Rent current house or sale for 1031?

Question

Not sure if this is the correct area to ask this question, but want to throw some numbers out to see what's the best direction.

Last year I bought a house, paid $13,000 through the city since it was an abandoned property.  I put another $10,000 in repairs and it's worth $40,000 or $600 for rent in the my area.  I'm in the process of closing on a foreclosure down my street.  Final paperwork should be done in mid Oct.  I would like to rent out the current home and live in the new house.  I'll have a 15 year mortgage which will be around $550 (with tax and insurance).

I was planning on renting out the 1st house, roughly $100 for tax, $50 for insurance, 10% for property maintenance and throwing in what's left over in reserve to put a new roof on it in 2 years and then sell it when the market (fingers crossed) is a little better and then buy a duplex for better income.

My wife on the other hand wants to sell it and use the money towards a larger down payment on the other house to make the monthly payments less.

From my experience, a person's standard of living is higher when there is extra money each month rather then having a little nest egg (the rental) gaining equity that can be used at a later date.  So I feel we will not save more money even when our mortgage payment is less.

You can see which way I'm leaning but I can see her point as well.

Tell me your thought from someone that has been doing this a little longer.

Thanks

John N. · Answer

The 1031 exchange would be my current residence that I have now into the 2nd house (new residence), skipping the idea of turning house number 1 into a rental.  If I turn the 1st house into a rental the income that would be coming in would help with the new mortgage on the 2nd house but won't need it since I will be able to handle all the new expenses on the 2nd house.   My plan is to turn house number 1 into a rental and socking away the money that isn't used for all the expenses and not touching it for anything other than paying the expenses just for that house and upkeep.  Then selling the 1st house in about 2 years and whatever money I get for it and adding the cash I socked away to buy a duplex.

Or am I not thinking right, that an income property (1st house) when it's turned into a rental later be used for a 1031 exchange for another income property (a duplex) or is that not "like kind" property.  Does it need to be another single family home that its sole purpose is to be used as another rental?

But my real question was, will I make/save more money in 2 years collecting rent or making a larger down payment on the 2nd house and having a smaller mortgage payment.

Thanks again.

Steven Hamilton II · Answer

You cannot 1031 into a personal residence.  So you would have to pay tax on the gain.

Secure a consistent reliable income for yourself.  Bottom line in the long run you are better off making sure that the rental can cover part of your new mortgage payment than to not have the monthly help.  A dollar today is worth more than a dollar tomorrow due to inflation.

Keep the Rental.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Ken Kim · Answer

I would lean towards renting rather than increasing the down payment.

To sell the first home and lose equity and a passive cash flow is the first negative.

The second negative is to take that additional cash from the sale and spend it on a larger downpayment which is not neccessary if you already have a downpayment for the 2nd place.

This is my opinion.  If you can cover the monthly payment for the 2nd home and not impact your current lifestyle, then I would rent the 1st home and live in the 2nd.

Possibly other options to lower payment on the 2nd home later down the road too.