1031 Exchange or Index Fund?

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1031 Exchange or Index Fund?

Account Closed
Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes

I'm Emma Whear. I'm a huge BPMoney fan. Here's my quick stats:

-21

-Living in Moscow ID

-Senior in College

-Real Estate Agent in Idaho and Washington

I bought a duplex back in October of 2020 for $206,000 (closing costs paid by seller). My husband and I put a whole lot of sweat and $3,000 into the property.

We planned to buy and hold, but are moving to Kentucky right after we graduate from college, and long-distance land lording isn't for us.

Currently UC for $254,000 (no agent fees, because I'm on both sides of the deal).

So... here's the hot question:

A. Should we take the money, do a 1031 exchange, and go buy a home quickly in Kentucky

B. Should we just pay the capital gains taxes (haven't owned for a year yet) to give us more flexibility in buying

C. Pay the capital gains and stick the money in our Vanguard Index Fund

Hot tips?

1Reply
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Most Popular Reply

Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y

@Account Closed, Your decision basis is going to be on the opportunity cost and real cost of the tax on $44K or profit.

That profit will be taxed at ordinary income rate.  So you can figure $12-$16K Of tax.

Questions to ask yourself:

1. Can I find a property within the timelines of a 1031 in KY that will satisfy my investing parameters?

2. How long will it take me in the vanguard fund to make up that much tax?

3. If I had an extra 2,3 or 10 months could I find a property that would be $15K cheaper than I can find now?

I'm with @Christopher Leet, Even with the timelines of the 1031 good purchases are possible.  And $15K of tax is a powerful incentive.

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  • Christopher Leet
    Rental Property Investor · Investor from Gilbert, AZ · Member since 2018 · 37 posts · 22 votes
    5y

    @Emma Whear Hi Emma. Kentucky is a great place. I would 1031 if your not willing to hire a property management company to manage for you. This will save you at tax time. As long as you don’t need the money I would try to find something comparable in KY to do the exchange. Good luck and if you have any other questions about KY let me know. Born and raised there but also invest there from a distance using a PM.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Account Closed, Your decision basis is going to be on the opportunity cost and real cost of the tax on $44K or profit.

    That profit will be taxed at ordinary income rate.  So you can figure $12-$16K Of tax.

    Questions to ask yourself:

    1. Can I find a property within the timelines of a 1031 in KY that will satisfy my investing parameters?

    2. How long will it take me in the vanguard fund to make up that much tax?

    3. If I had an extra 2,3 or 10 months could I find a property that would be $15K cheaper than I can find now?

    I'm with @Christopher Leet, Even with the timelines of the 1031 good purchases are possible.  And $15K of tax is a powerful incentive.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    5Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Dave Foster, Love your advise! My husband is originally from Kentucky, and the area we are headed to is pretty starkly different than where I'm from.

    In Moscow, $44k is barely a downpayment for a rough duplex.

    In Owensboro, $44k could feasibly buy (or come close to buying) an off-market duplex that needs some serious love. 

    Interestingly enough, the rental prices are similar, with a slightly higher price in Moscow, Idaho.


    To address your specifics:

    1). Planning to get my KY license before we land there, which will help (though not necessarily solve) the 45 days to identify timeline.

    2).  I'll look into that! Fantastic question.

    3). Also a good question. We have a few 'boots on the ground' people in the area, and I'll ask them that. 

    Cheers!

    1Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Christopher Leet Very neat to hear your from Kentucky! My husband and I are amateur investors in a super-tough market here in Moscow, Idaho - (Not California or Seattle, but still 🤷‍♀️) so are giddy about moving somewhere where houses can be bought for way less than $200,000.

    Any Kentucky-specific advice is fantastic! Planning to get my KY license in addition to WA and ID. 

    0Reply
  • Christopher Leet
    Rental Property Investor · Investor from Gilbert, AZ · Member since 2018 · 37 posts · 22 votes
    5y

    @Emma Whear where are you moving to? I’ve been investing there for a year now.

    1Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Christopher Leet Owensboro! Familiar with it? 

    0Reply
  • Terry Matthews
    Rental Property Investor · Owensboro, KY · Member since 2020 · 20 posts · 14 votes
    5y

    @Emma Whear welcome i’ve lived here my whole life. 

    1Reply
  • Ethan Board
    Realtor · Owensboro, KY · Member since 2018 · 33 posts · 22 votes
    5y

    @Emma Whear Im in Owensboro as well been here all my life. We have an investor meet up if you’re interested I’ll try and find you on Facebook and send you one

    2Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Ethan Board That would be fantastic! There's nothing like pulling from a pool of experience that runs way deeper than yourself. 

    1Reply
  • Jody Young
    Real Estate Agent · Owensboro, KY · Member since 2013 · 126 posts · 28 votes
    5y

    @Account Closed Owensboro is a great city and certainly a change of pace when compared to big cities. Welcome!

    1Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Jody Young Good to hear! I'm planning on grabbing my KY license in addition to my ID and WA. We've been stalking the Zillow market, and are psyched about prices. Would love your intel about ideal agent situations in Owensboro. Do you have any brokerage recommendations? 

    0Reply
  • Jody Young
    Real Estate Agent · Owensboro, KY · Member since 2013 · 126 posts · 28 votes
    5y

    @Account Closed absolutely, we've got a great office environment where I'm at and we're also #1 in the market. If you haven't already bought your KY license coursework, I can send you a discount code to save a little money, and I have a few course study books for the real estate principals and KY law sections to help pass the state exam. Feel free to reach out, I'm happy to help.

    1Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Jody Young I'd love that! Haven't bought yet - plan to take an online course. Looking at "The CE shop" currently.

    0Reply
  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    5y

    @Account Closed - a couple things to consider with a 1031 exchange (not KY specific):
    1. Are/were you guys residing in the ID duplex or was it strictly an investment?  If it is a residence then 1031 exchange is probably not an option or may be more complex/costly.
    2. For a clean 1031 exchange, your replacement property(ies) need to exceed the sale price of the disposed property, otherwise you can get into some complex tax situations.  For example, you can not "exchange" your ID duplex for a $40K KY duplex free-and-clear without a lot of added complexity and probably some immediate tax liability.
    3. 1031 Exchanges cost money, increase the complexity and urgency of an acquisition and can easily make you stretch investment criteria to make a deal work.  All this can quickly outweigh any potential tax deferral benefits.
    4. 1031 Exchange is a tax deferral, so it's not as simple as saying you don't have to pay $X in taxes.  The tax liability will eventually come due, potentially in a higher tax environment.
    5. You might need a more specialized/qualified accountant to prepare your taxes after an exchange than if just selling and taking the gain.

    2Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Michael Seeker Love it! Thanks for taking the time to respond. Looking into all of these factors. 

    0Reply
  • Sandra Morrison
    Investor · Cincinnati/Fort Thomas, KY · Member since 2015 · 206 posts · 183 votes
    5y

    @Jody Young I

    Would also be interested in the discount code. I am in northern KY and invest in Central Ky and Cincinnati, Ohio. Looking to get licensed in both states.

    1Reply
  • Jody Young
    Real Estate Agent · Owensboro, KY · Member since 2013 · 126 posts · 28 votes
    5y

    @Sandra Morrison hi! I sent you a message!

    0Reply
  • Kade Lucero
    Realtor · Salt Lake City, UT · Member since 2020 · 26 posts · 23 votes
    5y

    @Emma Whear First, I have a question about you being on “both” sides of the transaction. You are the seller and you wrote something up for the buyer? In Utah we don’t allow that and I just read about a couple agent who were disciplined and fined for that. Just curious if they allow that in Idaho?

    Second, I wouldn’t just sell and pay the tax and I wouldn’t put it in an index fund. Taxes are your largest expense and you want to avoid them at all costs. An index fund is nice to park some money for a little while, but real estate if done correctly will produce multiple, multiple, double-digit returns per year including the growth. I personally would keep the property in Idaho and put a property manager in place. Move to Kentucky, learn the market a little better, then when you’re ready sell the house in Idaho and 1031 exchange it to a rental in Kentucky. You can even look into a reverse 1031 where you buy the new property first, which lowers your timeline risk. I personally don’t have any experience in a reverse 1031, but you can talk to a 1031 company or accountant to get the details. If you don’t want to pay a property manager or are concerned about lower cashflow on the property, compare that the the tax cost and I’m sure it will be less to hire someone to manage the property!

    Good luck!

    0Reply
  • Kade Lucero
    Realtor · Salt Lake City, UT · Member since 2020 · 26 posts · 23 votes
    5y

    @Emma Whear I just saw that it’s already under contract, so I guess I was less than helpful lol. After it sells, I would definitely try to 1031 it into a new property in Kentucky. At least you can try and save the tax, but if not it should still be invested in real estate over an index fund. Plus, you’ll make up what you lost in taxes a lot faster investing in real estate than in an index fund.

    1Reply
  • Account Closed
    Rental Property Investor · FL · Member since 2017 · 74 posts · 27 votes
    5y

    @Emma Whear

    Love where your heads at! I think it ultimately depends what your end goal is and since you’re so young I’m sure you’ll land on your feet regardless ;)

    Do you want cash flow? If so I’d look at the 1031...

    Capital gains might not be too awful...have you talked with a CPA to find out what they’d be specifically?

    And long term you can’t go wrong with Vanguard, so I’d say really consider what your ideal state looks like and back into it from there.

    1Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Kade Lucero Thanks for your replies! It's called being a "dual agent" in Idaho, and isn't illegal, as long as it's declared. 

    I agree with you regarding the index fund and taxes question. After everyone's advice, and then talking more to a 1031 expert, sounds like my best option is to pay the taxes (since I'm currently in the lowest tax bracket) and then buy a house in Kentucky when I'm ready. 
    Because I owner-occupy a duplex, only half of it would be considered "investment" for the purposes of a 1031, and I haven't lived in my half for 2/5 last years, so no tax cut there. 

    0Reply
  • Account Closed
    OP
    Real Estate Agent · Moscow, ID · Member since 2021 · 18 posts · 5 votes
    5y

    @Account Closed. You are EXACTLY right. After talking to a CPA, turns out I'm in the lowest tax bracket (good and bad news, right 😂) and therefore the taxes would be 10% of the capital gain. That's a hit I'm willing to take for a little more time and luxury to look, instead of the restrictions of a 1031 exchange. If the taxes were significantly higher, you bet I'd be hustling a bit more to do the exchange.

    Thanks for taking the time to respond!

    0Reply
  • Kade Lucero
    Realtor · Salt Lake City, UT · Member since 2020 · 26 posts · 23 votes
    5y

    @Emma Whear yes, we have dual agency here as well, you just can’t represent the buyer on a property that you personally own here in Utah. Is that allowed in Idaho?

    0Reply
  • Logan Abell
    New to Real Estate · Owensboro, KY · Member since 2019 · 1 post · 2 votes
    5y

    @Ethan Board as another person in Owensboro I would love to attend some meet ups if possible. Been wanting to get into RE investing for some time now.

    2Reply
  • Ethan Board
    Realtor · Owensboro, KY · Member since 2018 · 33 posts · 22 votes
    5y

    @Logan Abell awesome I’ll search for you on Facebook and send an invite

    1Reply
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