the Midwest and the SunBelt states. I recommend the SunBelt states because of increasing populations. Also because it will not be so cold were you to go there in the winter.
If you were to buy an apartment complex, your cash flow would likely be a little better than with the single family houses. The management expenses would be a little lower and you would probably get a little bit better ratio of rents to property value. From my experience, single family houses have an advantage of less turnover of renters, thus less vacancy loss and lower maintenance expenses than the multiple-unit properties seem to get.
Understand that the houses I have mentioned would not necessarily be in crummy neighborhoods. They could well be in quite decent areas. They might not be brand new, but they might still be in pretty good condition. They might be brick three bedroom, one and a half or two bedrooms homes built in the 1960s through the 1990s.
SUMMARY: I recommend that you do the 1031 exchange of your lot sales proceeds into one or more other breakeven or positive cash flow investment properties in a low-cost state. Here are …
Some sample properties for sale today and rents.
*******Altus Times, Jackson County, Sunday July 16, 2006. City has an air force base, apparently a good rental market. County has declining population.
3 BEDROOM 2 Living areas, 1 Dining Room, 2 Baths, 2 Carports. Sets on corner with 5 lots $55,000. Snyder Cell 1-580-512-2408 Home 1-580-569-2402
3BEDROOM 1 1/2 bath. Carport. Fenced yard. $25,000 cash. 507 E. 2nd. Duke. 580-471-8585 [this property is “effective age” of 1966, 1296 sq ft, bought in 1994 for $35K, now assessed at $38K]
HOME FOR SALE 400 mars; 4 bedroom, 1 1/2 bath, 1 car garage, central heat and air. $37,000. 477-1605 [this property is 1125 sq ft, built 1975, with a 300 sq ft garage, and central heat and air conditioning]
LARGE 3 BEDROOM 2 bath. 2 small 1 bedroom apt. . 1 bedroom apt. $40,000. 477-0614
1- 2br. Ch/a $400mo. Close to hospital 3 br 1 1/2 bath $600mo. Call 477-1272 leave message
CLEAN 2BD, CH/A, fenced, washder/dryer hookups, 1 car garage 1107 Elder $325 mo. $250 deposit 482-2000.
********The Daily Ardmorite, Carter County, Sunday July 16, 2006. Growing population. Growing job base. On I-35 in South Central OK.
Falconhead 3Bdrm/2Bath, overlooking lake & golf course, screened back porch, strg bl. $69,000. 940-391-0946
Won t last long!2/1 C/H/A, newly remodeled, large yard, great neighborhood, less than rent! 1009 A SE $42,000. 580-504-2973 [“…less than rent…“ means your monthly ownership costs are less than a renter would pay for the property] [built 1964, 630 sq ft, bought for $26,500 in August of 2005]
Houses for Rent Lease Unfurn
Kelley Properties1Br Duplex $275mo/$2003Br Duplex $350mo/$2003Br House $400mo/$250 1 year lease, Ref s req d.(580)465-0780
2 Bdrm/1 BathStove, W/D hook-ups, gar., fenced yd. No pets. $500 mo. + $300 dep.1013 C NW [property built 1950, 1184 sq ft, bought for $23K on Oct 8, 2003]
226 6th NWLarge 2/3 Bdrm, new paint & carpet, W/D hookup, lg. dining room. $515mo + dep. (580)226-0665 [property built 1950, 1008 sq ft, assessed for $14K]
2Bdrm/1Bath$400mo/$150dep. home; 1 Bdrm Dplx $280/$100. Ref s req d. 226-9689
2 Bedroom 411 AshArdmore, $425mo/$250dp Ref s req d (580)657-6258
[property built 1955, 700 sq ft, bought for $31K in June, 2005]
1 Bdrm Lone Grove Stove, fridge. No pets, $350/$200 (580)657-4228
2 Br. For Rent CH/A W/D 7831 Myall Rd. in L.G., no pets, $475mo/$200dep., 580-657-8556 / 657-3572 [this is probably the property built in 1998, 832 sq ft, assessed value $36K]
2 Large BedroomUtility Room, stove $475mo + dep. 223-2641
Lake Murray VillageBrick 3Br 2Ba 2 FP $950 mo $500 dp 580-226-8159
2 Bdrm Brick Garagein L.G. No pets. $600 mo. (580)657-3900 / 618-1296
Plainview Sch 3/2 Brick 2502 Tanglewood $825mo $750/Cr ck req d 220-7202
[1985, 1716 sq ft, bought for $79K in Sept 2004, assessed value $91K]
2Bd 1 Bath/KitchenetteBeautiful view from higher ground 3mi S. of Dickson Sch. $700/$200 226-3328
2Bedroom/1BathNewly remodeled $450mo + dep. (580)504-6240
Lone Grove 3bd/2bain the country. CH&A, appl. & water furn. Nice & quiet. $575 mo. + dep. & refs. Call 580-657-2601 or 940-782-8537