1031 exchange or reduce primary home loan

2 Replies

Hello all, Facing a quandary here and wanted to ask what you would do here . I have a rental (sort of fell into this as it was my primary but couldn't sell it in 2011 market), and am thinking of either

1. selling it and buying a 4-plex/other and continue to pull in the passive income stream via 1031-exchange hopefully, or

2. selling it, take the hit of the capital gains/medicare surtax etc and just using the cash to pay down my balance on my primary.  

I am leaning towards 2 just because of the benefits of living almost debt free. here are some numbers (assuming Zillow' estimates are good)

Sale of rental - 650000

Net Adjusted basis - 299000

Capital gain = 286000 (assuming 10% selling cost, and pay  off rental loan of 198K). 

Capital gain tax - 68K (per calc at https://apiexchange.com/capital-gain-tax-calculato...)

After tax equity would -  318K 

@Vijay Hampapur , I'm so with you on the peace of living debt free that I'm an embarrassment to leverage happy 1031 investors and QIs every where. You're not going to go wrong paying some tax and gaining  peace of mind.  

But your calculations do not address  your perceived problem at all.  You need to one more analysis to make sure you feel good with option 2.  If you go that route you lose $68K from your balance sheet immediately.  The comparison you've got to make is between paying $68K now vs what that translates to in interest on your primary.  

In other words if your primary has a loan of $300K at 4% then you're paying $12000 in interest every year.  So the comparison is $68K now vs leaving it in to make money for you and paying that same $68K (but in the form of primary interest) over 5 1/2 years.  Meanwhile, if you can make 8% on your 68K through rental income you will generate just about $30K in revenue.

So, pay $68K now or leave it in the primary and only effectively pay $38K.  And then there's a positive inflation factor tenant principle pay down etc

Make sure your peace of mind can withstand that trade off.  If so then that's exactly what you should do.


 Thanks Dave..I will definitely take that into account

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