No one needs to be told that the residential housing market in Massachusetts needs creative solutions now more than ever. This may be the perfect time to dust off, and reconsider, the condominium conversion. Many owners of two and thee family dwellings have lost money in their 401(k) and other pension plans. You, the real estate professional, may be able to offer a positive approach to raising cash from these homes, much of which can be sheltered from immediate income taxation.
Let's take as an example a three family owner-occupied home worth, say $400,000 as a rental property. The owner lives in one apartment, the other two are leased to third parties. The property has been in the family for a long time, and there is no mortgage. If the property were sold as an investment property, the owner could utilize the $250,000/$500,000 exemption from capital gains on a portion of the proceeds. Capital gains would probably be payable on the remainder.
Consider what could happen if the three apartments were converted into three condominium units. The sale of the unit which the owner occupied would have the same protection from tax. The difference, however, is that the sale of the other two units could utilize an IRS Section 1031 deferral, so that no tax would be presently due when they are sold. The proceeds from the other units could either be invested in new investment property, or if the owner has had enough of the problems involved in being a landlord, the owner could invest the proceeds in TIC's (tenancies in common) which are marketed by many investment houses and throw off an investment return.
For you, the real estate professional, this conversion approach can give you an opportunity to obtain, perhaps, three listings and impress your client with the thoroughness of your consideration of your client's overall needs.
Like any other real estate situation, each condominium conversion is different because each piece of property is unique. The owner will need to assemble a team of professionals in addition to you, the Realtor. The team should include experienced attorneys, accountants, architects and surveyors. Together, the group of professionals may be able to develop good,solid listings where there were none before. These will not magically appear. They will be based on creative thinking and persistence. Some recipes for success never change.
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