Question: how to 1031 exchange duplexes in a competitive market.

9 Replies

I have 2 duplexes in Everett, WA.  One duplex cash flows $1000 and the other about $700.  I bought both as owner occupied.  Im thinking I could probably sell both duplexes around $1 mi and net about $250-$300k to reinvest.

I got married had a child and moved South to Tacoma, WA to be closer to family where I purchased a home with a mortgage of $3250. 

I have total debt of about $85K-$100k and am wondering if selling one duplex to satisfy that debt and rolling the other duplex into a similar property is the best thing to do?  If I dont sell anything, my monthly expenses leave me a little too tight at the end of the month.

My main goal is to increase my cash flow with the money that I have to reinvest.  Reinvesting in MF (4 plex or more) would be ideal, but I run the risk of losing out to the competition that seems to be able to buy at the drop of a hat.  Then that leaves me with the risk of getting hit with the 1031 tax.

Are there other ideas on how to reinvest the money from a 1031 tax exchange to achieve that goal?  Investing out of state/other ventures?

Thank You!

Originally posted by @Bart J. Olson :

I have 2 duplexes in Everett, WA.  One duplex cash flows $1000 and the other about $700.  I bought both as owner occupied.  Im thinking I could probably sell both duplexes around $1 mi and net about $250-$300k to reinvest.

I got married had a child and moved South to Tacoma, WA to be closer to family where I purchased a home with a mortgage of $3250. 

I have total debt of about $85K-$100k and am wondering if selling one duplex to satisfy that debt and rolling the other duplex into a similar property is the best thing to do?  If I dont sell anything, my monthly expenses leave me a little too tight at the end of the month.

My main goal is to increase my cash flow with the money that I have to reinvest.  Reinvesting in MF (4 plex or more) would be ideal, but I run the risk of losing out to the competition that seems to be able to buy at the drop of a hat.  Then that leaves me with the risk of getting hit with the 1031 tax.

Are there other ideas on how to reinvest the money from a 1031 tax exchange to achieve that goal?  Investing out of state/other ventures?

Thank You!

Other options would be to invest in a syndication, a larger multifamily property or you could look at commercial property or storage. The key is to look at a lot of deals.

 

If you lived in one of the duplexes recently you can sell it without paying cap gains tax (not using 1031).

Talk to your tax pro.

The first one you bought would probably make a good candidate for 1031 or hold.

@Bart J. Olson as @Max T. mentioned, as long as one was a primary resident for at least two of the last 5 yrs, your gain on sale is tax free. (I am not an accountant, so confirm that with your own expert, but my accountant told me that).

I am in a similar boat and realizing that I have created the value in my rentals and now it is a cash flow game. But to grow my wealth, and cash flow, I need to exit once the value jump has been realized and move my money into some there where there is value to unlock. So that is the strategy I am pushing towards.

With syndication deals, a lot, but not all, require you to be accredited. However, looking at some of the track records and investment packages on many, I can achieve more by rolling my equity from my rentals into those, than I am getting right now off cash flow. I am still analyzing my options, but it has me second guessing my current holdings.



Congratulation on your new wife and child!!

Good news is that you have many options to increase your cash flow. I'm going to list a few options.

* Increase cash. Would you consider short term leasing through Airbnb. I have clients who are making more money that way and less wear and tear on the property. 

* Invest More  You don't have to sell the properties to buy more properties. If you find a great deal you can extract the money from on of your properties to finance the deal. 

* Decrease Expenses Consider creating creating a budget and getting a clear understanding of all your expenses and income and cut unnecessary expenses you'll be surprise on what you'll find. 

* Reduce Liability  I'm going to shoot straight. It sounds like the $3,250 mortgage is butting the strain on your cash flow. I would consider selling the home. Less is more. 



@Bart J. Olson What's the interest rate on your debt? A lot of people don't consider the cost of money and the ROI they can achieve vs paying off low-interest debt and losing that cash forever. Something to consider at least.

As far as your 1031 exchange question, if you have $250-300 in equity and are cash flowing $1700, that's not too bad. If these duplexes also have a combined value of $1MM and are in an appreciating area, that's also great. Is there a way to keep them until you have enough equity to refi some out? Is there any opportunity to increase the values, or raise the rents?

Sounds like you're considering selling cash flowing assets to 1. pay off debt (at historically low current interest rates) and 2. fund a more expensive lifestyle. Given your long term goal of increasing cash flow this doesn't sound wise. HELOC, REFI, or just hold and keep a tighter handle on your finances so your cash flow can fund the next deal. This is all assuming that the current duplexes are good assets, not a hot mess, and from your post it sounds like they are.

Before doing ANYTHING, pull up your loan amortization tables. Not enough investors talk about loan pay-down! Its not glamorous like cash-flow, but the fact of the matter is that the longer you hold these properties the more of your monthly payments are going to principle, and although you need to REFI, HELOC, or sell to access that cash it is still building your long term wealth. Investors with shiny object syndrome or an obsession with not leaving any cash in their deals sell and REFI too frequently IMO, and miss out on longer term benefits like loan pay-down.

As much as I love cash-flow, my young family and I became millionaires on loan pay-down and appreciation, not monthly cash flow, and its pretty easy to tap into that equity for future deals now that its grown significantly.

Good luck! I went to school in Tacoma, love it there. There's some great Multi Families that will be waiting for you once your ducks are in a row.

@Bart J. Olson , You may have bought both of those duplexes as owner occupied.  The question there is going to be did you live in a unit for 2 out of the 5 years prior to sale and did your new wife also live with you there for 2 out of the 5 years prior to sale.  If yes then you can take the first $500K of profit tax free as @Max T. and @Evan Polaski said.

If your entire profit is less than your primary residence exclusion then sell and take the profit tax free.  But if there is more profit you would qualify for from the primary residence exclusion then I think a blended approach would be very appropriate and get you where you want to be.  Sell the duplexes and do a 1031 exchange on them.  You will take a certain amount of cash as "boot".  This would normally be taxable in a 1031 exchange.  But because you qualify for the primary residence exclusion it will not be taxed.  Meanwhile the rest goes forward in the 1031.  So part of the sale is tax free and the rest is tax deferred.   It doesn't get much better than that.

You can take the tax free portion and pay off the rest of your debt.  and use the tax deferred portion to continue generating income for you.