Many investors spend years focusing on cash flow, appreciation, and debt paydown. Then they sell and discover depreciation recapture and capital gains taxes can take a significant bite out of their profits. For those with larger portfolios: What's your exit strategy? • 1031 forever? • Sell selectively? • Pass properties to heirs? • Convert to another asset class? • 1031 forever? Sell selectively? Pass properties to heirs? Convert to another asset class? Interested in hearing how experienced investors are thinking about the end game, not just the acquisition.

One of the biggest Risks of the 1031 is that you are forced to find a suitable property in a short time. The DST market understands this and is geared to lure you in. But the fees, future 1031/upreit cost and low returns have you trapped. "Don't let the tax tail wag the dog". The advantage of selling and paying the tax is that you now have opportunity to deploy the capital as you see fit.

The tax bill on a big exit is the thing most investors don't model until it's too late. My plan centers on 1031s, but I'm also intentional about which properties I sell. I hold the ones with the lowest basis and best remaining depreciation. If a property has been fully depreciated and isn't cash-flowing well, I'm not attached to it sentimentally, but I'm very aware that selling it means paying 25% recapture plus capital gains on top. The move I've seen work best for investors with $1M+ in equity is the 1031 into a DST (Delaware Statutory Trust) as an off-ramp. You preserve the deferral, you get out of active management, and you can go as passive as you want in retirement. The downside is you give up control and the returns aren't as strong as a well-run rental. But if the alternative is handing 30-40% to the IRS, the math usually still favors the DST. If you're not ready to exit entirely, a partial refinance to pull equity tax-free buys time. You keep the property, keep the depreciation, and use the cash elsewhere. The part nobody talks about: your basis step-up at death. If your plan is to hold and pass down, that's actually a legitimate exit strategy. Your heirs inherit at fair market value and the recapture disappears. Not a strategy for everyone, but it's real. The short version: know your basis on every property, model the actual tax cost before you list, and talk to a CPA who specializes in real estate, not a generalist.

"Swap till you Drop!" Or "Buy, Borrow, die"

Great perspective, @Kasing Ng . One thing that stands out is how deferred taxes can quietly grow alongside the portfolio. A successful 1031 strategy often creates a larger embedded tax liability over time, which makes the eventual exit plan even more important. The point about operational burden is important as well. Passing appreciated real estate to heirs can be very tax-efficient, but it only works if the next generation is willing and prepared to manage the assets. Ultimately, the best exit strategy isn't just the most tax-efficient one. It's the one that aligns with the investor's goals, family situation, and long-term plans for the portfolio.

Good point, @Igor Ganapolsky. The entry strategy matters just as much as the exit strategy. A tax deed purchase is very different from a long-term rental where years of depreciation have already been taken. In one case, the investor is starting with a new basis; in the other, depreciation recapture and capital gains can become a bigger issue. The stronger approach is to look at both sides from the beginning: buy right on the front end, but also understand how basis, debt, taxes, and exit options may affect the deal later.

OP we prefer to sell and take the tax hit. And then reinvest into 100% to 400% COC deals. Have done a reverse 1031 before and the timing is real tight. Just sending our son off on a tour. Got to hear Reveille. US is a great place. Waiting for them to depart. If/when he retires. If he wants will sell all of our self storage to him. 30 year note. No balloon. Interest only at 3%. If we are worried about depreciation recapture will do 30 year installment payments. With payments staggered heavier to the back end versus straight line.

Both options have their place. Here's how I decide: **HELOC:** • Best for: Flexible access, only pay interest on what you use • Rates: Prime + 1-2% (~9-10%) • Pros: No closing costs, revolving • Cons: Variable rate, harder to find for investment properties **Cash-Out Refinance:** • Best for: Large lump sum, fixed rate • Rates: 7-8% for investment properties • Pros: Fixed rate, predictable • Cons: Closing costs (2-3%), resets your loan term **The Break-Even Formula:** Total refinance cost ÷ Monthly savings = Months to break even Example: $7,500 cost ÷ $150/month savings = 50 months (4.2 years) If you plan to hold for 5+ years, the refinance makes sense. If not, a HELOC is more flexible. I built a free calculator that compares cash-out refinance vs. HELOC side-by-side: https://smartmortgagecalc.space/compare.html It shows the break-even point instantly. No sign-up needed. What's your hold period?

I am trimming the fat and getting rid of the properties that are a nuisance. This can mean a number of things such as hard to manage, capital intensive, a crappy HOA, and underperformance. The idea is to give my heirs the best of the best. The ones I sell will not be a 1031. I will invest in Mortgage note funds, private credit, and well managed private equity investments with predictable returns of 10-15%. With the higher returns I will have offset any capital gain hits over time, avoid the public markets, and leave myself and my heirs with higher returns and less adminstrative tasks.

That makes sense. You are not simply selling properties—you are intentionally simplifying the portfolio so you and your heirs retain the strongest assets with fewer management demands. Reallocating some of the proceeds to mortgage note funds, private credit, and professionally managed private equity could improve diversification and reduce administrative work. The key is to evaluate each sale’s capital gains and depreciation recapture, the liquidity and fees of the replacement investments, and whether the projected 10%–15% returns justify the additional risk. A property-by-property tax and cash-flow analysis before selling would help confirm that the long-term after-tax benefit supports your estate-planning goals.

What's Your Plan for the Tax Bomb Hiding in Your Rental Portfolio?

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What's Your Plan for the Tax Bomb Hiding in Your Rental Portfolio?

Divin KanyamaBusiness Member

Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes

Many investors spend years focusing on cash flow, appreciation, and debt paydown.

Then they sell and discover depreciation recapture and capital gains taxes can take a significant bite out of their profits.

For those with larger portfolios:

What's your exit strategy?

1031 forever?
Sell selectively?
Pass properties to heirs?
Convert to another asset class?

Interested in hearing how experienced investors are thinking about the end game, not just the acquisition.

[email protected]

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Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

I am very active with our local REIA (RPAWI. org) and we have a lot of old folks who are still pinching pennies and paying down their last building. I don't want to be like them. The irony is that new investors can't wait to quit their W2 and travel the world, the ones that succeed are so deep in the game that they can't let loose and will white knuckle it financially until they drop.

I think most of us have the 1031, DST's and taxes down, but the real problem is to shift your scarcity mindset into abundance. We all got into REI to improve our lifestyle, not to tie another anchor around our neck.

So how do you do that? I am too young to sell and there is too much appreciation left on the table, but we have started to change one thing: I used to drive 100% of CF (and a lot of my earned income) back into the portfolio mostly for long term capex and upgrades like new driveways and we are not doing that anymore. That is getting paid out of equity now, CF is an owners distribution.

Eventually we are going to fold the portfolio in half, keep the top end, pay taxes, then pay off all remaining loans and go DST with the rest. Or some version of that.

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Igor Ganapolsky
Coral Springs, FL · Member since 2018 · 464 posts · 90 votes
1w
Good question Divin. I'll give you a different perspective since I buy at tax deed auctions in Florida.

When you buy at a tax deed sale, the property gets a new cost basis at your purchase price. There's no accumulated depreciation to recapture because you're starting fresh. If I buy a property for $50k at auction that's worth $150k, my basis is $50k. When I sell it, I pay capital gains on the difference, but there's no depreciation recapture because I never took depreciation in the first place.

That said, the "tax bomb" question really depends on how you acquired the property and what your strategy is. For traditional buy-and-hold investors who've been depreciating for decades, yeah, that recapture at 25% plus capital gains can sting. But if you're doing 1031 exchanges into death (step-up in basis for heirs), or if you're buying at deep discounts where the equity gain dwarfs the tax hit, it's a different conversation.

The real question isn't just "what's your exit strategy" but "what was your entry strategy." If you overpaid going in, no tax planning in the world saves you. If you bought right, the tax conversation becomes manageable.
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Divin KanyamaBusiness Member
OP
Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
1w
Good point, @Igor Ganapolsky. The entry strategy matters just as much as the exit strategy.
A tax deed purchase is very different from a long-term rental where years of depreciation have already been taken. In one case, the investor is starting with a new basis; in the other, depreciation recapture and capital gains can become a bigger issue.
The stronger approach is to look at both sides from the beginning: buy right on the front end, but also understand how basis, debt, taxes, and exit options may affect the deal later.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
1w
When I turn 60 sell one per year until either I'm dead or I'm out of houses. If I kick it before I run out of houses then my heirs can figure it out.
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- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  1w
  Fair enough. That’s a pretty simple exit strategy, and honestly, there’s nothing wrong with keeping it simple. The only thing I’d add is that having a basic plan in place can make the tax and estate side a lot smoother when the time comes.
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- JD MartinBusiness Member
  Moderator
  Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
  6d
  Quote from @Divin Kanyama:
  Fair enough. That’s a pretty simple exit strategy, and honestly, there’s nothing wrong with keeping it simple. The only thing I’d add is that having a basic plan in place can make the tax and estate side a lot smoother when the time comes.
  Well, it could, but I'd prefer my heirs have to do some work for that money 🤣
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Ryan ThomsonBusiness Member
Real Estate Agent · Colorado Springs, CO · Member since 2018 · 1k+ posts · 1k+ votes
1w
The tax bill on a big exit is the thing most investors don't model until it's too late.
My plan centers on 1031s, but I'm also intentional about which properties I sell. I hold the ones with the lowest basis and best remaining depreciation. If a property has been fully depreciated and isn't cash-flowing well, I'm not attached to it sentimentally, but I'm very aware that selling it means paying 25% recapture plus capital gains on top.
The move I've seen work best for investors with $1M+ in equity is the 1031 into a DST (Delaware Statutory Trust) as an off-ramp. You preserve the deferral, you get out of active management, and you can go as passive as you want in retirement. The downside is you give up control and the returns aren't as strong as a well-run rental. But if the alternative is handing 30-40% to the IRS, the math usually still favors the DST.
If you're not ready to exit entirely, a partial refinance to pull equity tax-free buys time. You keep the property, keep the depreciation, and use the cash elsewhere.
The part nobody talks about: your basis step-up at death. If your plan is to hold and pass down, that's actually a legitimate exit strategy. Your heirs inherit at fair market value and the recapture disappears. Not a strategy for everyone, but it's real.
The short version: know your basis on every property, model the actual tax cost before you list, and talk to a CPA who specializes in real estate, not a generalist.
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- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  6d
  Good insights. The exit strategy often deserves as much attention as the acquisition strategy. Many investors focus on equity growth and cash flow but underestimate the impact of depreciation recapture, capital gains, and basis when it's time to sell.
  Whether the solution is a 1031 exchange, DST, refinance, or long-term hold, the right approach depends on the numbers. Planning ahead can make a significant difference in the after-tax outcome.
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Joseph ScoreseBusiness Member
Banker · Philadelphia · Member since 2009 · 2k+ posts · 631 votes
6d
Great topic, Divin. I think the biggest takeaway is that the exit strategy should be discussed long before the exit actually happens.
Too many investors focus entirely on acquiring doors, increasing cash flow, and building equity without considering what eventually happens to that equity—or the tax consequences of accessing it.
The answer also doesn’t have to be the same for every property. Some assets may make sense to hold long term, others may be candidates for a 1031 exchange, and some may simply be worth selling and paying the tax if the capital can be deployed more effectively elsewhere.
From the lending side, I also see investors use strategic refinances to access equity without selling, although that introduces additional debt and needs to make economic sense based on the cost of capital and intended use of the proceeds.
Ultimately, I think sophisticated portfolio management is less about “How many doors can I accumulate?” and more about “What role does each property play in my long-term wealth strategy?”
The acquisition gets most of the attention, but the end game deserves just as much planning.
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- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  6d
  That's a great point, @Joseph Scorese . The best investors often think about the entire lifecycle of an investment, not just the acquisition. A portfolio can have multiple exit paths at the same time: some properties held for cash flow, others positioned for a 1031 exchange, and others sold when the opportunity cost of holding becomes too high.
  The refinance discussion is important too. Accessing equity without triggering a taxable event can be powerful, but it only works when the debt supports the overall strategy rather than becoming the strategy itself.
  Ultimately, the strongest portfolios aren't necessarily the ones with the most doors. They're the ones where each asset has a clear purpose and a well-defined end game.
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Diana Khan
Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 349 posts · 127 votes
6d
Quote from @Divin Kanyama:
Many investors spend years focusing on cash flow, appreciation, and debt paydown.
Then they sell and discover depreciation recapture and capital gains taxes can take a significant bite out of their profits.
For those with larger portfolios:
What's your exit strategy?
1031 forever?
Sell selectively?
Pass properties to heirs?
Convert to another asset class?
Interested in hearing how experienced investors are thinking about the end game, not just the acquisition.
@Divin Kanyama, I see this come up a lot with real estate clients. They spend years building the portfolio, but the estate plan does not always grow with it.

If the plan is to keep properties long term or eventually pass them to family, I like to look at more than just the tax side. Who owns each property, whether it is held personally or through an LLC, who takes over if the owner cannot manage things, and what actually happens to those ownership interests later all matter. I've seen people have a clear idea of what they want, but the documents were never updated to match it. I really enjoy these conversations because the exit plan, tax plan, and estate plan should all be talking to each other.
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- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  6d
  Thanks for the important insight, @Diana Khan As portfolios grow, the investment strategy, tax plan, and estate plan need to evolve alongside them. It's not enough to know what you want to happen to a property. The ownership structure, LLCs, and estate documents need to support that outcome.
  Some of the most successful transitions happen when those conversations take place years before they're needed, rather than during a sale, transfer, or unexpected life event.
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Kasing Ng
Accountant · San Francisco, CA | Remote · Member since 2026 · 57 posts · 31 votes
6d
Hi Divin,
I am a financial analyst and tax modeler rather than an active real estate portfolio owner, but from an underwriting and structural perspective, here is how those exit strategies function in practice.
Using 1031 exchanges indefinitely is common, but it only works as a permanent exit strategy if carried out until death. Under section 1014, a stepped-up basis at death eliminates accumulated capital gains and depreciation recapture. Without holding until death, rolling exchanges simply compounds the deferred tax liability into larger replacement assets.
Passing properties to heirs relies on that same stepped-up basis to wipe out the tax liability, but it transfers operational and management burdens to family members who may not want to manage real estate.
Selling selectively works when owners want liquidity or portfolio rebalancing, but the actual tax bill is frequently underestimated. Beyond the 20 percent capital gains rate, unrecaptured section 1250 gain is taxed at 25 percent, and accelerated depreciation from cost segregation triggers ordinary income recapture. If those figures are not modeled into the exit waterfall years in advance, they reduce net proceeds significantly.
Converting to another asset class, such as moving from physical properties into Delaware Statutory Trusts, provides passive diversification or estate liquidity, but it usually triggers a taxable event unless structured through specific exchange frameworks.
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- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  6d
  Great perspective, @Kasing Ng . One thing that stands out is how deferred taxes can quietly grow alongside the portfolio. A successful 1031 strategy often creates a larger embedded tax liability over time, which makes the eventual exit plan even more important.
  The point about operational burden is important as well. Passing appreciated real estate to heirs can be very tax-efficient, but it only works if the next generation is willing and prepared to manage the assets.
  Ultimately, the best exit strategy isn't just the most tax-efficient one. It's the one that aligns with the investor's goals, family situation, and long-term plans for the portfolio.
  [email protected]
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Marcus Auerbach
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
6d
I am very active with our local REIA (RPAWI. org) and we have a lot of old folks who are still pinching pennies and paying down their last building. I don't want to be like them. The irony is that new investors can't wait to quit their W2 and travel the world, the ones that succeed are so deep in the game that they can't let loose and will white knuckle it financially until they drop.
I think most of us have the 1031, DST's and taxes down, but the real problem is to shift your scarcity mindset into abundance. We all got into REI to improve our lifestyle, not to tie another anchor around our neck.
So how do you do that? I am too young to sell and there is too much appreciation left on the table, but we have started to change one thing: I used to drive 100% of CF (and a lot of my earned income) back into the portfolio mostly for long term capex and upgrades like new driveways and we are not doing that anymore. That is getting paid out of equity now, CF is an owners distribution.
Eventually we are going to fold the portfolio in half, keep the top end, pay taxes, then pay off all remaining loans and go DST with the rest. Or some version of that.
2 Reply
- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  5d
  That is a great perspective. At some point, the portfolio should begin serving the owner—not the other way around. Continually reinvesting every dollar may build net worth, but it can also delay the lifestyle and freedom that motivated the journey in the first place.
  I like the shift toward treating cash flow as an owner’s distribution while using equity strategically for major improvements. Your longer-term plan also sounds balanced: keep the strongest assets, simplify the portfolio, reduce debt, and use DSTs where appropriate. The exact structure may change, but intentionally defining what “enough” looks like is probably the most important step.
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Justin R.Pro Member
Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 votes
5d
"Swap till you Drop!"
Or "Buy, Borrow, die"
1 Reply
- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  5d
  Exactly—both strategies can be powerful, but they require careful tax, debt, and estate planning. The goal is not just to defer taxes, but to build wealth without creating unnecessary risk for yourself or your heirs.
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- David Switzer
  Member since 2024 · 35 posts · 20 votes
  19h
  100%
  0 Reply
Divin KanyamaBusiness Member
OP
Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
5d
.
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Kurt Pourbaix
Rental Property Investor · Loveland, CO · Member since 2014 · 77 posts · 15 votes
5d
How do you go about exchanging properties into a DST? How to do find trustworthy agents and investments?
0 Reply
- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  4d
  @Kurt Pourbaix A DST can be used as replacement property in a 1031 exchange, but you should involve a qualified intermediary before the sale closes so you never receive the proceeds. You generally have 45 days to identify the DST and 180 days to complete the exchange. Interview multiple QIs and securities-licensed DST representatives, verify their licensing and disciplinary history, understand how they are paid, and review the sponsor's track record, debt, fees, cash-flow assumptions, reserves, and exit strategy. DSTs are illiquid and distributions are not guaranteed, so it is worth checking with your own CPA, attorney, and investment adviser to make sure the offering fits both the 1031 rules and your long-term goals.
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Ryan SpathBusiness Member
Real Estate Agent · Boise, ID · Member since 2017 · 557 posts · 376 votes
5d
I honestly have not put tons of thought into this as of now. Likely we will keep everything in Idaho until the useful depreciation runs out and 1031 them into something else. We also own properties in Fl, I could see us 1031 these into Idaho at some point in the future just to have everything closer to home. I don't want to be the super saver my entire life and end up with tons of cash to donate, give to children, or the like. Ideally we use the majority of this, I like the ideas mentioned above of a combo of paid off properties and DST combo. For me in my early 40's still time to make the exact decision, however this life is a vapor and we likely need to think about this sooner than later.
[email protected]208-600-2814
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- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  4d
  @Ryan Spath , That sounds like a thoughtful and flexible approach. Keeping the Idaho properties until the depreciation benefit declines, then considering 1031 exchanges—and potentially consolidating the Florida properties closer to home—could simplify management over time. I also like the balance you are aiming for: building enough paid-off property and passive DST income to create security without postponing life indefinitely just to maximize what is left behind. Your early 40s give you time to adjust, but you are right that it is worth defining what "enough" looks like now. A simple long-term plan for income, lifestyle spending, property consolidation, and eventual exits can help you enjoy more along the way while keeping your options open. Of course, the tax and investment details should be reviewed based on your specific situation.
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John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 797 votes
1d
I am trimming the fat and getting rid of the properties that are a nuisance. This can mean a number of things such as hard to manage, capital intensive, a crappy HOA, and underperformance.
The idea is to give my heirs the best of the best. The ones I sell will not be a 1031. I will invest in Mortgage note funds, private credit, and well managed private equity investments with predictable returns of 10-15%. With the higher returns I will have offset any capital gain hits over time, avoid the public markets, and leave myself and my heirs with higher returns and less adminstrative tasks.
0 Reply
- Divin KanyamaBusiness Member
  OP
  Accountant · Seattle, WA · Member since 2025 · 216 posts · 72 votes
  18h
  That makes sense. You are not simply selling properties—you are intentionally simplifying the portfolio so you and your heirs retain the strongest assets with fewer management demands. Reallocating some of the proceeds to mortgage note funds, private credit, and professionally managed private equity could improve diversification and reduce administrative work. The key is to evaluate each sale’s capital gains and depreciation recapture, the liquidity and fees of the replacement investments, and whether the projected 10%–15% returns justify the additional risk. A property-by-property tax and cash-flow analysis before selling would help confirm that the long-term after-tax benefit supports your estate-planning goals.
  [email protected]
  WEMBO CPA532 Reviews
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Tomas Jems
Technology · NY · Member since 2026 · 19 posts · 4 votes
7h
Both options have their place. Here's how I decide:
**HELOC:**
• Best for: Flexible access, only pay interest on what you use
• Rates: Prime + 1-2% (~9-10%)
• Pros: No closing costs, revolving
• Cons: Variable rate, harder to find for investment properties
**Cash-Out Refinance:**
• Best for: Large lump sum, fixed rate
• Rates: 7-8% for investment properties
• Pros: Fixed rate, predictable
• Cons: Closing costs (2-3%), resets your loan term
**The Break-Even Formula:**
Total refinance cost ÷ Monthly savings = Months to break even
Example: $7,500 cost ÷ $150/month savings = 50 months (4.2 years)
If you plan to hold for 5+ years, the refinance makes sense. If not, a HELOC is more flexible.
I built a free calculator that compares cash-out refinance vs. HELOC side-by-side: https://smartmortgagecalc.space/compare.html
It shows the break-even point instantly. No sign-up needed.
What's your hold period?
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John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 797 votes
4h
One of the biggest Risks of the 1031 is that you are forced to find a suitable property in a short time. The DST market understands this and is geared to lure you in. But the fees, future 1031/upreit cost and low returns have you trapped. "Don't let the tax tail wag the dog". The advantage of selling and paying the tax is that you now have opportunity to deploy the capital as you see fit.
1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
2h
OP we prefer to sell and take the tax hit. And then reinvest into 100% to 400% COC deals. Have done a reverse 1031 before and the timing is real tight.
Just sending our son off on a tour. Got to hear Reveille. US is a great place. Waiting for them to depart.
If/when he retires. If he wants will sell all of our self storage to him. 30 year note. No balloon. Interest only at 3%.
If we are worried about depreciation recapture will do 30 year installment payments. With payments staggered heavier to the back end versus straight line.
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