Sell new build to grow or keep?

Question

I will be completing a new build SFH in about 60 days. I am doing a significant amount of the work myself and will have about 40% equity when finished. The house will cash flow about $150 a month. I already have another property that I will begin as soon as this one is finalized. Should I sell it and get my cash so that I can keep rolling into other deals or hold onto it? I am wanting to build a long term rental portfolio, but trying to decide if I should sell this one to speed up the portfolio growth.

Dave Foster · Answer

No such thing as a "dumb tax questions" @Trevor Davis!!  Just dumb taxes!  I agree 100% with @JD Martin.  Freeing up $65K now makes a heap of sense.  The problem you'll have with a 1031 exchange is that I think you probably already have title to the next property or lot you want to build on.  You cannot 1031 into improvements on a property you own.  so 1031ing into this next property is a hard stop.

But.... You could leap frog and 1031 into your next property after that!  Use the proceeds to buy a value add property or some lots you want to build on later.  Then when you complete your duplex/adu property you'll have your next one already lined up.

As an aside, one of my favorite models I've ever seen were some high end builders who would build two at a time only.  One they move into.  And one they sell to cover the construction costs and buy the lots for the next two.  By the time their next construction was done, two years had passed and they could sell the house they were living in tax free with the personal residence exemption.

JD Martin · Answer

Consider a 1031 exchange. Talk to @Dave Foster, he knows a lot about how you might structure something like that. Also your taxes will be based on the date you bought the property so if you just want to cash out push it past 365 days so you get out of ordinary income and into LT capital gains.

Ashish Acharya · Answer

This is a tax question as much as it is an investing decision, and that context matters here. JD's point about the $65k in profit making the sell decision a no-brainer from a cash flow perspective is reasonable, and his mention of the 1031 exchange is exactly the right direction to be thinking about.

Here's the thing, if you sell, youre likely looking at capital gains tax on that $65k profit, and depending on how long you've held the property and your overall income, that could be a meaningful chunk taken off the top before you can redeploy it. The good news is that if you've held it past 365 days the gains would be long term, and a 1031 exchange could let you roll that entire gain into your next property without triggering tax right now.

The other angle worth thinking about is whether keeping it as a rental and doing a cash-out refinance makes more sense than selling. With 40% equity you may be able to pull out a significant amount tax-free through a refi and still keep the asset depreciating on your return. That's a conversation worth having with a CPA before you make the final call because the numbers can look very different depending on your full tax picture.

Happy to connect!

Trevor Davis · Answer

Any advice on how to avoid a big tax hit? I plan on rolling right into the next new build but am working with the city to do a duplex. The property also has a 600 square foot building that I am going to convert into a studio apartment. This deal should cashflow a lot better than the one I am doing now. The tax question may be dumb, but I am new to this kind of real estate investing. Thank you for your help.

Trevor Davis · Answer

I can make about $65k in profit. It's a small starter home in a rural town. There is a need for affordable homes and I think I would benefit more from selling it than renting.

JD Martin · Answer

Without knowing how much money you can make from selling, $150 cash flow per month is a pretty sorry figure for something brand new. That's $1800/year, $18k in 10 years. If I could make more than $18k in profit I would be selling for sure unless I thought there was going to be some crazy appreciation if I held.

Sell new build to grow or keep?

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