{"id":169705,"date":"2024-03-25T12:10:10","date_gmt":"2024-03-25T18:10:10","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=169705"},"modified":"2024-03-25T12:10:16","modified_gmt":"2024-03-25T18:10:16","slug":"1031-investor-journal-three","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/1031-investor-journal-three","title":{"rendered":"Is a 1031 Exchange Really Worth It? After Three Months of Work, We’re Questioning It"},"content":{"rendered":"\n

Is a 1031 exchange really worth it? That\u2019s the question we asked ourselves as we ran property after property this month. <\/span><\/p>\n\n\n\n

If you\u2019re new here, we are <\/span>selling our spacious Brooklyn condo<\/span><\/a>, which we\u2019ve owned for almost 20 years and which has appreciated immensely. The plan is to <\/span>1031 exchange<\/span><\/a> it into a <\/span>multifamily<\/span><\/a> rental somewhere out of state, in a growing market, with landlord-friendly regulations. <\/span><\/p>\n\n\n\n

Running the Numbers<\/span><\/h2>\n\n\n\n

The condo goes on sale in May, and we expect to walk away with $850,000 in cash from the deal. We also assumed we would easily be able to clear our cash flow goal of $5,000 a month with that investment, but as we <\/span>ran the numbers<\/span><\/a>, we started to realize that not all markets would support this. Are the hours of effort to flip our profit into more real estate really worth it?<\/span><\/p>\n\n\n\n

What if we just sold our condo, collected the $975,000 sale price, paid off our remaining mortgage, took the capital gains hit, and threw the remainder into index funds, where we could count on a reasonable 8%-plus a year growth? <\/span><\/p>\n\n\n\n

We conferred with our tax attorney, who said: \u201cA ballpark IRS, NY, and NJ tax on the sale, based upon a $975,000 sale price and assuming Realtor commissions and other closing costs of $40,000, is an additional tax of $250,000 to $300,000.\u201d So that means, instead of walking away with $850,000, we would net $500,000 to $550,000.<\/span><\/p>\n\n\n\n

Ouch. That\u2019s a big bite. <\/span><\/p>\n\n\n\n

And since our plan is to use the rental cash flow to help <\/span>pay for our kids\u2019 college<\/span><\/a>, we would likely need to withdraw the 8% gains every year, which means, after 10 years, instead of seeing a nice equity growth on a rental property, we would be left with the exact amount of money we put into the index fund in the first place. Not ideal.<\/span><\/p>\n\n\n\n

That exercise at least helped me reframe the underwriting I\u2019m spending so much time on. By figuring out our 1031 transition plan to another property, I was basically making $250,000-plus for a couple of months\u2019 work. Worth it!<\/span><\/p>\n\n\n\n

Where We Are Now<\/span><\/h2>\n\n\n\n

And we <\/span>are<\/span><\/em> making progress\u2014-we just don\u2019t have a slam dunk yet.<\/span><\/p>\n\n\n\n

Last month, we successfully finalized our buy box:<\/span><\/p>\n\n\n\n