Selling a Rental vs 1031 Exchange

[Gonzalo Maturino]

I am looking for a little guidance as to whether or not I should sell my rental. I have had this property for 5 years and own it outright. The tenants are great but will be buying a home soon. If I sell it I stand to make a considerable amount. I know I would have to pay Capital Gains Taxes on it so that's really whats making me reconsider. I have also looked into a 1031 exchange but I would rather use the money on my own terms for future real estate investments. My goal is to eventually have 10 rental properties that are cash flowing. Has anyone run into a similar situation? If so what are your thoughts. 

[Dave Foster]

@Gonzalo Maturino, Here's the problem.  Both a sale with and a sale without a 1031 exchange have you ending up with cash you need to purchase property with in a sellers market.  

IF you do a sale without the 1031 you lose around 20% of your profit (fed cap gains and depreciation recapture) immediately.  But you have the luxury of taking your time to find your replacement.

If you do a sale with a 1031 exchange then you make effectively 20% more on your sale.  But you have some time restrictions that require you to act quickly.

So the choices are - make 20% less or have some anxious moments during the process.

To give you perspective - There is no penalty for starting a 1031 exchange and not finishing it like @Theresa Sanford did.  She did lose her exchange fee but that was it.  And since that is a deductible expense you actually end up losing $400 - $500 for the chance to possibly save the 20%.

I hear about the fear of the 45 day window all the time.  The reality is I've seen maybe 10 exchanges in the last year or so that the clients actually couldn't find good replacements that met their criteria.

If you want to end up with a bunch of rentals you're slowing yourself down by years if you lose 20% off the top each time.