Exchange to cash neutral or pay the cap gains?

Question

If the market is so hot that I can't find a deal that nets cash flow, would you buy a cash neutral property, or just pay the capital gains tax and depreciation recapture??

I thought the answer would be easy, but once you account for all the sales commissions, 1031 costs, and closing costs, both for the initial sale, and the future sale once you do find a better investment, it can get quite expensive to buy a neutral cash flow (read bad investment).

My situation is I have a property that is appreciating extremely well (at the moment) but is $185/mo negative. I want to do a 1031 into a cash flowing property. 2 months ago when I started this process, there were several SFR's that met my criteria. But this seems to have disappeared. I'm getting a little worried about meeting the 45 day identification period. But I won't buy a cash flow negative property. I already have one of those :)

There are still some base hit deals out there, but they don't meet my criteria for location and max rent. Going outside these criteria seems to add significant risk and overall vacancy costs.

Or maybe there is a way to extend the 45 day period and still meet the 180 day timeline.

Advice?

John Thedford · Answer

@Michael Delpier if you identify more than 3 properties there are more rules that kick in. Better talk to a QI first to make sure of the route you want to go.

@Dave Foster

Michael Delpier · Answer

@Dave Foster and @John Thedford thanks for your input.

I will be using a recommended QI here in Houston for the 1031. (If I go that route)

I have 2 plans at the moment. Either this will be a sell 1 and buy 4-6 SFR's, or a sell 1 and buy 1 multi family.

What has me worried is the identifying and closing of 4-6 SFR's in my target area within my set criteria within the 45 days.

I have not seen anything close to a good investment in the multi category in Houston. Most are 1/2% rule.

I know I have 180 days to close, but if I go the SFR route these will be distressed properties either through a wholesale or auction. So the time between identifying and closing is just hours.

Deals on the MLS (with my criteria) are just not available here in Houston.

If I cannot find something, it might be better to just pay Uncle Sam rather than to buy something that will get traided out later. 15% cap gains on roughly $300K vs. 2x the 6% sales commissions + closing costs.

But maybe there is something I am failing to see given my limited experience.

Dave Foster · Answer

@Michael Delpier, @John Thedford is right, barring a huge natural disaster and congressional action there's no exceptions. But it's a sellers market and that includes the property you have now. If the 45 days concerns you then sell your old property contingent upon finding a suitable replacement prior to close. Or, start your search and be willing to go under contract for the new property before your old property closes (the only requirement is that you close the sale before you close the purchase). Contingencies on a purchase are pretty much non-starters in a hot market but these other two options might help alleviate some the 45 day angst.

Also, remember that you do not have to stay with the same type or price range of real estate. You could move into multi or commercial or a passive DST. You could also sell and purchase multiple less expensive assets in order to reach positive cash flow.

John Thedford · Answer

There is no exception to the 45 day identification rule that I am aware of.

@Dave Foster is your expert.....!

Thomas S. · Answer

Stay away from investing in SFHs and you will not have any problems finding cash flow. SFH investors are only expecting to find appreciation, cash flow is not likely and not a priority.

Exchange to cash neutral or pay the cap gains?

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