The Man Who Did Not Sell His Property!

The Tax Man Cometh.

Fred had been a general contractor for 40 years. During which time he purchased, and paid for, a 1.5 acre piece of land and a 6,000 square foot metal building with office space that he used for his business. At age 72 Fred was finally retiring. I met Fred at the auction where he was selling off the accumulation of construction equipment and business assets.

I asked if the property was for sell, (I'm always looking for a deal). The property was located on a fenced corner lot in an industrial area that is about 95% occupied. The buildings on the land were in good condition. He asked what I thought the place was worth and I ventured about $360,000. He asked what I wanted it for and I told him I would build another 4000 square foot steel building with minimum office space on the property and rent out both buildings for the income. I did not get to buy the building. Fred decided to keep the property. Fred's reasoning was as follows.

If Fred sells the property for $360,000, less the selling cost and income tax of $116,000.00, he would have $244,000 left to invest. At a return of 5% he would earn an income of $12,200 annually. If Fred leases the building for $3,000 per month he would bring in $36,000 per year and have all the $360,000 still working for him (I think he could get $4,000 per month). As Fred had already depreciated the building to zero, he could not depreciate it again. If Fred builds another building to lease out, he would be able to depreciate the new improvements to shelter some of the rental income.

A year or so later I ran into Fred at a restaurant. Fred said that he built the other building and that he should have retired earlier and gone in to the rental business. My idea turned out to be a great deal for Fred and he could not thank me enough for the encouragement.