Wife is 45, I'm 50. We have three children to put through college (Junior in HS, 8th grade, and 6th grade). I would like to retire in ten years after our kids have graduated from college at age 60. Whether we have reached our retirement number is another topic that we'll ask in another post sometime in the future.
We have approximately $800,000 invested for retirement. ($600,000 in 403b and 457b and $200,000 in two Roth IRAs). We have $30,000 in 529s for each child (total $100,000) and about $500,000 in after tax investments.
The farmland has rental income of $16,000 annually, less approximately $1,000 for taxes so $15,000 net.
In order to buy out the other person's share of the farmland, we would have to come up with $130,000 (maybe a little more). So we have four options below.
- We could take the $130,000 out of our "after tax" investments and pay for the farmland in full. This would be about 1/3 of our total after tax investments.
- We could borrow the $130,000 at 4.5% interest from a bank. It would be a 5-yr ARM. No longer terms available.
- We could finance a lesser value and take some money out of investments in order to buy the farmland.
- We could have the farmland sold at an auction and take the proceeds and invest it using the Boglehead philosophy like our all our investments (3-fund method). If sold, our share would be approximately $300,000 - $500,000.
It is my understanding that if the estate sells the land and we inherit the proceeds from the sale, then we don't have any estate taxes to pay. If we purchase the land and later decide to sell it, we will owe capital gains taxes on the amount above our stepped-up value from the appraised value of today. Is my assumption correct?
We are leaning towards selling the land and investing the money in order to help with the kids college expenses if needed or help support us in our retirement. That way we don't have to worry about paying capital gains on the future sale of the farmland and/or worry about splitting the land among our three children in the future. We would also have full control over the money/investments at Vanguard.
Then again the farmland would be a source of steady income during retirement and could increase over time. Would the farmland income be a good match (increase our diversification) with our mostly index mutual funds and bonds investments? Would the farmland be a good investment if we have to take money from our after-tax investments and thus losing out on the return on that money?
I guess we are asking if we should diversify and become farmland rental income owners or continue having our entire investment portfolio (after tax and tax-deferred investments) in mutual funds and bond funds?
Your advice, opinions and recommendations are appreciated as always.