Creatively Save on Tax Payment from Sell

7 Replies

Hi Everyone!

I'm planning to sell my property next spring so I can officially pay-off all of my student loans. I bought it in July 2017, and house-hacked for about 8 months living in the basement and rented out the other 2 units. I moved out about 3 months ago. The property cash flows very nicely, and with a bit of luck and planning my property appreciated about $75-$100k since I purchased last year and properties are selling about 15-20% over asking in that neighborhood, so my profit should be nice. Next year I'm buying more property, looking at only 6-8 unit multi family. 

Is there a creative way to save as much on taxes as possible from selling my current property? My main concern is having the cash to payoff everything; no partial payments so retaining as much cash as possible. I thought of doing a 1031 into the 6 unit I purchase and doing a cash-out refi, however that carrying out is circumstantial. I'll definitely consult with my accountant as well but figured you guys would have experience with this. Any ideas? 

Originally posted by @Christopher Phillips :
@Alyse Moore

You live in the property. So, you can’t 1031

She could do a pro-rata 1031.  @Dave Foster has discussed that before.

Unfortunately, Alyse, you've got two conflicting goals on this one.

1.  Pay minimal taxes

2.  Have cash to pay down debt.

As it seems you are aware, if you 1031, you don't get the cash and you would have to refi.  This isn't a bad solution and would be the best one to accomplish both goals.

The question I have is maybe not workable, but the obvious solution would be to hang on to the house and use the cash flow to pay down debt.  Doesn't knock it out as you might otherwise like, but does allow you to keep the equity, retire debt now and use the cash flow later once the debt is gone.  win/win/win, no?

Originally posted by @Linda Weygant :
Originally posted by @Christopher Phillips:
@Alyse Moore

You live in the property. So, you can’t 1031

She could do a pro-rata 1031.  @Dave Foster has discussed that before.

Unfortunately, Alyse, you've got two conflicting goals on this one.

1.  Pay minimal taxes

2.  Have cash to pay down debt.

As it seems you are aware, if you 1031, you don't get the cash and you would have to refi.  This isn't a bad solution and would be the best one to accomplish both goals.

The question I have is maybe not workable, but the obvious solution would be to hang on to the house and use the cash flow to pay down debt.  Doesn't knock it out as you might otherwise like, but does allow you to keep the equity, retire debt now and use the cash flow later once the debt is gone.  win/win/win, no?

 You are correct. She could do a partial 1031, but not if she wants to cash out, not pay taxes, and use some of those funds to pay student loans and put the rest into a another investment property.

@Linda Weygant definitely a win/win but one of the things I forgot to include in my post is, I'm a bit afraid that here may be some major repairs in the next year or 2 that will need to be made. As of today I've made a fair amount of repairs to the property and my cash on cash return is still pretty good but once the rest of the repairs start to come up the returns will deplenish and start eating into my cash flow. Also with the market being as hot as it is now it seems like a good time to take my equity/pay out, move it to acquire a better property and pay-off my debt while I can. 

@Alyse Moore , I got excited for a minute at having you sell and take part as your primary exemption and 1031ing the rest.  But.... you didn't live in it long enough to qualify.  So your options really are to do a full 1031, or do a partial 1031 and pay tax on what you don't reinvest, or sell and pay all the tax.

If you're that concerned at the market over the next 6 months or the cap ex then you won't regret paying a little tax if the roof collapses the month after you sell.  

Other options

1. Do a 1031 and then refi after to get the cash to pay off student loans.

2. Do a refi now and pay off all debt and then next year sell and 1031 (riskier from the IRS point of view). 

3. Do a 1031 and move into one of the 6 units and then do a pinky swear with yourself to spend every penny you make (including starbucks and movie popcorn allowance) to paying off the Student loans.

I don't like student loans for folks wanting to invest.  They are a shoe waiting to drop that will never go away.  But I also can't give definitive advice without knowing someones entire situation. I can see a scenario where actually not paying off the student loans might work - for the right person.

Question - where are you living right now?  If you own then that might be the one to sell.  That's that one that I wouldn't have bought prior to paying off the loans.  Yes you'd pay tax but the cash generated from the sale would be more from return of your down payment and less taxable profit.  Move into one unit of the 6 plex.

@Dave Foster I'm going to do more research on the partial 1031. Until this post I never knew that was an option. Options 1 and 3 you provided are most likely what I'll go with. 

It literally causes pain when I think about using all that equity to payoff student loans at once lol, especially when it could be used as a down payment on several properties  but it makes sense to me being that the interest rate on my student loans is higher than the interest rate on my property. I spoke with a couple of financial advisors and read some blogs, and they're all saying to tackle student loan debt as aggressively as possible before assuming more leveraged positions. Also I have a large amount of student loans so I'm just ready to get rid of it.

1031 into the 6 unit and living one of the units is a good idea and an option I'll consider given the circumstances that may occur while trying to 1031. Just thinking, I could do that and rent out my current place to make some extra cash.  

I just bought my place a couple months ago, so unfortunately there's not enough equity in it to use for student loans. 

Thanks for the advice!